Search

Updated: Nov 23



Shareholder tax brackets and effective tax rate are important. An effective tax rate is the actual rate a taxpayer pays, calculated by dividing total tax by taxable income. A marginal tax rate is the rate at which the next dollar of income is taxed. I wouldn’t consider the marginal tax rate. The top tax rate is important. While the top tax rate is a flat 21 percent for C corporations and personal service corporations, the top rate for shareholders of an S corporation is 37 percent, but it is a graduated rate, so I believe the effective tax rate must be considered.


Another issue that must be considered for this analysis is that it appears most likely that we will have a new presidential administration next year, and some of the benefits of any entity type may very well disappear. That complicates tax-planning matters, but not entirely.


There are issues related to the recognition of income, the deduction of expenses and tax credits that should be considered, but many of these are the same for every business type. Note that I did not include the tax provisions of the CARES Act and the Families First Coronavirus Relief Act below because many of those issues are temporary. The tax credits in each, and the deferral of payroll taxes, apply to all entities.


Some advantages of an S corp are:


1. Shareholders are not subject to double taxation on income in retained earnings. 2. The income and loss of the S corp are allocated pro rata on a daily basis to each shareholder based on their ownership of all the shares of an S corp. 3. Capital losses are also allocated to the shareholders based on their daily pro rata share of total shares in the S corp. 4. An S corp is not subject to Social Security and Medicare taxes on pass-through income because it is not “self-employment income.” 5. An S corp can pay its shareholders a reasonable salary and only be taxed for Social Security and Medicare purposes on that salary, and not on the distributive allocation. The best source of information to determine the reasonable salary is the government’s own Bureau of Labor Statistics, but the IRS doesn’t normally get concerned about this unless the compensation is zero or very little. 6. The corporation can have an unlimited life and shares can be transferred easily to other people or entities. 7. Shareholders get the maximum protection for their personal assets if they keep their business affairs completely separate from their personal affairs. The courts can pierce the veil of a corporate entity if business affairs are not kept separate from personal affairs. 8. S corps are not subject to the Net Investment Income tax. 9. Fringe benefits for employees and owners of 2 percent or less of the S corp are not considered income for the shareholder or employee. They are also deductible by the S corp. 10. A greater than 2 percent owner of an S corp can deduct 100 percent of health care premiums paid by the corporation under a plan established by the corporation. 11. An S corp is eligible for the 20 percent Section 199A deduction on qualified business income, except as disallowed by law generally for certain service corporations. 12. A shareholder has basis in certain debts of the S corp to the shareholder, to be adjusted over time. 13. No gain or loss is recognized if property is transferred to a corporation by one or more persons solely in exchange for stock in the corporation and, immediately after the exchange, the people who are in control (as defined in section 368(c)) of the corporation. Section 368(c) defines control to mean the ownership of stock possessing at least 80 percent of the total combined voting power of all classes of stock entitled to vote and at least 80 percent of the total number of shares of all other classes of stock of the corporation. Other property received, called boot, is taxable in the transaction. 14. A shareholder can include loans the shareholder made to the S corp in basis, but not liabilities to outside persons or entities.


Some disadvantages of an S corp are:


1. It can only have 100 shareholders. A husband and wife are one shareholder but become two shareholders if they divorce. 2. It cannot have nonresident aliens as shareholders. 3. Shareholders must be individuals and certain trusts. 4. Partnerships, C corporations and multi-member LLCs cannot be shareholders. 5. It can generally only have one class of stock. 6. State tax law may not recognize an S corp. 7. A shareholder cannot include debt in their basis of the entity for debt to outside parties. 8. An S corp with more than 100 employees earning at least $5,000 in the prior year cannot claim the pension plan startup costs credit. 9. Shareholders in an S corp may be subject to the tax on income items related to their investments in the corporation. 10. There are restrictions on the ordinary income treatment on Section 1244 qualified small business stock. 11. Owner-employees who own more than 2 percent of the S corp stock may have to include fringe benefits in their gross income. 12. An S corp that is not a closely held corporation must use the “simplified look-back” method of accounting for long-term contracts if almost all of its income under a long term contract is from sources in the United States. 13. There are limitations on some deductions that are generally itemized deductions of shareholders and certain other expenses such as alimony. 14. Distributions to shareholders may be taxable if they exceed the AAA account first, earnings and profits second, and then the remaining basis in stock. 15. S corps must generally use a calendar year for reporting profits and losses, but may apply for a fiscal year from the IRS for business purposes, or it can elect a Section 444 tax year. 16. An S corp must make a proportionate allocation and distribution based on ownership interest. 17. A deduction for health insurance benefits is not allowed in excess of the earned income of the owner-employee from that business. 18. An S corp can have “built-in gains” if it does not become an S corp in its first year. Built-in gains are gains that are embedded in an S corp’s assets before it became an S corp. The gains on assets in this case are frozen and are then taxable to the S corp at the applicable corporate rate when they are sold. The gain or loss on “built-in gains or losses” is allocated to all shareholders on a pro rata basis, even when the property creating the “built-in gain or loss” was contributed by one shareholder, or several specific shareholders. 19. The “at-risk” rules apply to S corporations and this is applied at the shareholder level Shareholders cannot deduct losses unless they are at risk of losing property or paying a liability in the amount of the loss. Shareholders of an S corp cannot be liable for non-recourse debt. 20. The passive activity rules also apply at the shareholder level, but certain determinations related to a passive activity must be made at the corporate level. 21. An S corp can only claim a deduction for stock given to an employee for services in the amount and the year the employee includes the stock in income. This generally occurs when the stock vests in the employee and the amount of income is the difference between the amount the employee paid for the stock and its fair market value at the date the employee vests in the stock.


Data Source

  • Timothy E. Brown, CPA



Between the upcoming presidential election and the COVID-19 pandemic and its attendant stimulus packages, this year has seen more than its share of uncertainty around tax — which makes helping clients with year-end planning all the more crucial.

“Year-end tax planning is more important than ever this year,” said Renato Zanichelli, national managing partner of tax services at Grant Thornton, in a statement. “Businesses both large and small have been dealt a tough hand. Having the right tax strategy will help businesses navigate this time of historic disruption and put them on the right track as a new year begins.”

“Lawmakers dedicated trillions of dollars to keep families and businesses afloat, but those provisions may also require quick action, in many cases by the end of this year,” added Dustin Stamper, managing director in the firm’s Washington National Tax Office. “The government wants to get money in the hands of those who need it, and many of the most generous provisions are tax changes that provide welcome liquidity for businesses and timely relief for individuals.”

With that in mind, the Top Eight Firm has put together a list of 10 key tax considerations for year-end planning for both individuals and businesses.


FOR INDIVIDUALS: 1. Use above-the-line charitable deduction

Everyone is entitled to a charitable deduction this year. The Tax Cuts and Jobs Act doubled the standard deduction while repealing or limiting many itemized deductions, leaving millions fewer taxpayers claiming actual itemized deductions. Typically, there is no tax benefit for giving to charity unless you itemize deductions. However, the CARES Act created an above-the-line deduction of up to $300 for cash contributions from taxpayers who don’t itemize. To take advantage of this provision, taxpayers should make sure to donate before the end of the year.


2. Understand the impact of that stimulus check

The CARES Act directed the IRS to issue stimulus checks of up to $1,200 per taxpayer and $500 per qualified child dependent earlier this year. The payments were paid based on 2018 or 2019 return information, but are actually structured as advances of 2020 tax credits. The credits phase out for higher-income taxpayers, so taxpayers want to understand the implications if the check they received based on 2018 or 2019 won’t match the amount of credit they will calculate on the 2020 return. If the 2020 credit calculation is less than they received, there is no clawback. If they received less than the credit calculated for 2020, they can claim it as an additional refund.


