SWAP - Weekly Blog- -

Plan Rollover to a Roth

Thu, 16 May 2024 22:01:58 GMT

Considering a 529 for a family member?

Have you established, or are you considering, a Section 529 savings plan for a child, grandchild, or other family members? Such plans are a great way to help pay for a person’s college education. Contributions are not federally tax deductible, but they grow tax-free, and you can withdraw them tax-free to pay higher education expenses. But what happens if your child or other beneficiary doesn’t use all the money in the 529 account or decides not to go to college? Indeed, many young people are choosing not to attend college these days.

What do you do with the money in an overfunded 529 plan?

Suppose you withdraw the money and use it for non-education purposes. In that case, you must pay regular income tax plus a 10 percent penalty on the earnings (but not on your original contributions). If you want to keep tax-free treatment for withdrawals, you can change the Section 529 plan’s designated beneficiary to another qualified family member.

But starting in 2024, you have another alternative:

You can roll over the money into a Roth IRA for the beneficiary. If you satisfy some pretty complicated rules, you can transfer up to $35,000 to a Roth IRA tax-free. When the beneficiary turns 59 1/2, he or she can withdraw the Roth IRA money tax-free for any purpose. At age 59 1/2, the Roth IRA could be worth hundreds of thousands of dollars. Unfortunately, lawmakers have not gone out of their way to make such rollovers easy. To qualify for tax-free treatment, you must follow the rules below:

the 529 account must have been in existence for at least 15 years;
you can only roll over money that has been in the 529 account for at least five years;
each year, you can roll over an amount equal to the beneficiary’s IRA contribution limit for the year ($7,000 for 2024);
the beneficiary must have earned income at least equal to the amount of the rollover amount; and
you must reduce your maximum $7,000 rollover by any contributions the beneficiary makes to a traditional or Roth IRA.

Section 529 plan rollovers to a Roth IRA require a long-term commitment. You need at least five years to transfer the entire $35,000 to a Roth IRA. Such rollovers must also be coordinated with the beneficiary since they impact his or her ability to make IRA contributions. And there’s the little wrinkle of your state’s rules. The transfers may be subject to state income taxes. Despite the complexities involved, 529 to Roth IRA rollovers give 529 plan owners who overfund their plans welcome new flexibility in deciding what to do with their unused money.

If you want to discuss this strategy, please call us at 505-232-3275.

Sincerely,

Larry Filener, CPA

Southwest Accounting Pros, LLC

Why Your Small Business Needs Financial Services

Tue, 14 May 2024 13:31:48 GMT

Running a successful small business requires more than just a great product or service. You also need solid financial management and planning to grow and protect your company. Professional financial services can provide the expertise and resources to put your business on the path to prosperity.

To Set Up the Right Accounting System

Proper accounting is crucial, but it's not a small business owner's specialty. According to Webinar Care, a business guide provider, 67% of businesses state they are satisfied with their accounting services. Financial service providers can set up the ideal accounting system tailored for your venture. They handle details like choosing the right software, establishing processes for invoicing and payables, and creating budgets. With proper accounting practices in place from the start, you have the foundation to monitor the health of your business.

To Manage Payroll and Benefits

One major benefit of financial services is assistance in handling payroll, taxes, health insurance, and retirement accounts for your employees. They ensure payroll runs smoothly, taxes are paid on time, and that you offer competitive benefits packages. This lifts the burden so you can focus on operations, not regulatory requirements.

To Guide Strategic Business Planning

In addition to day-to-day support, a financial professional provides insights into big-picture planning. They can analyze profit margins, create realistic forecasts, and develop growth plans leveraging your revenue and expenses. With strategic financial management tailored to your venture, you can pursue opportunities confidently.

To Navigate Changing Laws and Regulations

Laws and regulations change frequently, and staying compliant is crucial. Financial experts help you navigate legal obligations related to taxes, employment, financial reporting, and more. They implement processes to keep your company in line with local, state, and federal laws influencing small business finances. This prevents nasty surprises or penalties down the road.

To Supply Ongoing Advisory Support

A financial services partner becomes your trusted advisor for the life of your business. As challenges arise or goals shift, they supply guidance to adjust your financial strategy accordingly. With ongoing advisory support, you don't have to decipher financial questions alone. Leverage their expertise as needs evolve.

Don’t underestimate the value financial expertise brings to your small business. Consistent guidance prevents growing pains from crippling your company’s progress. Investing in financial services sets your venture up for sustainable growth and success. Let us help you with your business's financial services . Reach out to Southwest Accounting Pros, LLC today to start the process.

Client Portal Announcement

Wed, 13 Mar 2024 21:05:20 GMT

Tax Season Transition - - Hello Sharefile

Dear Client:

As part of our ongoing commitment to enhancing and ensuring we are doing everything possible to protect your information from identity theft, we are excited to inform you about an important upgrade to our client portal service.

We had received a number of complaints about the convenience of the previous service that we were using (especially as it related to copying multiple files to the portal simultaneously). In order to provide you with an improved and streamlined service as well enhanced security, we are changing our client portal. Within the last few days, you should have received an email invitation with the extension “ swapnm.sharefile.com “ to setup your new portal.

If you forget or recently posted information for us on the old portal, don’t be concerned about your information. It will still be available to you for the next year. However, we request that you go through the setup with the new portal as soon as practicable. Please don’t hesitate to contact us if you are experiencing difficulties.

We will monitor the responses and reach out to you in the future if you haven’t responded. I am sorry for the incovenience, however, this new service is more secure and more easily accessible and will be a definate upgrade for us and you.

As always, we very much appreciate your business and look forward to working with you in the coming new year!!

Regards,

Larry Filener

Larry Filener, CPA

Southwest Accounting Pros, LLC

Making Tax-Free Family Loans

Wed, 13 Mar 2024 20:57:40 GMT

Family and Finances

Dear Client:

Here’s some information on how you can make loans to your family, or perhaps, help a family member buy a home by making a loan to them while ensuring that you and the family member benefit from a tax-smart loan structure.

Especially with home loans, the current national average interest rates for 30-year and 15-year fixed-rate mortgages is at 6.81 percent and 6.13 percent, respectively. Family loans can offer a much more attractive alternative. By charging the Applicable Federal Rate (AFR) as interest, you can give the borrower a good deal without giving yourself a tax headache.

The IRS issues new AFRs for term loans every month. The rates for April 2023 were as follows:

Short-term loan (three years or less): 4.86 percent
Mid-term loan (over three years but not more than nine years): 4.15 percent
Long-term loan (over nine years): 4.02 percent

Charging at least the AFR for a term loan to a family member allows you to avoid federal income tax and federal gift tax complications. If at some future point, if the AFR rates lower, you can always renew the loan with the lower rates.

There is also some ways to charge ZERO INTEREST on family loans. There are several tax-law exceptions:

First, it is possible to gift (not loan) $17,000 per year per person without any tax consequences. Additionally, if your son or daughter is married, you can give another $17,000 to the spouse (bringing the total to $34,000).
Second, it is possible to make family loans at $10,000 or lower without charging any interest. If a son or daughter is married, you could also loan $10,000 to their spouse for $10,000 or less without charging interest (bringing the total to $20,000). This could be done to give them a downpayment.

Third, there is also a $100,000 loophole, however there may be some complications. With the $100,000, you may have charge zero interest, but consideration should be given to possible tax implications. There may be imputed interest income to the maker of the loan if the total investment income of your son or daughter exceeds $1,000 in investment income (i.e. interest, dividends, etc.) per year. There are also possible gift tax implications.

It is crucial to document the loan with a written promissory note. Additionally, if you are going to charge interest and the borrower wants to deduct home mortgage interest on their tax return, it is important to legally secure the home as collateral. Make sure the borrower signs the note and that the note includes details such as the interest rate, a schedule of interest and principal payments, and any security or collateral for the loan. It is also possible to make some notes at the date of the loan documenting your intentions behind the loan (i.e. that you do expect repayment, and if interest is charged, that it will bear interest and you will receive earnings).

