Axley & Rode, LLP

Reminder: The extended deadline for paying estimated taxes is about a month away. If you pay estimated taxes, be aware that the first and second quarter payments for tax year 2020, which were originally due April 15 and June 15, are now due July 15. Individuals and corporations that make quarterly estimated tax payments have until July 15 to make their payment without penalty. The deadlines were extended as a response to the COVID-19 pandemic.

If you operate a small business, or you’re starting a new one, you probably know you need to keep records of your income and expenses. In particular, you should carefully record your expenses in order to claim the full amount of the tax deductions to which you’re entitled. And you want to make sure you can defend the amounts reported on your tax returns if you’re ever audited by the IRS or state tax agencies. Certain types of expenses, such as automobile, travel, meals and office-at-home expenses, require special attention because they’re subject to special recordkeeping requirements or limitations on deductibility. It’s interesting to note that there’s not one way to keep business records. In its publication “Starting a Business and Keeping Records,” the IRS states: “Except in a few cases, the law does not require any specific kind of records. You can choose any recordkeeping system suited to your business that clearly shows your income and expenses.” That being said, many taxpayers d...

If you’re age 65 and older, and you have basic Medicare insurance, you may need to pay additional premiums to get the level of coverage you want. The premiums can be costly, especially if you’re married and both you and your spouse are paying them. But there may be a silver lining: You may qualify for a tax break for paying the premiums. Tax deductions for Medicare premiums You can combine premiums for Medicare health insurance with other qualifying health care expenses for purposes of claiming an itemized deduction for medical expenses on your tax return. This includes amounts for “Medigap” insurance and Medicare Advantage plans. Some people buy Medigap policies because Medicare Parts A and B don’t cover all their health care expenses. Coverage gaps include co-payments, co-insurance, deductibles and other costs. Medigap is private supplemental insurance that’s intended to cover some or all gaps. Many people no longer itemize Qualifying for a medical expense deduction may be difficult ...

A leave-sharing program is one an employer sets up where employees can donate their vacation, sick or personal leave in exchange for the employer making cash payments to a tax-exempt organization. The IRS just provided guidance on leave-sharing programs that provide relief to COVID-19 victims. Specifically, Notice 2020-46 provides that cash payments employers make, under leave-sharing programs, to tax-exempt organizations providing relief to COVID-19 victims, won’t be treated as wages or compensation to the employees for federal tax purposes. Employees who forgo leave can’t claim a charitable contribution deduction for its value.  For additional details click here.

Childcare and adult dependent care can be expensive. That’s especially true for essential workers with dependents, now that schools and many traditional care services are closed during the COVID-19 crisis. The IRS is reminding taxpayers that they may be able to claim a valuable tax credit if they pay for care for qualified persons. The IRS defines a taxpayer’s qualifying person as a dependent who is: under age 13; a spouse who is unable to care for him or herself and lived more than half the year with the taxpayer; a person who is unable to care for him or herself, lived with the taxpayer more than six months and meets certain other conditions. Here’s more: https://bit.ly/2BXgiXj

The IRS has issued guidance clarifying that certain deductions aren’t allowed if a business has received a Paycheck Protection Program (PPP) loan. Specifically, an expense isn’t deductible if both: The payment of the expense results in forgiveness of a loan made under the PPP, and The income associated with the forgiveness is excluded from gross income under the Coronavirus Aid, Relief, and Economic Security (CARES) Act. PPP basics The CARES Act allows a recipient of a PPP loan to use the proceeds to pay payroll costs, certain employee healthcare benefits, mortgage interest, rent, utilities and interest on other existing debt obligations. A recipient of a covered loan can receive forgiveness of the loan in an amount equal to the sum of payments made for the following expenses during the 8-week “covered period” beginning on the loan’s origination date: 1) payroll costs, 2) interest on any covered mortgage obligation, 3) payment on any covered rent, and 4) covered utility payments. The l...

Valuable tax credits are available to employers to help mitigate the effects of the COVID-19 pandemic. But amid the chaos of the last few months, it may be hard to navigate the details of how to qualify for the credits. To help, the IRS has created a flowchart that explains the details of the Employer Retention Credit Also included in the document is a Leave Credits chart, which breaks down eligibility for paid sick leave and paid family leave credits by the employee’s situation. Employers can use the charts to determine whether they’re eligible for the credits, the amount of the credits and which wages apply to the credits.  Here are the two charts.

