Category: Uncategorized

Preface: We will ensure that associates continue to possess unsurpassed product knowledge and maintain their dedication to customer service and respect for their colleagues and for the communities in which they work and live. — Arthur Blank

Home Depot: Two Good Guys Success

“Bernie Marcus and Arthur Blank dreamed up The Home Depot from a coffee shop in Los Angeles in 1978. Avid DIYers, they envisioned a superstore that would offer a huge variety of merchandise at great prices and with a highly-trained staff. Employees would not only be able to sell, but they would also be able to walk customers at every skill level through most any home repair or improvement.

With help from investment banker Ken Langone and merchandising guru Pat Farrah, Marcus and Blank opened the first two Home Depot stores in Atlanta the following year. The 60,000-square-foot warehouses dwarfed the competition with more items than any other hardware store. But the heart of Home Depot was the expertly trained floor associates who could teach customers how to handle a power tool, change a fill valve or lay tile. It wasn’t enough to sell or even tell — associates also had to be able to show. Soon, The Home Depot began offering DIY clinics, customer workshops and one-on-one sessions with customers.

Marcus and Blank implemented a customer “bill of rights,” which stated that customers should always expect the best assortment, quantity and price, as well as the help of a trained sales associate, when they visit a Home Depot store. These commitments were an extension of the company’s “whatever it takes” philosophy.” [i]

Bernie Marcus was the son of a poor Russian Orthodox Jewish immigrants. With ambitions to be a psychiatrist during his high school years, but unable to afford college or medical school, he faced his career realities and obtained a job in discount retail. His map to the entrepreneurial launch point began at United Shirt Shops eventually leading him to Two Guys discount Store in New Jersey. With a sharp-eye towards making the journey count, he was soon in charge of more than $1.0B in business at Two Guys. That position gave him the visibility for an opportunity to obtain an executive position with Handy Dan Home Improvements Centers where he was chairman and CEO.

Arthur Blank was raised in Queens New York. He learned the accounting trade and obtained a job at Arthur Young & Company following his formal education. Blank then joined his family’s pharmaceutical business that was purchased by Daylin Corporation. Daylin was an investor in Handy Dan Home Improvements Centers.

Bernie offered Arthur a job at Handy Dan and the two enterprising future business partners soon became best friends. Soon the Daylin Corporation CEO set the two free to pursue their dreams from that coffee shop conversation in 1978, by firing them both. As Bernie and Arthur made their way out the door, the CEO Mr. Langone told them to “open up that store you talked about!”

They initially considered such names as MB Warehouse and Bad Bernie’s Buildall, and then an investor suggested the name Home Depot.  Working business connections with Ken Langone a New York investment banker who organized the initial group of investors, and merchandising consultant Farrah helped that coffee shop dream to bud into a very successful enterprise.

When they opened the first store, Home Depot had so few customers that if Bernie or Arthur saw someone leaving their store empty-handed, they took it personally. The legacy of Home Depot is build on the tenet that they are in the training business, and that they are the college for learning flooring installation, kitchen and bath remodeling, millwork and even computerized registers.

Bernie and Arthur summarize the impressive ascension from humble beginnings to entrepreneurial  success as learning how important the folks are with whom they surrounded themselves, and that is their secret — they surrounded themselves with people at the Depot who were better, smarter, and more talented than they were, and invited them along on the Home Depot train.

[i] https://corporate.homedepot.com/about/history

Preface: Taxes are not good things, but if you want services, somebody’s got to pay them so they’re a necessary evil. –Michael Bloomberg.

Historical Individual Income Tax Trends

Credit: Benuel B. Glick, EA

Overview

It has been said that death and taxes are two unavoidable facts of life. While it may not be quite that simple, there may be some truth to it. And, as the humorist Will Rogers said a century ago, “The difference between death and taxes is death doesn’t get worse every time Congress meets.” In fact, death is a much-anticipated liberation for the follower of Jesus.

