The IRS has announced a second Voluntary Disclosure Program for employers to resolve erroneous claims for credit or refund involving the COVID-19 Employee Retention Credit (ERC). Participation in the second ERC Voluntary Disclosure Program is limited to ERC claims filed for the 2021 tax period(s), and cannot be used to disclose and repay ERC money from tax periods in 2020.

The IRS has announced a second Voluntary Disclosure Program for employers to resolve erroneous claims for credit or refund involving the COVID-19 Employee Retention Credit (ERC). Participation in the second ERC Voluntary Disclosure Program is limited to ERC claims filed for the 2021 tax period(s), and cannot be used to disclose and repay ERC money from tax periods in 2020.

The program is designed to help businesses with questionable claims to self-correct and repay the credits they received after filing erroneous ERC claims, many of which were driven by aggressive marketing from unscrupulous promoters.

The first ERC Voluntary Disclosure Program was announced in late December 2023, and ended on March 22, 2024 (Announcement 2024-3, I.R.B. 2024-2, 364). Over 2,600 taxpayers applied to the first program to resolve their improper ERC claims and avoid civil penalties and unnecessary litigation.

The second ERC Voluntary Disclosure Program will allow businesses to correct improper payments at a 15-percent discount, and avoid future audits, penalties and interest.

Procedures for Second Voluntary Disclosure Program

To apply, employers must file Form 15434, Application for Employee Retention Credit Voluntary Disclosure Program, and submit it through the IRS Document Upload Tool. Employers must provide the IRS with the names, addresses, telephone numbers and details about the services provided by any advisors or tax preparers who advised or assisted them with their claims, and are expected to repay their full ERC claimed, minus the 15-percent reduction allowed through the Voluntary Disclosure Program.

Eligible employers must apply by 11:59 pm local time on November 22, 2024.

The Department of the Treasury and the IRS released statistics on the Inflation Reduction Act clean energy tax credits for the 2023 tax year. Taxpayers have claimed over $6 billion in tax credits for residential clean energy investments and more than $2 billion for energy-efficient home improvements on 2023 tax returns filed and processed through May 23, 2024.

The Department of the Treasury and the IRS released statistics on the Inflation Reduction Act clean energy tax credits for the 2023 tax year. Taxpayers have claimed over $6 billion in tax credits for residential clean energy investments and more than $2 billion for energy-efficient home improvements on 2023 tax returns filed and processed through May 23, 2024.

For the Residential Clean Energy Credit, 1,246,440 returns were filed, with a total credit value of $6.3 billion and an average of $5,084 per return. Specific investments include:

• Rooftop solar: 752,300 returns, up to 30 percent of the cost;
• Batteries: 48,840 returns, up to 30 percent of the cost.

For the Energy Efficient Home Improvement Credit, 2,338,430 returns were filed, with a total credit value of $2.1 billion and an average of $882 per return. Specific improvements include:

• Home insulation: 669,440 returns, up to 30 percent of the cost;
• Windows and skylights: 694,450 returns, up to 30 percent of the cost or $600;
• Central air conditioners: 488,050 returns, up to 30 percent of the cost or $600;
• Doors: 400,070 returns, up to 30 percent of the cost, $250 per door or $500 total;
• Heat pumps: 267,780 returns, up to 30 percent of the cost or $2,000;
• Heat pump water heaters: 104,180 returns, up to 30 percent of the cost or $2,000.

Internal Revenue Service Commissioner Daniel Werfel is calling on Congress to maintain the agency’s funding and not make any further cuts to the supplemental funding provided to the agency in the Inflation Reduction Act, using recent successes in customer service and compliance to validate his request.

Internal Revenue Service Commissioner Daniel Werfel is calling on Congress to maintain the agency’s funding and not make any further cuts to the supplemental funding provided to the agency in the Inflation Reduction Act, using recent successes in customer service and compliance to validate his request.

"The Inflation Reduction Act funding is making a difference for taxpayers, and we will build on these improvements in the months ahead," Werfel said during a July 24, 2024, press teleconference, adding that "for this progress to continue, we must maintain a reliable, consistent annual appropriations for the agency as well as keeping the Inflation Reduction Act funding intact."

During the call, Werfel highlighted a number of improvements to IRS operations that have come about due to the IRA funding, including expansion of online account features (such as providing more digital forms, making it easier to make online payments, and making access in general easier); providing more access to taxpayers wanting face-to-face assistance (including a 37 percent increase in interactions at taxpayer assistance centers); IT modernization; and the collection of more than $1 billion in taxes due form high wealth individuals.

Werfel did highlight an area where he would like to see some improvements, including the number of taxpayers who have activated their online account.

While he did not have a number of how many taxpayers have activated their accounts so far, he said that “"we are nowhere near where we have the opportunity to be,"” adding that as functionality improves and expands, that will bring more taxpayers in to use their online accounts and other digital services.

He also noted that online accounts will be a deterrent for scams, and it will provide taxpayers with the information they need to not be fooled by scammers.

“We see the online account as a real way to test these scams and schemes because taxpayers will have a single source of truth about whether they actually owe a debt, whether the IRS is trying to reach them, and also information we can push out to taxpayers more regularly if they sign up and opt in for it on the latest scams and schemes,” Werfel said.

By Gregory Twachtman, Washington News Editor

The IRS has intensified its efforts to scrutinize claims for the Employee Retention Credit (ERC), issuing five new warning signs of incorrect claims. These warning signs, based on common issues observed by IRS compliance teams, are in addition to seven problem areas previously highlighted by the agency. Businesses with pending or previously approved claims are urged to carefully review their filings to confirm eligibility and ensure credits claimed do not include any of these twelve warning signs or other mistakes. The IRS emphasizes the importance of consulting a trusted tax professional rather than promoters to ensure compliance with ERC rules.

The IRS has intensified its efforts to scrutinize claims for the Employee Retention Credit (ERC), issuing five new warning signs of incorrect claims. These warning signs, based on common issues observed by IRS compliance teams, are in addition to seven problem areas previously highlighted by the agency. Businesses with pending or previously approved claims are urged to carefully review their filings to confirm eligibility and ensure credits claimed do not include any of these twelve warning signs or other mistakes. The IRS emphasizes the importance of consulting a trusted tax professional rather than promoters to ensure compliance with ERC rules.

The newly identified issues include essential businesses claiming ERC despite being fully operational, unsupported government order suspensions, misreporting wages paid to family members, using wages already forgiven under the Paycheck Protection Program, and large employers incorrectly claiming wages for employees who provided services. The IRS plans to deny tens of thousands of claims that show clear signs of being erroneous and scrutinize hundreds of thousands more that may be incorrect. In addition, the IRS announced upcoming compliance measures and details about reopening the Voluntary Disclosure Program, aimed at addressing high-risk ERC claims and processing low-risk payments to help small businesses with legitimate claims.

IRS Commissioner Danny Werfel emphasized the agency’s commitment to pursuing improper claims and increasing payments to businesses with legitimate claims. Promoters lured many businesses into mistakenly claiming the ERC, leading to the IRS digitizing and analyzing approximately 1 million ERC claims, representing over $86 billion. The IRS urges businesses to act promptly to resolve incorrect claims, avoiding future issues such as audits, repayment, penalties, and interest. Taxpayers should recheck their claims with the help of trusted tax professionals, considering options such as the ERC Withdrawal Program or amending their returns to correct overclaimed amounts.

The IRS, in collaboration with state tax agencies and the national tax industry, has initiated a new effort to tackle the rising threat of tax-related scams. This initiative, named the Coalition Against Scam and Scheme Threats (CASST), was launched in response to a significant increase in fraudulent activities during the most recent tax filing season. These scams have targeted both individual taxpayers and government systems, seeking to exploit vulnerabilities for financial gain.

The IRS, in collaboration with state tax agencies and the national tax industry, has initiated a new effort to tackle the rising threat of tax-related scams. This initiative, named the Coalition Against Scam and Scheme Threats (CASST), was launched in response to a significant increase in fraudulent activities during the most recent tax filing season. These scams have targeted both individual taxpayers and government systems, seeking to exploit vulnerabilities for financial gain.

CASST will focus on three primary objectives: enhancing public outreach and education to alert taxpayers to emerging threats, developing new methods to identify fraudulent returns at the point of filing, and improving the infrastructure to protect taxpayers and the integrity of the tax system. This initiative builds on the successful framework of the Security Summit, which was launched in 2015 to combat tax-related identity theft. While the Security Summit made significant progress in reducing identity theft, CASST aims to address a broader range of scams, reflecting the evolving tactics of fraudsters.

The coalition has received widespread support, with over 60 private sector groups, including leading software and financial companies, joining the effort. Key national tax professional organizations are also participating, all committed to strengthening the security of the tax system.

Among the measures CASST will implement are enhanced validation processes for tax preparers, including improvements to the Electronic Filing Identification Number (EFIN) and Preparer Tax Identification Number (PTIN) systems. The coalition will also target the issue of ghost preparers, who prepare tax returns for a fee without proper disclosure, leading to inflated refunds and significant revenue losses.

In addition to these technical improvements, CASST will address specific scams, such as fraudulent claims for tax credits like the Fuel Tax Credit. By the 2025 filing season, CASST aims to have new protections in place, bolstering defenses across both public and private sectors to make it more difficult for scammers to exploit the tax system. This coordinated effort seeks to protect taxpayers and ensure the integrity of the nation’s tax system.

