Month: December 2021

Preface: “Happiness is the meaning and purpose of life, the whole aim and end of human existence” — Aristotle

Business Profits – The Journey to Bondage or Freedom

Credit: Donald J. Sauder, CPA | CVA

More than two thousand years ago as portrayed in Gospel of Luke, Joseph and Mary went up from Galilee out of the City of Nazareth into Bethlehem to be taxed. While many are familiar with the Christmas story, our purpose of mentioning it in this blog is that Joseph was required to take a mandatory vacation from his likely trade as a carpenter on account of a tax decree from emperor Caesar Augustus. Although the timing with the world-wide taxation decree was less ideal for the couple for whom God had a special purpose, the Wisemen knew it was all according to the perfect plan and additionally that Joseph and Mary were in complete compliance with the emperors tax regulations. For most tradesmen that historic time was supposedly not a journey of happiness or liberty.

Today as we enter 2022, business communities in the United States from east to west, north and south, are enjoying a journey through time that is unprecedented, extraordinary, and exceptional. It is to this cause that we wish reflect from an accounting perspective.

Double entry accounting is an incredible and wonderful invention and widely applied in managing business finances. While all that and more, it also has the ability to aid financial subterfuge. Therefore, the art of accounting is based on a high-level of trust. What business doesn’t want accurate, trustworthy, reliable financial data? While we would all agree on that, what often is overlooked is the underlying unit of that accounting—and more precisely money.

Today, truth be told, while some would agree that typewriters are a business tool for museums, our assumption is that the money we account for with business transaction is stable and timeless. Is that truth? Now, the purpose of this is not to say that any central bank currency, including the US dollar is facing forthcoming doom and that you need to prepare for some type of end; or that only using cash is the necessary. Certainly not. This is not investment advice, and this is not business advice. This is to say plainly and simply that no matter your social affinity, that at present, while enjoying the freedoms of this journey we could quickly see the realization that it is actually financial bondage for scores. If you believe the story of Genesis, then you should consider Proverbs 22:7– The rich rule over the poor, and the borrower is slave to the lender. There is money of kings, there is money of gentlemen, and money of peasants, but debt is the money of slaves – paraphrase of sage words from Norm Franz.

Along this unprecedented, extraordinary, and exceptional financial journey where we see RV’s driven for enjoyment that cost more than a decade of prime-year working salaries of a minimum wage earner, we need to appreciate the while world-wide taxation is not a new concept to history of world civilization, central banking certainly is.

I recently read a book about two adventurers who journeyed the globe in approximately 37 days. One of the most memorable facts of that read for me was that of the million-dollar smiles, accounted on the faces of some happy Asians heading home to their families after a good day of work where daily wages would be less than what some American’s spend daily on a cup of coffee.

Perhaps a people who do not know the history of their successes at present, whether family, community, or financial are likely at risk of missing a big key to their future successes.  Likewise as truth has always prevailed in history, we too should continue to believe it will prevail again. Subsequently, do we realize what is financial truth? The reality is that anyone searching for financial truth will realize that being materially subject to “money” risks with perhaps changing tax regulations, increased money printing, or interest rate shifts, we should humbly consider possible expectations if financial truth prevails, and secondly and more concerningly, if we even want it to prevail with freedoms it brings. Yet, if financial truth prevails, will you be in bondage? Any therein is the purpose of this blog.

In closing, the Wisemen knew exactly what journey they had embarked upon, and we should ponder that in our hearts this Christmas Day. Our encouragement to you looking towards the new year is like the angels words to the shepherds — “Fear not!” You too can understand the historical truths of money and its freedom.

With gratitude this Christmas Season, we have for the first 10 readers who email me dsauder@saudercpa.com — a free copy of Money and Liberty

God Bless on your journey ahead.

2021 Year-End Tax Planning for Businesses

Year-end tax planning for businesses is especially difficult for 2021 because the Build Back Better Act has the potential to impact broad areas of taxation. Congress continues to negotiate a compromise. Unfortunately, it is difficult to know what is likely to emerge as the final version. In addition, although the effective date for most of the provisions in the Build Back Better plan are tied to the enactment date, January 1, 2022, or even later, a few proposals may be retroactive.

