Author: dsauder

Preface: For which of you, intending to build a tower, sitteth not down first, and counteth the cost, whether he have sufficient to finish it?  Lest haply, after he hath laid the foundation, and is not able to finish it, all that behold it begin to mock him,  Saying, This man began to build, and was not able to finish –Luke 14:28-30

SWOT Analysis for the Aspiring Entrepreneur

Credit: Jacob M. Dietz, CPA

Should I start a business?  If you are considering becoming an entrepreneur, first spend significant amounts of time researching and thinking about your options.  This article does not delve into all the considerations, but it recommends that the aspiring entrepreneur conduct a SWOT analysis to examine Strengths, Weaknesses, Opportunities, and Threats.

Strengths

First, strengths are your characteristics and traits that can help.  Some strengths that you might possess include a good work ethic, discipline, integrity, experience, and good hand-eye coordination.  If you start and run your own business, expect to work hard.  You might work harder than you have ever worked before.  If you already possess a good work ethic, that is a strength to you.  Your life experience can be a strength.  If you worked in a similar business for your father for years, then that experience will be a strength to you as you start your own business.

Write down the strengths that you possess that could help you.  Be honest.  Do not overrate your strengths, but also do not underrate those strengths.  They are blessings given to you.  Appropriately considering your strengths may influence your decision about starting a business.

Why write out your strengths?  Seeing your strengths may bring clarity to you as to what your strengths are.  You might be able to think of some strengths off-hand, but as you look at them written down you may grasp a fuller picture.  Furthermore, if you seek counsel as you consider your business opportunity, and I recommend that you do seek counsel, then having written strengths allows your advisors to picture your strengths.

What would give you a competitive advantage? What internal strengths would help you run this business successfully?  Consider this question, ask your advisors for input, and write down the answers.

Weaknesses

Along with your strengths, remember your weaknesses.  Weaknesses include your characteristics that may harm you.  It may be painful to recognize your own weaknesses, but it also can be extremely beneficial. If you know your weaknesses, then you may be able to avoid long-term harm by avoiding certain situations, or by minimizing your weaknesses in certain situations.

For example, assume that you are terrified of heights and cannot work long hours in the heat without suffering from heat exhaustion.  Perhaps you should not start a roofing business.  On the other hand, sometimes a weakness can be mitigated.  Maybe you are weak at analyzing financial data.  If that is the case, then you may want to team up with a talented CPA who can assist you with the financial analytics.

Knowing your own weaknesses can be hard since there can be a tendency to overlook our own weaknesses.  Consider asking family members and work associates about your weaknesses.  Ask someone who has managed you what your weaknesses are.  Ask someone whom you have managed what your weaknesses are.

Again, write down your weaknesses.  If you do not write them down, it might be easy to forget them.  Also, your business counsellors may have better insights if the weaknesses are written.

The purpose of writing your weaknesses is not to make yourself feel bad.  Considering your weaknesses may help you avoid bad situations or take steps to minimize the danger of those situations.  Do not neglect this step.

Opportunities

In addition to analyzing your internal strengths and weakness, also consider external opportunities and threats.  What are the opportunities in the industry?  For example, suppose you want to become a residential homebuilder.  An opportunity could be that your township revised its zoning laws to allow more houses to be built.  Another opportunity could be a growing population of a certain demographic group that wants your product or service.  For example, if you want to start a home healthcare business, then a growing population of senior citizens could be an opportunity.

Opportunities are external to you, so they may require some outside research.  Reading can be a great way to gather some of this information.  Business publications, trade publications, and even your local newspaper might provide helpful information.  Consider talking with your librarian.  Your library may have access to business databases, publications, and references that will help you research.  You also may want to talk with experienced people in the industry in which you are considering starting out as an entrepreneur.  Do they know of any good opportunities to seize?

Some people who know the opportunities the best may not wish to share them with you as a competitor.  Nevertheless, you might find some entrepreneurs who may be willing to share their knowledge, even if they know that you might compete with them.  If you are having trouble finding someone, consider trying to find someone who might be less concerned about competition.  For example, if you aspire to start a roofing company, perhaps a building supplies entrepreneur might have some information on your industry.  In that situation, you would not be seen as a competitor but as a potential customer.  You might also be able to talk to someone who lives geographically far enough away to avoid some of the competition to share with you.  Just remember that there could be geographic differences in opportunity.  Consider reaching out to an older man who knows the industry, but who loves to pass on knowledge to those getting started.   Consider seeking out advisors and professionals who have knowledge in your industry.