The Internal Revenue Service will be processing about 50,000 "low-risk" Employee Retention Credit claims, and it will be shifting the moratorium dates on processing.

The Internal Revenue Service will be processing about 50,000 "low-risk"Employee Retention Credit claims, and it will be shifting the moratorium dates on processing.

"The IRS projects payments will begin in September with additional payments going out in subsequent weeks," the agency said in an August 8, 2024, statement."The IRS anticipates adding another large block of additional low-risk claims for processing and payment in the fall."

The agency also announced that it is shifting the moratorium period on processing new claims. Originally, the agency was not processing claims that were filed after September 14, 2023. It is now going to process claims filed between September 14, 2023, and January 31, 2024.

"Like the rest of the ERC inventory, work will focus on the highest and lowest risk claims at the top and bottom end of the spectrum," the IRS said. "This means there will be instances where the agency will start taking actions on claims submitted in this time period when the agency has seen a sound basis to pay or deny any refund claim."

The agency also said it has sent out "28,000 disallowance letters to businesses whose claims showed a high risk of being incorrect," preventing up to $5 billion in improper payments. It also has "thousands of audits underway, and 460 criminal cases have been initiated" with potentially fraudulent claims worth nearly $7 billion. Thirty-seven investigations have resulted in federal charges, with 17 resulting in convictions.

Businesses that receive a denial letter will have the ability to appeal the decision.

The agency also offered some other updates on the ERC program, including:

• The claim withdrawal process for unprocessed ERC has led to more than 7,300 withdrawing $677 million in claims;
• The voluntary disclosure program received more than 2,600 applications from ERC recipients that disclosed $1.09 billion in credits; and
• The IRS Office of Promoter Investigations has received "hundreds" of referrals about suspected abusive tax promoters and preparers improperly promoting the ability to claim the ERC.

"The IRS is committed to continuing out work to resolve this program as Congress contemplates further action, both for the good of legitimate businesses and tax administration," IRS Commissioner Daniel Werfel said in the statement.

By Gregory Twachtman, Washington News Editor

The IRS has announced substantial progress in its ongoing efforts to modernize tax administration, emphasizing a shift towards digital interactions and enhanced measures to combat tax evasion. This update, part of a broader 10-year plan supported by the Inflation Reduction Act, reflects the agency's commitment to improving taxpayer services and ensuring fairer compliance.

The IRS has announced substantial progress in its ongoing efforts to modernize tax administration, emphasizing a shift towards digital interactions and enhanced measures to combat tax evasion. This update, part of a broader 10-year plan supported by the Inflation Reduction Act, reflects the agency's commitment to improving taxpayer services and ensuring fairer compliance.

The IRS’s push for digital transformation has seen significant advancements, allowing taxpayers to conduct nearly all interactions with the agency online. This initiative aims to reduce the reliance on paper submissions, expedite tax processing, and improve overall efficiency. In 2024 alone, the IRS introduced extended hours at Taxpayer Assistance Centers across the country, particularly benefiting rural and underserved communities. The agency also reported a notable increase in face-to-face interactions, with a 37 percent rise in contacts during the 2024 filing season.

In parallel with these service improvements, the IRS has ramped up efforts to disrupt complex tax evasion schemes. Leveraging advanced data science and technology, the agency has focused on high-income individuals and entities employing sophisticated financial maneuvers to avoid taxes. Among the IRS’s new measures is a moratorium on processing Employee Retention Credit claims to prevent fraud, alongside initiatives targeting abusive use of partnerships and improper corporate practices.

The IRS also highlighted its progress in eliminating paper filings through the introduction of the Document Upload Tool, which allows taxpayers to submit documents electronically. This tool, along with upgraded scanning and mail-sorting equipment, is expected to significantly reduce the volume of paper correspondence, potentially replacing millions of paper documents each year. These technological upgrades are part of the IRS’s broader goal to create a fully digital workflow, thereby speeding up refunds and improving service accuracy.

Additionally, the IRS has launched new programs to ensure taxpayers are informed about and can claim eligible credits and deductions. This includes outreach efforts related to the Child Tax Credit and the Earned Income Tax Credit, aiming to bridge the gap for eligible taxpayers who may not have claimed these benefits. These initiatives underline the IRS's dedication to a more equitable tax system, ensuring that all taxpayers have access to the credits and services they are entitled to while maintaining robust compliance standards.

2021 Individual Tax Return Preparation Engagement Letter

2021 Individual Tax Return Preparation Engagement Letter

We are pleased to confirm and specify the terms of our engagement with you and to clarify the nature and extent of the services we will provide regarding the preparation of the income tax return(s) and tax planning services. Please review, sign, and return to us with your tax documents.

Click Here to Download a copy of the Letter

• TAX STRATEGIES FOR INDIVIDUALS AND FAMILIES
• INVESTMENT PLANNING
• TAX PLANNING FOR BUSINESS
• PLANNING FOR THE FUTURE

• TAX STRATEGIES FOR INDIVIDUALS AND FAMILIES
• INVESTMENT PLANNING
• TAX PLANNING FOR BUSINESS
• PLANNING FOR THE FUTURE
• THE CURRENT 2020 TAX CLIMATE
• NATIVE MINIMUM TAX (AMT)
• TAX CREDITS & DEDUCTIONS
• EDUCATION STRATEGIES
• ESTIMATED TAX PAYMENTS
• TAXES FOR DOMESTIC HELP
• CHILDREN’S TAXES
• CHANGES TO EXEMPTIONS
• SUPPORTING YOUR PARENTS
• TAX STRATEGIES FOR HOMEOWNERS
• IRAs FOR KIDS
• TAXES & DIVORCE
• MANAGING RECEIPT OF INCOME
• YEAR END TAX PLANNING TIPS
• CAPITAL GAINS & LOSSES
• APPRECIATING INVESTMENTS
• OTHER CONSIDERATIONs
• PASSIVE ACTIVITIES
• MUTUAL FUNDS
• BONDS
• REAL ESTATE
• INVESTING IN SMALL BUSINESSES
• THE CARES ACT: $2 TRILLION STIMULUS PACKAGE INCLUDES SMALL BUSINESS LOAN RELIEF
• INVESTING IN SMALL BUSINESSES
• EMPLOYER-PROVIDED BENEFITS
• BUSINESS TAX CREDITS & DEDUCTIONS
• CHOOSING THE BEST INVENTORY METHOD
• BENEFITING FROM BUSINESS LOSSES
• DEDUCTIONS FOR MEALS, ENTERTAIN- MENT, AND TRANSPORTATION COSTS
• EMPLOYEE OR INDEPENDENT CONTRACTOR?
• RETIREMENT STRATEGIES
• ESTATE PLANNING

• INTRODUCTION
• 2020 MAY BE OUR LAST CHANCE TO TAKE ADVANTAGE OF THESE TRADITIONAL  BUSINESS TAX BREAKS 
• HIGHLIGHTS OF SELECTED COVID-RELATED TAX PROVISIONS IMPACTING BUSINESSES
• SELECTED TAX CHANGES INCLUDED IN OTHER RECENT LEGISLATION
• TRADITIONAL YEAR-END TAX PLANNING TECHNIQUES  
•  FINAL COMMENTS                                   

2020 YEAR-END  INCOME TAX  PLANNING  FOR BUSINESSES

INTRODUCTION

It's that time of year when businesses normally start developing year-end planning strategies. However, there has never been a year quite like 2020. We think it is safe to say that year-end tax planning for 2020 is proving to be the trickiest in recent memory.  In response to the Coronavirus, Congress and the IRS have been exceedingly busy enacting and issuing never-seen-before tax relief for businesses and employers. Congress had little choice but to pass this complex legislation quickly, without time for adequate review. Consequently, as one would expect, there continues to be significant uncertainty on the application and implementation of many of the most important provisions in this legislation. In addition, Congress may not be through as it continues to struggle with attempts to enact even more Coronavirus relief legislation before the end of the year. Moreover, for well over a decade, we have been faced with the off-and-on expiration of a long list of popular business tax breaks. Historically, Congress has temporarily extended the majority of these tax breaks every few years. Unfortunately, several of these traditional tax breaks are currently scheduled to expire after the end of 2020.

We are sending this letter to help bring you up-to-date on the most significant tax provisions that could impact year-end planning for businesses. We start this letter with a listing of selected historic business tax breaks scheduled to expire at the end of 2020. We then discuss selected COVID­ related tax provisions that are most likely to impact businesses. We conclude this letter by highlighting certain time-honored, year-end tax planning techniques many businesses should consider notwithstanding the uncertain times we are currently experiencing.

Caution! It is entirely possible that Congress could enact additional COVID-related tax legislation before the end of this year. In addition, the IRS continues releasing guidance on various important tax provisions (particularly on COVID-related tax provisions that have already been enacted). We closely monitor new tax legislation and IRS releases on an ongoing basis. Please call our firm if you want an update on the latest tax legislation IRS notifications, announcem.ents, and guidance or if you need additional information concerning any item discussed in this letter.

Be careful! Although this letter contains planning ideas, you cannot properly evaluate a particular planning strategy without calculating the overall tax liability for the business and its owners (including the alternative minimum tax) with and without the strategy. Inaddition, this letter contains ideas for Federal income tax planning only. State income tax issues are not addressed. However, you should consider the state income tax impact of a particular planning strategy. We recommend that you call our Firm before implementing any tax planning technique discussed in this letter, or if you need more information concerning anything discussed.