In this article, we’ll briefly explore the history of America’s individual federal income tax rates. We will not look at all the shades or governmental motives for taxation. Nor will we get into excise, tariff, sales and use, corporate, investment, real estate, payroll, social security, estate and inheritance, gift, capital gains, tangible personal property, or state and local taxes. “Taxes” and “tax rates” will be referring to “individual income taxes” and “individual income tax rates” respectively.

Trying to cover all the nuances of calculating the tax rates would quickly turn this article into a book, and the graph shown above only highlights overall trends since 1913. It does not reflect exemptions, phase-outs, credits, blended rates, etc. However, excluding many additional factors, it does reflect the highest and lowest marginal individual tax brackets for given time periods.

Background

With some exceptions, the American government collected the majority of its revenues from duties, tariffs and excise taxes prior to 1913. In 1913 the 16^th Amendment to the U.S. Constitution was ratified by the states – albeit with much resistance – and a new era of taxation was born. In strong opposition of the 16^th amendment, speaker of the Virginia House of Delegates Richard E. Byrd warned: “A hand from Washington will be stretched out and placed upon every man’s business; the eye of the Federal inspector will be in every man’s counting house.…” Sound prophetically accurate?

Included in the 16^th Amendment is the following: “The Congress shall have the power to lay and collect taxes on incomes, from whatever source derived, without apportionment among the several States, and without regard to any census or enumeration.” In short, the United States Congress was finally allowed to directly assess income taxes on individuals without permission from the states, or anyone else for that matter. It’s not difficult to guess what Congress did next.

Modest Beginnings

Initially, the tax rates appeared modest enough with taxable income under $20,000 taxed at 1%, and the highest bracket of over $500,000 taxed at 7%. That didn’t last long. In October of 1917, shortly after declaring war on Germany (WWI), Congress passed the War Revenue Act which drastically increased the tax rates. In 1918 the top bracket for income over $1M was taxed at a whopping 77%! As the saying goes, strike while the iron is hot.

The 1920’s are often referred to as the ‘roaring 20s’. World War 1 ended in 1918, and Congress nimbly lowered the top tax rates in subsequent years. The 1920’s saw a significant top rate reduction; however, it was accompanied by much lower thresholds. By 1925 the top rate was at 25%, but that included all taxable income over $100,000.

New Era of Taxation

Black Tuesday crashed onto the financial stage on October 29, 1929, and decades of high taxation followed suit. By 1940, the top tax rate was at 81.1% on income over $5M. Not satisfied with the current state of affairs, president Roosevelt actually pushed for a top tax rate of 100% and is quoted as saying to Congress in April 1942, “…I therefore believe that in time of this grave national danger, when all excess income should go to win the war, no American citizen ought to have a net income, after he has paid his taxes, of more than $25,000 a year.” In addition to his New Deal, he was calling for more funds to alleviate the WWII financial burdens. You might say he reached 94% of his goal by 1944 when tax rates had reached 94% on taxable income over $200,000!

Taxes remained high During the rest of the ‘40s and all through the ‘50s with a marginal top rate of 91% on income over $400,000 from 1954 through 1963. It’s important to maintain perspective though, an estimated fewer than 10,000 households would have reached the top bracket in 1950 per a Wall Street Journal article.

In 1964, president Lyndon B. Johnson signed the largest pre-Reagan-era tax cuts into law. A top marginal rate of 77% on income over $400,000 might sound ridiculous to the current generation, but it was a welcome relief for wealthy earners in 1964. The top rate dropped to 70% in 1965, accompanied by a threshold drop from $400,000 to $200,000. The top marginal rates bounced around within the 70-77% range during the remainder of the ‘60s and for all of the ‘70s, and were generally triggered by the top tier income over $200,000.

Modern Era of Taxation

When America’s 40^th president, Ronald Reagan, was inaugurated on January 20, 1981, the economic climate was ripe for a legislative revolution of sorts. During Reagan’s tenure in office – from 1981 to 1989 – he incrementally slashed the top marginal tax rate for individuals from 70% down to 28%. It is important to note that this top rate of 28% was triggered by taxable income of approximately $30,000.

