With the new year comes a renewed interest in travel. Increased vaccines and vaccination rates are making travel safe once again. There has never been a time when getting out of the house and taking a vacation, has been more needed. The only thing better than a memorable trip is one that comes with a discount. If you are willing to do some planning in advance to intersperse your trip with business, that discount could arrive in the form of tax deductions. Here are some tips to maximize your deduction while staying totally within the rules of the IRS.

1. Plan your trip in advance

It is important that you plan at least one appointment before you leave on your trip. In order for travel to be deductible, the IRS requires that you meet the “prior set business purpose” clause, which means you are not allowed to travel and hope that you will find a business reason once you arrive. Making your appointments early will ensure you fulfill this requirement. These appointments could take the form of a meeting with an existing or prospective customer, vendor or employee. Just be sure to document the business purpose and keep a copy of all correspondence/advertisements related to the trip.

2. Make the majority of the days count as “business days”

According to the tax code, if the trip is within the United States and the majority of the days are considered business days, the entirety of the travel expenses are deductible. Business days include the day of travel to the location, any days used primarily for business, days where there is a business purpose that requires your presence, and any weekends that fall between other business days. So, if you fly to New York on Thursday morning, meet with a client on Friday, spend the weekend sightseeing, meet with another client on Monday, and fly home Tuesday evening, the entirety of your transportation to and from New York is 100% deductible. In addition, meeting these requirements means that 100% of lodging and transportation expenses are deductible. Meals are deductible up to 50%.
In the above example, the traveler accumulated six business days of travel. They could spend another five days having fun and still deduct all their transportation to New York as the majority of the days were business days (six out of eleven). However, they can only deduct six days of lodging, and other travel expenses. Not bad deal for an eleven-day trip to the Big Apple!

3. Only your portion of the expenses are deductible

Unfortunately, the IRS doesn’t agree with “the more the merrier.” Keep in mind that only the portion of expenses related to the individual doing business are deductible. If you own the business and decide to take a business trip with a spouse and a child, only your portion of the expenses are deductible. Similarly, you can only deduct the cost of lodging up to the amount that it would have cost only you to stay.

4. Keep good records

It doesn’t matter where you go or the nature of the business conducted on the trip; good record-keeping is essential. Keeping track of your schedule and expenses will help you to know exactly how much can be deducted and also gives you a layer of protection if the IRS comes asking questions. Make sure your book is in order and enjoy the trip.

Wherever you travel for business this year, keeping these tips in mind will help you maximize your deduction while staying in line with the rules the IRS has set.  Please let us know if you have questions concerning tax deductible business travel or any other tax compliance or planning issues, we can be reached at (480) 980-3977!

2021 has been another challenging year for many businesses.  Covid-19 has caused numerous businesses to rethink their business strategy.  Many businesses have had to pivot to new markets to sustain profitability and cash flow.  Congress has also had to respond to Covid-19.  It made changes to the Tax Cut and Jobs Act for 2020.  It also passed The Coronavirus Aid, relief and Economic Security Act (“CARES ACT”)  as well as the the American Rescue Plan.  Congress is currently negotiating Infrastructure and Budget Reconciliation Legislation.  These proposals include tax benefits for individuals as well as enhanced energy credits for individuals and businesses. However, the proposals include many provisions increasing the tax burden for individuals and businesses.  The existing Acts contain many tax provisions to help businesses and individuals impacted by Covid-19.  Some of these provisions are listed below.  As a business owner it is in your best interest to be aware of these changes and how they can help your business and reduce your tax liabilities.

Businesses

Employee Retention Credit

The American Rescue Plan extends the employee retention credit through the end of 2021. The employee retention credit was designed to encourage businesses to keep employees on their payroll. The refundable tax credit is 70% of $10,000 in wages paid per employee, per calendar quarter, for a total of $14,000 for the first two calendar quarters of 2021 for businesses that have been financially impacted by COVID-19.

The credit is available to all employers regardless of size, including tax-exempt organizations. There are only two exceptions: State and local governments and their instrumentalities and small businesses who take small business loans such as the Economic Impact Disaster Loan (“EIDL”).  Please note, Section 206 of the Relief Act amended section 2301 of the CARES Act to permit an employer that received a Paycheck Protection Program (“PPP”) loan to be eligible to claim an employee retention credit under section 2301 of the CARES Act by striking section 2301(j) of the CARES Act, effective retroactive to the original effective date of the CARES Act.

Paycheck Protection Program Loans 

Effective beginning in 2020 forgiveness of PPP Loans is considered non-taxable income to the business.  Additionally, expenses used to qualify for PPP Loan forgiveness are retroactively deductible for taxable years ending after 3/27/20.  This is a great deal for businesses impacted by the pandemic.

Paid Sick Leave Credit Extended Through Sept 2021:
The paid sick leave credit is designed to allow business to get a credit for an employee who is unable to work (including telework) because of Coronavirus quarantine or self-quarantine or has Coronavirus symptoms and is seeking a medical diagnosis. Those employees are entitled to paid sick leave for up to 10 days (up to 80 hours) at the employee’s regular rate of pay up to $511 per day and $5,110 in total.

The employer can also receive the credit for employees who are unable to work due to caring for someone with Coronavirus or caring for a child because the child’s school or place of care is closed, or the paid childcare provider is unavailable due to the Coronavirus. Those employees are entitled to paid sick leave for up to two weeks (up to 80 hours) at 2/3 the employee’s regular rate of pay or, up to $200 per day and $2,000 in total.

Family Leave Credit Extended Through Sept 2021:

Employees are also entitled to paid family and medical leave equal to 2/3 of the employee’s regular pay, up to $200 per day and $10,000 in total. Up to 10 weeks of qualifying leave can be counted towards the family leave credit.

Employers can be immediately reimbursed for the credit by reducing their required deposits of payroll taxes that have been withheld from employees’ wages by the amount of the credit.  This is a significant benefit to employers allowing them to immediately benefit from this tax incentive.

Eligible employers are entitled to immediately receive a credit in the full amount of the required sick leave and family leave, plus related health plan expenses and the employer’s share of Medicare tax on the leave, for the period of April 1, 2020, through Dec. 31, 2020. The refundable credit is applied against certain employment taxes on wages paid to all employees.

Eligible employers will report their total qualified wages and the related health insurance costs for each quarter on their quarterly employment tax returns or Form 941 beginning with the second quarter. If the employer’s employment tax deposits are not sufficient to cover the credit, the employer may receive an advance payment from the IRS by submitting Form 7200, Advance Payment of Employer Credits Due to COVID-19.

Eligible employers can also request an advance of the Employee Retention Credit by submitting Form 7200.

Increased Credit for Small Employer Retirement Plan Startup Costs with Automatic Enrollment

The CARES act increased the credit for retirement plan startup costs of employers with 100 or fewer employees, who received at least $5,000 of compensation from their employer for the preceding year.   The credit is equal to 50% of the plan startup costs paid during the taxable year.  The credit is available for the first three years of the plan and cannot exceed the greater of 1) $500 or 2) the lessor of a) $250 for each employee eligible to participate in the plan or B) $5000. An employer can qualify for a second annual credit of $500 for the three year period if the plan includes an automatic enrollment for employees.