Threats

A threat is an external item that could harm your potential venture. Threats may include legal, economic, and other hazards.  For example, if you wanted to start a residential construction company right after a housing bubble popped then you may face a major threat.

Some of the same research that you do to learn about opportunities may help you learn about threats as well.  Consider researching publications, talking with your librarian, and seeking out those with experience in the industry.

When researching threats and writing them down, try to portray them accurately.  If you and your business counsellors accurately understand the threats, then you might be able to chart a good course.

Just because you find grave threats does not automatically mean that you should abandon the idea for a business, although in certain situations that could be prudent.  Firefighters understand that fire poses a grave threat to their health and lives.   When the fire alarm goes off, however, the firefighters do not stay in the safety of their living rooms sipping cold water to avoid the grave danger.  Firefighters rush toward the action and the danger.  Firefighters, however, invest much time and action into safety to protect them from the danger.  They train for safety.  They don personal protective equipment to guard them from the danger.

If firefighters did not understand the danger of fires, then fires could hurt more of them.  Likewise, entrepreneurs increase the likelihood of problems if they do not understand the threats to their enterprise.

The factors going into a decision about entrepreneurship are many.  Remember to include a SWOT analysis in the decision process.  It might steer you away from a disastrous decision.  Alternatively, you may still make the decision to enter that field but be better prepared to use your strengths to seize certain opportunities and to take measures to minimize the risks from weaknesses and threats.  Feel free to contact your accountant if you would like to talk about becoming an entrepreneur.

This article is general in nature, and it does not contain legal advice.  Contact your advisors to discuss your specific situation.

Preface: Whatever you tax, you get less of. – Alan Greenspan

Cryptocurrency and Virtual Currency Taxation Guidance

Virtual currency transactions are taxable per IRS legislation just like transactions in any other taxable sales of property, e.g. real estate or stocks. The IRS is also increasingly aware that some taxpayers with virtual currency transactions may have incorrectly reported or completely failed to report income and pay the related tax on virtual currency gains. Therefore, it is actively addressing potential non-compliance in this area. So, millions of taxpayers may find themselves the target of a new IRS initiative called Operation Hidden Treasure.

Virtual Currency

Virtual currency is a digital representation of value, other than a representation of the U.S. dollar or a foreign currency i.e. “real currency”, that functions as a unit of account, a store of value, and a medium of exchange within in jurisdication. Some virtual currencies are convertible, which means that they have an equivalent value in real currency or act as a substitute for real currency.  The IRS uses the term “virtual currency” to describe the various types of convertible virtual currency that are used as a medium of exchange, such as digital currency and cryptocurrency.

Cryptocurrency. Cryptocurrency is a type of virtual currency that uses cryptography to secure transactions that are digitally recorded on a distributed ledger, such as a blockchain. Distributed ledger technology uses independent digital systems to record, share, and synchronize transactions, the details of which are recorded in multiple places at the same time with no central data store or administration functionality. A transaction involving cryptocurrency that is recorded on a distributed ledger is referred to as an “on-chain” transaction; a transaction that is not recorded on the distributed ledger is referred to as an “off-chain” transaction.

Regardless of the label applied, if a particular asset has the characteristics of virtual currency, it is virtual currency for IRS tax purposes. In general, virtual currency is treated as property and general tax principles applicable to property transactions apply to transactions using virtual currency.

Sale or Exchange of Virtual Currency

When a person sells virtual currency, they must recognize any gain or loss on the sale, subject to any limitations on the deductibility of losses. The gain or loss is the difference between adjusted basis in the virtual currency and the amount received in exchange for the virtual currency, which should be reported on the Federal income tax return in U.S. dollars. The basis is the amount spent to acquire the virtual currency, including fees, commissions, and other acquisition costs in U.S. dollars. The adjusted basis is basis increased by certain expenditures and decreased by certain deductions or credits in U.S. dollars.

Transfer of property. If virtual currency is exchanged for property, the gain or loss is the difference between the fair market value of the property received and adjusted basis in the virtual currency exchanged. If a taxpayer transfers property held as a capital asset in exchange for virtual currency, they will recognize a capital gain or loss.  If they transfer property that is not a capital asset in exchange for virtual currency, they will recognize an ordinary gain or loss.

