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To complement a will, many people choose to transfer specific securities to a revocable living trust. Assets transferred to the trust generally aren’t required to go through the time-consuming and expensive probate process. In addition, they can be managed by professionals and are usually protected from creditors.

Used correctly, a living trust helps to ensure that your beneficiaries receive some of your wealth on your death, without any unnecessary complications. However, for the trust to do its job, it must be properly funded.

Transferring assets

Living trusts are funded by simply transferring assets to the trust—in essence, legal ownership of your assets is changed from your name to the trust’s name.

However, the trust may not serve its objectives, particularly with respect to avoiding probate, if assets aren’t properly transferred to it. The disposition of assets that haven’t been properly transferred is governed by your will, so it’s worthwhile to add a “pour-over” provision to your will that directs any leftovers to the trust.

Choosing which assets to transfer

Bank accounts, securities, real estate, and business interests are some of the most common assets to transfer to a living trust. These assets can usually be transferred with little difficulty (though real estate may require a bit of additional work). However, it’s important to change the beneficiary designations for assets transferred to the trust.

IRA and 401(k) plan or other retirement plan benefits are typically not favored as assets to transfer to a revocable trust, since naming the trust as beneficiary without proper care can potentially trigger unwanted tax consequences.

Transferring ownership of life insurance policies and annuities to a trust is often recommended—however, you may want to simply change the beneficiary designations, rather than transfer the ownership. This is because, absent certain exceptions, insurance policies and annuities that are transferred within three years of your death will be included in your taxable estate. Often, this decision will hinge on how likely it is that estate tax will be a factor.

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Revocable trusts come with a number of benefits—they allow the assets they hold to avoid probate and allow for a person’s assets to be managed in the event that they become incapacitated. Contact us today if you have questions about revocable trusts and which assets you should use to fund them. We’ll be happy to help.

The EBSA Disaster Relief Notice 2021-01, recently issued by the U.S. Department of Labor (DOL), clarifies the duration of certain COVID-19-related deadline extensions. As these deadline extensions apply to health care benefits plans, they should be of interest to employers.

Deadline extensions will continue

The COVID-19 outbreak period is defined as beginning March 1, 2020, and ending 60 days after the announced end of the COVID-19 national emergency. However, according to guidance issued last year by the DOL and IRS, the COVID-19 outbreak period should be disregarded when calculating various deadlines under special enrollment provisions from COBRA, ERISA, and HIPAA.

The original emergency declaration, which would have expired on March 1, 2021, was recently extended. However, questions have arisen as to whether the outbreak period was required to end one year after it began, on February 28, 2021. This is because agencies defined the outbreak period solely by reference to the COVID-19 national emergency, but were relying on statutes that allowed them to specify disregarded periods for a maximum of one year.

The EBSA Disaster Relief Notice 2021-01 gives an answer to these questions—by providing that these extensions have continued past February 28 and will be measured on a case-by-case basis. According to the Relief Notice, extensions to applicable deadlines for individuals and plans that fall within the outbreak (or disregarded) period will last until the earlier of:

• The end of the outbreak period
• One year from the date the individual or plan was first eligible for outbreak period relief

The timeframes that were previously disregarded will resume once the disregarded period has ended. This means that while the outbreak period will continue until 60 days after the end of the COVID-19 national emergency, the maximum disregarded period for calculating relevant deadlines cannot exceed one year for any individual or plan.

Clear communication is advised

The DOL has advised that plan sponsors consider sending notices to participants clarifying the end of the relief period, which may include amending or reissuing previous disclosures that are no longer accurate. In addition, the Relief Notice advises sponsors to ensure that participants who are losing coverage are aware of other coverage options—including, for example, the COVID-19 special enrollment period in Health Insurance Marketplaces, also known as “Exchanges”.