Cash Method of Accounting 

C corporations may use the cash method of accounting if their average gross receipts for the prior three years were less than $26 million.  This is a great deal for those businesses with slow paying customers, they no longer have to pay income tax on those sales before they receive the cash from their customers.

C Corporation Tax Rate

The C Corporation tax rates remained flat at a rate of 21% for 2021. This includes personal service corporations.

Qualified Business Income Deduction

Still in effect for 2021, in the case of a taxpayer other than a C Corporation there shall be a deduction with respect to any qualified trade of business of an amount equal to the lessor of:

1. 20% of the taxpayers qualified business income
2. The greater of:

a. 50% of the w-2 wages of the qualified business
b. The sum of 25% of the w-2 wages of the qualified business plus 2.5% of the unadjusted basis immediately after acquisition of qualified property

*Please note that the w-2 limitation (2 above) does not apply to any taxpayer whose taxable income for the year does not exceed $329,800 MFJ and $164,900 single. The w-2 limit applies fully for a taxpayer whose taxable income is in excess of the threshold amount by $100,000 MFJ, $50,000 single. Also, note that if your business is a Specified Service Trade or Business (i.e. Health, Law, Accounting, Financial Services) and your taxable income exceeds $429,800 MFJ and $214,900 single, you no longer qualify for the deduction.

Section 179 Expense Limitations and Modifications

The maximum amount a taxpayer can elect to expense under sections 179 is increased from $1,040,000 in 2020 to $1,050,000 in 2021 Furthermore, the deduction limit or phase out began at $2,590,000 in 2020, this limit is increased to $2,620,000 in 2021. The Section 179 limit for SUVs, Trucks, Vans over 6000 pounds GVWR is $26,200. A truck or van that is a qualified non-personal use vehicle is not subject to the annual depreciation limit.

Bonus Depreciation

Taxpayers are required to take and additional first year special depreciation allowance for certain qualified property. This deduction is calculated after taking any Section 179 and before any regular depreciation deduction. This additional depreciation taken on new or used property is held at 100% from 2018 to 2022. This increased deduction also applies to Longer Production Period Property and Certain Aircraft. After 2022, the deduction is reduced 20 percentage points each year until it reaches 0% for qualified property and 20% for Longer Production Period Property and Certain Aircraft in 2027. The additional first year bonus depreciation for vehicles purchased after 9/27/17 remained at $8,000 for 2021.

Qualified Improvement Property

The CARES ACT also made provisions for Qualified Improvement Property (QIP”).  QIP is defined as improvement to the interior portion of a commercial building (provided the improvement is not attributable to enlargement of the building, elevators, escalators, or the internal structural framework of the building).  QIP now has a 15 year recovery period and if placed in service after 2017 qualifies for 100% Section 168(k) bonus depreciation.

Qualified Opportunity Funds

This new tax provision provides an effective deferral mechanism for short and long-term capital gains from current investments in nearly all asset classes including stocks and other securities. Unlike Section 1031 “like-kind” deferral, qualified opportunity zones will provide: (i) the ability to invest only the gain rather than the entire current investment, (ii) a broader range of investments eligible for the deferral, (iii) a potential basis step-up of 15 percent of the initial deferred amount of investment, and (iv) an opportunity to abate all taxation on capital gains post-investment.

The tax provision allows taxpayers to defer the short term or long-term capital gains tax due upon a sale or disposition of property if the capital gain portion of the sale or disposition is reinvested within 180 days in a “qualified opportunity fund”. A “Qualified Opportunity Zone Fund” is a corporation or partnership that invests at least 90 percent of its assets in qualified opportunity zone property. A Qualified Opportunity Zone is a population census tract that is a low-income community that is designated as a qualified opportunity zone. The governor of each state and the US Treasury Department certify the qualified opportunity zones within a state. In Arizona portions of Phoenix, Scottsdale, Glendale, Tempe and Mesa have been designated as Opportunity Zones.

Limitation of Business Interest Deduction Increased

Effective January 1, 2018, the deduction of business interest will be limited to the sum of:

1. Business interest income of the taxpayer for the tax year
2. 30% of the adjusted taxable income of the taxpayer for the tax year 2021
3. The floor plan financing interest of the taxpayer for the tax year

The amount of any business interest not allowed as a deduction for any taxable year shall be treated as business interest paid or accrued in the succeeding taxable year. There is an exemption from this provision for certain small businesses with average annual gross receipts of less than $25 million for the proceeding 3 tax years.

Limitation of Excess Business Losses of Non-Corporate Taxpayer Limited

Whereas the the TCJA made effective January 1, 2018, any excess business losses of the taxpayer shall not be allowed. Where “excess business loss” means the excess of aggregate deductions attributable to the business of the taxpayer over the sum of: The aggregate business income/gain of the taxpayer, $250,000 single and $500,000 MFJ.  Any disallowed excess business losses are treated as a net operating loss (NOL) for the current year for purposes of determining any NOL carryover to subsequent tax years

Research and Development Expenditures

Currently taxpayers may elect to deduct certain expenses for research and development in the current year. Effective after December 31, 2021, research and development expenses will be required to be capitalized and amortized ratably over a 5-year period.

Business Meals and Entertainment Expenses

Effective January 1, 2018, businesses may no longer deduct expenses generally considered to be entertainment, amusement or recreation, membership dues with respect to any club organized for business, pleasure, recreation or other social purpose or a facility used in connection with any of the above. Taxpayers may continue to deduct 50% of the cost of business meals, 100% of business meals at a restaurant,  if the taxpayer (or an employee of the taxpayer) is present and the food or beverages are not considered lavish or extravagant. The meals may be provided to a current or potential business customer, client, consultant or similar business contact. Food and beverages that are provided during entertainment events will not be considered entertainment if purchased separately from the event.

Individuals

The seven Individual Income Tax Brackets will remain as follows:

Income Tax Brackets for 2021

The marriage penalty is removed in every bracket except 37% for 2018 – 2025.

Standard Deduction/Personal Exemption

Effective January 1, 2018 through 2025, the standard deduction and personal exemption will change as follows:

Capital Gains and Qualified Dividend Rates for 2021 are as follows:

Net Investment Income Tax

This rate remains at 3.8% for 2021 and applies to modified AGI above $250,000 MFJ and $125,000 Single. An individual is subject to the net investment income tax on the lessor of net investment income (i.e. gross income from interest, dividends, annuities, royalties, rents, gain on disposition of property) for the year or or modified adjusted gross income for the year exceeding the threshold amount.

Additional Medicare Tax

This rate remains at .9% for 2021 and applies to wages and self employment income in excess of $250,000 MFJ, $125,000 Single.

State and Local Taxes

Effective January 1, 2018, an itemized deduction is allowed up to $10,000 for state and local income and property taxes, prior to this date this deduction was not limited.

