On December 14th, we are closing our offices at 3pm for an internal event.
Starting from October 20 (Friday) until December 29 (Friday), SKR + Co will be following our Fall office hours. Our offices will be closed at NOON on Fridays.
On December 14th, we are closing our offices at 3pm for an internal event.
Starting from October 20 (Friday) until December 29 (Friday), SKR + Co will be following our Fall office hours. Our offices will be closed at NOON on Fridays.
The full impact of COVID-19 is unknown. While we wait for questions to be answered many are asking what can we do right now? What’s next for our families? What’s next for family businesses and the people who work for them? Planning for our future generations is the greatest gift we can give, particularly during times of uncertainty.
Many closely-held businesses have been impacted by the COVID-19 pandemic, leading to depressed company valuations. The current federal estate, gift, and generation-skipping transfer (GST) tax exemption is $11.58 million per person. That, coupled with the low AFR and Section 7520 rates, provides an opportune time to transfer wealth out of estates without using up exemptions.
There are estate tax planning techniques that can be implemented which transfer the greatest amount of value from an estate while using the least amount of exemption. Transferring assets while they have a low value is a technique that is used to lock-in or freeze those low values in anticipation the asset will one day significantly increase in value. This transfers the appreciation in excess of the frozen value out of the estate with the added benefit of preserving the exemption for additional transfers.
Estate Planning Strategies
A grantor retained annuity trust (GRAT) is a powerful technique that allows a transfer of assets to a trust, in exchange for an annuity over a fixed term of years. After the annuity is paid off the assets transferred are owned by the trust for the benefit of the trust beneficiaries, normally the children.
A transaction can be structured to create a “zeroed-out” GRAT, where the annuity is structured in a manner so that the transaction does not produce a taxable gift. The calculation of the GRAT annuity payment is based on the Section 7520 rate in effect at the time of the transfer (for June 2020, the Section 7520 rate is 0.6%), thereby allowing more value to be transferred to the trust without using the exemption.
When transferring assets to the next generation, families are concerned about transferring too much to the younger generation, creating cashflow constraints and transfers that do not use their exemption in an effective manner. The zeroed-out GRAT can achieve financial stability, optimal estate tax results and flexible estate planning options. This simple, effective and time-tested strategy can achieve:
An intentionally defective grantor trust (IDGT) is an effective and efficient technique to transfer assets to a trust for future generations. Once the assets are gifted to the trust, they are considered taxable gifts and property of the trust. Those assets can remain in trust for multiple generations, allowing the gift to benefit both children and grandchildren, if desired.
The transaction can be structured as a sale of assets to an IDGT in exchange for a promissory note. This structure is typically an alternative to the aforementioned GRAT. However, this sale is not considered a taxable gift and does not create any gain for income tax purposes. The IDGT promissory note payment is based off the AFR in effect at the time of the transfer (for June 2020, the long-term AFR is 1.01% for promissory note terms longer than nine years), allowing more value to be transferred without using your exemption.
A sale to an IDGT is typically more successful than funding a GRAT as the AFR rate used as the interest rate in the promissory note is generally lower that the Section 7520 rate used to value GRATs. The promissory note can also be structured as an interest-only note with a balloon payment upon maturity, whereas a GRAT must be structured as an annual annuity. Moreover, sales to an IDGT allow for the immediate allocation of GST exemption. With a GRAT, the grantor cannot allocate GST exemption until the end of the GRAT term.
The sale to an IDGT can achieve financial stability, optimal estate tax results, and multigenerational estate planning options. This efficient, effective and time-tested strategy can achieve:
Giving money to a family member in excess of the annual exclusion ($15,000 in 2020) will be a taxable gift. A simple way to provide cash to a family member is to make a loan to them. Historically, if the loan has an interest rate of at least the AFR, the IRS will respect the loan and not claim the transaction to be a gift. With the historically low AFR, cash can be loaned to a family member without creating a burden from charging the family member a high interest rate. June 2020 AFR rates are at historic lows (June 2020 short-term AFR is .18% which applies for terms less than three years, mid-term AFR is 0.43% for terms three years through nine years, and long-term AFR is 1.01% for terms longer than nine years).