In conclusion, loans can assist family members in this crucial time when costs are rising so precipitously. They can provide homebuyers with better interest rates than commercial lenders offer, especially if family members charge the AFR. Remember to consider the loan terms and tax consequences when structuring the loan.

If you would like to discuss the family loan concept, please call us on our direct line at 505-232-3275.

Sincerely,

Southwest Accounting Pros, LLC

Estate Planning

Wed, 13 Mar 2024 20:48:04 GMT

Thinking down the road.

Dear Client:

Frequently, we find clients don’t think that they need an estate plan or a will because they are not in the “ultra-rich” category or perhaps because their total estate is less than the current estate tax limits. For 2023, thanks to the Trump tax cuts in 2017, that limit is $12.92 million. Regardless of whether you are among the “ultra-rich” or not, we believe that an estate plan and a will are essential for many reasons. Those reasons include:

1. A will establishes your wishes that, by law, will be honored after your death. Without a will, state law dictates the distribution of your assets, which may not align with your intentions.

2. If you have minor children, a will allows you to name a guardian to care for them in the event of your untimely passing and who will be responsible for their care and the safeguarding of their assets.

3. Wills can help your heirs avoid probate. Probate is a costly and time-consuming legal process. Avoiding probate will not only help save your heirs money, but it will speed up the legal process and help them avoid the bureaucratic grief and hassle that comes at a time they are least equipped to emotionally deal with it.

4. Even if you are currently under the estate tax threshold, there is no guarantee that the limit will continue. The current estate tax limits are due to decrease significantly in 2025 ($5 million adjusted for inflation).

5. The process of estate planning also gives you an opportunity to discuss with your heirs your desires for the disposition of your assets. We have found over the years that it is not uncommon to have a family member pass away and to have their remaining heirs have no idea of how family assets should be divided and disposed. Although it may not be a comfortable discussion, we strongly advise our clients to make sure they do a good job of communicating their wishes.

6. Proper estate planning can ensure that estate tax limits are doubled (i.e. 24m not 12m).

There is a very useful and effective tool called a living trust that gives you control over your assets while you are alive and will also allow the avoidance of probate upon your passing. The living trust is also flexible, so changes in your situation can be updated as circumstances change.

It is also important for you to consider IRAs and other Pension Plans when developing an estate plan. IRAs and other Pension Plans are distributed separately and, not necessarily, according to your will. Accordingly, it is important to separately address your pension plans and make sure you understand the distribution instructions that are contained in your pension paperwork.

We have found that clients are often concerned about the cost of developing a will and living trust. In truth, if managed well, this process is fairly inexpensive and worth the time and effort. We know several estate attorneys that are affordable and provide excellent advice and assistance and would be happy to recommend them.

Estate planning is not a one-time event but a process that you should review and update regularly to accommodate life changes and fluctuations in estate and death tax rules. Should you decide to engage an attorney, we always appreciate participating in that process as we often have ideas and suggestions that should be incorporated and considered.

If you have any questions or concerns about estate planning, please do not hesitate to call us at 505-232-3275.

Sincerely,

Larry Filener, CPA

Southwest Accounting Pros, LLC

Education Benefits for Employees

Wed, 13 Mar 2024 19:43:26 GMT

Question: If I Hire My Kids, Can I Give Them Tax-Free Education Benefits?

Educational Benefits for Employees / Kids

Yes! Potentially, in two different ways. Here’s how. Payments for Job-Related Education Your business can reimburse an employee for certain education expenses, and the reimbursements will be treated as tax-favored working condition fringe benefit payments. For the employee, that means the reimbursements are free of any federal income tax hit or federal employment tax hit. Nice! For your business, that means the reimbursements are deductible as employee compensation expense. Also, nice!

This favorable federal tax treatment is generally allowed if the education is required by your business, or by law or regulation, for the employee to retain his or her current job; or the education maintains or improves skills required in the employee’s current job. More good news. When the preceding tests are passed, this favorable tax treatment is available for any employee, including one who happens to be related to the employer’s owner, such as your 22-year-old employee-child. A favorable working condition fringe benefit tax treatment is also available when your business pays for education that passes the preceding tests by making direct payments to the educational institution on behalf of the employee.

If your business pays for education that does not pass the preceding tests—such as education that prepares the employee for a new business or profession—the payments count as taxable wage compensation for the employee (unless the payments are run through a Section 127 educational benefits plan, as explained later). In either case, your business can deduct the costs as employee compensation expense.

Undergraduate Degree Program Cannot Be Work-Related Education The IRS says an undergraduate degree automatically trains you for a new profession or business. Therefore, reimbursements or payments by your business for costs for an employee, including your employee child, to obtain a Bachelor of Arts or a Bachelor of Science cannot qualify as tax-free working-condition fringe benefit payments. Presumably the same is true for costs to obtain a community college associate degree. Sadly, the Tax Court has repeatedly agreed with the IRS on this issue.

So, if your business pays for an employee to obtain an undergraduate degree, the payments will represent taxable compensation for the employee. But your business can deduct the costs as employee compensation expenses. Key point. As stated above, the general rule is that employer reimbursements for payments of undergraduate degree program costs won’t qualify for tax-free working condition fringe benefit treatment.

But the IRS informally says that each course in a program must be evaluated separately to see if an employer’s coverage of the cost of that course can qualify as a tax-free working condition benefit. For instance, if your employee-child’s work involves accounting, your business could apparently treat reimbursements for his or her undergraduate accounting courses as tax-free working condition fringe benefit payments, even though those courses are part of an undergraduate degree program.

MBA Program Can Be Work-Related Education

The IRS has also taken the position that a Master of Business Administration (MBA) trains you for a new profession or business. According to the feds, employer payments to cover the costs of obtaining an MBA cannot qualify as tax-free working condition fringe benefit payments. Thankfully, several Tax Court decisions say tax-free working condition fringe benefit treatment should apply when the MBA program maintains or improves skills used in the employee’s current profession or business. If the MBA also happens to enhance the employee’s resume and increase his or her earning potential, that’s not a problem according to the Tax Court.

For instance, if your employee-child’s work involves management and administrative matters, your business can apparently treat payments to cover his or her MBA program costs as tax-free working condition fringe benefit payments.

Payments under a Section 127 Educational Assistance Plan

Here’s another option. Your business can install an educational assistance plan that can give each eligible employee up to $5,250 in annual federal-income-tax-free and federal-payroll-tax-free benefits. These tax-favored plans are called Section 127 plans, after the section of our beloved Internal Revenue Code that allows them.

Section 127 Plan Basics Section 127 plans can cover the cost of just about anything that constitutes education, including graduate coursework, whether the education is job-related or not. But some businesses set up Section 127 plans to cover only education that’s job-related. That’s up to your business to decide. Your business can deduct payments made under the Section 127 plan. To qualify for this favorable tax treatment, the education must be only for the participating employee—not for the employee’s spouse or dependents. Also, the plan cannot cover courses involving sports, games, or hobbies.

If the employee is a related party, such as a child of the owner, some additional restrictions apply. We will explain.

Payments for Student Loans

Through the end of 2025, a Section 127 plan can also make tax-free payments to cover principal and interest on any qualified education loan taken out by a participating employee. The payments are subject to the $5,250 annual limit, when combined with any other payments in that year to cover the employee’s eligible education expenses.

Loophole for Payments to Benefit Your Employee-Child

You might think the Section 127 plan rules will mean no dice for employees who happen to be children of business owners. Not necessarily true. There’s a loophole for any employee-child who is age 21 or older, and a legitimate employee of the business; and not a dependent of the business owner (that would be you); and not a more than 5 percent owner of the business.