As the Relief Notice 2021-01 acknowledges, the COVID-19 pandemic may disrupt normal plan operations. However, the DOL offers reassurance that enforcement will emphasize compliance assistance and other relief for fiduciaries acting in good faith and with reasonable diligence—and that the IRS and U.S. Department of Health and Human Services concur with the guidance and its application to laws under DOL jurisdiction.

Additional challenges

Although the clarification offered by the Disaster Relief Notice will likely be helpful to plan sponsors and administrators, its timing and the way it interprets the one-year limitation could be disappointing—after all, determinations of the disregarded period that depend on individual circumstances may give rise to significant administrative challenges. In addition, plan sponsors and administrators will need to quickly develop a strategy for communicating these complicated new rules to participants.

For further information and updates, contact us today.

As tax-filing season rolls around, you’re probably focused on your income or business tax returns—however, there’s also another type of return you may have to file. If you’ve made substantial gifts of wealth to family members in 2020, you may also need to file a gift tax return.

How to file a gift tax return

Generally speaking, if you’ve made gifts to or for someone during the year and those gifts exceed the annual gift tax exclusion ($15,000 per person for 2020 and 2021), you’ll need to file a federal gift tax return (Form 709)—although there are certain exceptions, such as gifts to U.S. citizen spouses. If your spouse is a U.S. citizen, an unlimited amount can be gifted—but gifts to a noncitizen spouse are subject to a separate exclusion ($157,000 for 2020 and $159,000 for 2021).

In addition, you’ll need to file a gift tax return if you make any gifts of future interests, even if they’re less than the annual exclusion amount. You’ll also need to file a gift tax return if you split gifts with your spouse, regardless of the amount.

The deadline for 2020 gifts is coming up soon—your return is due by April 15 of the year after you make the gift. However, it’s possible to file for an extension and extend the deadline to October 15.

Keep in mind that being required to file a gift tax return doesn’t necessarily mean you owe gift tax. Only taxpayers who have already exhausted their lifetime gift and estate tax exemption ($11.58 million for 2020 and $11.7 million for 2021) will owe tax.

An additional note: while the IRS has announced an extension of the federal income tax filing and payment due date from April 15, 2021, to May 17, 2021, it hasn’t specifically addressed the gift tax filing deadline. Additional guidance from the IRS is expected soon.

Exceptions to the gift tax return requirement

You’re not required to file a gift tax return if:

• Your spouse is a U.S. citizen and you made outright gifts to your spouse, in any amount, including gifts to marital trusts that meet certain requirements
• You directly paid qualifying educational or medical expenses to an educational institution or health care provider on behalf of someone else
• You made charitable gifts and aren’t otherwise required to file Form 709—though charitable gifts should also be reported if a return is otherwise required
• The gifts you made were of present interests and fell within the annual exclusion amount

Even if you aren’t required to, you should consider filing a gift tax return if you transferred hard-to-value property, such as interests in a family-owned business or artwork. This is because adequate disclosure of the transfer in a return triggers the statute of limitations, which means the IRS will generally be prevented from challenging your valuation more than three years after you file.

Under certain circumstances, it may even be advisable to file Form 709 to report nongifts. If, for example, you sold assets to a trust or a family member, filing a return will trigger the statute of limitations and prevent the IRS from claiming that the assets were undervalued and, therefore, partially taxable, more than three years after you file the return.

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We know that state tax rules and regulations are complicated. Contact us today for help in determining whether you need to file a gift tax return.

Data security is an important piece of the audit risk assessment. In the case that your financial statements are audited, your audit team will specifically investigate critical cyber risks and your internal controls’ effectiveness, and will assess your practices to identify any weaknesses that might require additional inquiry, testing and disclosure.

Making cybersecurity a priority

Cybersecurity is viewed by most companies today as more than just an information technology (IT) issue—it’s also a business problem. It’s important to identify your company’s most important data assets during the audit process, and to consider the ways your management team evaluates, manages and responds to cybersecurity risks and incidents.