The intra-family loan achieves financial stability, optimal estate tax results, and cashflow. This simple, effective and time-tested strategy can achieve:
Planning for the future is not a task to be taken lightly, even in the best of times. During times of uncertainty it becomes even more important. The three estate planning strategies summarized above provide options.
Conclusion: The zeroed-out GRAT is an effective strategy to take advantage of the increased exemption, low Section 7520 rate, and current economic environment. These three factors significantly increase the amount of wealth a family can transfer to the next generation while using a minimal amount of their exemption. Alternatively, a sale to an IDGT can be an effective strategy to transfer wealth to multi-generations and take advantage of the extremely low AFR. Finally, low interest intra-family loans allow families to provide liquidity to various family members without overburdening the family with onerous interest payments.
|UPDATED 3/19/20, 10:30 a.m.|
IRS Updates on Tax Payments
**Please note: we are planning a client webinar for early next week to explain how the tax deferrals will work. Event details will be posted on our website.**
The U.S. Treasury Department and Internal Revenue Service (IRS) issued guidance allowing all individual and other non-corporate tax filers to defer up to $1 million of federal income tax (including self-employment tax) payments due on April 15, 2020, until July 15, 2020, without penalties or interest.
To clarify, the federal tax payment deferrals include 2019 tax payments as well as 2020 first quarter estimated federal tax payments.
This applies to federal taxes, states taxes vary. Colorado officials said they would mirror IRS guidance as it is updated amid the pandemic. See the American Institute of CPAs (AICPA)’s state-by-state guide for more information.
The guidance also allows corporate taxpayers a similar deferment of up to $10 million of federal income tax payments that would be due on April 15, 2020, until July 15, 2020, without penalties or interest.
The current guidance does not change the April 15 filing deadline, or the requirement to file for an extension if you do not file by April 15. We anticipate this also may change; however, we are working diligently toward these deadlines.
Read the full IRS guidance here.
We are monitoring the Treasury Website and the IRS Website for updates and will continue to post the latest information to our Coronavirus Updates page.
SKR+CO Document Exchange – New Secure In Person Dropbox:
SKR+CO installed a secure dropbox on the 3rd floor of our building. Clients may drop documents off securely, should you prefer to do so in person. Please use an envelope, clips or rubber bands to keep your documents organized.
Access to the 4th floor will only be available to SKR+CO essential personnel, effective immediately.
USPS mail services, secure email and the client portal are also available to exchange and securely share documents with your CPA. As always, please call your CPA with questions — our receptionist is happy to connect you as we work remotely.
SKR+CO Client Information:
In an abundance of caution, please avoid unnecessary trips to the SKR+CO office. Instead, we highly encourage:
Sharing documents digitally via the SKR+CO client portal and/or secure email, both located on our client center page.
If possible, please share and/or sign documents electronically via our portal or secure email.
Business Recovery Information:
Webinar: We are preparing a webinar for clients regarding business recovery.
Social Media: We will share information placed on our update page through our social media platforms, should you prefer accessing information via those channels.
Business Recovery: Please review the Business Recovery Guide
Additional information from the IRS regarding coronavirus can be found here: https://www.irs.gov/coronavirus
We will list closure status or other updates on our website and our social media channels.
“After the natural disasters in the fall of 2013, the Colorado SBDC disaster relief team worked with federal, state and local resources to produce a comprehensive guide to assist Colorado businesses in preparing for, responding to, and recovering from natural disasters and emergencies.” Click here for the guide . More information can be found on the SBDC Website
Stay up to date with the latest SKR+CO information. Sign up for our newsletter where we will update you with new information as it becomes available to us. You can join our newsletter by signing up at the bottom of our Client Center page.
Do you drive a heavy vehicle for work? It could lighten your tax load. If you’re a business owner, your SUV, pickup truck or van may be eligible for 100% first-year bonus depreciation. But it must:
See below for some business vehicles that can do the heavy lifting.
Other rules apply. Contact your trusted advisor for details.