Age-21-or-older status is pretty likely, when the employee-child spends substantial time working in the parent’s business and attends school only part-time. Also, when the employee-child is working in the business and is also attending graduate schedule, the child likely has age-21-or-older status. Working in the parent’s business means the employee-child has an income, making it more likely he or she will not be a dependent, under the federal income tax rules. Under those rules, a child is a dependent, only if the child does not provide over half of his or her own support.

Bottom line. What starts off looking like a narrow loophole ends up being wide enough to drive a truck through for many small business owners. Good!

Here are some more rules regarding your Section 127 plan.

1. It must be a written plan for the exclusive benefit of employees of your business.

2. It must benefit employees who qualify under a classification scheme set up by your business that does not discriminate in favor of highly compensated employees or employees who are dependents of highly compensated employees.

Key point. There is no discrimination problem if all your employees are eligible for the Section 127 plan, even though they all happen to be members of your family. But if you have other employees, you may have to cover them too.

Your Section 127 plan cannot offer employees the choice between tax-free educational assistance and other taxable compensation such as wages. That means the plan benefits cannot be included as an option in, say, a cafeteria benefit program.

It does not have to be prefunded. Your business can pay or reimburse qualifying expenses as they are incurred by the employee, including an employee who is your age-21-or-older child.

It must give employees reasonable notification about the availability of the plan and its terms. It cannot funnel over 5 percent of the annual benefits to more than 5 percent owners or their spouses or dependents.

Dodging the Bullet of 5 Percent Ownership

To avoid disqualification of your employee-child under the rule stated above, he or she cannot be a more than 5 percent owner of your business. Here we are talking about actual ownership, such as via shares of stock in your C or S corporation (or your partnership business) that the child directly owns in his or her own right, plus attributed (indirect) ownership in the business under the attribution rules summarized below.

Stock Ownership Attribution Rules

Ownership in your C or S corporation is attributed to your employee-child if he or she8 owns options to acquire more than 5 percent of the stock in your corporation, is a more than 5 percent partner in a partnership that owns stock in your corporation, or is a more than 5 percent shareholder in another corporation that owns stock in your corporation.

Also, an under-age-21 child is considered to own any stock owned directly or indirectly by a parent (that would be you). But there is no attribution if the child is age 21 or older.

Bottom line. Unless your over-age-21, non-dependent employee-child directly owns more than 5 percent of the stock in your C or S corporation, he or she should dodge the bullet of 5 percent ownership. If so, your C or S corporation can set up a Section 127 plan and can start paying for and deducting your employee-child’s eligible expenses right now.

Your employee-child will owe zero federal income tax and zero federal employment tax on up to $5,250 per year collected from the Section 127 plan. Nice!

Ownership Attribution for an Unincorporated Business

Your business may be unincorporated. That means you operate it as a sole proprietorship, a single-member (one-owner) LLC treated as a sole proprietorship for tax purposes, a multi-member (several owners) LLC treated as a partnership for tax purposes, or a partnership. In that case, you still have to worry about ownership being attributed to your employee-child. The good news is, the rules are the same as the rules for corporations that we just explained. Bottom line. Things should work out as long as your employee-child does not have direct ownership of more than 5 percent of your unincorporated business.

Takeaways

Payments for job-related education. Your business can reimburse an employee for certain education expenses, which are tax-free for the employee and deductible by your business. Undergraduate degree programs cannot be work-related education. Generally, reimbursements or payments for an undergraduate degree don’t qualify as tax-free working-condition fringe benefit payments. MBA program can be work-related education.

Payments to cover the costs of obtaining an MBA can qualify as tax-free working-condition fringe benefit payments if the MBA program maintains or improves skills used in the employee’s current profession or business.

Payments under a Section 127 educational assistance plan. Your business can establish an educational assistance plan that provides each eligible employee with up to $5,250 in annual tax-free benefits. Loophole for payments to benefit your employee-child. If your employee-child is age 21 or older, not a dependent, and not a more than 5 percent owner of the business, you can include him or her in a Section 127 plan for tax-free educational assistance.

More rules. The Section 127 plan must adhere to several guidelines, such as being a written plan for the exclusive benefit of employees, not discriminating in favor of highly compensated employees, and not offering employees the choice between tax-free educational assistance and other taxable compensation.

Ownership attribution. If your employee-child is age 21 or older, he or she is not subject to the Section 127 ownership attribution rules.

If you have additional questions, please don’t hesitate to contact us!

Regards,

The Team at SWAP

Research and Development Credit

Fri, 08 Mar 2024 00:27:53 GMT

R&D Credit??

SOUTHWEST ACCOUNTING PROS, LLC

Accountants & Financial Advisors

Start-ups: New Bang for R&D—Save More as an S Corporation

Small businesses can use their research and development tax credits to reduce their Social Security taxes under the Protecting Americans from Tax Hikes (PATH) Act of 2015.

This truly benefits start-up companies that are involved with research and development activities. The government finally understood that it takes time to develop and grow a new business (and for that business to start paying income taxes). If you have employees in your start-up, it’s a good guess that payroll taxes are a big part of your tax bill.

Because of this law, start-up businesses have the opportunity to claim both a tax credit and a tax deduction for the same dollar spent on research and development. This double bite out of your taxes works like this: You get a research credit against payroll taxes. And you still deduct the payroll taxes as business expenses to calculate taxable income. 1

You can use this new payroll tax credit if you operate as an S corporation, C corporation, partnership, or sole proprietor. But you may be able to save even more money if your business becomes an S corporation.

Big Decision to Incorporate

It is a big decision to form an S corporation. For federal tax purposes, not much changes for you because the corporation’s income and deductions pass through to you as a shareholder, and you report them on your personal tax return.2 Like a proprietorship, with an S corporation, you don’t pay corporate tax.

But as an S corporation, you are subject to the state corporate laws, such as holding regularly scheduled director and shareholder meetings and maintaining minutes, bylaws, better records, and separate bank accounts. Also, you now are required to file corporate tax returns, in addition to your personal returns.

S Corporation Can Mean More Money for You

When you look at this new payroll tax credit and compare the S corporation with the sole proprietorship, you will find that the S corporation can save more money. Why? Put simply: your salary in the S corporation increases the payroll, enabling the possibility of more tax credits.

If you form an S corporation and work for the S corporation, you are both the owner-shareholder and an employee. Your S corporation counts the Social Security taxes that it pays on your personal wages to calculate its new payroll tax credit, because it is your employer.3 If your wages are a significant portion of the total payroll, S corporation status increases the amount of this new payroll tax credit and gives you more tax savings.

As a sole proprietor, you pay self-employment taxes. The law does not allow you to apply the research tax credit against your self-employment taxes. To be clear, sole proprietors also can take this new payroll tax credit. But the earnings of the proprietor do not count when calculating the amount of the credit.

What Is a Qualifying Small Business?

The most important requirement to qualify for the new payroll tax credit is the amount of your gross receipts. A small business qualifies for this credit if its annual gross receipts amount to less than $5 million.4

There is a second rule that uses typically complicated IRS language: your business cannot have any gross receipts in any year beginning before the preceding fifth year.5 What does this mean? For practical purposes, it means that the payroll tax credit is available only for start-ups. And you can claim the new payroll tax credit for up to five years, only.6

Mechanics: The Credit and How It Works

To use the research and development credit against your payroll taxes, you must make an election each year.7 The deadline for the election is the due date of your original return (with extensions).8

You then apply the tax credit to the payroll for the first calendar quarter beginning after the date you file your tax return. With no election, you use the research and development tax credit against your regular income taxes or carry forward the research and development credit until you owe income tax.