2020 MAY BE OUR LAST CHANCE TO TAKE ADVANTAGE OF THESE                                                                              TRADITIONAL  BUSINESS TAX BREAKS

For well over a decade, we have been faced with the off-and-on expiration of a long list of popular tax breaks for businesses. Historically, Congress has temporarily extended the majority of these tax breaks every few years. However, several of these tax breaks for businesses are scheduled to expire at the end of 2020, and Congress has yet to extend them. Some of the more popular business tax breaks scheduled to expire at the end of 2020 include: Deductions for qualified improvements to certain energy-efficient commercial buildings; Credit of up to $2,000 for construction of qualified energy-efficient new homes; 7-year depreciation period for certain motor sports racetrack property; Employer credit for payments for qualified family and medical leave; 3-year depreciation period for certain race horses; and the Work Opportunity Credit for hiring workers from certain disadvantaged groups. Please note as we send this letter, it has been reported that some members of Congress are still pushing for these tax breaks to be extended beyond 2020. However, only time will tell whether they will be extended.  Planning Alert! In addition to these traditional expiring tax breaks, the COVID-inspired CARES Act (discussed in more detail below) also contains certain tax breaks scheduled to expire after 2020. For example, the 50% employee retention credit of up to $5,000 per employee is effective for qualified wages paid after March 12, 2020 and before January 1, 2021. Caution! Although not expiring, the current 26% business tax credit for Qualified Solar Energy Property, Fiber-Optic Solar Property, Qualified Fuel Cell Property and Qualified Small Wind Energy Property is reduced to 22% for qualified property where the construction of the property begins after 2020 and before 2022. Thus, to qualify for the full 26% credit (instead of next year’s 22% credit), construction of the qualifying energy-efficient property must begin no later than December 31, 2020.

HIGHLIGHTS OF SELECTED COVID-RELATED TAX PROVISIONS IMPACTING BUSINESSES

Largely in response to government-mandated shutdowns caused by COVID-19 (COVID), Congress enacted a series of tax- relief measures for businesses, including: The Families First Coronavirus Response Act (“Families First Act”) and the Coronavirus Aid, Relief and Economic Security Act (“CARES Act”). It is well beyond the scope of this letter to provide you a detailed discussion of the many business tax relief provisions contained in this voluminous legislation. Instead, the following are selected highlights that could have an impact on your business tax planning. Caution! Congress passed most of this recent COVID-Related legislation in a hurried fashion, without time to address the many uncertainties that would inevitably arise. As a result, over the last several months, we have experienced a stream of piecemeal guidance from the IRS and Small Business Administration (SBA) attempting to respond to some of these uncertainties. As we finish this letter, we are still waiting for guidance on many unanswered questions. Our firm continues to monitor the developments in this area, so please call our firm if you need additional information regarding any of the provisions listed below.

Paycheck Protection Program Loans (PPP Loans). This program was intended to provide struggling businesses with a quick infusion of cash to stay afloat and to retain employees in the midst of government-mandated shutdowns. The initial cash outlay was in the form of a PPP Loan, with a potential for all or a portion of the loan to be forgiven if the borrower could establish that the borrowed funds were used for certain qualifying business expenditures (i.e., generally payroll, rent, utilities, and mortgage payments) during a designated 8-week or 24-week “Covered Period.” As we send this letter, the PPP Loan program stopped accepting loan applications on August 8, 2020 (although there are legislative proposals to extend that deadline). The SBA reported that there have been more than 5.2 million PPP Loans made aggregating approximately $525 billion in total. Planning Alert! Most PPP Loan borrowers are now struggling with how and when they should apply to the lender for their PPP Loan forgiveness. There are continued uncertainties regarding the PPP Loan forgiveness process, and we are hoping for additional guidance in the near future. As we wait for that guidance, here are a few things you should know:

• No Defined Deadline For Submitting PPP Loan Forgiveness There is currently no deadline for submitting a PPP Loan Forgiveness Application. Generally, payments (if any) are not due on a PPP Loan until the SBA remits the PPP Loan’s forgiveness amount (if any) to the initial lender of the PPP Loan. However, if the borrower fails to apply for loan forgiveness within 10 months of the end of the borrower’s 8-week or 24-week covered period, payments of principal and interest on the PPP Loan must begin at the end of that 10-month period.

• Deductibility Of Expenses Related To The PPP Loan Forgiveness Even though the CARES Act provides that forgiveness of a PPP Loan is tax free, the IRS is currently taking the position that no tax deduction will be allowed for an expense, if the payment of that expense results in the forgiveness of a PPP Loan amount. As we complete this letter, there is significant pressure from business and professional groups urging the IRS to allow such deductions, or for Congress to pass legislation that would allow the deductions. Please contact our firm if you want a status report on this issue.

• Expedited Forgiveness Procedures For Smaller PPP The procedures for gathering documentation and applying for PPP Loan forgiveness could be tedious and time consuming. Planning Alert! In early October, the IRS and the SBA released a new “simplified” PPP Loan forgiveness Application Form that can be used only by borrowers that received a

PPP Loan of $50,000 or less. This should significantly simplify the PPP Loan Forgiveness process for those qualifying borrowers who borrowed $50,000 or less. Caution! Certain members of Congress are currently promoting legislation that, if passed, could also substantially streamline the loan forgiveness process for PPP Loans under a certain dollar threshold that could turn out to be higher than $50,000. As we complete this letter, the chance of this type of legislation being enacted is uncertain.

Employment-Related Payroll Tax Credits, Deferrals, Etc. Last Spring, in addition to the PPP Loan provision, Congress passed a dizzying array of tax relief provisions designed to subsidize qualifying employers for keeping employees on their payroll, and to provide additional liquidity for their businesses. These tax relief provisions include: Refundable employer tax credits of up to 100% of the qualifying Sick Leave And Family Leave Payments made to qualifying employees; Refundable income tax credits for self-employed individuals with respect to their “Family Leave and Sick Leave Equivalent Amounts;” Refundable 50% Employee Retention Credit for qualifying wages paid by certain employers experiencing business closure or economic hardship due to COVID; and, Deferral of deposits for the 6.2% portion of employer payroll taxes (can also apply to the 6.2% portion of S/E Tax). Planning Alert! It is well beyond the scope of this letter to provide a detailed discussion of the various technical requirements a business must satisfy to qualify for and claim these benefits. However, if you think your business may qualify for any of these tax benefits, feel free to call our firm. We will be glad to review your particular situation and advise you whether your business qualifies.

Temporary Relief For Net Operating Losses (NOLs). Before the Tax Cuts And Jobs Act of 2017 (TCJA), net operating losses (NOLs) could generally be carried back two prior years, and carried forward for 20 years. TCJA generally repealed the 2-year carried back period for NOLs (except for NOLs attributable to certain farming businesses and certain property and casualty insurance companies), and allowed NOLs to be carried forward indefinitely. TCJA also limited the deduction for NOL carryforwards to 80% of the taxable income for the carryover year. The CARES Act generally provides the following temporary relief with respect to NOLs: 1) Allows NOLs arising in tax years beginning after 2017 and before 2021 (e.g., NOLs arising in calendar years 2018, 2019, or 2020 for calendar-year taxpayers) to be carried back to 5 preceding years; and 2) Removes the 80% of taxable income limit for the NOL deduction for any tax year beginning before 2021. Planning Alert! A taxpayer may elect to forego the carryback of an NOL. Generally, the election to forego the NOL carryback must be made by the due date (including extensions) for the year of the NOL. The CARES Act provides that the election to forego the 5-year NOL carryback for tax years beginning in 2018 or 2019, may be made by the due date (including extensions) of the taxpayer’s return for the first taxable year ending after March 27, 2020.

Temporary Increase Of Limit On Business Interest Expense From 30% To 50% Of ATI. Effective for tax years beginning after 2017, TCJA generally limited the amount of business interest expense in excess of business interest income allowed as a deduction to 30% of Adjusted Taxable Income (ATI). Businesses with average gross receipts for the preceding three years of $25 million ($26 million for 2020) or less are generally exempt from this limit. The CARES Act makes the following changes:

• Increases the limit from 30% to 50% of ATI (unless the taxpayer elects otherwise) for tax years beginning in 2019 and 2020;
• Allows a taxpayer to use its “2019” ATI for purposes of determining the amount of the 50% of ATI limit for “2020”; 3) For partnerships, the 30% of ATI limit remains in place for 2019 but is 50% for 2020; and 4) Unless a partner elects otherwise, 50% of a partnership’s “excess business interest” allocated to a partner in 2019 is fully deductible by the partner in 2020 and not subject to the 50% ATI limitation (the remaining 50% of excess business interest from 2019 allocated to the partner is subject to the regular ATI limitations for 2020 and subsequent years).

Retroactive Fix For Computing Depreciation For “Qualified Improvement Property.” The CARES Act finally corrected the depreciation “glitch” contained in TCJA with respect to “Qualified Improvement Property.” Qualified Improvement Property (QIP) is generally defined as “an improvement” to the interior portion of a commercial building (provided the improvement is not attributable to an enlargement of the building, elevators or escalators, or the internal structural framework of the building), if the improvement is placed in service “after” the building was first placed in service. Due to a drafting error in TCJA, QIP was assigned a depreciable life of 39 years, instead of the intended 15 year life. To compound the error, assigning QIP a depreciable life of 39 years (instead of 15 years) also disqualified QIP for the 100% 168(k) first-year bonus depreciation, because 168(k) property must have a depreciable life of 20 years or less. The CARES Act fixes this mistake retroactively by assigning a 15-year depreciable life for all QIP that was placed in service after 2017. Therefore, QIP placed in service in 2018 or 2019 retroactively qualifies for the 100% 168(k) bonus depreciation. Tax Tip! This is great news for taxpayers that have previously capitalized post-2017 remodeling costs for existing restaurants, retail stores, and office buildings. So long as the qualifying improvements to the remodeled property was placed in service after 2017, the capitalized remodeling should now qualify for a 100% write off under 168(k). Planning Alert! Recently-issued final 168(k) regulations confirm that a purchaser of an existing commercial building containing QIP made by a previous owner, will not be able to treat any portion of the building’s purchase price as QIP.