Qualified Residence Interest

Effective January 1, 2018 through 2025, the qualified residence interest deduction and home equity indebtedness deduction are limited as follows:

Miscellaneous Itemized Deductions

Effective January 1, 2018 through 2025 these deductions are suspended.

Alternative Minimum Tax (“AMT”)

The AMT exemption amount increases from $113, 400 in 2020 to $114,600 in 2021 MFJ, $72,900 in 2020 to $73,600 in 2021 Single. Furthermore, the phase out threshold for the exemption is increased from $1,036,800 in 2020 to $1,047,200 in 2021 MFJ, $518,400 in 2020 to$523,600 in 2021 Single.

Shared Responsibility Payment

Effective January 1, 2018, the shared responsibility payment enacted as part of the Affordable Care Act is reduced from $272 per month (Single), $1,360 per month (family of five), to $0 for both categories.

Child Tax Credit Extended 

The American Rescue Plan makes the Child Tax Credit fully refundable for 2021 and extends it through 2025.  It also makes 17-year-olds eligible as qualifying children.  The act increased the amount of the credit from $2,000 to $3000 per child ($3,600 for children under 6).  The credit phases out for taxpayers with incomes over $75,000 single, $150,000 for married taxpayers.

2021 has been another challenging year for many businesses.  Covid-19 has caused numerous businesses to rethink their business strategy.  Many businesses have had to pivot to new markets to sustain profitability and cash flow.  Congress has also had to respond to Covid-19.  It made changes to the Tax Cut and Jobs Act for 2020.  It also passed The Coronavirus Aid, relief and Economic Security Act (“CARES ACT”)  as well as the the American Rescue Plan.  Congress is currently negotiating Infrastructure and Budget Reconciliation Legislation.  These proposals include tax benefits for individuals as well as enhanced energy credits for individuals and businesses. However, the proposals include many provisions increasing the tax burden for individuals and businesses.  The existing Acts contain many tax provisions to help businesses and individuals impacted by Covid-19.  As a business owner it is in your best interest to be aware of these changes and how they can help your business and reduce your tax liabilities.

Please let us know if you have questions concerning the 2021 federal tax law changes or any other tax compliance or planning issues, we can be reached at (480) 980-3977!

Winning Performance Measures to Manage Your Business

In today’s business environment, business owners/managers have been overwhelmed with advice about performance measures: Total Return to Shareholders (“TRS”), Discounted Cash Flows (“DCF”), Economic Profit, Economic Value Added (“EVA”), Return on Invested Capital (“ROIC”), Earnings Per Share (“EPS”), Profit Margin, and many others. Oftentimes, the real purpose of using these performance measures has gotten lost in the sea of metrics. These performance measures are used to help managers make value creating decisions and to guide all company employees to value creation.

Economic Profit

Some performance measures are indeed better than others. We prefer economic measures (such as economic profit) to accounting based measures (such as earning per share).  Economic Profit is the difference between the revenue received from the sale of an output and the costs of all inputs used, as well as any opportunity costs.  Empirical research suggests that cash flows, not accounting earnings, are what drive business value and stock price performance. It’s also easier to understand the sources of value and short term versus long term tradeoffs, when you use economic performance.

However, there is no perfect performance measure. As a result, it is better to use a framework, that links various economic measures to various accounting based measures, to describe different aspects of performance. The ultimate output measure is shareholder value creation (i.e. stock performance) in the stock market for public companies or business value creation for privately held companies. It can be used by business owners and managers to set shareholder value creation targets. Shareholder value creation can then be linked to some measure of intrinsic value.

Intrinsic Value / Financial Indicators

Intrinsic value is a measure of an asset or company’s worth.  A company’s Intrinsic value it is ultimately driven by its long term cash flow generating ability and can be measured by DCF. Intrinsic values such as DCF can then be linked to important financial indicators such as: revenue growth, gross margin, operating profit, liquidity, solvency and return on invested capital. However, because short term financial indicators may signal changes in value creation too late, we need to also use operating and strategic measures called value drivers (such as market share, cost per unit, value of R&D projects) to manage the business. Monitoring these value drivers helps avoid sacrificing long term value creation for short term financial results.

Value Drivers

There are a variety of value drivers that can be managed to improve intrinsic value, some of them include:  Economies of Scale, Technology, Product and Service Offering, Access to Capital, Financial Performance, Skilled Employees, Solid Customer Base, Market Environment, Branding and Marketing Strategy, Strategic Vision. The costs per unit typically go down with an increase in production output. It may be through the spread of capacity costs over bigger volumes or through quantity discounts. A company should exploit the internal economies of scale well that would help it grow. Companies that can show technological expertise better through the development of products that address emerging customer needs, can lure customers into choosing modern high-performance products.  Companies that can develop a mix of product and service offerings can appeal to a broader set of customers.  Companies that have greater access to access to equity capital and debt are in a stronger position to support growth and achieve their goals.

Companies that perform regular financial analysis to measure trends, identify its assets and liabilities, and compare its financial performance with its competitors can increase intrinsic value. Skilled human capital is vital for any organization. Company employees contribute skills, creative abilities, experience, and knowledge to the business as well as the health of the company’s culture. The employees will determine the effectiveness of production and service delivery and can increase intrinsic value.  Having a customer base that is solid and widespread is important for the continuing viability of a company, it reduces risk and increases intrinsic value.  A company’s management needs to develop a good understanding of the impact of economic factors on their industry, their market share and market position, and their unique and niche offering. A company with strong branding will improve its sales through an increase in market recognition and also give it a clear direction that helps enhance operational efficiency.  A large number of companies simply formulate yearly budgets without trying to put together long-term business plans or forecasts that are in tune with the needs of their customers. Since valuation is inclined towards future prospects, the management of the company needs to adopt a strategic vision if they want to create value.

Comprehensive Framework

Each class of measurement has a role in management decision making and performance management

Stock Performance <—- Intrinsic Value <—- Financial Indicators <—- Value Drivers

Management can set long term value creation targets in terms of the market value of the company or total return to shareholders.  Alternative strategies/opportunities and the value of the business units, or the entire company, can be evaluated in terms of intrinsic value (DCF).  Intrinsic value can be translated into short term and medium term financial targets and targets for operating and strategic value drivers (Market Share).  Performance can be assessed by comparing results with targets on both financial indicators and key value drivers. Managerial rewards can be linked to performance on both financial measures and key value drivers.  Financial Indicators can be supplemented with strategic and operating value drivers that provide insight about where a company’s performance is heading. Value drivers help companies to understand the reasons for their current performance and how their future performance will likely develop.

Business owners and managers are oftentimes overwhelmed with advice about performance measures used to manage their business. A comprehensive framework to cut through the confusion of proliferating metrics can help business owner more effectively manage their business. This framework should include long term value creation targets, intrinsic value metrics, financial targets and value drivers. Using the right business performance measures can have a positive impact of your businesses bottom line!

Please let us know if you have questions concerning financial plans or any related topics, we can be reached at (480) 980-3977!