With the holiday season right around the corner, it is a good time for business owners to focus on strategic planning for next year. Here are some ways to get started.
A good place to find inspiration for strategic objectives is your financial statements. They will tell you whether you are excelling or struggling so you may decide how strategically ambitious or cautious to be in the coming year.
Use the numbers to look at key performance indicators such as gross profit, which tells you how much money you made after your production and selling costs were paid. It’s calculated by subtracting the cost of goods sold from your total revenue. Also calculate current ratio, which is calculated by dividing current assets by current liabilities. It helps you gauge the strength of your cash flow.
A CFO or CPA-prepared budget can serve as more than just a management tool – it also can be presented to lenders and investors who want to know more about your start-up’s operations and its expected financial results. Review your findings with your CPA or a CFO consultant if you do not already have a CFO on staff.
Human resources is another critical area of strategic planning. Consider last year’s employee turnover rate. High turnover could be a sign of poor training, substandard management or low morale. Any of these problems could undercut the strategic objectives you set.
Examine sales and marketing. Did you meet your goals for new sales last year, as measured in both sales volume and number of new customers? Did you generate an adequate return on investment for your marketing dollars?
Finally, take a close look at your production and operations. Many companies track a metric called customer reject rate that measures the number of complete units rejected or returned by external customers. Sometimes a business must improve this rate before it moves forward with growth objectives. If yours is a service business, you should similarly track and assess customer satisfaction.
Set new objectives
With a review of your financials and key business areas complete, you can more reasonably set goals for next year under the banner of your strategic plan. On the financial side, for instance, your objective might be to boost gross profit from 20% to 30%. But how will you lower your costs or increase efficiency to make this goal a reality?
Or maybe you want to lower your employee turnover rate from 20% to 10%. Strategize what will you do differently from a training and management standpoint to keep your employees from jumping ship this year.
Don’t let year end creep any closer without reviewing your business’s recent performance. Then, use this data to set realistic goals for the coming year.
Contact your trusted advisor to choose the best metrics numbers and put together a solid strategic plan.
Owners of certain rental real estate interests have final guidance on what qualifies for the qualified business income (QBI) deduction.
QBI in a nutshell
QBI equals the net amount of income, gains, deductions and losses — excluding reasonable compensation, certain investment items and payments to partners for services rendered. The deduction is subject to several significant limitations; however, QBI generally allows partnerships, limited liability companies (LLCs), S corporations and sole proprietorships to deduct as much as 20% of QBI received.
Many taxpayers involved in rental real estate activities were uncertain whether they would qualify for the deduction. The final guidance leaves no doubt that individuals and entities that own rental real estate directly or through disregarded entities (entities that are not considered separate from their owners for income tax purposes, such as single-member LLCs) may be eligible.
The safe harbor applies to qualified “rental real estate enterprises.” For purposes of the safe harbor only, the term refers to a directly held interest in real property held to produce rents. It may consist of an interest in a single property or multiple properties.
You can treat each interest in a similar property type as a separate rental real estate enterprise or treat interests in all similar properties as a single enterprise. Properties are “similar” if they are part of the same rental real estate category (that is, residential or commercial). In other words, you can only hold commercial real estate in the same enterprise with other commercial real estate. The same applies for residential properties.
Bear in mind, if you opt to treat interests in similar properties as a single enterprise, you must continue to treat interests in all properties of that category — including newly acquired properties — as a single enterprise. If, however, you choose to treat your interests in each property as a separate enterprise, you can later decide to treat your interests in all similar commercial or all similar residential properties as a single enterprise.
Notably, the guidance provides that an interest in mixed-use property may be treated as a single rental real estate enterprise or bifurcated into separate residential and commercial interests.
Safe harbor requirements
The final guidance clarifies the requirements you must fulfill during the tax year in which you wish to claim the safe harbor. Requirements include:
Keeping separate books and records. You must maintain separate books and records reflecting income and expenses for each rental real estate enterprise. If the enterprise includes multiple properties, you can meet this requirement by keeping separate income and expense information statements for each property and consolidating them.