Transfer of services. Generally, self-employment income includes all gross income derived by an individual from any trade or business carried on by the individual as other than an employee.  Consequently, the fair market value of virtual currency received for services performed as an independent contractor, measured in U.S. dollars as of the date of receipt, constitutes self-employment income and is subject to the self-employment tax.

In addition, the medium of remuneration for services is immaterial to the determination of whether the remuneration constitutes wages for employment tax purposes.  Consequently, the fair market value of virtual currency paid as wages, measured in U.S. dollars at the date of receipt, is subject to Federal income tax withholding, Federal Insurance Contributions Act (FICA) tax, and Federal Unemployment Tax Act (FUTA) tax and must be reported on Form W-2, Wage and Tax Statement.

The amount of income a taxpayer must recognize is the fair market value of the virtual currency, in U.S. dollars, when received.  In an on-chain transaction, the taxpayer receives the virtual currency on the date and at the time the transaction is recorded on the distributed ledger.

If a taxpayer pays for a service using virtual currency that they hold as a capital asset, then they have exchanged a capital asset for that service and will have a capital gain or loss. The gain or loss is the difference between the fair market value of the services received and the adjusted basis in the virtual currency exchanged.

Cryptocurrency Transactions and Hard Forks

A hard fork occurs when a cryptocurrency undergoes a protocol change resulting in a permanent diversion from the legacy distributed ledger. This may result in the creation of a new cryptocurrency on a new distributed ledger in addition to the legacy cryptocurrency on the legacy distributed ledger. If the cryptocurrency went through a hard fork, but the taxpayer did not receive any new cryptocurrency, whether through an airdrop (a distribution of cryptocurrency to multiple taxpayers’ distributed ledger addresses) or some other kind of transfer, the taxpayer doesn’t have taxable income. If a hard fork is followed by an airdrop and the taxpayer receives new cryptocurrency, they have taxable income in the tax year they receive that cryptocurrency.

Summary

This blog highlights some of the complex tax rules for virtual currency transactions and promotes compliance with Operation Hidden Treasure. We encourage you to maintain records that document receipt, purchase date, cost basis, fair value at the time of sale, exchange or other dispositions of all your virtual currency ownership. Please contact our office if you would like additional guidance on when and how to report and treat your transactions related to virtual currency and cryptocurrency.

 

Preface: We all want a simpler code, but tax reform is about much more. It is about ensuring that everyone pays their fair share. The tax code is also used to promote behavior that we as a nation support, such as home ownership or charitable contributions. –Charles B. Rangel

Tax Planning: Charitable Giving

The majority of taxpayers are probably already aware that they can get an income tax deduction for a monetary gift to a charity when itemizing tax filing deductions on Schedule A. But there is a lot more to charitable giving.

Firstly, under the current tax legislation, for example, you are permitted to give appreciated property to a charity without being taxed on the appreciated gains. In addition, fort these reasons, and more, charitable giving may be an important part of your overall estate planning. These benefits can be achieved, though, only if you meet various requirements including substantiation requirements, percentage limitations and other restrictions. This blog is to introduce you to some of these charitable giving requirements and tax saving techniques.

To begin, let’s look at the basics –  Your charitable contribution giving can help minimize your tax bills only if you itemize your deductions. Once you do, the amount of your savings varies depending on your tax bracket and will be greater for contributions that are also deductible for state and local income tax purposes.

An individual may deduct any qualified charitable contribution as long as the contribution does not exceed the individual’s adjusted gross income.

Non-Itemizing Tax-Payers

The Coronavirus Aid, Relief, and Economic Security (CARES) Act allows an above-the-line deduction for non-itemizers in tax year 2020, However, unlike the provision under the CARES Act, the deduction for 2021 is claimed as deduction in calculating taxable income and not as an above-the-line deduction in calculating adjusted gross income. Individuals can take a $300 deduction against taxable income even if they do not itemize. The contribution must be made in cash. The cash must be contributed to churches, nonprofit educational institutions, nonprofit medical institutions, public charities, or any other qualifying 501c3 organization.

Itemizing Tax-Payers

Under the 2017 Tax Cuts and Jobs Act, the percentage limitation on the charitable deduction contribution base is increased from 50 percent to 60 percent of an individual’s adjusted gross income for cash donations to public charities in 2018 through 2025. There is an even greater benefit, because in addition, for 2021 you can elect to deduct up to 100 percent of your AGI with charitable contributions (formerly 60 percent prior to the CARES Act).