Because people are often the weakest link in cybersecurity, auditors will assess your company’s awareness, training, and accountability policies to make sure sensitive data is kept safe. Policies may also need to be regularly updated as your business environment changes, and as hackers become increasingly sophisticated and find new ways of breaking into systems.

For example, companies might need to modify their practices to make sure they maintain effective data security as remote working arrangements during the COVID-19 pandemic cause more employees to access data from less-secure home networks.

It’s also important that responsibility doesn’t fall solely on your company’s IT department—Cybersecurity needs to be integrated into your organization’s values and goals. As such, auditors also make an analysis of the tone from the heads of your organization. After all, if your company’s ability to operate will be diminished in the long run if you can’t keep its intellectual property—and its customers—safe.

Importance to lenders and investors

Stakeholders tend to have confidence in the ability of auditors to identify and evaluate cyber risks, since the Public Company Accounting Oversight Board (PCAOB) has yet to find any material misstatements on a public company’s financial statements due to cybersecurity breaches.

Nevertheless, external stakeholders and audit committees do acknowledge the risk that financial reporting may be affected by future cyberattacks. As such, auditors are expected to be active in communicating about cybersecurity measures and any costs associated with breaches. Because the full cost of a data breach may not always be immediately apparent (especially when you include the company’s response and reputational damage), financial statement disclosures need to be as timely, comprehensive, and accurate as possible.

An adaptable approach

While traditional audit risks like supply chain or related party risks tend to remain fairly constant and predictable, cybersecurity risks are always evolving. We have extensive experience in evaluating and disclosing data security practices, and can help you to update your policies and procedures if they haven’t kept up with the times. Each accounting period, our audit team makes a fresh assessment of the cybersecurity risks facing your company in today’s marketplace and modifies our audit procedures accordingly.

Please do not hesitate to contact us with any questions or concerns.

If you’re considering launching a business with partners, you may be wondering what type of entity to form—and an S corporation could be the most suitable form for your new business to take. Here are a few of the reasons why.

The biggest advantage of forming an S corporation (as opposed to a partnership) is that you won’t be personally liable for corporate debts as S corporation shareholders.

However, if you want to receive this protection, it’s important to make sure that:

• The corporation is adequately financed
• The existence of the corporation as a separate entity is maintained
• Any formalities required by your state are observed, including:
  • Filing articles of incorporation
  • Holding organizational meetings
  • Adopting by-laws
  • Electing a board of directors

S corporations and anticipated losses

For any business that expects to incur losses in its first few years, forming an S corporation is preferable to forming a C corporation from a tax standpoint. This is because C corporation shareholders get no tax benefit from such losses.

S corporation shareholders, by contrast, can deduct their percentage share of these losses on their personal tax returns, to the extent of their basis in the stock and in any loans you make to the entity. In addition, any losses that exceed a shareholder’s basis and can’t be deducted are carried forward, so they can be deducted later when there’s sufficient basis.

Income earned once an S corporation begins to earn profits is taxed directly to the shareholder whether or not it’s distributed. As such, it’s reported on your individual tax return and aggregated with income from other sources. The shareholder is also eligible to take the 20% pass-through deduction, subject to various limitations, to the extent the income is passed through to the shareholder as qualified business income. And while wages are still subject to Social Security taxes, shares of an S corporation’s income aren’t subject to self-employment tax.

If you’re planning to provide fringe benefits such as health and life insurance, you should also be aware that the costs of providing such benefits to a more than 2% shareholder are deductible by the entity but are taxable to the recipient.

S status: reasons for caution

It’s worth noting that S corporations can also inadvertently lose their S status if a partner transfers stock to an ineligible shareholder, such as:

• Another corporation
• A partnership
• A nonresident alien

In the case that the S election is terminated, the corporation then becomes a taxable entity— meaning that you wouldn’t be able to deduct any losses as an S corporation shareholder and your earnings might be subject to double taxation, both at the corporate level and when distributed to you. If you’re considering forming an S corporation, it’s generally good practice for each partner to sign an agreement not to make any transfers that might jeopardize the S election.