Performing rental services. For enterprises in existence less than four years, at least 250 hours of rental services must be performed each year. For those in existence at least four years, the safe harbor requires at least 250 hours of rental services per year in any three of the five consecutive tax years that end with the tax year of the safe harbor.
The rental services may be performed by owners or by employees, agents or contractors of the owners. Rental services include:
Financial or investment management activities, studying or reviewing financial statements or reports, improving property, and traveling to and from the property do not qualify as rental services.
Maintaining contemporaneous records. For all rental services performed, you must keep contemporaneous records that describe the service, associated hours, dates and the individuals who performed the service. If services are performed by employees or contractors, you can provide a description of them, the amount of time employees or contractors generally spent performing those services, and time, wage or payment records for the individuals.
This requirement does not apply to tax years beginning before January 1, 2020. The IRS cautions, though, that taxpayers still must establish their right to any claimed deductions in all tax years, so be prepared to document your QBI deduction.
Providing a tax return statement. You must attach a statement to your original tax return (or, for the 2018 tax year only, on an amended return) for each year you rely on the safe harbor. If you have multiple rental real estate enterprises, you can submit a single statement listing the requisite information separately for each.
Excluded real estate arrangements
The safe harbor is not available for all rental real estate arrangements. The guidance excludes:
The guidance states that taxpayers that do not qualify for the safe harbor may still be able to establish that an interest in rental real estate is a business for purposes of the deduction.
The final safe harbor rules apply to tax years ending after December 31, 2017, and you have the option of instead relying on the earlier proposed safe harbor for the 2018 tax year. Plus, you must determine annually whether to use the safe harbor.
Contact your trusted advisor to determine whether you are eligible for this and other valuable tax breaks.
Bitcoin and other forms of virtual currency are gaining popularity worldwide. Yet many businesses, consumers, employees and investors are still confused about how they work and how to report transactions on their federal tax returns. The IRS recently announced that it is reaching out to taxpayers who potentially failed to report income and pay tax on virtual currency transactions or did not report them properly.
The nuts and bolts
Unlike cash or credit cards, small businesses generally don’t accept bitcoin payments for routine transactions. However, a growing number of larger retailers and online businesses now accept payments. Businesses can also pay employees or independent contractors with virtual currency. The trend is expected to continue, so more small businesses may soon get on board.
Virtual currency has an equivalent value in real currency and can be digitally traded between users. It can also be purchased and exchanged with real currencies (such as U.S. dollars). The most common ways to obtain virtual currency like bitcoin are through virtual currency ATMs or online exchanges, which typically charge nominal transaction fees.
Virtual currency has triggered many tax-related questions. The IRS has issued limited guidance to address them. In 2014, the IRS established that virtual currency should be treated as property, not currency, for federal tax purposes.
As a result, businesses that accept bitcoin payments for goods and services must report gross income based on the fair market value of the virtual currency when it was received. This is measured in equivalent U.S. dollars.
From the buyer’s perspective, purchases made using bitcoin result in a taxable gain if the fair market value of the property received exceeds the buyer’s adjusted basis in the currency exchanged. Conversely, a tax loss is incurred if the fair market value of the property received is less than its adjusted tax basis.
Wages paid using virtual currency are taxable to employees and must be reported by employers on W-2 forms. They are subject to federal income tax withholding and payroll taxes, based on the fair market value of the virtual currency on the date of receipt.
Virtual currency payments made to independent contractors and other service providers are also taxable. In general, the rules for self-employment tax apply and payers must issue 1099-MISC forms.
The IRS announced it is sending letters to taxpayers who potentially failed to report income and pay tax on virtual currency transactions or did nott report them properly. The letters urge taxpayers to review their tax filings and, if appropriate, amend past returns to pay back taxes, interest and penalties.
By the end of August, more than 10,000 taxpayers will receive these letters. The names of the taxpayers were obtained through compliance efforts undertaken by the IRS. The IRS Commissioner warned, “The IRS is expanding our efforts involving virtual currency, including increased use of data analytics.”
Last year, the tax agency also began an audit initiative to address virtual currency noncompliance and has stated that it is an ongoing focus area for criminal cases.