• Claiming The 100% 168(k) Depreciation For QIP Placed In Service In 2018 Or The IRS says that we generally have two options to recoup the unclaimed 100% depreciation deduction for QIP placed in service in 2018 or 2019. First,

we can amend the 2018 or 2019 return and claim the 100% depreciation deduction on the amended return. If we choose to amend the 2018 return, the IRS says that we must file the amended 2018 return no later than October 15, 2021. Second, we could recoup the 100% 168(k) depreciation by claiming it through an automatic accounting method change in a subsequent year. For example, by filing an automatic accounting method change, you could claim the 100% deduction on your 2020 return (or even a later return). Planning Alert! If the QIP was placed in service in 2018 or 2019 by a partnership subject to the Centralized Partnership Audit Regime, our options for recouping the 100% depreciation deduction are more limited. We can either: 1) File for an “Administrative Adjustment Request” (AAR) under the new “Centralized Partnership Audit Regime” for the current tax year, or 2) File for an automatic accounting method change.

SELECTED TAX CHANGES INCLUDED IN OTHER RECENT LEGISLATION

Recent Legislation Extends The Due Date For Establishing A New Retirement Plan. Before the passage of the Consolidated Appropriations Act of 2020 (the “Appropriations Act”), calendar-year taxpayers wishing to establish a new qualified retirement plan for a tax year generally had to adopt the plan by December 31st of that year. However, a SEP could be established by the due date of the tax return (including extensions), but a SIMPLE plan was required to be established by October 1st of that year. Effective for plans adopted for taxable years beginning after 2019, the Appropriations Act generally allows the adoption of a stock bonus, pension, profit-sharing, or annuity plan for a taxable year after the close of the taxable year as long as the plan is adopted by the due date of the employer’s tax return, including extensions. Caution! The IRS says that a SIMPLE plan must still be adopted for an existing business with an effective date no later than October 1st of the year. Moreover, the Committee Reports to the Act say this new extended adoption date does not override rules requiring certain plan provisions to be in effect during a plan year, such as the provision for elective deferrals under a qualified cash or deferral arrangement (also known as a 401(k) plan).

Retroactive Repeal UBIT Imposed On Tax-Exempt Organizations That Provide Employee Parking. Under the Tax Cuts and Jobs Act (TCJA), a tax-exempt organization’s unrelated business taxable income was increased by amounts paid or incurred by the organization to provide employee parking. This provision was effective for amounts paid or incurred after 2017. Recent legislation repealed this provision retroactively, effective for amounts paid or incurred after 2017. Planning Alert! Tax-exempt organizations that previously paid unrelated business income tax on expenses for qualified transportation fringe benefits, including employee parking, may now claim a refund. To do so, they should file an amended Form 990-T within the time allowed for refunds. More information on this process can be found at “How To Claim a Refund or Credit of Unrelated Business Income Tax (UBIT) or adjust Form 990-T for Qualified Transportation Fringe Amounts” at the IRS website.

Don’t Overlook Simplified Accounting Methods For Certain Small Businesses. Although not part of the recent COVID- related tax legislation, its important to be aware that the Tax Cuts And Jobs Act (enacted in late 2017) provides for the following accounting method relief for businesses with Average Gross Receipts (AGRs) for the Preceding Three Tax Years of $26 Million or Less for 2020: 1) Generally allows businesses to use the cash method of accounting even if the business has inventories, 2) Allows simplified methods for accounting for inventories, 3) Exempts businesses from applying UNICAP, and

4) Liberalizes the availability of the completed-contract method. Planning Alert! The IRS has released detailed procedures to follow for taxpayers who qualify and wish to change their accounting methods in light of these new relief provisions. Please call our firm if you want us to help you determine whether any of these simplified accounting methods might be available to your business.

TRADITIONAL YEAR-END TAX PLANNING TECHNIQUES  

Pay Special Attention to “Timing” Issues! From a tax-planning standpoint, 2020 has been anything but a “normal” year for many businesses. The coronavirus has caused many businesses to incur an unprecedented loss of revenues during 2020, combined with unexpected additional costs. While at the same time, some business sectors have actually flourished during this difficult time. Consequently, for 2020, there is clearly no single year-end tax planning strategy that will necessarily apply to all (or even a majority) of businesses. Planning Alert! In normal times, a traditional year-end tax planning strategy for businesses would include reducing current year taxable income by deferring taxable income into later years and accelerating deductions into the current year. This strategy has been particularly beneficial where the income tax rate on the business’s income in the following year is expected to be the same or lower than the current year. For businesses that have done well during the COVID crisis, this strategy would still generally be advisable. However, for businesses that expect their taxable income to be much lower in 2020 than in 2021, the opposite strategy might be more advisable. Caution! As we discuss the planning methods that involve the “timing” of income or deductions, please keep in mind that you might want to consider taking the precise opposite steps recommended, if you decide it would be better to defer deductions into 2021, while accelerating income into 2020. Moreover, the relatively new 20% 199A deduction that was first available in 2018 adds another wrinkle to deciding whether to defer or accelerate revenues, and/or to defer or accelerate deductions. As discussed in more detail below, your ability to take maximum advantage of the 20% 199A deduction for 2020 and/or 2021 may, in certain situations, be

enhanced significantly if you are able to keep your taxable income below certain thresholds. Consequently, please keep that factor in mind as you read through the following timing strategies for income and deductions.

Planning With The First-Year 168(k) Bonus Depreciation Deduction. Traditionally, a popular way for businesses to maximize current-year deductions has been to take advantage of the First-Year 168(k) Bonus Depreciation Deduction. Before the “Tax Cuts And Jobs Act” (TCJA) which was enacted in late 2017, the 168(k) Bonus Depreciation deduction was equal to 50% of the cost of qualifying “new” depreciable assets placed in service. TCJA temporarily increased the 168(k) Bonus Depreciation deduction to 100% for qualifying property acquired and placed in service after September 27, 2017 and before January 1, 2023. TCJA further enhanced the 168(k) Bonus Depreciation deduction by making the following changes:

• “Used” Property Temporarily Qualifies For 168(k) Bonus Before TCJA, only “new” qualifying property was eligible for the 168(k) Bonus Depreciation deduction. For qualifying property acquired and placed in service after September 27, 2017 and before 2027, the 168(k) Bonus Depreciation may be taken on “new” or “used” property. Therefore, property that generally qualifies for the 168(k) Bonus Depreciation includes “new” or “used” business property that has a depreciable life for tax purposes of 20 years or less (e.g., machinery and equipment, furniture and fixtures, sidewalks, roads, landscaping, computers, computer software, farm buildings, and qualified motor fuels facilities). Caution! As discussed previously, a purchaser of an existing commercial building containing QIP made by a previous owner, will not be able to treat any portion of the building’s purchase price as QIP. Planning Alert! The expansion of the 168(k) Bonus Depreciation to “used” property has expanded planning opportunities, including: 1) A lessee that currently leases qualifying 168(k) property (e.g., leased equipment) from an unrelated lessor, could later purchase the property from the lessor and qualify for the 100% 168(k) Bonus Depreciation; 2) Taxpayers that purchase the operating assets of another operating business will be able to deduct 100% of the purchase price that is properly allocated to 168(k) assets (other than QIP) of the target business; and 3) The IRS says that a person who buys a partnership interest from an unrelated selling partner may be entitled to the 100% 168(k) Bonus Depreciation deduction with respect to a certain portion of the purchase price of the partnership interest, if the partnership owns existing qualifying 168(k) property.

• The 100% 168(k) Bonus Depreciation Deduction For “Used” Property Generally Makes Cost Segregation Studies More Depreciable components of a building that are properly classified as depreciable personal property under a cost segregation study are generally depreciated over 5 to 7 years. Before TCJA, these depreciable building components for a purchaser of a “used” building generally qualified for the 179 Deduction (subject to the dollar caps), but did not qualify for a 168(k) Bonus Depreciation deduction because the 168(k) depreciation deduction only applied to “new” property. However, after TCJA, the depreciable components of a building that are properly classified as “personal property” (as opposed to “real property”) will qualify for the 100% 168(k) Bonus Depreciation (whether new or used).