We can answer any questions you have before you finalize your choice of entity. Contact us today, and let us assist you in launching your new venture.

On March 11, President Biden signed the $1.9 trillion American Rescue Plan Act (ARPA) into law—and while relief provided to individuals is perhaps the best known part of the ARPA, there are also several financial benefits and tax breaks and for businesses.

Here are a few of the tax implications of the ARPA.

Extension of the Employee Retention Credit (ERC)

The ARPA extends the ERC—a valuable tax credit—from June 30 until December 31, 2021. The ERC rate of credit will continue at 70% through this extended period. In addition, the ERC continues to allow for up to $10,000 in qualified wages for any calendar quarter. Between the Consolidated Appropriations Act extension and the extension of the ARPA, an employer could have up to $40,000 per employee in qualified wages through 2021.

Changes to the qualified dependent care assistance program (DCAP)

Under a qualified dependent care assistance program (DCAP), the gross income of eligible employees typically doesn’t include amounts paid or incurred by an employer for dependent care assistance provided to the employee.

Prior to the passing of the ARPA, no more than $5,000, or $2,500 for married individuals filing separately, could be excluded from an employee’s gross income under a DCAP during a given tax year, subject to certain limitations—although contributions made by an employer to a DCAP can’t exceed the employee’s earned income or the lesser of employee’s or spouse’s earned income if the employee is married.

However, under the ARPA, the exclusion for employer-provided dependent care assistance is increased from $5,000 to $10,500—and from $2,500 to $5,250 for married individuals filing separately—for 2021 only.

This provision of the ARPA is effective for tax years beginning after December 31, 2020.

Paid credits for sick and family leave

Changes under the ARPA apply to amounts paid with respect to calendar quarters beginning after March 31, 2021. The ARPA also has implications for paid sick time and paid family leave. Among other changes, the law:

• Extends the paid sick time and paid family leave credits under the Families First Coronavirus Response Act from March 31, 2021, through September 30, 2021.
• Provides that on qualified leave wages, both paid sick and paid family leave credits may be increased by the employer’s share of Social Security tax (6.2%) and employer’s share of Medicare tax (1.45%).

Restaurant revitalization grants

Eligible restaurants, food trucks, and other businesses that provide food and drinks may receive restaurant revitalization grants from the Small Business Administration under the ARPA. Amounts that are received as restaurant revitalization grants aren’t included in the gross income of the person who receives the money for tax purposes.

Contact us to learn more

These are only a few of the provisions in the ARPA, and many others may also be beneficial to your business. For more information about your situation, contact us today.

The statement of cash flows might be the most underappreciated and misunderstood piece of a company’s annual report—in essence, the statement of cash flows informs you of cash entering and leaving a business. This can be important information, since even a business that reports positive net income on its statements might not have enough cash in the bank to cover its bills. You can gain significant insight into the financial health and long-term viability of your company by reviewing the statement of cash flows.

The statement of cash flows is generally organized into three sections, under Generally Accepted Accounting Principles (GAAP):

1. Operations

This first section is concerned with cash flows from selling products and services, and typically starts with accrual-basis net income. This accrual-basis net income is then adjusted for items related to the normal operation of your business, including:

• Income taxes
• Gains or losses on asset sales
• Depreciation
• Amortization
• Net changes in working capital accounts, such as:
  • Inventory
  • Accounts receivable
  • Prepaid assets
  • Accrued expenses and payables

The final result of this calculation is your cash-basis net income. A company may be better off closing than continuing to incur losses if they’ve reported several successive years of negative operating cash flows.

2. Investing activities

This section includes transactions involving the buying or selling of property, equipment, and marketable securities. It reveals if a company is reinvesting in future operations or divesting assets for emergency funds.

3. Financing activities

Finally, this last section includes cash flows from raising, borrowing and repaying capital—it helps to highlight a company’s ability to obtain cash from lenders and investors, through principal repayments, dividends paid, new loan proceeds, issuances of securities or bonds, or additional capital contributions by owners.