3. Supercharge investment with opportunity zones

Opportunity zones are one of the most powerful incentives ever offered by Congress for investing in specific geographic areas. In certain scenarios, not only can an investor potentially defer paying tax on gains invested in an opportunity zone until as late as 2026, but they only recognize 90 percent of the gain if they hold the investment for five years. Additionally, if they hold the investment for 10 years and satisfy the rules, they pay no tax on the appreciation of the opportunity zone investment itself. If they’re worried about capital gains rates going up under a new administration, this may provide an excellent tax-free investment. There are more than 8,000 opportunity zones throughout the United States, and many types of investment, development and business activities can qualify.


4. Make up a tax shortfall with increased withholding

COVID-19 created cash-flow problems for many individuals. Taxpayers should make sure their withholding and estimated taxes align with what they actually expect to pay while they have time to fix a problem. If they find themselves in danger of being penalized for underpaying taxes, they can make up the shortfall through increased withholding on their salary or bonuses. A larger estimated tax payment at the end of the year can still expose them to penalties for underpayments in previous quarters, but withholding is considered to have been paid ratably throughout the year, so increasing it for year-end wages can save them in penalties.


5. Leverage low interest rates and generous exemptions before they’re gone

The historically low interest rates and lifetime gift and estate tax exemptions present a powerful estate-planning opportunity. Many estate and gift tax strategies hinge on the ability of assets to appreciate faster than the interest rates prescribed by the IRS. In addition, the economic fallout of COVID-19 is depressing many asset values. There’s a small window of opportunity to employ estate-planning techniques while interest rates are still low and the lifetime gift exemption is at an all-time high. The current gift and estate tax exemptions are set to expire in a few years, and a new administration in the White House could accelerate that timeline.



FOR BUSINESSES: 6. Accelerate AMT refunds When the Tax Cuts and Jobs Act repealed the corporate Alternative Minimum Tax, it allowed corporations to claim all their unused AMT credits in the tax years beginning in 2018, 2019, 2020 and 2021. The CARES Act accelerates this timeline, allowing corporations to claim all remaining credits in either 2018 or 2019. This gives companies several different options to file for quick refunds. The fastest method for many companies will be filing a tentative refund claim on Form 1139, but corporations must file by Dec. 31, 2020, to claim an AMT credit this way.


7. Use current losses for quick refunds

The CARES Act resurrected a provision allowing businesses to use current losses against past income for immediate refunds. Net operating losses arising in tax years beginning in 2018, 2019 and 2020 can be carried back five years for refunds against prior taxes. These losses can even offset income at the higher tax rates in place before 2018. Companies should consider opportunities to accelerate deductions into a loss year to benefit from this rate arbitrage and obtain a larger refund. Accounting method changes are among the most powerful ways to accelerate deductions, but remember any non-automatic changes a company wants to make effective for the 2020 calendar year must be made by the end of the year. C corporations make NOL refund claims themselves, but passthrough businesses like partnerships and S corporations pass losses onto to owners, who will make claims. The fastest way to obtain a refund is generally by filing a tentative refund claim, but these must be filed by Dec. 31, 2020, for the 2019 calendar year. If losses will be in 2020, the business should start preparing to file early, because they cannot claim an NOL carryback refund until they file their tax return for the year.


8. Retroactive refund for bonus depreciation

The CARES Act fixed a technical problem with bonus depreciation, a generous provision that allows companies to immediately deduct the full cost of many types of business investments. The legislation expands bonus depreciation to apply to a generous category of qualified improvement property. QIP is commonly thought of as a retail and restaurant issue, but it is much broader and applies to almost any improvement to the interior of a building that is either owned or leased. The fix is retroactive, so businesses can fully deduct qualified improvements dating back to Jan. 1, 2018, which may offer relatively quick refunds. Taxpayers who filed 2018 and 2019 returns before the law changed can choose whether to reflect the additional retroactive deduction entirely in the 2020 year with an accounting method change, or amend both the 2018 and 2019 returns to apply bonus depreciation for QIP in each of those years.