• Annual Depreciation Caps For Passenger Vehicles Vehicles used primarily in business generally qualify for the 168(k) Bonus Depreciation. However, there is a dollar cap imposed on business cars, and also on trucks, vans, and SUVs that have a loaded vehicle weight of 6,000 lbs or less. This dollar cap was increased significantly under TCJA. More specifically, for qualifying vehicles placed in service in 2020 and used 100% for business, the annual depreciation caps are as follows: 1st year - $10,100; 2nd year - $16,100; 3rd year - $9,700; fourth and subsequent years - $5,760. Moreover, if the vehicle (new or used) otherwise qualifies for the 168(k) Bonus Depreciation, the first year depreciation cap (assuming 100% business use) is increased by $8,000 (i.e., from $10,100 to $18,100 for 2020). Thus, a vehicle otherwise qualifying for the 168(k) Bonus Depreciation deduction with loaded Gross Vehicle Weight (GVW) of 6,000 lbs or less used exclusively for business and placed in service in 2020 would be entitled to a depreciation deduction for 2020 of up to $18,100, whether purchased new or used. If the vehicle continues to be used exclusively for business during the second year (i.e., during 2021), it would be entitled to a second-year depreciation deduction of up to $16,100. Planning Alert! Even better, if the same new or used business vehicle (which is used 100% for business) has a loaded GVW over 6,000 lbs, 100% of its cost (without a dollar cap) could be deducted in 2020 as a 168(k) Bonus Depreciation deduction. Caution! When taking the 168(k) Bonus Depreciation on your business vehicle (and whether or not it weighs more than 6,000 lbs), if your business-use percentage drops to 50% or below in a later year, you will generally be required to bring into income a portion of the deduction taken in the first year.

• 168(k) Bonus Depreciation Taken In Tax Year Qualifying Property Is “Placed In ” The 168(k) Bonus Depreciation deduction is taken in the tax year the qualifying property is “placed in service.” Consequently, if your business anticipates acquiring qualifying 168(k) property between now and the end of the year, the 168(k) Bonus Depreciation deduction is taken in 2020 if the property is placed in service no later than December 31, 2020. Alternatively, the 168(k) Bonus Depreciation deduction can be deferred until 2021 if the qualifying property is placed in service in 2021. Generally, if you are purchasing “personal property” (equipment, computer, vehicles, etc.), “placed in service” means the property is ready and available for use (this commonly means the date on which the property has been set up and tested). If you

are dealing with building improvements (e.g., “Qualified Improvement Property”), the date on the Certificate of Occupancy is commonly considered the date the qualifying building improvements are placed in service.

Un-Reimbursed Employee Business Expenses Are Not Deductible! For 2018 through 2025, “un-reimbursed” employee business expenses are not deductible at all by an employee. Good News! Generally, employee business expenses that are reimbursed under an employer’s qualified “Accountable Reimbursement Arrangement” are deductible by the employer (subject to the 50% limit on business meals), and the reimbursements are not taxable to the employee. However, reimbursements under an arrangement that is not a qualified “Accountable Reimbursement Arrangement” generally must be treated as compensation and included in the employee’s W-2, and the employer would get no offsetting deduction for the business expense. Planning Alert! Generally, for a reimbursement arrangement to qualify as an “Accountable Reimbursement Arrangement” - 1) The employer must maintain a reimbursement arrangement that requires the employee to substantiate covered expenses, 2) The reimbursement arrangement must require the return of amounts paid to the employee that are in excess of the amounts substantiated, and 3) There must be a business connection between the reimbursement (or advance) and anticipated business expenses.

Restrictions On Deducting Entertainment Expenses. Generally, business expenditures with respect to an entertainment, amusement or recreation activity are not deductible after 2017. Planning Alert! Fortunately, the IRS has announced that taxpayers can still generally deduct 50% of the cost of meals with a business associate (e.g., a current or potential business customer, client, supplier, employee, agent, partner, professional advisor). In addition, the IRS stated that a taxpayer could deduct 50% of the cost of food and beverages provided during a nondeductible entertainment activity with a business associate provided the food and beverages are purchased separately from the entertainment, or the cost of the food and beverages is stated separately from the cost of the entertainment on one or more bills, invoices, or receipts. Caution! If an employer reimburses an employee’s deductible business meal and beverage expense under an Accountable Reimbursement Arrangement, the employer could deduct 50% of the reimbursement. However, as discussed previously, an employee who is not reimbursed by the employer for the business meal would get no deduction because un-reimbursed employee business expenses are not deductible (from 2018 through 2025).

S Corporation Shareholders Should Check Stock And Debt Basis Before Year-End. If you own S corporation stock and you think your S corporation will have a tax loss this year, you should contact us as soon as possible. These losses will not be deductible on your personal return unless and until you have adequate “basis” in your S corporation. Any pass-through loss that exceeds your “basis” in the S corporation will carry over to succeeding years. You have basis to the extent of the amounts paid for your stock (adjusted for net pass-through income, losses, and distributions), plus any amounts you have personally loaned to your S corporation. Caution! A shareholder cannot get debt basis by merely guaranteeing a third-party loan to the S corporation. Please do not attempt to restructure your loans without contacting us first.

Deductions For Business Expenses Paid By Partners May Be Limited. Historically, the IRS has ruled that a partner may deduct business expenses paid on behalf of the partnership only if there is an agreement (preferably in writing) between the partner and the partnership providing that those expenses are to be paid by the partner, and that the expenses will not be reimbursed by the partnership. Tax Tip. If you are a partner paying unreimbursed expenses on behalf of your partnership, to be safe, you should have a written agreement with the partnership providing that those expenses are to be paid by you, and that the expenses will not be reimbursed by the partnership.

Maximize Your 20% 199A Deduction For “Qualified Business Income” (QBI). First effective in 2018, the 20% 199A Deduction has had a major impact on businesses. This provision allows qualified taxpayers to take a 20% Deduction with respect to “Qualified Business Income,” “Qualified REIT Dividends,” and “Publically-Traded Partnership Income.” Based on 2018 and 2019 tax filings, of these three types of qualifying income, “Qualified Business Income” (QBI) has had the biggest impact by far on the greatest number of taxpayers. Consequently, this discussion of the 20% 199A Deduction focuses primarily on “Qualified Business Income” (QBI). Planning Alert! As many of you discovered with your 2018 and 2019 returns, if you own an interest in a business as a sole proprietor, an S corporation shareholder, or a partner in a partnership, you are a very good candidate for the 20% 199A Deduction with respect to QBI. Unfortunately, it is not feasible to provide a thorough discussion of the 20% 199A Deduction for Qualified Business Income (QBI) in this letter. However, the following are selected highlights that could be particularly helpful for year-end planning:

• W-2 Wage And Capital Limitation On The Amount Of The 20% Of QBI Generally, the amount of your 20% of QBI Deduction with respect to each Qualified Trade or Business may not exceed the greater of: 1) 50% of the allocable share of the business’s W-2 wages allocated to the QBI of each “Qualified Trade or Business,” or 2) The sum of 25% of your allocable share of W-2 wages with respect to each “Qualified Trade or Business,” plus 2.5% of your allocable share of unadjusted basis of tangible depreciable property held by the business at the close of the taxable year. Planning Alert! For 2020, an otherwise qualifying taxpayer is entirely exempt from the W-2 Wage And Capital Limitation if the

Taxpayer’s “Taxable Income” (computed without regard to the 20% 199A Deduction) is $163,300 or below ($326,600 or below if married filing jointly). Caution! For 2020, the Wage and Capital Limitation phases in ratably as a taxpayer’s Taxable Income goes from more than $163,300 to $213,300, or from more than $326,600 to $426,600 (if filing jointly).

• Business Income From “Specified Service Trade Or Businesses” (SSTBs) Does Not Qualify For The 20% 199A Deduction For Owners Who Have “Taxable Income” Above Certain Based on your “Taxable Income” (before the 20% 199A Deduction), all or a portion of your qualified business income from a so-called “Specified Service Trade or Business” (i.e., certain service-type operations in various professional fields such as law, medicine, accounting, consulting, etc.) may not qualify for the 20% 199A Deduction. More specifically, if your “Taxable Income” for 2020 (before the 20% 199A Deduction) is $163,300 or below ($326,600 or below if married filing jointly), “all” of the qualified business income from your “Specified Service Trade or Business” (SSTB) is eligible for the 20% 199A deduction. However, if for 2020 your “Taxable Income” is $213,300 or more ($426,600 or more if married filing jointly), “none” of your SSTB income qualifies for the 20% 199A Deduction. Caution! If for 2020, your “Taxable Income” is between $163,300 and $213,300 (between $326,600 and $426,600 if married filing jointly), only “a portion” of your SSTB income will be eligible for the 20% 199A Deduction.

• Planning Alert! A taxpayer with Taxable Income for 2020 of $163,300 or less ($326,600 or less if married filing jointly)

qualifies for two major benefits: 1) The taxpayer’s SSTB income (if any) is fully eligible for the 20% 199A deduction, and

2) The taxpayer is completely exempt from the W-2 Wage and Capital Limitation. Consequently, if you are in a situation where your 20% 199A Deduction would otherwise be significantly reduced (or even eliminated altogether) due to either or both of these limitations, it is even more important that you consider year-end strategies that could help you reduce your 2020 taxable income (before the 20% 199A Deduction) to or below the $163,300/$326,600 thresholds.