Many business owners work tirelessly to develop excellent product and service offerings and/or high quality manufacturing and distribution capabilities. However, when it comes to putting that same energy and focus into a financial plan, they come up short. However, it is the financial plan that helps them manage their growth and ensure they are getting the right return on their investment of time and resources.  The financial plan also enables a business owner more effectively communicate its long term plan with its banks, investors and co-travelers.

Business Goals and Objectives

The first step in this planning process is to identify objectives and goals associated with the new or expanding business. By establishing performance goals, the entrepreneur sets achievement levels to work toward, as well as a method of measurement to evaluate actual performance. Without goals, it is impossible to know if actual performance is good enough to meet the company’s financial obligations: payroll, accounts payable, loan payments, return to shareholders.

A wise business owner once said, “If you do not choose a destination, any path you take will get you there!” You can be sure that your bank or investors have specific expectations. Failure to meet these minimum levels of production may result in your financiers asking you to take your business elsewhere. Not a pleasant thought, yet it happens regularly when management does not pay attention to the numbers.

Components of Financial Plan

A good financial plan begins with a good understanding of the business. How has the business performed in the past, and what is it expected to do in the future? What operational plans does the management team have to be successful in the future? What are the business goals for the next year, and what are the resulting action items the company plans to execute in order to achieve these goals? These goals and action items can include items such as: new product or service offerings, increased sales in a particular market, increased marketing efforts, increased manufacturing capability or operational efficiency.

Once the organization has defined its operational plans for the future, the next step is to translate these operational plans into the financial plans. The financial plan should consist of a set of monthly or quarterly financial statements including an income statement, balance sheet and cash flow statement.  These financial statements help you to understand how your company will perform in the future, for example does your business generate enough cash flow to cover its payroll, insurance, advertising expense or debt service. If not, the company has the opportunity to revise its plans to achieve its goals.  These financial statements along with other financial metrics and goals can then be used as benchmarks to measure the company’s actual performance  throughout the year.  You can also use this financial plan to evaluate other business opportunities that you may encounter throughout the year. For example, you may use your plan to help you evaluate whether or not you should acquire a competitor in your industry or divest of a particular segment of your business.

Financial goals could include the following:

• Total sales/revenue – ideally, it should reflect a reasonable increase each year
• Gross margin – stable with industry or improving each year
• Expenses – as low as possible, increasing only as needed
• Capital expenditures – as low as possible, increasing only as needed
• Profitability – stable with industry or improving each year
• Cash flow – ideally, it should reflect a reasonable increase each year
• Return on investment – ideally, this should be better than your industry average

These are just a few ideas that may or may not be appropriate to your particular business. The point is that management should continually set realistic performance goals and monitor the results. The bottom line: do you know where your company is going, and are you leading or following?

Time-Frames in Financial Plans

Financial plans can cover a variety of time-frames; some look out 10 years into the future, while others look out 2 quarters into the future. Most companies do a combination of long term financial planning, which looks at the next three to five years, in combination with more detailed short term financial planning that looks at the next 6 to 12 months.

Most companies begin preparation of their financial plans for the following year and beyond in the third and fourth quarter of the current year. The larger the company the longer the process can take and the earlier in the year these companies begin. The key is to give yourself adequate time to do your research, and get your financial plan in place before beginning the new year.

Based on our experience working with clients over the past 18 years, below are some of the items we have noted with clients that utilize financial plans and those that do not.  Which category do you want to be in?

Case Study #1 – No Financial Plan 

• Client does not see value in financial planning and does not prepare a good plan
• Client does not perform competitive financial analysis of business
• Client does not monitor key financial metrics – profit, liquidity, solvency ratios
• Client is not aware of bank loan covenants
• Market conditions change and client is faced with a business recession
• Lack of diversification in client base results in significant decline in revenue
• Client is caught by surprise when it begins incurring monthly net losses and negative cash flow
• Client defaults on bank loans covenants and bank calls loan forcing workout
• Client forced to lay-off staff
• Client losses its commercial building to its bank
• Client forced to sell business at fire sale prices

Case Study #2 – Detailed Financial Plan

• Client prepares a detailed 5 year financial plan and updates it on an annual basis
• Client measures its financial performance relative to its plan on a monthly basis
• Client identifies financial challenges while they are small and makes minor course corrections to stay on track and hit its goals
• Client completes competitive financial analysis on an annual basis to understand its performance relative to its industry averages
• Client improves revenue growth over 30% per year
• Client improves profitability over 25% per year
• Client able to make long term commitments to new employees
• Client shares financial plan and performance with its bank on a monthly basis
• Bank approves client for working line of credit, building loan and equipment loan
• Client maintains strong balance sheet to allow it to acquire competition in downturn
• Client maintains profitability and positive cash flow through recession
• Client able to perform mid year tax planning to lower tax liabilities
• Client sleeps peacefully at night knowing that it is on-track to meet its goals

Uses of a Financial Plan

Once you have completed your financial plan, you now have a road map you can use to guide your progress and actions throughout the year. It will help you to quickly identify where you may not be on-track with your plan, so that you can quickly course-correct to get your business back on-track. You can also use this financial plan to evaluate other business opportunities that you may encounter throughout the year. For example, you may use your plan to help you evaluate whether or not you should acquire a competitor in your industry or divest of a particular segment of your business. Your financial plan can also be shared with outside investors, employees, or business partners to educate them on your business and show them where your business is headed. You can also use your financial plan to identify your future financing needs and secure the financing you need.

Studies have shown time and time again that the more a business measures its performance against established goals, the more likely it is to improve its performance. A good financial plan is one of the key tools you can use to measure your company’s performance. A good financial plan can help your company exceed its goals, and can help ensure the company’s financial performance is good enough to meet its financial obligations.

Please let us know if you have questions concerning financial plans or any related topics, we can be reached at (480) 980-3977!

On March 11, 2021, President Biden signed into law, the one year act, called the American Rescue Plan.  This act contains many tax provisions to help individuals and businesses impacted by Covid-19.  Some of these provisions are listed below.  As a business owner it is in your best interest to be aware of these provisions and how they can help your business and reduce your tax liabilities.

 

Employee Retention Credit

The American Rescue Plan extends the employee retention credit through the end of 2021. The employee retention credit was designed to encourage businesses to keep employees on their payroll. The refundable tax credit is 70% of $10,000 in wages paid per employee, per calendar quarter, for a total of $14,000 for the first two calendar quarters of 2021 for businesses that have been financially impacted by COVID-19.

The credit is available to all employers regardless of size, including tax-exempt organizations. There are only two exceptions: State and local governments and their instrumentalities and small businesses who take small business loans such as the Economic Impact Disaster Loan (“EIDL”).  Please note, Section 206 of the Relief Act amended section 2301 of the CARES Act to permit an employer that received a Paycheck Protection Program (“PPP”) loan to be eligible to claim an employee retention credit under section 2301 of the CARES Act by striking section 2301(j) of the CARES Act, effective retroactive to the original effective date of the CARES Act.