Here are some highlights of current proposals under the Build Back Better Plan that may impact businesses:

• • • • Effective in tax years beginning after December 31, 2022, the Section 250 deduction may be reduced from 37.5 percent of the foreign-derived intangible income plus 50 percent of the global intangible low-taxed income amount (if any) included in the gross income for the tax year to 24.8 and 28.5 percent respectively.
      • Owners of pass-through businesses may be impacted by an expanded application of the 3.8 percent net investment income tax. A modification to the net investment income tax starting in 2022 would classify pass-through income as investment income subject to the NIIT even if the taxpayer materially participates in the business.
      • Currently scheduled to expire after 2025, the disallowance of excess business losses may be made permanent. An excess business loss is the amount by which the total deductions attributable to all of the taxpayer’s trades or businesses exceed their total gross income and gains attributable to those trades or businesses plus a threshold amount adjusted for cost of living. For tax years beginning in 2021, the threshold amounts are $262,000 (or $524,000 in the case of a joint return).
      • Under current law, a tax credit may be available in 2021 for a taxpayer who places a new qualified plug-in electric drive motor vehicle in service. The maximum credit is $7,500 and is reduced once a manufacturer sells 200,000 eligible vehicles for use in the United States. However, taxpayers may want to hold off on making that purchase until 2022. Under proposals in the Build Back Better Act, it could mean an additional $5,000 credit. If the credit is not currently available, the tax savings increase to $12,500.
      • Corporations with average annual adjusted financial statement income greater than $1 billion ($100 million for members of an international financial reporting group) may be subject to a 15% alternative minimum tax in tax years beginning after December 31, 2022.
      • A corporate interest deduction limit may be imposed on certain members of international financial reporting groups effective in tax years beginning after December 31, 2022.

Changes in the taxation of corporations and pass-through entities always makes it a good idea to review choice of entity decisions to make sure the current entity structure continues to make the most sense.

Expiring Tax Provisions

Taxpayers might consider taking advantage of the following tax benefits in 2021 before they expire.

Employee Retention Credit. The recently passed Infrastructure Investment and Jobs Act includes a tax provision that terminates the employee retention credit early. With the exception for wages paid by an eligible recovery startup business, wages paid after September 30, 2021 are no longer eligible for the credit.

Research and experimental expenditures. Under present law, research and experimental expenditures are deductible in the year paid or incurred or at the taxpayer’s option, amortizable over a period of not less than 60 months beginning in the month that benefits are first realized from the expenditures.

Beginning in 2022, research and experimental expenditures performed in the United States are required to be amortized ratably over five years and over fifteen years for foreign research. Taxpayers may want to consider the implications of the upcoming changes in 2022 tax year.

Deferred Payroll Tax Payments. Employers that took advantage of the option to defer payroll taxes due from the period beginning on March 27, 2020 and ending on December 31, 2020 must prepare to make the payments. Half of the deferred payroll taxes are due on December 31, 2021, with the remainder due on December 31, 2022.

There is no one size fits all for tax planning and any tax strategy may have unintended consequences if the taxpayer’s situation is not appropriately evaluated to consider the future changing tax landscapes. 

2021 Year-End Tax Planning for Individuals

As we near the end of 2021, Congress is still considering a large package of tax changes that could increase taxes in 2022 for wealthier taxpayers while potentially reducing taxes for low to middle-income taxpayers.

Referred to as the Build Back Better Act, the detail of this legislation are still subject to substantial changes as legislators continue to negotiate the terms. It is possible an agreement might not be reached until very late in the year. Some of the tax provisions may be effective as of the enactment date, others could potentially be retroactive, and some might be effective starting in 2022 or later.

In general, tax planning includes accelerating deductions, postponing income, reviewing investment portfolios for possible capital gain or loss realizations, making charitable gifts, and lifetime gifts to family members. However, due to its size, the implications of the Build Back Better Act must be taken into consideration. Unfortunately, it may be enacted too late to act. Therefore, you will benefit from speaking to us now about your situation and year-end plans that might make sense for you within this changing tax landscape.

High-Income Taxpayers

The Build Back Better plan proposes a larger tax burden for individuals and estates and trusts with high income. These proposals include:

• • • a modification to the net investment income tax starting in 2022 that would classify pass through income as investment income subject to the NIIT even if the taxpayer materially participates in the business.
    • an additional tax of five percent that would apply to the modified adjusted gross income of a joint filer, single filer, or head of household in excess of $10 million ($5 million for a married taxpayer filing separately, $200,000 for an estate and trust). An additional three percent tax that would apply to the modified adjusted gross income of a joint filer, single filer, or head of household in excess of $15 million ($12.5 million for a married taxpayer filing separately, $500,000 for an estate and trust). The surcharge would apply in tax years beginning after 2021.
    • new limits on the favorable tax rules for investment in qualified small business stock. Possibly retroactive to the sale or exchange of qualified small business stock after September 13, 2021, favorable rules will not apply to any taxpayer with adjusted gross income of $400,000 or more, or any estate or trust.
    • wash sale rules may apply to a wider range of investments including foreign currency, cryptocurrency and commodities.