Want to know the status of your federal tax refund? If you filed your 2019 tax return and are waiting for your refund, you can check its status by using the IRS’s “Where’s My Refund” tool at https://bit.ly/3aUZ5tw.   You can check the status about 24 hours after the IRS acknowledges receipt of your electronically filed tax return or up to four weeks after a you mail a paper return. To use the tool, you’ll need your Social Security number, tax filing status and exact amount of the refund claimed. The refund tool updates every 24 hours, usually overnight, so you only need to check once a day. You also can check your refund status through the “IRS2Go app” for your mobile device.

If you’re self-employed and work out of an office in your home, you may be entitled to home office deductions. However, you must satisfy strict rules. If you qualify, you can deduct the “direct expenses” of the home office. This includes the costs of painting or repairing the home office and depreciation deductions for furniture and fixtures used there. You can also deduct the “indirect” expenses of maintaining the office. This includes the allocable share of utility costs, depreciation and insurance for your home, as well as the allocable share of mortgage interest, real estate taxes and casualty losses. In addition, if your home office is your “principal place of business,” the costs of traveling between your home office and other work locations are deductible transportation expenses, rather than nondeductible commuting costs. And, generally, you can deduct the cost (reduced by the percentage of non-business use) of computers and related equipment that you use in your home office, in...

Some Economic Impact Payments (EIPs) were sent on prepaid debit cards. These EIP cards were sent in plain envelopes from “Money Network Cardholder Services.” Some recipients thought the envelopes were junk mail and they threw them in the trash. The IRS now explains that individuals who have lost or destroyed their cards may request free replacements through MetaBank® Customer Service. The $7.50 standard fee will be waived for the first reissuance of an EIP Card. Any initial reissuance fee charged to a customer earlier will be reversed. Individuals don’t need to know their card numbers to request replacements. You can request a replacement by calling 800-240-8100 (option 2 from main menu).

Did you receive an Economic Impact Payment (EIP) that you need to return? EIPs are amounts sent by the IRS to eligible recipients to help defray the economic effects of COVID-19. With millions of EIPs sent, inevitably, some were sent in error to persons who are deceased or otherwise ineligible. These EIPs must be returned. If the EIP is a paper check, the IRS says: Write “VOID” on the back of the check, in the endorsement area, and mail it to the appropriate address. If you’ve cashed the check or if the EIP was by direct deposit, the IRS says: Pay it back to the U.S. Treasury with a personal check or money order. Addresses and details are available here: https://bit.ly/3gMREs2   See Q54.

The IRS has issued FAQs for C corporations that are interested in carrying back net operating losses (NOLs) to years in which the alternative minimum tax (AMT) applies. The Coronavirus Aid, Relief and Economic Security (CARES) Act amended the tax code to provide for a carryback of any NOL arising in a tax year starting after Dec. 31, 2017, and before Jan.1, 2021. The carryback applies to each of the five tax years preceding the tax year in which the loss arises (the carryback period). This is relevant to both individual and corporate taxpayers. To read the FAQs:  https://bit.ly/3gM73Jq

On June 4, the U.S. Senate passed the Paycheck Protection Program (PPP) Flexibility Act of 2020. The president is expected to sign it into law. The bill largely follows the Small Business Administration’s (SBA’s) interim final rule on loan forgiveness requirements issued in late May. The bill eases several of the PPP’s more onerous restrictions regarding loan forgiveness. For example, businesses will have 24 weeks rather than eight weeks to use the loan money. The bill also eliminates the restrictions that limited nonpayroll expenses to 25% of loan proceeds and the restrictions that limited loan terms to two years. Contact us for more information.

Restaurants and entertainment venues have been hard hit by the novel coronavirus (COVID-19) pandemic. One of the tax breaks that President Trump has proposed to help them is an increase in the amount that can be deducted for business meals and entertainment. It’s unclear whether Congress would go along with enhanced business meal and entertainment deductions. But in the meantime, let’s review the current rules. Before the pandemic hit, many businesses spent money “wining and dining” current or potential customers, vendors and employees. The rules for deducting these expenses changed under the Tax Cuts and Jobs Act (TCJA), but you can still claim some valuable write-offs. And keep in mind that deductions are available for business meal takeout and delivery. One of the biggest changes is that you can no longer deduct most business-related entertainment expenses. Beginning in 2018, the TCJA disallows deductions for entertainment expenses, including those for sports events, theater product...