9. Claim quick disaster loss refunds Tax rules allow businesses to claim certain losses attributable to a disaster on a prior-year tax return. This is meant to provide quicker refunds. President Donald Trump’s COVID-19 disaster declaration was unprecedented in scope, designating all 50 states, the District of Columbia and five territories as disaster areas. This means essentially every U.S. business is in the covered disaster area and may be eligible for refunds from certain types of losses. Under this provision, a business could claim a COVID-19 related disaster loss occurring in 2020 on a 2019 amended return for a quicker refund. The provision may potentially affect losses arising in a variety of circumstances, including the loss of inventory or supplies or the closure of offices, stores or plants. To qualify, the loss must actually be attributable to or caused by COVID-19 and satisfy several other requirements.


10. Consider the timing of payroll tax deduction The CARES Act allows employers to defer paying their 6.2 percent share of Social Security taxes for the rest of 2020. Half of the deferred amount is due by Dec. 31, 2021, with the other half due by Dec. 31, 2022. This provides a great liquidity benefit, but taxpayers should consider the impact on deductions before the end of the year. Businesses generally cannot deduct their share of payroll taxes until paid. For most businesses, the value of deferring the actual payment is worth also deferring the deduction, but there may be some benefits for paying early to take the deduction in 2020, such as increasing an NOL for the rate arbitrage benefits discussed above. Some taxpayers using specific methods of accounting may also be able to pay the taxes as late as 8-½ months into 2021 and still claim the deduction for 2020.






BONUS: Re-evaluate the company’s tax function

Many tax departments at even the largest and most sophisticated companies still dedicate most of their time to basic number-crunching and repetitive processes. These kinds of inefficiencies make it hard to meet deadlines, present audit and tax risks, and cost businesses money — especially during unprecedented times like the COVID-19 pandemic where teams may be lean and struggling to keep up. Data analytics and automation can help mitigate these problems and enable a business’ tax function to focus more on strategic, value-added solutions — shifting away from a compliance-only role.


Data Source



The Internal Revenue Service is reopening the registration period for parents to list their kids so they can receive an extra $500 per child in economic impact payments under the CARES Act.


The $2.2 trillion stimulus package that Congress passed in March to help blunt the economic impact of the novel coronavirus pandemic included $1,200 in “Economic Impact Payments” for adults, plus an additional $500 per child. To rush the payments out, the IRS relied on tax filings for 2018 and 2019 from taxpayers, but many of those tax returns didn’t include information about the youngest children, especially after the IRS eliminated the dependent exemption with the 2017 tax reform, nor did the service have the information needed for people who don’t normally file tax returns, such as low-income taxpayers, and recipients of Social Security, veterans and railroad retirement benefits.


In response, the IRS created a Non-Filers tool so even people who didn’t file their taxes could still receive the stimulus payments, while also barring incarcerated and undocumented taxpayers from receiving the payments. However, the IRS also kept the Non-Filers tool available for only a few weeks in April and told taxpayers to hurry and register or else they would have to wait until next year to claim the payments. But after receiving many complaints that the stimulus payments were incorrect or never arrived, along with other problems, the IRS is now making the Non-Filers tool available again but only until the end of September.


The IRS is asking eligible federal benefit recipients to use the Non-Filers tool starting Aug. 15 through Sept. 30 to enter information on their qualifying children to receive the supplemental $500 payments. Those eligible to provide the information include people with qualifying children who receive Social Security retirement, survivor or disability benefits, Supplemental Security Income, railroad retirement benefits and Veterans Affairs compensation and pension benefits and did not file a tax return in 2018 or 2019.

The IRS expects the catch-up payments, equal to $500 per eligible child, will be sent by mid-October.


“IRS employees have been working non-stop to deliver more than 160 million Economic Impact Payments in record time. We have coordinated outreach efforts with thousands of community-based organizations and have provided materials in more than two dozen languages,” said IRS Commissioner Chuck Rettig in a statement Friday. “Given the extremely high demand for EIP assistance, we have continued to prioritize and increase resource allocations to eligible individuals, including those who may be waiting on some portion of their payment. To help with this, we are allocating additional IRS resources to ensure eligible recipients receive their full payments during this challenging time.”