• Evaluating Reasonable W-2 Compensation Levels Paid To S Corp Owners/Employees Is More Important Than Ever! Even before the 20% 199A Deduction provision was enacted, S corporation shareholder/employees have had an incentive to pay themselves W-2 wages as low as possible because only the shareholder’s W-2 income from the S corporation is subject to FICA Other income of the shareholder from the S corporation is generally not subject to FICA or Self-Employment (S/E) taxes. Traditionally, where the IRS has determined that an S corporation shareholder/employee has taken unreasonably “low” compensation from the S corporation, the IRS has argued that other amounts the shareholder has received from the S corporation (e.g., distributions) are disguised “compensation” and should be subject to FICA taxes. In light of the 20% 199A Deduction, reviewing the W-2 wage level for Shareholder/Employees of S Corporations becomes even more important. For example, for S Corporation shareholder/employees who expect to have 2020 Taxable Income (before the 20% 199A Deduction) of $163,300 or less ($326,600 or less if married filing jointly), in order to maximize their potential 20% 199A Deduction there is a tax incentive to keep the shareholders’ W-2 wages as “low” as possible, because: 1) The W-2 Wages paid to shareholders do not qualify for the 20%199A Deduction, but the W-2 Wages do reduce a shareholder’s pass-through Qualified Business Income, 2) The shareholder will be exempt from the W-2 Wage and Capital Limitation (so lower W-2 wages will not limit the shareholder’s potential 20% 199A Deduction amount), and 3) The shareholder’s pass-through SSTB income (if any) will be fully eligible for the 20% 199A Deduction, while W-2 wages paid to the shareholder/employee will not qualify. Caution! The IRS has a long history of attacking S Corporations that it believes are paying shareholder/employees unreasonably low W-2 wages. Planning Alert! If you want our Firm to review the W-2 wages that your S corporation is currently paying to its shareholders in light of this 20% 199A Deduction, please contact us as soon as possible. The quicker you contact us on this issue, the better chance you have to take steps before the end of 2020 to increase your 20% deduction.

 FINAL COMMENTS

Please contact us if you are interested in a tax topic that we did not discuss. Tax law is constantly changing due to new legislation, cases, regulations, and IRS rulings. Our Firm closely monitors these changes. In addition, please call us before implementing any planning idea discussed in this letter, or if you need additional information concerning any item mentioned in this letter. We will gladly assist you. Note! The information contained in this material should not be relied upon without an independent, professional analysis of how any of the items discussed may apply to a specific situation.

Disclaimer: Any tax advice contained in the body of this material was not intended or written to be used, and cannot be used, by the recipient for the purpose of promoting, marketing, or recommending to another party any transaction or matter addressed herein. The preceding information is intended as a general discussion of the subject addressed and is not intended as a formal tax opinion. The recipient should not rely on any information contained herein without performing his or her own research verifying the conclusions reached. The conclusions reached should not be relied upon without an independent, professional analysis of the facts and law applicable to the situation.

• INTRODUCTION
• 2020 MAY BE OUR LAST CHANCE TO TAKE ADVANTAGE OF THESE TRADITIONAL TAX BREAKS
• HIGHLIGHTS OF RECENT LEGISLATIVE CHANGES
• HIGHLIGHTS OF TRADITIONAL YEAR-END TAX PLANNING TECHNIQUES
  
  

 2020 YEAR-END  INCOME TAX PLANNING  FOR  INDIVIDUALS

INTRODUCTION

 With year-end approaching, this is the time of year we suggest possible year-end tax strategies for our clients. However, there has never been a year quite like 2020. We think it is safe to say that year-end tax planning for 2020 is proving to be the trickiest in recent memory. In response to the Coronavirus, Congress and the IRS have been exceedingly busy enacting and issuing never-seen­ before tax relief. Many of these new tax relief provisions are temporary, and expire after 2020. Moreover, for well over a decade, we have been faced with the off-and-on expiration of a long list of popular tax breaks. Historically, Congress has temporarily extended the majority of these tax breaks every few years. Unfortunately, several of these traditional tax breaks are currently scheduled to expire after the end of 2020.

 This letter is designed to bring you up-to-date on the most significant tax provisions that could impact your year-end planning. We start this letter with a listing of selected historic tax breaks scheduled to expire at the end of 2020. We then discuss selected legislative changes (including COVID-related tax provisions) that are most likely to impact your year-end tax planning. We conclude this letter by highlighting certain time-honored, year-end tax planning techniques that remain relevant notwithstanding the recent COVID-related tax changes.

 Caution! It is entirely possible that Congress could enact additional COVID-related tax legislation before the end of this year. In addition, the IRS continues releasing guidance on various important tax provisions (particularly on COVID-related tax provisions that have already been enacted). We closely monitor new tax legislation and IRS releases on an ongoing basis. Please call our firm if you want an update on the latest tax legislation IRS notifications, announcements, and guidance or if you need additional information concerning any item discussed in this letter.

 Be Careful! We suggest you call our firm before implementing any tax planning technique discussed in this letter. You cannot properly evaluate a particular planning strategy without calculating your overall tax liability with and without that strategy. This letter contains ideas for Federal income tax planning only. State income tax issues are not addressed.

 2020 MAY BE OUR LAST CHANCE TO TAKE ADVANTAGE OF THESE TRADITIONAL TAX BREAKS

For well over a decade, we have been faced with the off-and-on expiration of a long list of popular tax breaks. Historically, Congress has temporarily extended the majority of these tax breaks every few years. However, several popular tax breaks for individuals are scheduled to expire at the end of 2020, and Congress has yet to extend them. Some of the more popular tax breaks scheduled to expire at the end of 2020 include: Deduction (up to $4,000) for Qualified Higher Education Expenses; Deduction for Mortgage Insurance Premiums as Qualified Residence Interest; Income Exclusion For Discharge Of Qualified Principal Residence Indebtedness; and the 10% Credit (with a lifetime cap of $500) for Qualified Energy-Efficient Home Improvements (e.g., qualified energy-efficient windows, storm doors, roofing). As we send this letter, it has been reported that some members of Congress are still pushing for these tax breaks to be extended beyond 2020. However, only time will tell whether these tax breaks will be extended. Please call our office if you would like a status report on any of these expiring provisions. Planning Alert! Although not expiring, the credit for “Qualified Fuel Cell Property,” “Qualified Small Wind Energy Property,” “Qualified Solar Electric Property,” “Qualified Solar Water Heating Property,” And “Qualified Geothermal Heat Pump Property” is to be reduced from 26% to 22% for property installed after 2020. Also, for “2020 only,” volunteer firefighters and volunteer EMS personnel may exclude from income up to $50 per month of expense reimbursements made by the State or political subdivision.

HIGHLIGHTS OF RECENT LEGISLATIVE CHANGES

In late December, 2019, Congress passed the Consolidated Appropriations Act of 2020 (the “Appropriations Act”) which pre-dated the more recent flurry of COVID-related legislation. The Appropriations Act included significant changes to various IRA and qualified retirement plan rules. Most of these changes are first effective in 2020. In addition, the more recently-enacted “CARES Act” provided temporary relief relating to Required Minimum Distributions from IRAs and qualified retirement plans. The following are highlights of selected changes from both of those pieces of legislation that we feel will have the greatest impact on tax planning for individuals:

Required Beginning Date For Required Minimum Distributions (RMDs) Delayed To Age 72. Before this change, you were required to begin taking “Required Minimum Distributions” (RMDs) from your IRA or qualified retirement plan account no later than the April 1st following the year you reached age 70½ (i.e., the required beginning date). For individuals who reach age 70½ after 2019, the Appropriations Act changed the age of the required beginning date for RMDs from 70½ to age 72. So, if you reach age 70½ after 2019, you will not be required to take your first RMD until April 1st following the year in which you reach age 72!  Planning Alert! Individuals who reached age 70½ during 2019 were still generally required to take their first RMD no later than April 1st of 2020, and were also required to take their second RMD no later than December 31, 2020. However, the Coronavirus Aid, Relief And Economic Security Act (the “CARES Act”) suspended all RMDs from an IRA or employer-sponsored defined contribution retirement plan that are otherwise required in 2020. This suspension applies to owners of IRAs and beneficiaries of inherited IRAs. Tax Tip! An RMD generally may not be rolled over into another IRA or qualified retirement plan. However, the IRS says that an individual who actually received an RMD during 2020, may roll over that RMD into an IRA or qualified retirement plan provided the rollover occurred by the later of: 1) August 31, 2020, or 2) 60 days after the receipt of the RMD.

Age Limit On Contributing To An IRA Removed. Before 2020, an individual who reached age 70½ during the year could not contribute to a traditional IRA for that year, or any later year. For contributions made for tax years beginning after 2019, the Appropriations Act removed all age limits for contributing to an IRA. Stated more simply, for contributions made for tax years beginning after 2019, there is no age limit on contributions to a traditional or Roth IRA! Planning Alert! Regardless of your age, you must have “earned income” (e.g., W-2 wages; Income subject to self-employment tax) at least equal to the amount of your contribution to a traditional or Roth IRA. Caution! As discussed in the immediately-following segment, making a deductible contribution to your IRA after reaching age 70½ could have a negative tax impact on any “Qualified Charitable Distributions” you are planning to make from your IRA.

Changes To “Qualified Charitable Distributions” (QCDs) For IRA Owners. If you have reached age 70½ and you are planning to make charitable contributions before the end of 2020, there is a long-standing tax break known as a “Qualified Charitable Distribution” (QCD) that could apply to you. This popular provision generally allows taxpayers, who have reached age 70½, to have their IRA trustee transfer up to $100,000

from their IRAs “directly” to a qualified charity, and exclude the IRA transfer from income. The IRA transfer to the charity also counts toward the IRA owner’s “Required Minimum Distributions” (RMDs) for the year. Changes Under The Appropriations Act. Although the Appropriations Act increased the required beginning date for RMDs from age 70½ to age 72, the minimum age for making a QCD remains at age 70½. But beware, starting in 2020, the Appropriations Act generally reduces the tax-free portion of a QCD by the amount of any deductible contributions made to an IRA after reaching age 70½. If you are planning to make a QCD for 2020 and you also plan to make a deductible IRA contribution for 2020, please call our firm first. We will gladly advise you on the impact of this new rule on your decision.