At the bottom of the statement of cash flows—or in a narrative footnote disclosure—capital leases and noncash transactions will be reported in a separate schedule. So, if you’ve purchased equipment directly using loan proceeds, the transaction will appear at the bottom of the statement—and not as a cash outflow from investing activities and an inflow from financing activities.

For U.S. companies entering into foreign currency transactions, the effect of exchange rate changes is generally reported as a separate item in the reconciliation of beginning and ending balances of cash and cash equivalents.

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Need help interpreting the statement of cash flows? Not sure how to classify transactions? Contact us today, and let us help you get it right.

Although the COVID-19 pandemic has forced many businesses to close, there are still some entrepreneurs who have started new small businesses this year—and many begin by operating as sole proprietors. If this describes you, here are a few tax rules and considerations.

QBI deductions

You’re eligible to claim the pass-through or qualified business income (QBI) deduction, subject to limitations, to the extent your business generates qualified business income. This deduction can be up to 20% of the pass-through entity owner’s QBI for tax years through 2025. You can take this deduction even claim the standard deduction instead of itemizing deductions on your tax return.

Filing as a sole proprietor

If you’re a sole proprietor, you’ll need to file Schedule C with your Form 1040. Any business expenses are deductible against gross income, while losses (if you have them) are generally deductible against your other income—though this is subject to special rules related to passive activity losses, hobby losses, and losses in activities where you weren’t “at risk.”

You’ll also need to get a taxpayer ID number and withhold and pay employment taxes if you hire employees.

Taxes for self-employment income

For 2021, you’ll need to pay Medicare tax on all earnings and Social Security on net self-employment earnings up to $142,800.

In addition, there is a 0.9% Medicare tax imposed on self-employment income that is:

• In excess of $250,000 for joint returns
• In excess of $125,000 for married taxpayers who are filing separate returns
• In excess of $200,000 in all other cases

Although self-employment tax is imposed in addition to income tax, half of your self-employment tax can be deducted as an adjustment to your income.

Estimated tax payments

Generally speaking, sole proprietors will need to make quarterly estimated tax payments. In 2021, these payments will be due on April 15, June 15, September 15, and January 17, 2022.

Deducting a home office

If you work or perform management or administrative tasks from a home office, or if you store inventory or product samples at your home, you may be able to deduct an allocable portion of some home-maintenance costs.

Deductions for health insurance

100% of your health insurance costs can be deducted as a business expense—so your deduction for medical care insurance isn’t subject to the rule limiting deductions for medical expenses.

Recordkeeping and tax breaks

To ensure that you’ll be able to claim all the tax breaks you’re entitled to, you’ll want to keep thorough and complete records of income and expenses. Certain expenses, such as automobile, travel, meals, and office-at-home expenses, are also subject to special deductibility limits or recordkeeping rules and require special attention.

Qualified retirement plans

Qualified retirement plans can be a worthwhile option to consider—amounts contributed to these plans are deductible at the time of contribution and are only taken into income after they’re withdrawn. Compared to many qualified plans, SEP plans can be attractive because they require less paperwork. SIMPLE plans are also available to sole proprietors and come with the bonus of tax advantages that have fewer restrictions and administrative requirements. You may also still be able to contribute to an IRA, even if you don’t establish a qualified retirement plan.

Questions? Contact us today

If you need more information about the tax aspects of starting a small business, or need assistance with reporting or recordkeeping requirements, contact us today—we can help guide you through the process.

Leaving a legacy for your children, grandchildren, and future generations is one of the most important goals of estate planning—and there’s no better way to do that than helping to provide for their educational needs.

A 529 plan allows you to fund tuition and other educational expenses—and to do so on a tax-advantaged basis. However, there’s no guarantee that subsequent owners will use the plan in accordance with the original owner’s wishes after the original owner passes away.