It’s often difficult for married couples to save as much as they need for retirement when one spouse doesn’t work outside the home — perhaps so that spouse can take care of children or elderly parents. In general, an IRA contribution is allowed only if a taxpayer has compensation. However, an exception involves a “spousal” IRA. It allows a contribution to be made for a nonworking spouse. Under the spousal IRA rules, the amount that a married couple can contribute to an IRA for a nonworking spouse in 2020 is $6,000, which is the same limit that applies for the working spouse. Two main benefits As you may be aware, IRAs offer two types of benefits for taxpayers who make contributions to them. Contributions of up to $6,000 a year to an IRA may be tax deductible. The earnings on funds within the IRA are not taxed until withdrawn. (Alternatively, you may make contributions to a Roth IRA. There’s no deduction for Roth IRA contributions, but, if certain requirements are met, distributions are...

The economic impact of the novel coronavirus (COVID-19) is unprecedented and many taxpayers with student loans have been hard hit. The Coronavirus Aid, Relief and Economic Security (CARES) Act contains some assistance to borrowers with federal student loans. Notably, federal loans were automatically placed in an administrative forbearance, which allows borrowers to temporarily stop making monthly payments. This payment suspension is scheduled to last until September 30, 2020. Tax deduction rules Despite the suspension, borrowers can still make payments if they choose. And borrowers in good standing made payments earlier in the year and will likely make them later in 2020. So can you deduct the student loan interest on your tax return? The answer is yes, depending on your income and subject to certain limits. The maximum amount of student loan interest you can deduct each year is $2,500. The deduction is phased out if your adjusted gross income (AGI) exceeds certain levels. For 2020, th...

The IRS recently increased the carryover limit for Health Flexible Spending Arrangements (FSAs) to an amount indexed for inflation. The agency also clarified the ability of a health plan to reimburse individual insurance policy premium expenses incurred before the beginning of the plan year for coverage provided during the plan year. Boosted maximum Under IRS Notice 2020-33, the maximum $500 carryover amount for a plan year has been increased to an amount equal to 20% of the maximum salary reduction contribution under Internal Revenue Code Section 125(i) for that plan year. For a plan year starting in 2020, the maximum unused amount that may be carried over to the following plan year beginning in 2021 is $550 (20% of $2,750). Future increases will be in $10 multiples. Pertinent deadlines Because Sec. 125 cafeteria plans must be expressed in writing, plans that offer Health FSAs may not use the increased carryover amount for a plan year that begins in 2020 (or a later year...

The IRS recently released the 2021 inflation-adjusted amounts for Health Savings Accounts (HSAs).  HSA basics An HSA is a trust created or organized exclusively for the purpose of paying the “qualified medical expenses” of an “account beneficiary.” An HSA can only be established for the benefit of an “eligible individual” who is covered under a “high deductible health plan.” In addition, a participant can’t be enrolled in Medicare or have other health coverage (exceptions include dental, vision, long-term care, accident and specific disease insurance). In general, a high deductible health plan (HDHP) is a plan that has an annual deductible that isn’t less than $1,000 for self-only coverage and $2,000 for family coverage. In addition, the sum of the annual deductible and other annual out-of-pocket expenses required to be paid under the plan for covered benefits (but not for premiums) cannot exceed $5,000 for self-only coverage, and $10,000 for family coverage. Within specified dolla...

The IRS recently issued frequently asked questions (FAQs) regarding retirement plan distribution and loan relief under the Coronavirus Aid, Relief and Economic Security (CARES) Act. This relief applies to qualified individuals affected by the novel coronavirus (COVID-19) pandemic. It expanded distribution options and favorable tax treatment, increased plan loan limits and delayed repayment of outstanding plan loans. The FAQs explain that the IRS plans to release further guidance under Internal Revenue Code Section 2202 “in the near future.” It will apply principles originally articulated in Notice 2005-92, which interpreted distribution and loan relief enacted in response to Hurricane Katrina. Meanwhile, here are some highlights of the CARES Act FAQs: Optional relief. Employers may choose whether to amend their plans to provide the Sec. 2202 distribution and loan relief, which includes allowing qualified individuals to delay repayment of outstanding plan loans for up to one year. They...

Nearly everyone has heard about the Economic Impact Payments (EIPs) that the federal government is sending to help mitigate the effects of the coronavirus (COVID-19) pandemic. The IRS reports that in the first four weeks of the program, 130 million individuals received payments worth more than $200 billion. However, some people are still waiting for a payment. And others received an EIP but it was less than what they were expecting. Here are some answers why this might have happened. Basic amounts If you’re under a certain adjusted gross income (AGI) threshold, you’re generally eligible for the full $1,200 ($2,400 for married couples filing jointly). In addition, if you have a “qualifying child,” you’re eligible for an additional $500. Here are some of the reasons why you may receive less: Your child isn’t eligible. Only children eligible for the Child Tax Credit qualify for the additional $500 per child. That means you must generally be related to the child, live with them more than ...