The payroll tax credit is limited to $250,000 per year for a maximum of five years.9 You can apply some, all, or none of your research credit to reduce payroll taxes and can apply any difference to reduce income taxes. The choice is yours. You just need to say so in the election.

You use the credit to reduce the employer’s share of Social Security taxes.10 The credit does not apply to the employee’s Social Security taxes (the part that the company had to withhold from employee wages and pay over to the IRS on the employee’s behalf).11

1 IRC Section 3111(f)(4).

2 IRC Section 1366(a)(1)(A).

3 IRC Section 3111(f)(1).

4 IRC Section 41(h).

5 Ibid.

6 Ibid.

7 IRC Section 41(h)(4)(A).

8 Ibid.

9 IRC Section 41(h)(4)(B)(i).

10 IRC Section 3111(f).

11 IRC Section 3101.

12 IRC section 38.

SECURE 2.0

Fri, 08 Mar 2024 00:26:11 GMT

SECURE 2.0 and You

The SECURE 2.0 Adds New Escapes from the 10% Early Withdrawal Penalty

Ordinarily, you must pay a 10 percent penalty when you withdraw your money from an IRA or other retirement account before you reach age 59 1/2. This is in addition to paying the regular income tax in the case of tax-deferred accounts. But there have always been some exceptions and, now with the Secure Act 2.0, there are new ones.

Unfortunately, most of these exceptions require that something bad happen to you! So, while we hope that you don’t qualify for most of these exceptions, here are the new rules in case they do.

New Emergency Personal Expense Exception

A new emergency personal expense withdrawal exception to the 10 percent penalty begins in 2024. This penalty exception applies to any taxpayer who needs the money “for purposes of meeting unforeseeable or immediate financial needs relating to necessary personal or family emergency expenses.” This can cover just about anything (within reason). Moreover, you are only required to provide a written certification to the plan administrator that the withdrawal is for an emergency.1 Though broadly defined, emergency personal expense distributions are severely limited in amount. You can make only one emergency personal expense distribution per calendar year, for a maximum of $1,000.2 Hardly enough to deal with most real emergencies!

In addition, once you take your first emergency personal expense distribution, you can’t take another in a subsequent year unless:3

• you fully repay the prior distribution,

• your regular deferrals and other employee contributions made to the plan since the emergency distribution total at least as much as the prior emergency distribution, or

• three years have passed since the previous emergency personal expense distribution.

In any event, if you need a quick $1,000 for an emergency, you’ll know you can always take it out of your IRA.

Domestic Abuse Exception

Starting in 2024, victims of domestic abuse will be allowed to take penalty-free withdrawals from their retirement accounts of up to $10,000 or 50 percent of their vested balance, whichever is less. The withdrawal must be made within one year of any date during which the abuse occurred. Abuse victims have the option of repaying the money within three years.4 “Domestic abuse” is broadly defined to include “physical, psychological, sexual, emotional, or economic abuse, including efforts to control, isolate, humiliate, or intimidate the victim, or to undermine the victim’s ability to reason independently, including by means of abuse of the victim’s child or another family member living in the household.” This includes abuse both by a spouse or domestic partner.5 Employer plans and IRA custodians will be able to rely on an individual’s self-certification that they qualify to receive such a distribution.

Terminal Illness Exception

Starting immediately, individuals with a terminal illness will be able to make penalty-free retirement account distributions of any amount. For these purposes, a terminal illness is one that can reasonably be expected to result in death within 84 months (7 years). A doctor must certify that the individual has such a terminal illness.6 The seven-year period for what constitutes a terminal illness is much longer than the normal two-year terminal illness definition under other provisions of the tax law. Such a terminal illness could presumably include, for example, various forms of cancer with a low seven-year survival rate. Just how low the survival rate must be for a disease to be reasonably expected to result in death is unclear. Such distributions may be repaid within three years, but of course, they don’t have to be. Key point. There has long been an early withdrawal penalty exception for individuals who are unable to work due to a terminal illness.7 This new exception allows terminally ill people to make penalty-free withdrawals even if they are able to work while they are sick.

Long-Term Care Exception

Starting in 2026, to pay for long-term care insurance, retirement account owners may take penalty-free annual, qualified distributions of up to 10 percent of their vested balance or $2,500 (adjusted for inflation), whichever is less. Such insurance can be for you or for your spouse if you file a joint return.8 To qualify for this exception, you must have either paid or been assessed long-term care insurance premiums equal to or greater than the distribution in the year it is made. You’ll also need to provide your plan administrator with a “Long-Term Care Premium Statement” with your long-term insurance details.9

Disaster Recovery Exception

For many years, Congress has authorized individuals impacted by certain natural disasters such as hurricanes, floods, and fires to withdraw a specified amount of retirement funds without penalty for a limited time. But Congress had to authorize such distributions for each disaster (or series of disasters). All such authorizations had expired as of 2021. The SECURE 2.0 Act permanently reinstates disaster recovery distributions for all federally declared disasters. Congress no longer has to authorize them after each disaster. The reinstatement is retroactive to disasters occurring on or after January 26, 2021. 10 To qualify for such distributions, your “principal place of abode” (residence) must be located in a federally declared disaster area, and you must have suffered an economic loss due to the disaster. You must take your distribution within 180 days of the disaster.11 Unfortunately, the SECURE 2.0 Act substantially reduces the amount that may be withdrawn penalty-free in the event of a disaster. The maximum disaster recovery distribution amount is $22,000.12 Before, the maximum was $100,000. You have the option of spreading the income from disaster recovery distributions evenly over three years, beginning with the year of distribution. This gives you three years to pay the income tax due on the distribution. Alternatively, you can elect to include all the income from the distribution in the year of the distribution. In addition, you have the option of repaying all or part of your distribution within three years.13

Age 50 Exception for Public Safety Workers

Effective immediately, the SECURE 2.0 Act expands the public safety worker exception to the 10 percent penalty. Private-sector firefighters, state and local corrections officers, and other forensic security employees may take penalty-free withdrawals from their employer’s defined contribution and/or defined benefit plans if they separate from service the year they turn 50 or any year thereafter. 14 In addition, effectively immediately, the existing 10 percent penalty exception for public safety workers is expanded to include such workers who separate from service before they reach age 50, so long as they have 25 or more years of service for the employer sponsoring the plan.15

1 IRC Section 72(t)(2)(I).

2 Ibid.

3 IRC Section 72(t)(2)(I)(vii).

4 IRC Section 72(t)(2)(K).

5 IRC Section 72(t)(2)(K)(iii)(II).

6 IRC Section 72(t)(2)(L).

7 IRC Section 72(t)(2)(A)(iii).

8 IRC Section 72(t)(2)(N).

9 Ibid.

10 IRC Section 72(t)(2)(M).

11 IRC Section 72(t)(11)(A).

12 IRC Section 72(t)(11)(B).

13 IRC Sections 72(t)(11)(C); 72(t)(11)(D).

14 IRC Section 72(t)(10).

15 Ibid.

Buying vs Leasing

Fri, 08 Mar 2024 00:21:47 GMT

Having thoughts about a new business vehicle?

Dear Client:

Buy or Lease a Business Vehicle: Which Costs Less?

If you’re trying to decide between leasing and buying your next business vehicle, this question is probably foremost in your mind; Which option costs less?

Unfortunately, comparing the costs of leasing and buying isn’t as simple as it looks. To do it right, you must consider not just out-of-pocket costs but also cash available, the tax benefits of each option, and the time value of money.

The Difference between Leasing and Buying:

When you buy you own the vehicle free and clear after you repay the loan. So, you get the trade-in or sale value of the vehicle when you decide to get rid of it. When you lease, the dealer or leasing company owns the vehicle, and you pay for its use over the lease term. When the lease ends, you can either buy the vehicle for a “residual value” stated in the lease or walk away and get a new vehicle.