New 10-Year Pay-Out Requirement For Those Who Inherit An IRA Or Qualified Plan Account. If an individual died before 2020 and someone other than the surviving spouse was named as the beneficiary of the decedent’s IRA or qualified plan account, RMDs to the named beneficiary were required to begin by December 31 of the year following the year of death, and could be paid over the life expectancy of the named beneficiary. For example, if an individual died in 2019 and a child (regardless of age) was the beneficiary of the individual’s IRA, the child could take RMDs over the child’s life expectancy. Planning Alert! Effective for individuals dying after 2019, the Appropriations Act generally requires a decedent’s entire remaining IRA or qualified account balance to be distributed to a named beneficiary by December 31 of the 10th year following the year of the decedent’s death. This required 10-year pay out does not apply if the named beneficiary is the decedent’s spouse, has a qualified disability, is chronically ill, or is no more than 10 years younger than the decedent. If the named beneficiary is a minor, the 10-year pay-out requirement does not kick in until the beneficiary reaches majority (age 18 in many jurisdictions).

• Planning For Rollovers By Surviving The new 10-year payout requirement does not apply to a surviving spouse who is the named beneficiary of the decedent’s IRA or qualified retirement plan. In that event, the surviving spouse would generally treat the IRA as an “inherited” IRA and be required to take RMDs over the surviving spouse’s “single life expectancy” (with no 10-year pay out requirement). However, it is generally advisable for the surviving spouse to convert the decedent’s IRA into the name of the surviving spouse (i.e., convert it into a “spousal IRA”). This is generally advisable because, once the decedent’s IRA is converted to a spousal IRA: 1) The surviving spouse will not be required to begin taking RMDs until the April 1stfollowing the year the surviving spouse reaches age 72, and 2) When the RMDs begin, the surviving spouse’s RMDs will be determined using the “Uniform Lifetime Distributions Table” (with no 10-year pay out requirement), which will result in a smaller annual required payout than under the “single life expectancy” computation that would otherwise be required had the surviving spouse not converted the decedent’s IRA into a spousal IRA.

For Some - 2020 May Be A Good Year To Consider A Roth Conversion. If you have been considering converting your traditional IRA into a Roth IRA, it is best to convert in a low income year so your Roth conversion income is taxed at the lower tax rates. Therefore, if you are in a situation where, due to COVID (or for any other reason), your 2020 income is significantly lower than the income you expect in 2021 and later years, it may be a good idea to consider converting all or a portion of your traditional IRA into a Roth IRA before the end of 2020. Planning Alert! If you want a Roth conversion to be effective for 2020, you must transfer the amount from the regular IRA to the Roth IRA no later than December 31, 2020 (you do not have until the due date of your 2020 tax return).Caution! Whether you should convert your traditional IRA to a Roth IRA can be an exceedingly complicated issue. Your tax rate in the year of conversion is just one of many factors that you should consider. Please call our Firm if you need help in deciding whether to convert to a Roth IRA.

Economic Impact Payments. By now, the vast majority of individuals qualifying for an “economic impact payment” (EIP) under the CARES Act of up to $1,200 per qualifying individual (and $500 per qualifying dependent) have received the payment. If you haven’t received the payment (or you think your payment was less than it should have been), you can obtain detailed information on economic impact payments at  www.irs.gov by accessing the link - “Economic Impact Payment Information Center: EIP Eligibility and General Information.” Planning Alert! Technically, the EIP is an advance payment of a 2020 refundable tax credit. A “refundable” credit generally means to the extent the credit exceeds the taxes you would otherwise owe with your individual income tax return without the credit, the IRS will send you a check for the excess. If for some reason you did not get the EIP (or the amount you received was too low), the credit will be re- computed when you file your 2020 income tax return based on your 2020 AGI. You will be entitled to a refundable credit for the amount of the credit computed on your 2020 income tax return in excess (if any) of the advance payment you previously received. If the credit computed on your 2020 return is less than the EIP you received, generally you will not have to pay back the excess.

Temporary “Above-The-Line” Deduction Of Up To $300 For Charitable Contributions For Individuals Who Do Not Itemize Deductions. For the 2020 tax year only, the CARES Act allows individuals who do not elect to itemize their deductions, to take a so-called “above-the-line” deduction of up to $300 for cash contributions to a qualifying charity. Therefore, an individual may deduct this $300 amount in addition to the standard deduction for 2020. Caution! Contributions to a donor advised fund do not qualify for this special “above-the-line” deduction.

Temporary Increase In Charitable Contribution Limit For Individuals Who Do Itemized Deductions. Traditionally, for those who itemize their deductions, the deduction for charitable contributions made in cash to qualifying charities has been limited to 60% (through 2025) of an individual’s adjusted gross income (AGI), and to 30% of AGI for certain “property” contributions. For the 2020 tax year only, the CARES Act allows an individual to deduct “cash” contributions to qualifying charities up to 100% of the individual’s AGI (as reduced by the amount of all other charitable contributions allowed to the individual under the traditional charitable contribution limits). Caution! A qualifying charity does not include a donor-advised fund.

HIGHLIGHTS OF TRADITIONAL YEAR-END TAX PLANNING TECHNIQUES

Pay Special Attention To “Timing” Issues! From a tax-planning standpoint, 2020 has been anything but a “normal” year for most. The pandemic has caused many individuals to incur significant losses in income. While at the same time, some individuals have actually experienced an increase in their expected income during this difficult time. Consequently, for 2020, there is clearly no single year-end tax planning strategy that will necessarily apply to all (or even a majority) of individuals.

In normal times, a traditional year-end tax planning strategy would include reducing your current year taxable income by deferring taxable income into later years and accelerating deductions into the current year. This strategy is particularly beneficial where your income tax rate in the following year is expected to be the same or lower than the current year. Consequently, in the following discussion we include traditional year-end tax planning strategies that would allow you to accelerate your deductions into 2020, while deferring your income into 2021. Caution! For individuals who expect their taxable income to be much lower in 2020 than in 2021, the opposite strategy might be more advisable. That is, for individuals who have experienced a significant drop in income during 2020, a better year-end planning strategy might include accelerating income into 2020 (to be taxed at lower rates), while deferring deductions to 2021 (to be taken against income that is expected to be taxed at higher rates). As we discuss the planning methods that involve the “timing” of income or deductions, please keep in mind that you might want to consider taking the precise opposite steps recommended if you decide it would be better to defer deductions into 2021, while accelerating income into 2020.

Taking Advantage Of “Above-The Line” Deductions. Traditional year-end planning includes accelerating deductible expenses into the current tax year. So-called “above-the-line” deductions reduce both your “adjusted gross income” (AGI) and your “modified adjusted gross income” (MAGI), while “itemized” deductions (i.e., below-the-line deductions) do not reduce either AGI or MAGI. Deductions that reduce your AGI (or MAGI) can generate multiple tax benefits by: 1) Reducing your taxable income and allowing you to be taxed in a lower tax bracket; 2) Potentially freeing up other deductions (and tax credits) that phase out as your AGI (or MAGI) increases (e.g., Certain IRA Contributions, Certain Education Credits, Adoption Credit, Child and Family Tax Credits, etc.); 3) Potentially reducing your MAGI below the income thresholds for the 3.8% Net Investment Income Tax (i.e., 3.8% NIIT only applies if MAGI exceeds $250,000 if married filing jointly; $200,000 if single); or 4) Possibly reducing your household income to a level that allows you to qualify for a “refundable” Premium Tax Credit for health insurance purchased on a government Exchange. Planning Alert! In addition, individuals reporting Qualified Business Income will generally find it much easier to qualify for the new 20% 199A Deduction with respect to that Qualified Business Income if their 2020 taxable income does not exceed $326,600 if filing a joint return or $163,300 if single. So, if you think that you could benefit from accelerating “above-the-line” deductions into 2020, consider the following:

• Identifying “Above-The-Line” “Above-the-line” deductions include: Deductions for IRA or Health Savings Account (HSA) Contributions; Health Insurance Premiums for Self-Employed Individuals; Qualified Student Loan Interest; Qualifying Alimony Payments (if the divorce or separation instrument was executed before 2019); and, Business Expenses for a Self-Employed Individual. Caution! Un-reimbursed employee business expenses are not deductible at all for 2018 through 2025.

However, employee business expenses that are reimbursed under an employer’s accountable plan are excluded altogether from the employee’s taxable income.

• Accelerating “Above-The-Line” As a cash method taxpayer, you can generally accelerate a 2021 deduction into 2020 by “paying” it in 2020. “Payment” typically occurs in 2020 if, before the end of 2020: 1) A check is delivered to the post office, 2) Your electronic payment is debited to your account, or 3) An item is charged on a third-party credit card (e.g., Visa, MasterCard, Discover, American Express). Caution! If you post-date the check to 2021 or if your check is rejected, no payment has been made in 2020 even if the check is delivered in 2020. Planning Alert! The IRS says that prepayments of expenses applicable to periods beyond 12 months after the payments are not deductible in 2020.