For beneficiaries of Social Security, SSI, veterans' or railroad retirement benefits who already used the Non-Filers tool after May 5 to provide information about children, no further action is needed. The IRS will automatically make a payment in October.

Those who receive any of those benefits and haven’t used the Non-Filers tool to provide information on their child should register online by Sept. 30 using the Non-Filers tool. However, anyone who has already filed or plans to file either a 2018 or 2019 tax return should file the tax return and not use this tool.

People who can’t access the Non-Filers tool can still submit a simplified paper return following the procedures described in this FAQ on IRS.gov.

This may be the final chance to submit the information this year. The IRS said any beneficiary who misses the Sept. 30 deadline will need to wait until next year and claim it as a credit on their 2020 federal income tax return.

Those who received their original EIP by direct deposit will also have any supplemental payment direct deposited to the same account, while others will receive a check.

Eligible recipients can check the status of their payments using the IRS’s online Get My Payment tool. A notice verifying the $500-per-child supplemental payment will be sent to each recipient and should be retained with other tax records.

The IRS noted that other non-filers can still receive a payment, but they have to act by Oct. 15. While most Americans have already received their EIPs, the IRS said people with little or no income and who aren’t required to file tax returns still remain eligible to receive stimulus payments. People in this group should also use the Non-Filers’ tool, but they need to act by Oct. 15 to receive their payment this year.

The Non-Filers tool is aimed at people with incomes generally below $24,400 for married couples, and $12,200 for singles. That includes couples and individuals who are experiencing homelessness. People can qualify, even if they don’t work or have no earned income. However, low- and moderate-income workers and working families who are eligible to receive special tax benefits, such as the Earned Income Tax Credit or Child Tax Credit, can’t use this tool. Instead, they need to file a regular tax return by using IRS Free File or some other method.

The IRS is still dealing with a number of other issues holding up the stimulus payments for some taxpayers.


Those include:


-Spouse’s past-due child support. The IRS said it’s actively working to resolve cases where part or all of an individual’s payment was taken and applied to their spouse’s past-due child support. People in this situation don’t need to take any action. The IRS said it will automatically issue the portion of the EIP that was applied to the other spouse’s debt.


-Spouses of deceased taxpayers. When the CARES Act passed in March, the IRS originally implemented the legislation in accordance with processes and procedures relating to the 2008 stimulus payments (which were sent to deceased individuals). After further review this spring, the Treasury decided that those who died before receipt of the payments should not receive the advance payment. As a result, the EIP procedures were modified to stop future payments to dead people. The cancellation of uncashed checks is part of this process. Some EIPs to spouses of deceased taxpayers were canceled. The IRS said it’s actively working on a systemic solution to reissue payments to surviving spouses of deceased taxpayers who were unable to deposit the initial EIPs paid to the deceased and surviving spouse. For EIPs that have been canceled or returned, the surviving spouse will automatically get their share of the EIP.

The IRS has come under fire from taxpayers and lawmakers in Congress over the delays and said it has taken steps to get payments to as many eligible individuals as possible. A recent oversight report said the IRS correctly figured the amount due for 98 percent of the payments issued. However, the IRS acknowledged the significance of the issue for those who haven’t yet received their full payment. The service is still looking at ways to help people get the right amount of the stimulus payment and will continue to provide updates on further improvements as they occur.

For more information on the EIP, including the latest answers to frequently asked questions and other matters, visit IRS.gov/coronavirus, which provides information about issues such as why the payment received is less than $1,200, why someone is considered ineligible to receive a payment, and why someone might not be eligible to receive the $500 per qualifying child payment.


Data Source: Michael Cohn

Editor-in-chief, AccountingToday.com

1
2
CONTACT US
  • Facebook Basic Black
  • LinkedIn Basic Black

Timothy E. Brown, CPA, LLC

Physical Address:                                        

2310 Parklake Drive, Suite 165                    

Atlanta, GA  30345                                         

W 770.498.2333  F 844.333.6756

www.tebcpa.com

Professionalism * Integrity * Expertise

Mailing Address:

P.O. Box 870205

Stone Mountain, GA  30087

© 2017 created by Modern Créatif