Implications of going virtual
Contact your trusted advisor if you have questions about the tax considerations of accepting virtual currency or using it to make payments for your business. If you receive a letter from the IRS about possible noncompliance, consult with your trusted business advisor before responding.
In light of the recent natural disasters, we feel it is prudent and timely to revisit casualty loss rules.
If you suffered damage to your home or personal property last year, you may be able to deduct these “casualty” losses on your 2017 federal income tax return. A casualty is a sudden, unexpected or unusual event, such as a natural disaster (hurricane, tornado, flood, earthquake, etc.), fire, accident, theft or vandalism. A casualty loss doesn’t include losses from normal wear and tear or progressive deterioration from age or termite damage.
Here are some things you should know about deducting casualty losses:
When to deduct. Generally, you must deduct a casualty loss on your return for the year it occurred. However, if you have a loss from a federally declared disaster area, you may have the option to deduct the loss on an amended return for the immediately preceding tax year.
Amount of loss. Your loss is generally the lesser of 1) your adjusted basis in the property before the casualty (typically, the amount you paid for it), or 2) the decrease in fair market value of the property as a result of the casualty. This amount must be reduced by any insurance or other reimbursement you received or expect to receive. If the property was insured, you must have filed a timely claim for reimbursement of your loss.
$100 rule. After you’ve figured your casualty loss on personal-use property, you must reduce that loss by $100. This reduction applies to each casualty loss event during the year. It doesn’t matter how many pieces of property are involved in an event.
10% rule. You must reduce the total of all your casualty or theft losses on personal-use property for the year by 10% of your adjusted gross income (AGI). In other words, you can deduct these losses only to the extent they exceed 10% of your AGI.
Have questions about deducting casualty losses? Contact your business advisor today.
The dog days of summer may be nearing an end, but the popularity of vacation rentals remains strong.
While homeowners across the Pikes Peak region happily offer their private residences as short-term rentals through online booking sites like Airbnb, HomeAway or VRBO, some may be unaware of the associated tax liability such as sales and lodging tax.
For example, the city of Colorado Springs states that “owners or property managers must collect both sales and lodging or LART tax for each stay of less than 30 days” and also requires a sales tax license to operate short-term rentals.
If you operate short-term rentals and have questions about local requirements or how to be compliant, please contact your tax advisor today!
One of the most common inquiries clients have for their accountants is “What documents do I need to save, and for how long?” Retaining, organizing, and filing old records can become a burden, both at the business and individual levels. As we all strive to achieve a more “paperless” process, how do we determine what warrants taking up valuable office and storage space and what does not?
Records should be preserved only as long as they serve a useful purpose or until all legal requirements are met. To keep files manageable, it is a good idea to develop a schedule so that at the end of a specified retention period, certain records are destroyed.
At Stockman Kast Ryan + Co., we have developed records retention schedules we think you will find helpful. Although it doesn’t cover every possible record, it does cover the most common ones. As always, please feel free to ask us should you have specific questions or concerns.
If you’re like many Americans, you may not start thinking about filing your tax return until close to this year’s April 18 deadline. You may even want to file for an extension so you don’t have to send your return to the IRS until October 16. However, it can be in your best interest to file early.
In an increasingly common scam, thieves use victims’ personal information to file fraudulent tax returns electronically and claim bogus refunds. This is usually done early in the tax filing season. When the real taxpayers file, they’re notified that they’re attempting to file duplicate returns. A victim typically discovers the fraud after he or she files a tax return and is informed by the IRS that the return has been rejected because one with the same Social Security number has already been filed for the same tax year. The IRS then must determine who the legitimate taxpayer is.
Tax identity theft can cause major headaches to straighten out and significantly delay legitimate refunds. But if you file first, it will be the tax return filed by a potential thief that will be rejected — not yours.
Keep Your Computer Secure
Avoid Phishing and Malware
Protect Personal Information
Find the latest tax tips at IRS Security Awareness Tax Tips.
Source: IRS tips Issue Number: IRS Taxes. Security. Together. Tax Tip Number 12