So, the impact on the cost calculation involves lots of variables. Leasing requires less money up front and often lower monthly payments. Consequently, leasing leaves you more cash. That’s an advantage you must account for in your cost calculation. Another key factor in the comparison is how much you can save on taxes using each option. The key tax differences could involve bonus depreciation, Section 179 expensing, and MACRS depreciation.

If you buy your vehicle and use the vehicle in your business, you can deduct the cost of operating and maintaining it using either a pre-determined mileage rate set by the IRS (which for 2024 is 67 cents per mile, and that 67cents includes 30 cents for depreciation), or your actual expenses (operating expenses plus depreciation and Section 179 expensing).

The actual expense method gives you your deductions quicker than the mileage method because, depending on the type of vehicle, you can claim the following: bonus depreciation,

section 179 expensing, and MACRS depreciation

You can also use the mileage rate or actual costs to deduct vehicles you lease. The actual cost deduction for business vehicles you lease consists of monthly lease payments, amortization of down payment and other up-front costs, and lease reduction amounts for luxury vehicles, if applicable.

So How Can We Help:

How can you absolutely know whether it’s better to buy or lease? Well, the quickest way is to call us, and we can enter your numbers and calculate the cost of each scenario. We can also factor in the after-tax adjusted present value method which takes the money you pay out and the money you collect and values that money in today’s dollars so you can make a true comparison.

So, to calculate the time value of money, you start with this question: what is your safe rate of investment return after taxes? With that number, the calculator values the cash intake and outlay and makes the comparison.

Other Considerations:

There are many other intangible considerations that can factor into your decision. How often you want a new vehicle—leasing gives you a big push to get a new vehicle every three years or so, when the lease ends. How much you drive—leased vehicles are subject to mileage limits as well as fees for excess damage, which may be a major bummer if you plan to drive the vehicle a lot and treat it roughly. Cash Flow considerations. Generally, a lease takes less cash flow for the first few years of ownership. You may have significant cash flow needs and that may be a big advantage. However, buying generally results in higher depreciation deductions in the first year, so that may be of significant advantage.

It is a complex question, but one that most businesses think about. Please don’t hesitate to contact us if we can help you consider weighing your options on your next vehicle.

Regards,

Larry Filener, CPA

Southwest Accounting Pros, LLC

CinFen

Fri, 08 Mar 2024 00:13:50 GMT

The CTA is upon us!

Dear Client:

The Corporate Transparency Act (CTA) is upon us. It takes effect on January 1, 2024, and imposes a new federal filing requirement for most corporations, limited liability companies (LLCs), and other business entities.

Corporations, LLCs, and other entities subject to the CTA are called “reporting companies.” People who form new reporting companies must file a beneficial ownership information (BOI) report with the Department of the Treasury’s Financial Crimes Enforcement Network (FinCEN) within 90 days of forming the company.

The owners of reporting companies created before 2024 must also file a BOI report, but they have until December 31, 2024.

Some businesses are exempt from filing—for example, large operating companies with over 20 employees and $5 million in income. There are other, more narrow exemptions as well.

The BOI report must contain the name, the birth date, the address, and an ID number and image of that ID for each “beneficial owner” of the reporting company. These are the human beings who (1) own or control at least 25 percent of the company or (2) exercise “substantial control” over the company.

The BOI report is filed online at a new federal database called BOSS (an acronym for Beneficial Ownership Secure System). There is no filing fee.

Government law enforcement and security agencies will use the data from BOI reports to help combat money laundering, tax evasion, terrorism, and other crimes. It will not be available to the public.

Naturally, people have lots of questions about the BOI report filing requirements—for example:

• Do you have to file a BOI report if you own a single rental property in an LLC? (Yes.)

• Do you have to file 10 BOI reports if you own 10 LLCs? (Yes.)

• Are registered agents responsible for filing the BOI report? (No.)

• Do the self-employed have to file? (No.)

• Do I need to list a street address in the BOI report? (Yes.)

• Do I need to list my Social Security number in the BOI report? (No, but you do have to have an approved ID number, like a drivers license)

• Must I file an updated BOI report if a beneficial owner leaves the company? (Yes.)

• Do I have to list my minor child in a BOI report? (No.)

Currently the final regulations are not completed, so we don’t have all the answers. We were planning to include the BOI filings with our tax returns. However, we have been notified by our Software that the Treasury has not yet given tax software companies a roadmap on how to interface with their system and allowing e-filing. Accordingly, we don’t have a source to provide that service yet.

So… currently we are in a bit of a holding pattern. We will remind our clients of the requirements and, for those of you that would like us to take care of this reporting, we can do so. It just won’t be as easy and seamless. Hopefully the tax software groups will be given access so that this will be an easier process.

Please don’t hesitate to contact us if you have any questions on the above.

Regards,

Larry Filener, CPA

Southwest Accounting Pros, LLC

De Minimis Election

Fri, 08 Mar 2024 00:11:10 GMT

What is the De Minimis Election??

Dear Client:

For 2024, you can elect the de minimis safe harbor to expense assets costing $2,500 or less ($5,000 with audited financial statements or similar).

The term “safe harbor” means that the IRS will accept your expensing of the qualified assets if you properly followed the safe harbor rules.

Here are three benefits of this safe harbor:

1. Safe harbor expensing is superior to Section 179 expensing and depreciation because you don’t have the recapture period that can complicate your taxes.

2. Safe harbor expensing simplifies your tax and business records because you don’t have the assets cluttering your books.

3. The safe harbor does not reduce your overall ceiling on Section 179 expensing.

Here’s how the safe harbor works. Say you are a small business that elects the $2,500 ceiling for safe harbor expensing, and you buy two desks costing $2,100 each. On the invoice, you see the quantity “two” and the total cost of $4,200, plus sales tax of $378 and a $200 delivery and setup charge, for a total of $4,778.

Before this safe harbor, you would have capitalized each desk at $2,389 ($4,778 ÷ 2) and then either Section 179 expensed or depreciated it. You would have kept the desks in your depreciation schedules until you disposed of them.

With the safe harbor, you expense the desks as office supplies—your tax records life is easier.

There is a two-step process to benefit from the safe harbor. It works like this:

Step 1— For safe harbor protection, you must have in place an accounting policy that requires expensing an amount of your choosing, up to the $2,500 (or $5,000 limit in some cases). We help our clients follow this policy in preparing your monthly / annual financial statements.

Step 2— When our firm prepares your tax return, we make the election on your tax return for you to use safe harbor expensing. This is done with an election statement on your federal tax return and file that tax return by the due date (including extensions).

September 25, 2023

De Minimis Election

If you would like our help in ensuring that you are taking advantage of the De Minimis election or you need further assistance or have questions, please don’t hesitate to call us at 505-232-3275.

Sincerely,

Larry Filener

Larry Filener, CPA

Southwest Accounting Pros, LLC

Home Office Deduction

Fri, 08 Mar 2024 00:02:00 GMT

You and Your Home Office

Dear Client:

Frequently, we find that business owners use their home to perform the administrative duties for their businesses. There are beneficial ways to structure this, but it has to be done properly and the conditions of the law have to be met. Accordingly:

1. Your office must be used regularly and exclusively for business. However, you don’t have to have a separate room but an area where you don’t do anything else.

2. The office must either be your principal place of business, a place where you meet regularly with clients or patients, or where you conduct administrative tasks for your business. For example, a plumber that works in different places but your administrative work is always done in that home, then you would qualify.

3. Your proof of regular use and administrative use requires some type of entry in a diary or calendar. Kee the timely entry requirement in mind when making these entries. The IRS recommends that you keep a weekly log.

As mentioned above, the IRS also requires you to supply proof of the expenses that you are requesting reimbursement for. There is a simple way to do this. It is called the IRS form 8829. This form and its instructions contain the rules and help you make the proper allocations.