A carefully designed trust avoids this potential pitfall, but trusts have a significant drawback of their own. The earnings of 529 plans are tax-exempt when used for qualified education expenses—trusts, by contrast, are subject to federal income tax at some of the highest rates in the tax code.

One way to gain some of the best benefits of both approaches is to create a family education trust—and use it to invest in one or more 529 plans.

What’s a 529 plan?

A 529 plan is a state-sponsored investment account—one that allows parents, grandparents, or other family members to make substantial cash contributions. These contributions aren’t deductible, but the funds grow tax-free, and as long as they’re being used for qualified education expenses, earnings can be withdrawn tax-free for federal income tax purposes.

Qualified education expenses include:

• Books
• School supplies
• Tuition
• Fees
• Some room and board

While any contribution made to a 529 plan is removed from your taxable estate—and is also shielded from gift taxes—529 plans do have their share of disadvantages. They include relatively limited investment choices and there isn’t any way to invest assets other than cash. And, as mentioned before, there is always the risk that the plan’s subsequent owner might use the funds for purposes other than education.

Using a trust to hold a 529 plan

Establishing a trust—and using that trust to hold one or more 529 plans—is an alternative that offers several advantages:

• A trust can hold a number of assets and investments outside of 529 plans—including noncash assets and funds held for noneducational purposes (such as medical expenses).
• Trusts allow you to explicitly specify which family members are eligible for the educational assistance they provide. You’ll also be able to control how the funds may be used or distributed if they’re no longer needed for educational purposes, and appoint trustees and successor trustees, who oversee the trust and ensure it’s used properly.
• Depending on state law, a trust may also allow you to maintain tax-advantaged education funds indefinitely—benefiting future generations while preventing those who would use the funds for other purposes from accessing them.

Contact Us to Make a Plan

Interested in setting up a family education trust? Need help designing a trust to maximize educational benefits while minimizing taxes? Contact us today—we’ll help you establish a plan that offers the flexibility you need to shape your educational legacy.

Bad news for people who are accustomed to using the optional standard mileage rate to calculate the deductible costs of operating an automobile for business: the permissible deduction rate decreased by one-and-one-half cents, to 56 cents per mile, this year. This might lead you to claim a lower deduction for vehicle-related expenses in 2021 than you could for 2020 or 2019.

How to deduct vehicle expenses

Thankfully, it doesn’t have to be the standard rate. Businesses are also permitted to deduct the actual expenses attributable to business use of vehicles including gas, oil, tires, insurance, repairs, licenses and vehicle registration fees. Business owners can also claim a depreciation allowance for the vehicle, although certain limits apply to depreciation write-offs on vehicles that don’t apply to other types of business assets.

For some business owners, the cents-per-mile rate is useful because it saves you the hassle of tracking actual vehicle-related expenses. All you need to record is the mileage for each business trip, the date, and the destination.

This method is also a common way for employers to reimburse employees for the business use of their personal vehicles, and these reimbursements can help attract and retain employees who drive their personal vehicles extensively for business purposes because employees can no longer deduct unreimbursed employee business expenses on their own income tax returns.

The 2021 cents-per-mile rate 

Beginning on January 1, 2021, the standard mileage rate for the business use of a vehicle has been reduced to 56 cents per mile. This rate was 57.5 cents for 2020 and 58 cents for 2019.

Annual adjustments to the cents-per-mile rate are based on an annual study commissioned by the IRS about the fixed and variable costs of operating a vehicle. These include gas, maintenance, repair and depreciation. The decreased rate partly reflects the current price of gas, which is down from a year ago.

When you can’t use the standard method

Whether or not you can use the cents-per-mile deduction method depends partly on how you’ve claimed deductions for the same vehicle in the past and partly on whether or not the vehicle is new to your business this year. If the vehicle is new, you may want to take advantage of certain first-year depreciation tax breaks on the vehicle instead.

Unsure which method is right for you? We can help. If you have questions about tracking and claiming these expenses in 2021 (or claiming them on your 2020 income tax return), contact us.