“Itemized” Deductions. Although “itemized” deductions (i.e., below-the-line deductions) do not reduce your AGI or MAGI, they still may provide valuable tax savings. Starting in 2018 and through 2025, recent legislation substantially increased the Standard Deduction. For 2020, the Standard Deduction is: Joint Return

- $24,800; Single - $12,400; and Head-of-Household - $18,650. Planning Alert! If you think your itemized deductions this year could likely exceed your Standard Deduction of $24,800 if filing jointly ($12,400 if single), consider the following:

• Accelerating Charitable Contributions Into If you want to accelerate your charitable deduction into 2020, please note that a charitable contribution deduction is allowed for 2020 if the check is “mailed” on or before December 31, 2020, or the contribution is made by a credit card charge in 2020. However, if you merely give a note or a pledge to a charity, no deduction is allowed until you pay the note or pledge. Caution! As discussed previously, for 2020 only, the CARES Act allows a taxpayer to deduct charitable contributions of up to 100% of the individual’s AGI if made in “cash.” Contributions of “property” (e.g., stock, real estate) do not qualify for this temporary 100% of AGI rule.

• Medical Expense If you think your itemized deductions this year could likely exceed your standard deduction of $24,800 if filing jointly ($12,400 if single), but you do not expect your itemized deductions to exceed your Standard Deduction next year, you could save taxes in the long run by accelerating elective medical expenses (e.g., braces, new eye glasses, etc.) into 2020. Planning Alert! For 2020, you are allowed to take a medical expense itemized deduction only to the extent your aggregate medical expenses exceed 7.5% of your AGI. This 7.5% threshold is scheduled to increase to 10% after 2020.

• $10,000 Cap On State And Local From 2018 through 2025, your aggregate itemized deduction for state and local real property taxes, state and local personal property taxes, and state and local income taxes (or sales taxes if elected) is limited to $10,000 ($5,000 for married filing separately).

• Limitations On The Deduction For Interest Paid On Home Mortgage “Acquisition ” Before the Tax Cuts And Jobs Act (TCJA), individuals were generally allowed an itemized deduction for home mortgage interest paid on up to $1,000,000 ($500,000 for married individuals filing separately) of “Acquisition Indebtedness” (i.e., funds borrowed to purchase, construct, or substantially improve your principal or second residence and secured by that residence). Subject to certain transition rules, TCJA reduced the dollar cap for Acquisition Indebtedness incurred after December 15, 2017 from

$1,000,000 to $750,000 ($375,000 for married filing separately) for 2018 through 2025. Planning Alert! If you think your itemized deductions this year could likely exceed your Standard Deduction, paying your January, 2021 qualifying home mortgage payment before 2021 should shift the deduction for any qualifying interest portion of that payment into 2020.

• “Home Equity Indebtedness” Suspended For 2018 through TCJA suspended the deduction for interest with respect to “Home Equity Indebtedness” (i.e., up to $100,000 of funds borrowed that do not qualify as “Acquisition Indebtedness” but are secured by your principal or second residence). Caution! Unlike the interest deduction for “Acquisition Indebtedness,” TCJA did not grandfather any interest deduction for “Home Equity Indebtedness” that was outstanding before 2018.

Postponing Taxable Income May Save Taxes. Generally, deferring taxable income from 2020 to 2021 may also reduce your income taxes, particularly if your effective income tax rate for 2021 will be lower than your effective income tax rate for 2020.

• Planning For Tax The deferral of income could cause your 2020 taxable income to fall below the thresholds for the highest 37% tax bracket (i.e., $622,050 for joint returns; $518,400 if single). In addition, if you have income subject to the 3.8% Net Investment Income Tax (3.8% NIIT) and the income deferral reduces your 2020 modified adjusted gross income (MAGI) below the thresholds for the 3.8% NIIT (i.e.,

$250,000 for joint returns; $200,000 if single), you may avoid this additional 3.8% tax on your investment income.

• Deferring Self-Employment If you are a self-employed individual using the cash method of accounting, consider delaying year-end billings to defer income until 2021. Planning Alert! If you have already received the check in 2020, deferring the deposit of the check does not defer the income. Also, you may not want to defer billing if you believe this will increase your risk of not getting paid.

Traditional Year-End Planning With Capital Gains And Losses. Generally, net capital gains (both short- term and long-term) are potentially subject to the 3.8% NIIT. This could result in an individual filing a joint return with taxable income for 2020 of $496,600 or more ($441,450 or more if single) paying tax on his or her net long-term capital gains at a 23.8% rate (i.e., the maximum capital gains tax rate of 20% plus the 3.8% NIIT). In addition, this individual’s net short-term capital gains could be taxed as high as 40.8% (i.e., 37% plus 3.8%). Consequently, traditional planning strategies involving the timing of your year-end sales of stocks, bonds, or other securities continue to be as important as ever. The following are time-tested, year-end tax planning ideas for sales of capital assets. Planning Alert! Always consider the economics of a sale or exchange first!

• Planning With Zero Percent Tax Rate For Capital Gains And For individuals filing a joint return with 2020 Taxable Income of less than $80,000 (less than $40,000 if single), their long-term capital gains and qualified dividends are taxed at a zero percent rate. Tax Tip. Individuals who have historically been in higher tax brackets but are now expecting a significant drop in their 2020 taxable income, may find themselves in the zero percent tax bracket for long-term capital gains and qualified dividends for the first time. For example, a significant drop in 2020 taxable income could have occurred due to COVID-19; or because you are between jobs; or you recently retired; or you are expecting to report higher-than-normal business deductions in 2020. Planning Alert! If you are experiencing any of these situations, please call our Firm as soon as possible and we will help you determine whether you can take advantage of this zero percent tax rate for long-term capital gains and qualified dividends. If you wait too late to contact us, you may run out of time before the end of this year to take the recommended steps to maximize your tax savings.

• Timing Your Capital Gains And If the value of some of your investments is less than your cost, it may be a good time to harvest some capital losses. For example, if you have already recognized capital gains in 2020, you should consider selling securities prior to January 1, 2021 that would trigger a capital loss. These losses will be deductible on your 2020 return to the extent of your recognized capital gains, plus $3,000. Tax Tip. These losses may have the added benefit of reducing your income to a level that will qualify you for other tax breaks, such as: 1) The $2,500 American Opportunity Tax Credit, 2) The

$2,000 Child Tax Credit, 3) The Adoption Credit of $14,300, or 4) Causing your taxable income to drop below the $326,600/$163,300 thresholds for purposes of the 20% 199A Deduction (previously mentioned).  Planning Alert! If, within 30 days before or after the sale of loss securities, you acquire the same securities, the loss will not be allowed currently because of the “wash sale” rules (although the disallowed loss will increase the basis of the acquired stock). Tax Tip. There is no wash sale rule for gains. Thus, if you decide to sell stock at a gain in order to take advantage of a zero capital gains rate, or to absorb capital losses, you may acquire the same securities within 30 days without impacting the recognition of the gain.

The “Premium Tax Credit” Under The Affordable Care Act. Although TCJA essentially eliminated the penalty for individuals who fail to purchase qualified health coverage by reducing the “Shared Responsibility Tax” (SR Tax) to Zero, it did not repeal the refundable “Premium Tax Credit” or “PTC.” The PTC is still generally available for eligible low-and-middle income individuals who purchase health insurance through a State or Federal Exchange. The PTC is generally paid in advance directly to the insurer (“Advance Payments”). Any individual who received Advance Payments for 2020 is required to file a 2020 income tax return to reconcile: 1) The amount of the “actual” PTC (based on the individual’s “actual” 2020 Household Income), with 2) The Advance Payments of the PTC (which were determined by the Exchange based on the individual’s “projected” 2020 Household Income). Caution! If an individual’s Advance Payments for 2020

exceed the “actual” PTC, the excess must be paid back on the 2020 tax return as an “additional tax liability.”

• Possible Cap On The Amount That Must Be Paid Back! The amount of the 2020 excess payment that must be repaid as an additional tax liability is capped if the individual’s actual 2020 Household Income is less than 400% of the Federal Poverty Line (FPL) for the individual’s family For example, for 2020, as long as an individual’s actual household income is less than 400% of the FPL, the maximum amount that must be repaid will not exceed $1,350 for a single individual and $2,700 for others. Planning Alert! In some cases, an individual whose “actual” 2020 Household Income is projected to be 400% or more of the FPL may be able to trigger these dollar caps by reducing his or her “actual” 2020 Household Income below 400% of the FPL. For example, an individual might make a contribution to an IRA (if eligible to do so) in order to reduce his or her 2020 Household Income to less than 400% of the 2020 FPL for the individual’s family size. Taking this step would cap the amount of the individual’s excess payments required to be paid back as an additional tax liability to $1,350 for single individuals and

$2,700 for others. Tax Tip! If you think that you may have to pay back some or all of your 2020 excess payments, please call our Firm as soon as possible so we can determine whether you can take steps before the end of 2020 to minimize the amount of the pay back.

FINAL COMMENTS

Please contact us if you are interested in a tax topic that we did not discuss. Tax law is constantly changing due to new legislation, cases, regulations, and IRS rulings. Our Firm closely monitors these changes. In addition, please call us before implementing any planning ideas discussed in this letter, or if you need additional information. Note! The information contained in this material should not be relied upon without an independent, professional analysis of how any of the items discussed may apply to a specific situation.

Disclaimer: Any tax advice contained in the body of this material was not intended or written to be used, and cannot be used, by the recipient for the purpose of promoting, marketing, or recommending to another party any transaction or matter addressed herein. The preceding information is intended as a general discussion of the subject addressed and is not intended as a formal tax opinion. The recipient should not rely on any information contained herein without performing his or her own research verifying the conclusions reached. The conclusions reached should not be relied upon without an independent, professional analysis of the facts and law applicable to the situation.