Now that you have completed the form, submit it to the corporation for reimbursement. The corporation writes the check to you for the amount on your Form 8829 and keeps the form as part of the proof of the deductions. You receive the check as a reimbursement of employee expenses—which is not taxable to the employee. With this reimbursement, your S corporation gets the deduction and you have no taxable income.

Also, unlike the arrangements above, this payment by the S corporation:

1. It is deductible by your S corporation as an office expense.

2. The payment is proper under Regulation 1.62-2(c)(4).

3. Sets you up to be allowed the business mileage on your vehicle for trips beginning from your home.

5. Reduces audit questions.

6. Increases the ability of your corporation to protect you from personal liability.

Page 2

September 18, 2023

Home Office Deduction

Also, another point to keep in mind. When you claim the deduction as outlined above, you deduct only the unreimbursed portion of mortgage interest and property taxes on your personal return. Thus, if your home office makes up 15 percent of your home, the corporation reimburses 15 percent of your mortgage interest and property taxes. Your personal itemized deduction is for the remaining 85 percent.

Please don’t hesitate to contact us if you have further questions concerning the above. Our main office number is 505-232-3275.

Regards,

Larry Filener, CPA

Southwest Accounting Pros, LLC

Albuquerque, New Mexico

Repairs Vs Capital Improvements

Thu, 07 Mar 2024 23:57:27 GMT

Have you thought about Repairs Vs Capital Improvements?

Repairs vs Capital Improvements

Dear Client:

The distinction between repair expenses and improvement costs can impact your tax benefits.

The tax law categorizes repair and improvement costs differently. Repair expenses are generally more beneficial for tax purposes, providing greater after-tax cash value than the depreciation deductions you would get from improvements or additions.

One key reason for this is recapture taxes. When you depreciate a building and then sell it at a profit, a percentage (up to 25 percent) of the straight-line depreciation you claimed on the building is taxed as “unrecaptured Section 1250 gain.” This effectively transforms what you might have considered deductions into something resembling a profit-sharing loan from the IRS, which is repayable upon sale.

Further, depreciation deductions come in small parts over long durations—27.5 years for residential rental properties and 39 years for commercial properties. In comparison, repair expenses can provide immediate tax benefits, depending on how the passive loss rules affect you.

Example. If you spent $30,000 on repairs to your business building and are in the 28 percent tax bracket, you could save $8,400. On the other hand, if you classified the same $30,000 as a capital expenditure (improvement), you would deduct depreciation and save approximately $215 a year.

And this $215 per year is not really $215 a year because it does not consider the capital gains increase that will have to be paid when the property is sold. It also doesn’t consider the:

• the time value of money, or

• the devastating effect of recapture taxes.

September 11, 2023

Repairs vs Capital Improvements

If you would like our help distinguishing between repairs and improvements, stay tuned for our next newsletter which will help you with that. However, if you need further assistance or have questions, please don’t hesitate to call us at 505-232-3275.

Sincerely,

Larry Filener

Larry Filener, CPA

Southwest Accounting Pros, LLC

Loans From C&S Corporations to Their Shareholders

Thu, 07 Mar 2024 23:36:12 GMT

Loans, Your Business, and You.

Loans From C & S Corporations to Their Shareholders

Dear Client:

If you operate your business as a C or an S corporation, and if you loan money to the corporation or the corporation loans money to you, you need documentation that the loan is indeed a loan.

With the S corporation, the loan that fails as a loan can result in taxable wages to you.

With the C corporation, the loan that fails as a loan can result in taxable dividends to the shareholder.

Good News, Bad News

Nariman Teymourian got a real shock when, at the end of his IRS audit, the IRS claimed that he owed over $600,000 in taxes and penalties, primarily because he had received advances from the corporation in which he had majority control.

Good news. Mr. Teymourian won his case in court and paid zero additional taxes.

Bad news. Mr. Teymourian had to go to court.

If you own a C corporation, pay attention to your advance account. When the IRS looks at your advance account, it decides between two options:

1. The advances are loans from the corporation to you.

2. The advances are disguised dividends that should be taxable to you.

Obviously, there is a huge difference between a loan and a taxable dividend.

Here’s the Teymourian Story

Mr. Teymourian was building a home. His corporation made some big advances during this building effort. The paperwork between Mr. Teymourian and the corporation was not close to perfect, and that triggered the problems with the IRS.

Key point. Operating as a C or an S corporation requires that you be pretty good at paperwork.

Mr. Teymourian won his case, but he also had the displeasure of the IRS’s company in court.

September 4, 2023

Loans From C & S Corporations to Their Shareholders

Page 2

Criteria for Being Successful in your IRS Defense

Here are seven magic questions to which you want to answer “yes” to ensure that your advances are treated as loans. We structured these as after-the-fact questions, because you would be giving your answers to the IRS after the fact.

1. Did you sign a promissory note or other document promising to repay the money to the corporation?

2. Did you pay interest on the advances?

3. Did you make payments on a fixed monthly, quarterly, or other schedule?

4. Did you give the corporation collateral to secure your repayment?

5. Did you repay the loan?

6. Did the corporation check to make sure you had the ability to repay the loan (i.e., did it look at credit reports and statements of net worth)?

7. Did both you and the corporation conduct yourselves as if the advances were loans?

While it is not necessary to have a yes answer to all of the above, the more positive responses the better.

If you would like our help with your corporate advances account, please call us at 505-232-3275.

Sincerely,

Larry Filener

Larry Filener, CPA

Southwest Accounting Pros, LLC

Pass Thru Entity Tax Deduction

Thu, 07 Mar 2024 23:29:36 GMT

PTET - Pass Thru Entity Tad Deduction.

Dear Client:

We have some critical updates on the pass-through entity tax (PTET), which has recently become the rule in most states rather than the exception. The PTET enables owners of pass-through businesses, such as S corporations and multi-member LLCs, to navigate around the $10,000 annual limit on state and local taxes (SALT). For those paying high amounts of state New Mexico income tax, the PTET deduction can save significant federal dollars

How PTET Works

The PTET process is relatively straightforward. A pass-through entity (PTE) can choose to pay state income tax on its business income, which would otherwise pass on to its owners.

The PTE then claims a federal business expense deduction for these state income tax payments. Next, the states allow the owners to claim a credit or a deduction for these taxes, which avoids the SALT limit. Consequently, owners benefit from the federal deduction against their state income tax and avoid the $10,000 SALT limit on some or all of their pass-through income. If an owner is at the top federal rate of 37%, significant savings can be made.

State Updates

Currently, 36 of the 41 states imposing income taxes have adopted some form of PTET. So far, in 2023, Hawaii, Indiana, Iowa, Kentucky, Montana, Nebraska, and West Virginia have enacted a PTET.

Of these, Indiana, Iowa, Kentucky, and West Virginia have made their PTET retroactive to 2022, while Nebraska’s new PTET is retroactive to 2018. Hawaii’s and Montana’s PTETs are not retroactive.

Eligibility

In all states with a PTET, partnerships, S corporations, and multi-member LLCs taxed as partnerships or S corporations are eligible to elect to pay a state PTET. Sole proprietorships, single-member LLCs taxed as sole proprietorships, C corporations, trusts in most states, and LLCs taxed as C corporations are not eligible.

Deadline for PTET Election

No state (except Connecticut) requires a PTE to pay a state PTET; the PTE must elect to do so. The due dates for making the PTET election vary from state to state. In New Mexico, the election is made by filing Form RPD-41367 with the state business return.

PTET Opt-Outs

In most states, a PTET election is binding on all the PTE’s owners, and individual owners cannot opt out. The only exceptions are Arizona, California, New York, and Utah.

If you think that this strategy would be helpful in your business, please don’t hesitate to contact us at 505-232-3275.