Qualifying employers must fall into one of two categories:

The employer’s business is fully or partially suspended by government order due to COVID-19 during the calendar quarter.
The employer’s gross receipts are below 80% of the comparable quarter in 2019

Employers will calculate these measures each calendar quarter and take the tax benefit each calendar quarter until the $10,000 limit is reached or they no longer qualify for the credit.

 

Economic Injury Disaster Loans (EIDL) and Paycheck Protection Program Loans

The bill allows taxpayers to exclude, EIDL grants and Paycheck Protection Program loan forgiveness received from the Small Business Administration,  from gross income.  Furthermore, this grant exclusion will not result in a denial of the deduction, reduction in tax attributes, or denial of the basis increase.  This is a tremendous benefit for those employers who participated in these loan programs!

 

Businesses Meals Deduction 100% 

The Act added a temporary exception to the 50% limit on the amount that businesses may deduct for food or beverages. The temporary exception allows a 100% deduction for food or beverages from restaurants.  Beginning January 1, 2021, through December 31, 2022, businesses can claim 100% of their food or beverage expenses paid to restaurants as long as the business owner (or an employee of the business) is present when food or beverages are provided and the expense is not lavish or extravagant under the circumstances.

 

Child Tax Credit 

The American Rescue Plan makes the Child Tax Credit fully refundable for 2021.  It also makes 17-year-olds eligible as qualifying children.  The act increased the amount of the credit from $2,000 to $3000 per child ($3,600 for children under 6).  The credit phases out for taxpayers with incomes over $75,000 single, $150,000 for married taxpayers.

 

Child and Dependent Care Credit

The American Rescue Plan makes this credit fully refundable in 2021. The maximum child and dependent care credit is $1,050 for one qualifying dependent and $2,100 for two or more qualifying dependents. It act also increases the exclusion for employer provided dependent care assistance to $10,500 for 2021.

 

Family and Sick Leave Credits

The bill extends the Family and Sick leave credits from December 31, 2020 to September 30, 2021.  It also increases the ,limit on the credit for paid family leave to 12,000.  The act also allows the credits for leave that is due to the Covid-19 vaccination.

 

Recovery Rebates 

The American Rescue Plan  provides for additional recovery rebate credits for individuals up to $1,400 ($2,800 for married taxpayers filing jointly) plus an additional $1,400 for each dependent in 2021.  The recovery rebate credit starts to phase out for taxpayers with adjusted gross income over $75,000 single, $150,000 married filing jointly.

2020 and 2021 have been challenging years for many businesses.  Covid-19 has caused numerous businesses to rethink their business strategy.  Many businesses have had to pivot to new markets to sustain profitability and cash flow.  Congress has also had to respond to Covid-19.  It passed the American Rescue Plan in 2021.   It is in your best interest to understand these new provisions in the tax law as they could impact both your business and personal bottom lines!

Please let us know if you have any questions regarding the American Rescue Plan or other tax compliance or planning issues, we can be reached at (480) 980-3977!

As many small business owners know, maintaining a smooth cash flow can be a challenge. It can require you to juggle nearly every aspect of your business, from staying on top of accounts receivable, to extending lines of credit, to managing inventory. Successful cash flow managers effectively manage the inflows of cash to their business as well as the outflows of cash from their business.  Increasing your cash flow reduces the amount of invested capital that you need to support a given level of business activity. An increased, consistent cash flow also creates a predictable business pattern, making it easier to plan for future growth as well as obtain financing.  Here are a few things you can do to increase your business cash flow.

Organize Billings 

The faster your receivables turn over, the more capital you’ll be able to spend on growing your business. Bill early and often, don’t wait until the end of the month to bill. Put yourself on a daily or weekly billing schedule with an accounting software program. These programs can automatically classify the age of accounts receivable – fewer than 30 days old, between 30 and 59 days, between 60 and 90 days, etc. This kind of automated flagging system allows you to act immediately on overdue accounts.  Also, implement a credit policy that includes regular follow-up (verbal and written) on overdue accounts.

Stretch Out Payables 

Take the maximum amount of time allotted (often 60 or 90 days) to pay your suppliers. Think of these terms as an interest-free line of credit from your supplier. It gives you sufficient time to collect receivables without spending money on short term credit lines.

Balance Your Client Base  

Many service companies work with certain clients on a project-by-project basis. Look for ways to convert some of these clients to a retainer relationship, where they pay you a set amount of money per month for a certain number of services. You might want to offer them some kind of incentive, value-added services, a discount, to encourage them to shift to a retainer. This might reduce your profit margin, but it will help make your cash flow more predictable. Product companies will want to utilize marketing and advertising to smooth out their cash flow through out the year, driving sales into softer months or quarters.

Form a Buying Cooperative

Save money on supplies by rounding up a few business partners and buying supplies like computers, and printer paper in bulk, then divide them up amongst yourselves. If you don’t want to invest the time in forming your own cooperative, your local chamber of commerce or industry association may be able to provide you with contact names for buying cooperatives in your area.

Tighten Your Inventory 

Overstocking inventory can tie up significant amounts of cash. Benchmark your inventory turns to make sure they are within industry norms. You can do this by calculating your inventory turnover ratio (cost of goods sold divided by the average value of your inventory). Avoid buying more than you know you need when suppliers lure you with big discounts; this can tie up cash. Periodically check your inventory for old or outdated stock, and either defer upcoming orders to use that stock or sell inventory at cost to improve your liquidity.

Consider Leasing

Leasing can cost more than buying, however, these costs often can be justified by the cash flow and tax benefits. By leasing computer equipment, cars, or other tools you need to expand your business, you will avoid tying up cash that might be better used for running your business day-to-day. Lease payments are also considered a business expense, so the tax benefits are maintained even though the items are not purchased.

Maintaining a smooth cash flow can be a challenge. However, successful cash flow managers effectively manage the inflows of cash to their business as well as the outflows of cash from their business.  Increasing your cash flow can really pay off, it reduces the amount of invested capital that you need to support business activity, it creates a predictable business, it makes it easier to plan for future growth as well as obtain financing.  So if you haven’t tried some of the suggestions above, give them a try, you may be surprised at the positive impact to your bank account.  If you have any questions regarding cash flow management, give us a call today 480 980-3977

Is your company experiencing one or more of the following?

• Inability to grow revenue or profitability beyond a certain point
• Growth in revenue while profits remain flat or decline
• Costs spiraling out of control
• Growth in revenue constrained by limited cash flow
• Surprise at year end when profitability not where it should be
• Limited time to locate the financing you need

If so, you are not alone, we hear this from many businesses, both large and small. Having a good financial management system can help your company grow its revenues while controlling costs and maintaining profitability. It can also help your company obtain the funds it needs, when it needs them and on the best possible terms. Here are a few things you can do to eliminate the challenges listed above:

Establish the Current Financial Condition

Analyze your company’s current financial condition. Identify areas of financial strength and weakness. Compare the company’s current performance to previous years performance, to other competitors in your industry, and to best-in-class in other industries. A solid understanding of the firm’s current financial condition will help determine what things need to be changed in the future to improve performance. It will also help you in developing your financial forecast.