The income-based percentage limit is temporarily eliminated for an individual taxpayer’s cash charitable contributions to public charities, private foundations other than a supporting private foundation, and certain governmental units for 2020 and 2021. An individual may deduct any qualified charitable contribution as long as the contribution does not exceed the individual’s adjusted gross income.

Generally, a bank record or written communication from the charity indicating its name, the date of the contribution and the amount of the contribution is adequate.

An individual may carry forward for five years any qualifying cash contributions that exceeds his or her adjusted gross income. Partners in a partnership and shareholders in an S corporation may also deduct qualified charitable contributions that do not exceed their adjusted gross income.

Contributions to certain private foundations, veterans’ organizations, fraternal societies, and cemetery organizations are limited to 30 percent of adjusted gross income. A special limitation also applies to certain gifts of long-term capital gain property.

Contributions must be paid in cash or other property before the close of your tax year to be deductible, whether you use the cash or accrual method.

Taxpayers over 70 ½ years of age are allowed an exclusion from gross income for distributions from their IRA made directly to a charitable organization of up to $100,000 ($100,000 for each spouse on a joint return). A qualified charitable distribution counts toward satisfying a taxpayer’s required minimum distributions from a traditional IRA.

Contributions must be paid in cash or other property before the close of your tax year to be deductible, whether you use the cash or accrual method. Your donations must be substantiated. Generally, a bank record or written communication from the charity indicating its name, the date of the contribution and the amount of the contribution is adequate. If these records are not kept for each donation made, no deduction is allowed. Remember, these rules apply no matter how small the donation.

However, there are stricter requirements for donations of $250 or more and for donations of cars, trucks, boats, and aircraft. Additionally, appraisals are required for large gifts of property other than cash. Finally, donations of clothing and household gifts must be in good used condition or better to be deductible.

There are other special charitable giving techniques beyond the usual gifts of cash. These include, among others, a bargain sale to a charity, a gift of a remainder interest in your residence and a transfer to a charity in exchange for an annuity.

If you enjoy charitable giving as part of your tax planning, please do not hesitate to contact us with your tax questions about any of the tax giving benefits raised in this blog.

 

 

Preface: Education is what remains after one has forgotten what one has learned in school. — Albert Einstein

Educational Improvement Tax Credits with Special Purpose Entity (SPE)  

Pennsylvania’s Educational Improvement Tax Credit (a.k.a. EITC Program) is a tax credit-based program that provides charitably inclined individuals and businesses to give educational support to qualifying Pennsylvania private schools in the form of a tax credit.

These Pennsylvania tax credits are obtained from donations to a qualifying educational organization through an approved EITC vehicle. For example, with an EITC contribution, qualifying individuals and businesses can receive PA tax credits up to 90% for their qualifying and approved organization charitable contributions, so a $3,000 donation can give you a $2,700 credit towards your Pennsylvania income taxes.

Often, too many qualifying businesses do not capitalize on the opportunity to encourage funding the future of local schools and aspiring students with this special Pennsylvania tax credit. While the EITC Program has been available in Pennsylvania for more than a decade, recent revision provides these qualified credits with a simplified Special Purpose Entity investment.

A Special Purpose Entity is a pass-through partnership established solely to make contributions to schools through Pennsylvania’s Educational Improvement Tax Credit (EITC) program and distribute the tax credits received to its members.

There exist several Special Purpose Entity (SPE) participation opportunities that comprise a partnership K-1 investment that confers members the chance to obtain a credit that begins with an investment threshold of around $3,000. Therefore, SPE investments are ideal for taxpayers with $100,000 or more of taxable Pennsylvania income.

Additionally, there is a minimal barrier to entry for approval to participate in an SPE for an EITC credit. The process includes a one or perhaps two-page application where you designate the school(s) you wish to fund and the donation amount applicable to each. Once your application is approved, the SPE will communicate expectations of when they request the contribution check.

Following the end of the calendar year, SPE members obtain Federal and State K-1 forms, as with any partnership interest. The Federal Form K-1 shows your investment and Federal charitable contribution amount of the 10% of non-qualifying credit payment. In addition, the PA K- 1 allocates members a 90% PA tax credit, filed on a members PA-40 as other credits.

Who can join SPEs?

• • • • Legal entities and individuals who are owners or employees of an LLC, partnership, or corporation (but not sole proprietorship)
      • Individuals who own stock in any public company registered to pay tax in Pennsylvania2

What are the benefits of joining the SPE?