Considering the timing for these tax changes, wealthier taxpayers may want to consider accelerating income rather than the usual postponement of income and may also want to consider postponing deductions rather than the usual acceleration of deductions. In addition, a careful review of portfolio investments may be beneficial.

Other December 2021 tax strategies:

• • • All taxpayers may want to look at year-end charitable contributions to take advantage of the $300 deduction for those claiming the standard deduction or the 100 percent of adjusted gross income limit on those itemizing deductions; both provisions currently expire at the end of 2021
    • With a possible significant increase in IRS funding to enhance audit rates of tax returns, taxpayers may want to focus on making sure they have documentation to support all deductions and credits on their tax returns
    • Owners of pass-through businesses should consider reviewing possible changes to the 20 percent deduction for qualified business income, disallowance of excess business losses, changes to the taxation of carried interests, and a significant package of changes to the taxation of partnerships.
    • There is a proposal to extend residential energy credits in the Build Back Better Act. However, under current law, they are due to expire at the end of 2021. Taxpayers might consider the tax impact for timing installation of energy-efficient exterior windows, doors, skylights, roofs, and insulation, as well as energy efficient heating and air conditioning systems and water heaters to take advantage of the greatest tax savings.
    • Under current law, a tax credit may be available in 2021 for a taxpayer who places a new qualified plug-in electric drive motor vehicle in service. The maximum credit is $7,500 and is reduced once a manufacturer sells 200,000 eligible vehicles for use in the United States. However, taxpayers may want to hold off on making that purchase until 2022. Under proposals in the Build Back Better Act, it could mean an additional $5,000 credit. If the credit is not currently available, the tax savings increase to $12,500.

Because of the large scope of the Build Back Better Plan, including retroactive changes to the tax rules, there is no one size fits all for tax planning and any strategy may have unintended consequences if the taxpayer’s situation is not evaluated holistically. Please call our office to schedule an appointment to discuss your tax strategies strategy.

Preface: “It’s tangible, it’s solid, it’s beautiful. It’s artistic, from my standpoint, and I just love real estate.”  Donald Trump, 45th President of the United States of America

Tax Planning: Real Estate Activity Compliance

Landlords should be aware that keeping accurate accounting records is just as important as collecting the rent on time each month. If a taxpayer owns rental real estate, there are federal tax responsibilities. All rental income must be reported on their tax return, and in general the associated expenses can be deducted from their rental income.

If a landlord is a cash basis taxpayer, they will report rental income on their return for the year they receive it, regardless of when it was earned. As a cash basis taxpayer, a landlord generally deducts their rental expenses in the year they pay them. If a landlord uses an accrual method, they generally report income when they earn it, rather than when they receive it and they deduct their expenses when they incur them, rather than when they pay them. Most individuals use the cash method of accounting.

Rental Income

Landlords must include in their gross income all amounts they receive as rent. Rental income is any payment received for the use or occupation of property. Landlords must report rental income for all their properties. In addition to amounts they receive as normal rent payments, there are other amounts that may be rental income that include:

• • • • Amounts paid to cancel a lease
      • Advance rent
      • Expenses paid by a tenant
      • Security deposits

Rental Expenses

If a landlord receives rental income from the rental of a dwelling unit, there are certain rental expenses they may deduct on their tax return. These expenses may include mortgage interest, property tax, operating expenses, depreciation, and repairs.

Landlords can deduct the ordinary and necessary expenses for managing, conserving, and maintaining their rental property. Ordinary expenses are those that are common and generally accepted in the business. Necessary expenses are those that are deemed appropriate, such as interest, taxes, advertising, maintenance, utilities, and insurance.

Recordkeeping

Good records will help landlords monitor the progress of their rental property, prepare your financial statements, identify the source of receipts, keep track of deductible expenses, prepare their tax returns and support items reported on tax returns. Landlords must be able to substantiate certain elements of expenses to deduct them. Generally, the landlord must have documentary evidence, such as receipts, canceled checks or bills, to support their expenses. Keep track of any travel expenses that are incurred for rental property repairs.

Contact Us

Questions? Call our office. We can assist you with your real estate business accounting evaluate the proper recordkeeping to substantiate your real estate business transactions.