Financial Forecast

Set up a system of projected financial statements which can be used to analyze the effects of your firm’s operating plan on projected profits or other financial condition indicators. Perform a sensitivity analysis on the financial forecast. At a minimum, look at a best case and worst case scenario of the plan to understand your company’s financial position if things deviate from the base plan or most probable plan. This financial plan will help chart your company’s path to growth and profitability; you need to understand the key levers that significantly influence the financial plan.

This system can also be used to monitor operations after the plan has been put into effect. Rapid awareness of deviations from the original financial plan is essential to a good control system, which in-turn is essential to business success in a changing world.

Financial Requirements

Determine the specific financial requirements needed to support the company’s five year plan. This includes funds for plant and equipment as well as inventory and receivable buildups, for R&D programs, and for major advertising/marketing campaigns. Forecasting financial requirements is an essential part of any firm’s management process, and the faster the growth rate the more important the financial forecast. Good financial planning is also important, perhaps even more important, for smaller companies. Whereas a firm such as Home Depot, whose stock is traded on the New York Stock Exchange has relatively easy access to capital markets, a smaller firm may find it difficult, or even impossible, to obtain funds unless its management has time to plan for funds acquisition.

Financing Sources

Forecast the financing sources to be used over the next five years. This involves estimating the funds that will be generated internally as well as those which must be obtained from external sources. External resource providers should be identified as soon as possible so that their requirements can be clearly understood and managed in a timely manner. Any constraints on the operating plan imposed by financial limitations, which would limit the use of total and or short term debt, should be incorporated into the company’s overall business plan; examples include restrictions on the debt ratio, current ratio and the coverage ratios by a financial resource.

Establish Controls

Establish and maintain a system of controls governing the allocation and use of funds within the firm. Essentially, this involves making sure that the basic plan is carried out properly. This system of controls also enables the firm to very quickly determine where it is deviating from its plan throughout the year. With this information, the firm can make the appropriate decisions to course correct before it gets too far off track.

Develop a Feedback Loop

Develop procedures for adjusting the basic plan if the forecast economic conditions upon which the plan was based do not materialize. For example, if the economy turns out to be stronger than was forecasted when the basic plan was drawn up, then these new conditions must be recognized and reflected in higher production budgets, larger marketing quotas, etc. as rapidly as possible

If your company is experiencing financial inefficiencies, an inability to grow revenue or profitability beyond a certain point, growth in revenue while profits remain flat or decline, costs that spiral out of control, growth in revenue constrained by limited cash flow, a surprise at year end when profitability not where it should be, or limited time to locate the financing you need, take control. Take the time necessary to establish a financial management process. This process will help your company grow revenues while controlling its costs and maintaining profitability. It will also help your company get the funds it needs, when it needs them and on the best possible terms.

Please let us know if you have questions concerning financial management systems or any related topics, we can be reached at (480) 980-3977!

As many small business owners know, maintaining a smooth cash flow can be a challenge. It can require you to juggle nearly every aspect of your business: from staying on top of accounts receivable, to extending lines of credit or managing inventory. Successful cash flow managers effectively manage the inflows of cash to their business as well as the outflows of cash from their business. Increasing your cash flow reduces the amount of invested capital that you need to support a given level of business activity. An increased, consistent cash flow also creates a predictable business pattern, making it easier to plan for future growth as well as obtain financing. Here are a few things you can do to increase your business cash flow:

Organize Billings and Collection

The faster your receivables turn over, the more capital you’ll be able to spend on growing your business. Bill early and often – don’t wait until the end of the month to bill. Put yourself on a billing schedule with an accounting software program. These programs can automatically classify the age of accounts receivable – fewer than 30 days old, between 30 and 59 days, between 60 and 90 days, etc. This kind of automated flagging system allows you to act immediately on overdue accounts. Also, implement a credit policy that includes regular follow-up (verbal and written) on overdue accounts.

Stretch Out Payables

Take the maximum amount of time allotted (often 60 or 90 days) to pay your suppliers. Think of these terms as an interest-free line of credit from your supplier. It gives you sufficient time to collect receivables without spending money on short term credit lines.  Try to match the collection of your accounts receivable with the payment of your accounts payable to smooth out cash flow.

Balance Your Client Base

Many service and professional companies work with certain clients on a project-by-project basis. Look for ways to convert some of these clients to a retainer relationship, where they pay you a set amount of money per month for a certain number of services. You might want to offer them some kind of incentive, value-added services, a discount, to encourage them to shift to a retainer. This might reduce your profit margin, but it will help make your cash flow more predictable.

Form a Buying Cooperative

Save money on supplies by rounding up a few business partners and buying supplies like computer parts and printer paper in bulk, then divide them up among yourselves. If you don’t want to invest the time in forming your own cooperative, your local chamber of commerce or industry association may be able to provide you with contact names for buying cooperatives in your area.

Tighten Your Inventory

Overstocking inventory can tie up significant amounts of cash. Benchmark your inventory turns to make sure they are within industry norms. You can do this by calculating your inventory turnover ratio (cost of goods sold divided by the average value of your inventory).  You can also calculate your Economic Order Quantity to ensure you are purchasing the right amount of inventory at the right time.  Avoid buying more than you know you need when suppliers lure you with big discounts; this can tie up cash. Periodically check your inventory for old or outdated stock, and either defer upcoming orders to use that stock or sell inventory at cost to improve your liquidity.

Consider Renting or Leasing

Leasing can cost more than buying, however these costs often can be justified by the cash flow and tax benefits. By leasing computer equipment, cars, or other tools you need to expand your business, you will avoid tying up cash that might be better used for running your day-to-day business. Lease payments are also considered a business expense, so the tax benefits are maintained even though the items are not purchased.

Maintaining a smooth cash flow can be a challenge. However, successful cash flow managers effectively manage the inflows of cash to their business as well as the outflows of cash from their business. Increasing your cash flow can really pay off; it reduces the amount of invested capital that you need to support business activity, it creates a predictable business, and it makes it easier to plan for future growth as well as obtain financing. If you haven’t tried some of the suggestions above, give them a try. You may be surprised at the positive impact to your bank account.

Please let us know if you have questions about managing your cash flow or any related topics, we can be reached at (480) 980-3977!

2020 has been a challenging year for many businesses.  Covid-19 has caused numerous businesses to rethink their business strategy.  Many businesses have had to pivot to new markets to sustain profitability and cash flow.  Congress has also had to respond to Covid-19.  It made changes to the Tax Cut and Jobs Act for 2020.  It also passed The Coronavirus Aid, relief and Economic Security Act (“CARES ACT”)  on March 27, 2020.  These acts contained many new tax provisions to help businesses and individuals impacted by Covid-19.  Some of these provisions are listed below.  As a business owner it is in your best interest to be aware of these changes and how they can help your business and reduce your tax liabilities.