• • • • Receiving 90% of your contribution as a Pennsylvania tax credit;
      • Being able to direct your contribution to a private Pennsylvania school;
      • Being able to contribute the amount desired as an individual rather than through business ownership percentage;
      • Participate in the tax credit program in a Pennsylvania business partnership with out-of-state business owners who can’t benefit from the program.

If you think an SPE investment is of interest to you, or would like more information on SPE participation or paying your Pennsylvania income taxes while funding private education, please contact our office.

 

Structural vs. Cyclical: The Great Inflation Debate

Event: Breakfast Presentation 
Date: July 27, 2021

Location: Shady Maple Smorgasbord 
Speaker: Michael Coolbaugh

Inflation is all the rage. Today’s media narrative is fixated on inflation and what it might mean for your investments, career and business ventures. Unfortunately, what often gets lost in the media blitz is the difference between structural and cyclical. In our discussion, we’ll touch on which of these forces are at play – and in what direction – and what it means for economic decision making.”

Event Schedule:

7:30AM  Buffet Breakfast

8:20AM  Introduction

8:30AM  Structural vs. Cyclical: The Great Inflation Debate | Webcast Presentation

9:30AM  Adjourn

Free for Clients and Friends of the Firm

Space is limited! Please RSVP by July 21, 2021 to reserve your space!

Email attendee names and business affiliation with “July 27th Presentation” in subject line to: accounting@saudercpa.com

“Michael Coolbaugh is the Founder and Chief Investment Officer of the alternative investment firm, Strom Capital Management LLC. In addition to his responsibilities at Strom, Mr. Coolbaugh has also served as the Chief Macro Strategist at Element Macro Research LLC for the past two years. Prior to launching Element Macro Research, he worked at $10.7bn hedge fund of funds manager K2 Advisors, where he managed direct trading strategies for institutional client portfolios. Previously he spent a short stint at New York-based family office and proprietary trading firm Koyote Capital. And prior to that, he worked as an analyst at Paloma Partners Management Company, focused on merger arbitrage, event-driven and special opportunities.”

Disclaimer: This presentation is for educational and informational purposes only, and is not to be construed as information or other intentions including legal, tax, investment, financial, or other advice. Nothing contained in this presentation constitutes a solicitation, recommendation, endorsement, or offer by Sauder & Stoltzfus or any third party service provider to buy or sell any securities or other financial instruments in this or in in any other jurisdiction in which such solicitation or offer would be unlawful under the securities laws of such jurisdiction.

Preface: This Holiday Weekend we provide the following suggested reading for business owners; but this is for education purposes only, and we are not stating either that current apparent inflationary forces will or will not perhaps be contained in future months.

The Hyperinflation Survival Guide: Strategies for American Businesses

Of the books published regarding hyperinflation, this may be the only one that provides effective strategies for operating a business under conditions of a rapidly depreciating currency. “The Hyperinflation Survival Guide: Strategies for American Businesses” was written by Dr. Gerald Swanson (an associate professor of economics at the University of Arizona).

Harry E. Figgie, Jr. sponsored the research and production of this book. As it was originally printed in 1989, it was way ahead of its time.

However, this doesn’t change the fact that this book will prove to be an excellent resource for businessmen and individuals once the Federal Reserve’s destruction of the U.S. dollar enters its terminal stage. Amazon link to purchase

Read Free Here: The Hyperinflation Survival Guide: Strategies for American Businesses

Thought: Consider the fact as your read this, that increasing foreign bank account compliance now may more completely restrict the future ability to protect your future business currency in any increasing inflationary environment. There are now increasingly fewer and fewer safety nets in the business system outside of the Fed and Treasury.

Preface: “Ninety percent of all millionaires become so through owning real estate.” –Andrew Carnegie

2021 Tax Planning: Rental Real Estate as Qualified Business Income

For taxpayers who own and operate a rental real estate business, you may qualify to claim the business income deduction under Section 199A for your rental properties in one of two ways.

Qualified Business Income Deduction (QBID)

With the Tax Cuts and Jobs Act Congress enacted Section 199A to provide a deduction to non-corporate taxpayers of up to 20 percent of the taxpayer’s qualified business income from each of the taxpayer’s qualified trades or businesses, including those operated through a partnership, S corporation, or sole proprietorship. Individuals, estates and trusts can also deduct 20 percent of aggregate qualified real estate investment trust (REIT) dividends and qualified publicly traded partnership income.