Regards,

Larry Filener, CPA

Southwest Accounting Pros, LLC

The Augusta Rule

Thu, 07 Mar 2024 23:20:53 GMT

The Augusta Rule

WEEKLY SWAP CLIENT COMMUNICATION

THE AUGUSTA RULE

Dear Client:

Normally, rental income is just like any other income, and you are required to pay income taxes on the income. But a little-known loophole in the tax law completely excludes certain amounts of rental income from your income taxes. IRC 280A(g), or the 14 day rule allows homeowners to rent out their home. And you don’t have to worry about reporting the income on your tax return, either, since it is tax-free.

In this article, you will learn the simple requirements for this tax loophole, and how to easily handle the (very few) wrinkles that could complicate it.

Requirements:

1. You can rent out your primary home, a secondary home or a vacation home.

2. Expenses related to the rental of these properties are not deductible.

3. You have to rent out the home for less than 15 days (i.e. up to 14 days).

4. The 14 day rule is cumulative and doesn’t have to be consecutive. For instance, you could rent out the house one day per month and still be under the 14 day limit.

5. The rental price must be reasonable for that location, type of house and date of rental.

Business Owners Can Use 280 For Their Homes:

Under 280, a business owner can rent their personal home for business meeting to their own business. Businesses need meeting space for board meetings, strategic planning meetings, shareholder meetings, etc. If a businessowner choses, to use their home for business meetings, their business can rent the home and the owner doesn’t have to include the rent in their income. However, the business does get a deduction for the rent.

The requirements are as follows:

1. It is very important to establish a market value for the rent paid. An easy source for that would be VRBO or Airbnb listings that are of similar size, location and around the approximate date that the event takes place.

2. All expenses deductible by businesses have to be ordinary and necessary, so the owner will have to establish and document the purpose of the meeting, those in attendance, etc.

THE AUGUSTA RULE

8-21-23

Continued

3. I will be important to establish a contract between the business and the owner that specifies the details, dates, requirements, etc.

4. Only the cost of the rental of the residence can be used. For instance, if there is food or equipment to be furnished, they should not be included in the agreement and the business should pay for those things separately.

Once this is done, the business can deduct the cost of the rental and the owner does not have to report the income!!

If you have any questions about the Agusta Rule, please do not hesitate to call us at 505-232-3275.

Sincerely,

Larry Filener, CPA

Southwest Accounting Pros, LLC

Weekly SWAP Update

Thu, 07 Mar 2024 22:35:22 GMT

Employing Children

EMPLOYING CHILDREN

Dear Client:

Sometimes business owners want to hire their children in their businesses. The are many possible reasons for hiring your children, teaching your children the value of entrepreneurship, helping them develop good work ethics, etc. But is it possible to get a tax break too? In some cases, the answer might be yes.

CAN THE INCOME BE TAX FREE TO MY CHILD

In many cases yes:

1. Each of your children can be paid up to 13,850 (the amount increases each year). As long as the wage doesn’t exceed that amount, the child will not owe any federal or state income tax nor have to file an income tax return.

2. Your business gets to deduct the $13,850, thus reducing your income tax.

3. As long as the children are under the age of 18 and your business is a sole proprietorship or single member LLC, you don’t have to pay FICA taxes on their wages.

4. If they are over the age of 18, you will have to pay FICA taxes on them. However, the total tax rate for social security is 15.3%, so it is often still advantageous.

5. The children are required to perform actual services and receive wages that are reasonable for the services being rendered.

6. You have to have proof of the services rendered (i.e. time cards, etc.).

How about owners of S and C Corporations, can they still get this deduction? The answer is, often yes:

1. You can pay your children from S Corps or C Corps, but at any age, you have to pay social security taxes for them.

2. As an alternative, you can setup a Family Management Business and contract with the S or C Corporation that is structured as a Schedule C, and then pay the children from the Schedule C. If it is structured that way and they under the age of 18, they can receive the wages free from social security tax.

EMPLOYING CHILDREN

August 14, 2023

(Continued)

In some cases, if you are willing to make an IRA contribution for your children, you can increase the amounts paid to the children and still allow them to pay no taxes.

If you think that this strategy would be helpful in your business, please don’t hesitate to contact us at 505-232-3275.

Regards,

Larry Filener, CPA

Southwest Accounting Pros, LLC

Tax Consequences of a Short Sale of Your Principal Residence

Tue, 16 May 2023 21:57:00 GMT

The real estate boom appears to be over for now.

Morgan Stanley predicts that house prices could fall by 10 percent by the end of 2024, perhaps twice as much in a worst-case scenario. Homeowners who purchased their homes at the top of the market could be in trouble, especially if the U.S. falls into a recession.

No homeowner wants to go through foreclosure and its credit rating destruction. Fortunately, there is an alternative: a short sale.

In a short sale, homeowners sell their home in a regular sale through a real estate agent for less than the amount of their mortgage. The lender accepts the sale proceeds, releases the mortgage lien on the property, and typically writes off the remainder of the loan as an uncollectible debt.

Lenders agree to short sales only where it’s clear that

• the home is worth less than what the homeowner owes, and

• the homeowner is financially unable to keep up the mortgage payments due to job loss, health issues, death, or other hardship circumstances.

Typically, a short sale involves forgiveness of part of the mortgage debt owed by the homeowner. Debt forgiveness can constitute taxable income to the borrower. Whether the debt forgiven in a short sale is taxable income depends on several factors, including whether

• the mortgage is a recourse or a non-recourse loan,

• the forgiven debt qualifies for the qualified principal residence indebtedness exclusion, or

• the homeowner was insolvent at the time of the debt cancellation.

Forgiveness of a non-recourse loan (a loan for which the borrower is not personally liable) does not result in taxable income to the borrower. Twelve states allow only non-recourse home loans.

But recourse loans are standard practice in the other 38 states.

Fortunately, for underwater homeowners who have recourse loans, Congress passed the Mortgage Forgiveness Debt Relief Act in 2007. Thanks to this law, up to $750,000 of “qualified principal residence indebtedness” forgiven by a lender is excluded from tax. This exclusion remains in effect through 2025 and applies only to debt to acquire or build the taxpayer’s principal residence.

Homeowners who don’t qualify for the qualified principal residence indebtedness exclusion can still avoid paying tax on their canceled indebtedness if they were insolvent when the debt was canceled. Taxpayers are insolvent if their total liabilities exceed the fair market value of all their assets immediately before the debt cancellation. It’s likely that most homeowners who can get their lenders to agree to a short sale qualify as insolvent.

Guidance on electric vehicles.

Mon, 15 May 2023 22:41:00 GMT

The IRS recently issued new guidance on electric vehicles. There are four ways you can potentially benefit from a federal tax credit for an EV you place in service in 2023 or later:

• Purchase an EV, and claim the clean vehicle credit.

• Lease an EV, and benefit from the lessor’s EV discount.

• Purchase a used EV that qualifies for the used EV tax credit.

• Purchase an EV for business use, and claim the new commercial clean vehicle tax credit.

The new clean vehicle credit is available through 2032, with a maximum credit of $7,500.

To qualify for the clean vehicle credit, you must meet specific criteria, including income limits, vehicle price caps, and domestic assembly requirements. The credit amount for vehicles delivered on or after April 18, 2023, depends on the vehicle meeting critical minerals sourcing and/or battery components sourcing requirements.

If you can’t find an EV that qualifies for the credit or your income is too high, you can lease an EV from a leasing company that can claim up to a $7,500 commercial clean vehicle tax credit. The leasing company may then pass on all or part of the credit to you through reduced leasing costs.

For used EV purchases, you can earn a credit of up to $4,000, but you must buy the vehicle from a dealer and meet the law’s lower income caps and other restrictions.

Finally, if you purchase an EV for business use, you can qualify for the commercial clean vehicle tax credit, which is not subject to critical minerals or battery components rules, making it easier to qualify for this credit starting April 18, 2023.