Businesses

Reinstatement of the Net Operating Loss Carryback

Whereas the Tax Cut and Jobs Act generally eliminated the net operating loss carryback for taxable years after December 31, 2017, the CARES ACT now allows a 5 year carryback of net operating losses arising in taxable years beginning after 2017 and before 2021.  These losses may now be carried back to each of the 5 preceding tax years.  The CARES ACT also removed the 80% of taxable income limitation on use of the carryovers and carrybacks of NOL’s arising in taxable years beginning before 2021.  This is a welcome change to the tax code for those businesses struggling in 2020.

Paid Sick Leave Credit:
The paid sick leave credit is designed to allow business to get a credit for an employee who is unable to work (including telework) because of Coronavirus quarantine or self-quarantine or has Coronavirus symptoms and is seeking a medical diagnosis. Those employees are entitled to paid sick leave for up to 10 days (up to 80 hours) at the employee’s regular rate of pay up to $511 per day and $5,110 in total.

The employer can also receive the credit for employees who are unable to work due to caring for someone with Coronavirus or caring for a child because the child’s school or place of care is closed, or the paid childcare provider is unavailable due to the Coronavirus. Those employees are entitled to paid sick leave for up to two weeks (up to 80 hours) at 2/3 the employee’s regular rate of pay or, up to $200 per day and $2,000 in total.

Family Leave Credit:

Employees are also entitled to paid family and medical leave equal to 2/3 of the employee’s regular pay, up to $200 per day and $10,000 in total. Up to 10 weeks of qualifying leave can be counted towards the family leave credit.

Employers can be immediately reimbursed for the credit by reducing their required deposits of payroll taxes that have been withheld from employees’ wages by the amount of the credit.  This is a significant benefit to employers allowing them to immediately benefit from this tax incentive.

Eligible employers are entitled to immediately receive a credit in the full amount of the required sick leave and family leave, plus related health plan expenses and the employer’s share of Medicare tax on the leave, for the period of April 1, 2020, through Dec. 31, 2020. The refundable credit is applied against certain employment taxes on wages paid to all employees.

Eligible employers will report their total qualified wages and the related health insurance costs for each quarter on their quarterly employment tax returns or Form 941 beginning with the second quarter. If the employer’s employment tax deposits are not sufficient to cover the credit, the employer may receive an advance payment from the IRS by submitting Form 7200, Advance Payment of Employer Credits Due to COVID-19.

Eligible employers can also request an advance of the Employee Retention Credit by submitting Form 7200.

Increased Credit for Small Employer Retirement Plan Startup Costs with Automatic Enrollment

The CARES act increased the credit for retirement plan startup costs of employers with 100 or fewer employees, who received at least $5,000 of compensation from their employer for the preceding year.   The credit is equal to 50% of the plan startup costs paid during the taxable year.  The credit is available for the first three years of the plan and cannot exceed the greater of 1) $500 or 2) the lessor of a) $250 for each employee eligible to participate in the plan or B) $5000. An employer can qualify for a second annual credit of $500 for the three year period if the plan includes an automatic enrollment for employees.

Cash Method of Accounting 

Effective for tax years after 2017 C corporations may use the cash method of accounting if their average gross receipts for the prior three years were less than $25 million ($26 Million for 2019 and 2020).  This is a great deal for those businesses with slow paying customers, they no longer have to pay income tax on those sales before they receive the cash from their customers.

C Corporation Tax Rate

The C Corporation tax rates remained flat at a rate of 21% effective January 1, 2018. This includes personal service corporations.

Qualified Business Income Deduction

Effective January 1, 2018, in the case of a taxpayer other than a C Corporation there shall be a deduction with respect to any qualified trade of business of an amount equal to the lessor of:

1. 20% of the taxpayers qualified business income
2. The greater of:

a. 50% of the w-2 wages of the qualified business
b. The sum of 25% of the w-2 wages of the qualified business plus 2.5% of the unadjusted basis immediately after acquisition of qualified property

*Please note that the w-2 limitation (2 above) does not apply to any taxpayer whose taxable income for the year does not exceed $321,400 MFJ and $160,700 single. The w-2 limit applies fully for a taxpayer whose taxable income is in excess of the threshold amount by $100,000 MFJ, $50,000 single. Also, note that if your business is a Specified Service Trade or Business (i.e. Health, Law, Accounting, Financial Services) and your taxable income exceeds $421,400 MFJ and $210,700 single, you no longer qualify for the deduction.

Section 179 Expense Limitations and Modifications

The maximum amount a taxpayer can elect to expense under sections 179 is increased from $1,020,000 in 2019 to $1,040,000 in 2020 Furthermore, the deduction limit or phase out began at $2,550,000 in 2019, this limit is increased to $2,590,000 in 2020. The Section 179 limit for SUVs, Trucks, Vans over 6000 pounds GVWR is $25,900. A truck or van that is a qualified non-personal use vehicle is not subject to the annual depreciation limit.

Bonus Depreciation

Taxpayers are required to take and additional first year special depreciation allowance for certain qualified property. This deduction is calculated after taking any Section 179 and before any regular depreciation deduction. This additional depreciation taken on new or used property is held at 100% from 2018 to 2022. This increased deduction also applies to Longer Production Period Property and Certain Aircraft. After 2022, the deduction is reduced 20 percentage points each year until it reaches 0% for qualified property and 20% for Longer Production Period Property and Certain Aircraft in 2027. The additional first year bonus depreciation for vehicles purchased after 9/27/17 remained at $8,000 for 2020.

The CARES ACT also made provisions for Qualified Improvement Property (QIP”).  QIP is defined as improvement to the interior portion of a commercial building (provided the improvement is not attributable to enlargement of the building, elevators, escalators, or the internal structural framework of the building).  QIP now has a 15 year recovery period and if placed in service after 2017 qualifies for 100% Section 168(k) bonus depreciation.

Qualified Opportunity Funds

This new tax provision provides an effective deferral mechanism for short and long-term capital gains from current investments in nearly all asset classes including stocks and other securities. Unlike Section 1031 “like-kind” deferral, qualified opportunity zones will provide: (i) the ability to invest only the gain rather than the entire current investment, (ii) a broader range of investments eligible for the deferral, (iii) a potential basis step-up of 15 percent of the initial deferred amount of investment, and (iv) an opportunity to abate all taxation on capital gains post-investment.

The new provision allows taxpayers to defer the short term or long-term capital gains tax due upon a sale or disposition of property if the capital gain portion of the sale or disposition is reinvested within 180 days in a “qualified opportunity fund”. A “Qualified Opportunity Zone Fund” is a corporation or partnership that invests at least 90 percent of its assets in qualified opportunity zone property. A Qualified Opportunity Zone is a population census tract that is a low-income community that is designated as a qualified opportunity zone. The governor of each state and the US Treasury Department certify the qualified opportunity zones within a state. In Arizona portions of Phoenix, Scottsdale, Glendale, Tempe and Mesa have been designated as Opportunity Zones.

Limitation of Business Interest Deduction Increased

Effective January 1, 2018, the deduction of business interest will be limited to the sum of:

1. Business interest income of the taxpayer for the tax year
2. 30% of the adjusted taxable income of the taxpayer for the tax year, now as part of the CARES ACT this is increased to 50% of taxable income
3. The floor plan financing interest of the taxpayer for the tax year

The amount of any business interest not allowed as a deduction for any taxable year shall be treated as business interest paid or accrued in the succeeding taxable year. There is an exemption from this provision for certain small businesses with average annual gross receipts of less than $25 million for the proceeding 3 tax years.