With the current tax legislation, this tax deduction is effective for tax years beginning after December 31, 2017, and before January 1, 2026.

The Qualified Business Income deduction is calculated as the lesser of:

• • • combined qualified business income (up to 20% of qualified business income, plus 20% of REIT dividends and publicly traded partnership income); or
    • 20% of the excess (if any) of taxable income over net capital gain.

In order to qualify for the tax deduction, a business must be a qualified trade or business which is defined as any trade or business other than a specified service trade or business (SSTB) or the trade or business of performing services as an employee (attorneys, accountants and architects may not qualify for the 199A.)

Rentals meet the definition of a qualified trade or business in one of two ways:

• • • rentals to a commonly owned business; or
    • under a safe harbor for certain rental real estate activities.

Rentals to a commonly owned business

 A rental activity is treated as a qualified trade or business if it rents or licenses tangible or intangible property to a commonly owned trade or business. A business and a rental activity are commonly owned if the same person or group of persons directly or indirectly owns at least 50 percent of each of them. Businesses can meet this common-ownership test even if they are not otherwise eligible for aggregation.

 Safe Harbor for Rental Real Estate Enterprise

 Under a safe harbor, a rental real estate enterprise is treated as a trade or business for purposes of Section 199A only if:

• For tax years beginning after 2019, the taxpayer maintains sufficient contemporaneous records.
• Separate books and records are maintained to reflect income and expenses for each rental real estate enterprise; and
• At least 250 hours of rental services are performed per year; for qualifying purposes of the 250 hour rule, the following are considered rental services:

1. 1. 1. 1. 1. Advertising tasks for tenants to rent or lease real estate;
            2. Time negotiating or signing leases;
            3. Assembling and obtaining information on tenant applications;
            4. Collection of payments of rent income of the real estate;
            5. Tasks to repair or maintain the real estate;
            6. Management of the real estate;
            7. Purchase of supplies and materials for rental function;
            8. Supervision of contractors working to perform services or repairs for the real estate.

Please call our office to discuss how you perhaps may tax plan for your rental business to meet the requirements for Section 199A and take full advantage of the tax deductions available to you rental business.

Preface: “The economy is behaving in ways we did not expect, and new ideas will be needed if we are to prevent a repetition of the Great Recession and restore prosperity.” — Mervyn King

Browsing The End of Alchemy

Credit: Donald J. Sauder, CPA | CVA

Is something wrong with the global banking system? Mervyn King knows firsthand. With a decade of leadership at the Bank of England, including time during the 2008 global financial crisis, Mervyn writes about the history and future of banking and provides a clear clarion call for work to solving the long-term risk of a credit powered banking system.

In his 2016 448 page book The End of Alchemy Mervyn King outlines the growing global banking risks with over-leveraging of and excessive risk assumptions with real estate loans, derivatives, and financial engineering driven excess with banker facing career sanctions for missing forward profit guidance.

While economists apply econometric models to endeavor to make accurate predictions about the future for planning purposes, uncertainty abounds. That’s why we have insurance enterprises because such impossible to predict events exist that cannot be forecasted or measured. Without effective risk management tools as a necessary part of the capitalist system, the financial system would fail, and perhaps in grand way. Yet even with strong safety nets, the uncertainty that abounds can be still be alarming disruptive. This results in the fact that currently financial crisis’ and recessions as unavoidable outcomes of from the banking system structure.

In the free-market economy it is believed that people act in their own best interests. Yet, when one party fails to act in fairly and fails to keep a “contract” this behavior is harmful to board trust in the system and requires society to apply resolutions with a proper judicial system measures from checks and balances.

Money is only as good as the trust the users place in it. If trust were to fail in the financial system on a large scale the entire system would implode. Therefore, those who are part of the system must be willing prisoners to keep the system working effectively.

A central banks role is act as a lender of last resort, that is to provide whatever liquidity is necessary to maintain trust in the banking system. This is a “whatever credit is required will be provided” mechanism, but hence bank are to only loan for good collateral assets to prevent losses to depositors. When the necessary 2008 emergency funding was required, one major problem was that the liquidity required did not have good collateral to pillar the loans. Therefore, the riskiness of the loans required the lender of last resort to step up to the counter to keep the system intact, necessitated moral hazard on behalf of qualifying collateral.