To claim an EV credit, the seller must complete a seller’s report and provide a copy to you and the IRS. For the clean vehicle credit, you will file IRS Form 8936; for the commercial clean vehicle credit, you will file IRS Form 8936-A.

TAX-SAVING TIPS

Tue, 02 May 2023 22:15:00 GMT

Tax-Saving Tips

May 2023

Holding Real Property in a Corporation: Good or Bad Idea?

As the real estate market has cooled off in many parts of the country, investing in property may seem wise in the long run. But taxes can be a significant concern.

Owning real estate in a C corporation may not be wise when considering taxes because it puts you at risk of being double-taxed.

This means that if you sell the property and make a profit, the gain may be subject to taxation twice—once at the corporate level and again at the shareholder level when the corporation pays out profits to shareholders as dividends.

The Tax Cuts and Jobs Act reduced the double taxation threat, but with our current federal debt, you face the risk that lawmakers will hike the corporate tax rates and possibly also tax dividends at higher ordinary income rates.

To avoid this threat, I usually recommend using a single-member LLC or revocable trust to hold real property. A disregarded single-member LLC delivers super-simple tax treatment combined with corporation-like liability protection, while a revocable trust can avoid probate and save time and money.

If you are a co-owner of real property, it is advisable to set up a multi-member LLC to hold the property. The partnership taxation rules that multi-member LLCs follow have several advantages, including pass-through taxation.

In conclusion, holding real property in a C corporation can expose you to the risk of double taxation, and I don’t recommend it. Instead, consider a single-member LLC, revocable trust, or multi-member LLC, depending on your situation.

Helicopter View of 2023 Meals and Entertainment

As you may already know, there have been some major changes to the business meal deduction for 2023 and beyond. The deduction for business meals has been reduced to 50 percent, a significant change from the previous 100 percent deduction for business meals in and from restaurants, which was applicable only for the years 2021 and 2022.

To help you better understand the current situation, see the table below:

Amount Deductible for Tax Year 2023 and Beyond

Description 100% 50% Zero

Restaurant meals with clients and prospects

Entertainment such as baseball and football games with clients and prospects

Employee meals for convenience of employer, served by in-house cafeteria

Employee meals for required business meeting, purchased from a restaurant

Meal served at chamber of commerce meeting held in a hotel meeting room

Meal consumed in a fancy restaurant while in overnight business travel status

Meals cooked by you in your hotel room kitchen while traveling away from home overnight

Year-end party for employees and spouses

Golf outing for employees and spouses

Year-end party for customers

Meals made on premises for general public at marketing presentation

Team-building recreational event for all employees

Golf or theater outing or football game with your best customer

Meal with a prospective customer at a country club following your non-deductible round of golf

Are You a Regular Investor or a Tax-Favored Securities Trader?

As we navigate the recent volatility in the stock market, you may want to think about the possible favorable federal income tax treatment the tax code gives to a securities trader.

Suppose you can qualify as a securities trader for federal income tax purposes. In that case, you deduct your trading-related expenses on Schedule C of Form 1040 and make the taxpayer-friendly mark-to-market election, which is not available to garden-variety investors.

The mark-to-market election has two important federal income tax advantages:

1. Exemption from the capital loss deduction limitation

2. Exemption from the wash sale rule

But there is a price to pay for these tax advantages. As a trader who has made the mark-to-market election, you must pretend to sell your entire trading portfolio at market on the last trading day of the year, which may have little or no tax impact if you have little or nothing in your trading portfolio at year-end.

Your trading activities must constitute a business for you to qualify as a securities trader, and you must meet both of the following requirements:

1. Your trading must be frequent and substantial.

2. You must seek to profit from short-term market swings rather than longer-term strategies.

If you are a calendar-year taxpayer, the deadline to make the mark-to-market election for your 2023 tax year is April 18, 2023 (that’s right around the corner). You make the election by including a statement with your 2022 Form 1040 filed by that date or with a Form 4868 extension request for your 2022 return filed by that date.

Avoid This Family-Member S Corporation Health Insurance Mistake

There are two important issues related to health insurance deductions for S corporations.

First, if you own more than 2 percent of an S corporation, there are three steps you need to follow to claim a deduction for health insurance:

• Step 1. The cost of the insurance must be on the S corporation’s books.

• Step 2. The corporation must include the cost of the health insurance premiums on your W-2 form as taxable income (but not subject to payroll taxes).

• Step 3. If eligible, you must claim the health insurance deduction as an above-the-line deduction on Schedule 1 of Form 1040.

Second, this three-step procedure applies to your spouse, children, grandchildren, great-grandchildren, parents, grandparents, and great-grandparents if they work for your S corporation and the corporation covers them with health insurance.

The three rules apply to the relatives listed above who work in the S corporation, even if they don’t own any stock directly. For health insurance purposes, the tax code attributes your stock ownership to them and deems that they own what you own.

It’s crucial to get this right, as failing to do so could result in a lost health insurance deduction for your family members and zero deductions or the S corporation.

If you or your S corporation did not handle this correctly in the past, you need to amend the returns to ensure that you create and protect the proper tax deductions.

Your business is important to us and appreciated.

Should you have any questions please contact us.

505-232-3275

New Rules for Businesses

Tue, 22 Nov 2022 22:25:00 GMT

Dear Passthrough Owner (i.e. S Corporations, Partnerships and LLCs):

In March of this year, the State of New Mexico passed legislation, retroactive to January 1, 2022, that is designed to work around the $10,000 federal cap on deductible state and local tax (SALT). It provides for passthrough entities to pay, and deduct as an expense, New Mexico individual income tax owed by their shareholders. Those payments can then be claimed on the shareholder’s New Mexico income tax return without being subjected to the $10,000 limitation.

What this means for a passthrough owner is that, instead of making New Mexico estimated tax payments, you can start having your business make those payments for you. Additionally, to maximize the benefit, you can reduce or eliminate altogether the New Mexico income tax being withheld from your paycheck.

You can then eliminate the state deduction with your W-2 payroll, and replace it with payments made directly by the business. However, the payments made by the business must be calculated and paid at the rate of 5.9% of your anticipated K-1 income plus your salary. Any excess will be refunded when you file your return.

This is a somewhat complex change, but the net result will mean that less total tax will be paid. We will be going through our client list and reaching out to all of you that this rule could potentially benefit. If you are one of our annual December payroll clients we can manipulate the New Mexico state income tax withheld, but if you are scheduled to make a fourth quarter estimated payment due in January we will be in touch with you about that. The overall goal is to try to have the business pay enough of your New Mexico income tax in advance to avoid paying a balance due with the return next April, leaving New Mexico income tax out of the SALT equation altogether in calculating the amount subject to the $10,000 federal deduction cap.

This will be more manageable in 2023, but for 2022, we will be working to catchup with your current status so that we are ensuring that you receive the most favorable treatment.

One other thing. As many of you know, we have been working diligently to process the ERC (Employee Retention Credits) for our clients. We are just about caught up with the list we developed of those that we believe are eligible. We have attempted to review all of our clients and process the credit for those that qualified (many did not qualify as they had revenue and/or salary increases during the specified period). If you believe that you should have received the credit and we haven’t contacted you yet, please don’t hesitate to get in touch with us. For those of you that we have already processed the credit application, we just received this week notice that our first client (credit application filed months ago) received their refund check. Unfortunately, the IRS is very backed up and we are not expecting these credits to happen quickly. The sources that we have been consulting think that it could easily be next summer before the IRS has fully processed the applications they are wading through right now.

As always, we appreciate the opportunity to serve our business clients and will always strive to ensure that your business receives the maximum possible tax benefits allowed by the law.

Regards,

Larry Filener, CPA

Southwest Accounting Pros, LLC