In 1993, newly elected president Bill Clinton proposed an ambitious budget to cut the national deficit in half by 1997, and signed the Omnibus Budget Reconciliation Act into law. Among many other things, this bill increased the top marginal rate to 39.6%, accompanied by a $250,000 threshold.

From 1991 through 2018 we see a consistent top rate in the 35 – 40 percent range. The top marginal rate remained at 35% with a threshold of $311,950 from 2003 to 2012. In 2013 it increased to 39.6% accompanied with a $450,000 threshold. In 2018 the top marginal rate decreased to 37% with a $600,000 threshold.

In this article we glimpsed into the historical tax trends for American individuals over a 105 year span. I’ll refrain from making a prediction for the next 105, but I am reminded of a wise saying from millennia ago: “The thing that hath been, it is that which shall be; and that which is done is that which shall be done: and there is no new thing under the sun” (Ecclesiastes 1:9 KJV).

 

Preface: In the long run we shall have to pay our debts at a time that may be very inconvenient for our survival. — Norbert W.

Business and Nonbusiness Bad Debts

It is virtually inevitable that at one time or another some taxpayers will incur financial investment losses either in business or personal lives. One frequently occurring type of loss is a bad debt. Whether made in the course of business, or to a friend or relative, sometimes a loan simply cannot be repaid despite the best intentions of the debtor, and if there is little or no prospect that repayment can be made in the future.  In those cases, a “bad debt” may exist for tax purposes. The issue then becomes whether you can salvage some tax benefit from not being repaid.  Although this subject is fraught with complexities, we have outlined the basic tax principles below so you may consider your options.

The first step is ascertaining that a real debt exists. There must be a valid and legally enforceable obligation to pay you a fixed or “determinable” sum of money. Loans between family members, or other related parties such as corporations and their shareholders, are particularly scrutinized to make sure that they are really debts rather than disguised gifts, dividends, or contributions to the corporation’s capital. Therefore, if you are contemplating a loan to a related party, you must ensure that you treat the transaction as a true loan by taking the steps that an arm’s-length lender would take, such as putting it in writing and charging a reasonable rate of interest.

Secondly, it then must be determined if, and when, the debt has become totally or partially worthless. If so, that is a bad debt. One problem, however, is that the IRS often requires taxpayers to play a guessing game. A taxpayer might claim a bad debt loss when nonpayment is only probable, rather than a virtual certainty, and then the IRS may disallow the loss as premature because there is some possibility of repayment in a later year. On the other hand, if the taxpayer waits until repayment is clearly hopeless, the IRS may maintain that the debt was really worthless in a prior tax year and determine that the loss should have been taken then. Because of potential statute of limitations problems, we generally recommend that the loss be claimed in the earliest possible year that it can reasonably be argued to be worthless. There are a number of facts which might indicate worthlessness, including the debtor’s bankruptcy, but no one of them is decisive; it is the totality of circumstances that is determinative.

Once you have established that a bad debt exists, you must also determine whether that debt had a business or nonbusiness nature. The specific tax deduction to which you may be entitled often hinges upon this characterization. As you might expect, a business bad debt must be created or acquired, or become worthless, in the course of your trade or business. If you conduct a business in the form of a corporation, generally any debt held by the corporation is a business debt. Any debt not falling into the business category is a nonbusiness debt. A nonbusiness debt must be completely worthless before a loss can be taken, whereas a loss on a business bad debt can be taken when partial worthlessness can be established. Furthermore, nonbusiness bad debts are subject to the limitations on capital losses. Business bad debts, on the other hand, are deductible as ordinary losses in full against your other income.

As we said above, this is a complex topic and the preceding discussion can give only a rudimentary overview of all of the tax rules involved. If you are, or may be in a situation where these rules could affect you, please do not hesitate to contact us.

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.