To maintain the financial system, the obvious system disequilibrium is that over a duration of time debt has grown to excessive levels creating a low interest rate environment, that now imprisons the financial systems long-term viability. The Bank of England for 315 years from 1694 to 2009 never set bank interest rates below 2%. With banking system mired today in near zero rates, that 2% anchor level, never breached in centuries, seems to have perhaps untethered from the alchemy ship, and hence would raise the question – where are the banking systems risks taking the world?

The book looks at a fundamental question of why experts have talking about “recovery” for more than a decade after 2008. What trust should be placed in the systems long-term capacity to prevent a greater financial crisis from re-occurring?

What is next? Aside from the The End of Alchemy, the United States Federal Reserve has recently (June 2021) proposed what may be the first significant steps to launching a virtual currency, that would reshape the entire banking infrastructure and future of financial alchemy in the United States . This idea of a fully digital US dollar that was unthinkable just a few short years ago, has huge banking implication. One of key considerations of importance, is that with digital currency there are no needs for the icon of Main Street American for centuries – the cornerstone architecture of a local bank.

Is this simple a currency proposition that a digital dollar be used alongside the Us Dollar currency, perhaps the single largest shift in American commerce since the Tea Act in 1773 by the British Parliament? Who knows? Perhaps a John on the Isle of Patmos?

In The End of Alchemy Mervyn King gives a clear guide with the futuristic concept of a financial system with a “Pawnbroker for all Seasons” proposal. And, for the rest of story read: The End of Alchemy – Money, Banking, and the Future of the Global Economy

Preface: “You can’t tax business. Business doesn’t pay taxes. It collects taxes.” ― Ronald Reagan

2021 Tax Planning: Itemized Deductions 

There are two choices or standard strategies for deductions on your federal income tax return: 1) you can itemize deductions or 2) use the standard deduction. Maximizing these deduction benefits can optimize your taxes because any tax deduction ultimately reduces the amount of your taxable income.

Firstly, the standard tax deduction amount for federal tax filing purposes varies depending on the taxpayers income, age, and mostly your filing status. The amount is also adjusted annually for inflation. Certain taxpayers cannot use the standard deduction: These include I) A married individual filing separately whose spouse itemizes deductions. II) An individual who files a tax return for a period of less than 12 months because of a change in his or her annual accounting period. III) An individual who was a nonresident alien or a dual-status alien during the year. However, nonresident aliens who are married to a U.S. citizen or resident alien at the end of the year and who choose to be treated as U.S. residents for tax purposes can take the standard deduction.

The standard deduction for 2021 rises to $25,100 and increase of $300 from 220. For single and married filing separately taxpayers the standard deduction is $12,550 for 2021, up $150 from 2020. For heads of households the standard deduction is $18,800 for 2021.

The standard tax deduction is automatically available to any taxpayer and adjusted per filing status.

Secondly, Itemized deductions are a Form 1040 Schedule A deductions. This includes amounts paid for state and local income or sales taxes, real estate taxes, personal property taxes, or qualifying mortgage interest. Additionally, you may also include gifts to charity and part of the amount you paid for medical and dental expenses. You would usually benefit by itemizing on your tax filing if you:

1. 1. 1. 1. 1. Cannot use the standard deduction or the amount you can claim is limited;
            2. Paid Uninsured medical and dental expenses;
            3. Paid substantial interest or taxes on your home or a second home;
            4. Paid Investment Interest;
            5. Paid unreimbursed employee expenses;
            6. Made large charitable contributions to qualified charities.

The higher standard deduction under recent tax reform measures has led to fewer taxpayers itemizing their tax deductions currently and simpler tax filings. However, taxpayers may have an opportunity to itemize this year by keeping these tips in mind:

The deduction that taxpayers can claim for state and local income, sales and property taxes is limited. This deduction is limited to a combined, total deduction of $10,000. It is $5,000 if married filing separately. Any state and local taxes paid above this amount can’t be deducted.The deduction for mortgage interest is also limited to interest paid on a loan secured by the taxpayer’s main home or second home.

For homeowners who choose to refinance, they must use the loan to buy, build, or substantially improve their main home or second home, and the mortgage interest they may deduct is subject to the limits described as following when buying a home.Taxpayers who buy a new home this year can only deduct mortgage interest they pay on a total of $750,000 in qualifying debt for a first and second home ($375,000 if married filing separately).

For existing mortgages, if the loan originated on or before December 15, 2017, taxpayers continue to deduct interest on a total of $1 million in qualifying debt secured by first and second homes.