Limitation of Excess Business Losses of Non-Corporate Taxpayer Removed

Whereas the the TCJA made effective January 1, 2018, any excess business losses of the taxpayer shall not be allowed. Where “excess business loss” means the excess of aggregate deductions attributable to the business of the taxpayer over the sum of: The aggregate business income/gain of the taxpayer, $250,000 single and $500,000 MFJ;  The CARES ACT removed this cap for any taxable year beginning before January 1, 2021.

Research and Development Expenditures

Currently taxpayers may elect to deduct certain expenses for research and development in the current year. Effective after December 31, 2021, research and development expenses will be required to be capitalized and amortized ratably over a 5-year period.

Business Meals and Entertainment Expenses

Effective January 1, 2018, businesses may no longer deduct expenses generally considered to be entertainment, amusement or recreation, membership dues with respect to any club organized for business, pleasure, recreation or other social purpose or a facility used in connection with any of the above. Taxpayers may continue to deduct 50% of the cost of business meals if the taxpayer (or an employee of the taxpayer) is present and the food or beverages are not considered lavish or extravagant. The meals may be provided to a current or potential business customer, client, consultant or similar business contact. Food and beverages that are provided during entertainment events will not be considered entertainment if purchased separately from the event.

Individuals

The seven Individual Income Tax Brackets will remain as follows:

Income Tax Brackets for 2020

The marriage penalty is removed in every bracket except 37% for 2018 – 2025.

Standard Deduction/Personal Exemption

Effective January 1, 2018 through 2025, the standard deduction and personal exemption will change as follows:

Capital Gains and Qualified Dividend Rates for 2020 are as follows:

Net Investment Income Tax

This rate remains at 3.8% for 2020 and applies to modified AGI above $250,000 MFJ and $125,000 Single. An individual is subject to the net investment income tax on the lessor of net investment income (i.e. gross income from interest, dividends, annuities, royalties, rents, gain on disposition of property) for the year or or modified adjusted gross income for the year exceeding the threshold amount.

Additional Medicare Tax

This rate remains at .9% for 2020 and applies to wages and self employment income in excess of $250,000 MFJ, $125,000 Single.

State and Local Taxes

Effective January 1, 2018, an itemized deduction is allowed up to $10,000 for state and local income and property taxes, prior to this date this deduction was not limited.

Qualified Residence Interest

Effective January 1, 2018 through 2025, the qualified residence interest deduction and home equity indebtedness deduction are limited as follows:

Miscellaneous Itemized Deductions

Effective January 1, 2018 through 2025 these deductions are suspended.

Alternative Minimum Tax (“AMT”)

The AMT exemption amount increases from $111,700 in 2019 to $113, 400 in 2020 MFJ, $71,700 in 2019 to $72,900 in 2020 Single. Furthermore, the phase out threshold for the exemption is increased from from $1,020,600 in 2019 to $1,036,800 in 2020 MFJ, $510,300 in 2019 to $518,400 in 2020 Single.

Shared Responsibility Payment

Effective January 1, 2018, the shared responsibility payment enacted as part of the Affordable Care Act is reduced from $272 per month (Single), $1,360 per month (family of five), to $0 for both categories.

Child Tax Credit Enhanced

This credit was held flat at $2,000 per child from 2019 to 2020. The phase out for the credit was held flat at AGI of $400,000 MFJ and $200,000 Single from 2018 to 2019. There is also a $500 credit for qualifying dependents other than qualifying children.

2020 has been a challenging year for many businesses.  Covid-19 has caused numerous businesses to rethink their business strategy.  Many businesses have had to pivot to new markets to sustain profitability and cash flow.  Congress has also had to respond to Covid-19.  It made changes to the Tax Cut and Jobs Act for 2020.  It also passed The Coronavirus Aid, Relief and Economic Security Act (“CARES ACT”)  on March 27, 2020.  These acts contained many new tax provisions to help businesses and individuals impacted by Covid-19.  It is in your best interest to understand these changes in the tax law as they could impact both your business and personal bottom lines!

Please let us know if you have questions concerning the 2020 federal tax law changes or any other tax compliance or planning issues, we can be reached at (480) 980-3977!

Is your business buying and selling property on a regular basis? Are you paying tax with every sale that results in a gain? If so, you may want to consider a like-kind exchange!

In general, all gains and losses realized on sales and other dispositions of property are taxable, but an exception is made when business or investment property is traded or exchanged for “like-kind” property. In this case, the newly acquired property is viewed as a continuation of the investment in the original property, so the tax basis does not change. The reason to make the tax free exchanges is not to avoid taxes, but to defer them while realizing some other investment aims.

Generally, if you exchange business or investment property solely for business or investment property of a like-kind, no gain or loss is recognized under Internal Revenue Code Section 1031. However, if as part of the exchange, you also receive other (not like-kind) property or money, a gain is recognized to the extent of the other property and money received, but a loss is not recognized.

Like-Kind Property

Properties are of like-kind, if they are of the same nature or character, even if they differ in grade or quality. Personal properties of a like class are like-kind properties. Real properties generally are of like-kind, regardless of whether the properties are improved or unimproved. Property held for productive use in a trade or business may be exchanged for property held for investment. Some examples of like kind exchanges include: exchanging improved for unimproved real estate and exchanging a used car for a new one.

Real property in the United States and real property outside the United States are not like-kind properties. Personal property used predominantly in the United States and personal property used predominantly outside the United States are also not like-kind properties. Furthermore, Section 1031 does not apply to exchanges of inventory, stocks, bonds, notes, other securities or evidence of indebtedness, or certain other assets.

Exchange Requirements

Like-kind exchanges are a useful planning tool in deferring tax on appreciated property if you intend to reinvest in a similar property within a relatively short period of time. No gain or loss is recognized in a deferred like-kind exchange if you meet the following requirements:

1) You must follow specific procedures to identify replacement property within 45 days after relinquishing the old property.

2) You must receive the replacement property within 180 days after relinquishing the old property or by the due date of your tax return for the year in which you transferred the property given up, whichever is earlier.

Example:

Say you trade an old truck used in your business with an adjusted basis of $5,000 for a new one costing $50,000. The dealer allows you $20,000 on the old truck and you pay the remaining $30,000. This is a like-kind exchange. Your basis in the new truck is $35,000 (the adjusted basis in the old truck plus the amount you paid). Furthermore, you can defer the tax on the $15,000 gain. At a capital gains rate of 15%, this exchange enables you to defer over $2,250 in taxes!

So if you find yourself buying and selling a lot of property for your business, it is in your best interest to consider like-kind exchanges. With a little upfront planning, you can significantly reduce your tax bill and improve your bottom line!

Please let us know if you have questions concerning like-kind exchanges or any related concepts, we can be reached at (480) 980-3977!