Many taxpayers often find unused items in good condition they can donate to a qualified charity and receive an itemized deduction benefit on Schedule A. These donations may qualify for a tax deduction. For some taxpayers, checks, credit card, or other money gifts is the preferred donation medium. For any donation whether items or money taxpayers must have proof of all cash and non-cash donations for itemizing.

Driving a personal vehicle while donating services on a trip sponsored by a qualified charity could qualify for a tax break. Itemizers can deduct 14 cents per mile for charitable mileage driven in 2021.

With itemized tax deductions you need to keep receipts on file, and with standard deduction their no extra effort to document the tax deduction. Generally, if itemized tax expenses exceed your standard tax deduction it is a good idea to itemize your taxes.

This year, when tax planning for 2021 be certain to discuss with your tax advisor the tax benefits of either itemizing taxes or stream-lining your 2021 tax filing with a standard deduction.

Preface:“A budget is more than just a series of numbers on a page; it is an embodiment of our values.”
– Barack Obama 

The Proposed Tax Reform Effects on S-Distributions and Gifts

The Department of the Treasury has published the Biden Administration’s proposed plan for raising revenues in 2022 detailing more specifically the tax effects of the new tax reform. In this blog we will highlight two tax items of interest to entrepreneurs and business owners.

SE taxes on S-Corporation Distributions and LLC Distributions

Firstly, the proposed tax reform will revise the tax laws for taxable self-employment earnings. The proposed tax reform would require both materially participating partners who receive guaranteed payments to pay self-employment taxes on their distributive shares of income for pass-through earnings above an AGI of $400,000. S-corporation shareholders while under current tax laws are required to pay a reasonable compensation wage and not taxes for self-employment taxes on distributions.

The tax reform would also subject S-Corporation earnings and distributions beginning in 2022, to the additional income taxes on earnings that would be subject to social security tax as the lesser of (i) the potential social security income, or (ii) the excess over $400,000 of the sum of the potential social security income, wage income subject to FICA under current law, and 92.35 percent of self-employment income subject to social security tax under current law.

This is a possible increase on taxes for business owners including those with an AGI less than $400,000. Of course while not final legislation, this may increase income tax costs for a multitude of small business owners with a pending closure of the social security taxes loophole.

Taxes on Appreciated Gifts

Under the proposed tax reform, a donor or deceased owner of an appreciated asset would realize a capital gain at the time of the transfer. In other words gifts with a built-in gain would tax taxable at transfer.

So for a donor, the amount of the gain realized would be the excess of the asset’s fair market value on the date of the gift over the donor’s basis in that asset. For a decedent, the amount of gain would be the excess of the asset’s fair market value on the decedent’s date of death over the decedent’s basis in that asset. That gain would be taxable income to the decedent on the Federal gift or estate tax return or on a separate capital gains return. Of course assets with gains of $1.0m or greater would be taxed at the 43% rate capital gains rate when including net investment taxes.

The use of capital losses and carry-forwards from transfers at death would be allowed against capital gains income and up to $3,000 of ordinary income on the decedent’s final income tax return, and the tax imposed on gains deemed realized at death would be deductible on the estate tax return of the decedent’s estate.

Interestingly for legacy businesses e.g. say family partnerships or trusts, a gain on unrealized appreciation also would be recognized by a trust, partnership, or other noncorporate entity that is the owner of property if that property has not been the subject of a recognition event within the prior 90 years. The first possible recognition event for any taxpayer under this provision would thus be December 31, 2030. For those graduates looking ahead — New Years Day 2031 has opportunity for valuation experts. A qualifying transfer would be defined under the gift and estate tax provisions and would be valued using the methodologies used for gift or estate tax purposes.

Payment of tax on the appreciation of certain family-owned and -operated businesses would not be due until the interest in the business is sold or the business ceases to be family-owned and operated. Furthermore, the proposal would allow a 15-year fixed-rate payment plan for the tax on appreciated assets transferred at death, other than liquid assets such as publicly traded financial assets and other than businesses for which the deferral election is made.

The Internal Revenue Service (IRS) would be authorized to require security at any time when there is a reasonable need for security to continue this deferral. That security may be provided from any person, and in any form, deemed acceptable by the IRS.

Summary: With IRS proposed changes from qualified valuation features to securitized collateral with legal documents, the proposed tax reforms will likely bring tax compliance factors to the forefront of business planning and strategy in the year ahead.