When 15-year depreciation for QIP might be better than 100% bonus depreciation

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Earlier this year, Congress finally passed legislation that corrects a drafting error related to real estate qualified improvement property (QIP). The correction is part of the Coronavirus Aid, Relief, and Economic Security (CARES) Act. The correction retroactively allows real property owners to depreciate QIP faster than before, either 100% the year the QIP is placed in service or over a 15-year period. The 100% bonus depreciation might sound a lot better, but in some cases 15-year depreciation will provide more tax savings in the long run.

Background

QIP is defined as an improvement to an interior portion of a nonresidential building that’s placed in service after the date the building was first placed in service. However, QIP doesn’t include any expenditures attributable to:

  • The enlargement of the building,
  • Any elevator or escalator, or
  • The building’s internal structural framework.

When drafting the Tax Cuts and Jobs Act (TCJA) in 2017, members of Congress made it clear that they intended to allow 100% first-year bonus depreciation for QIP placed in service in 2018 through 2022. Congress also intended to give you the option of claiming 15-year straight-line depreciation for QIP placed in service in 2018 and beyond.

Due to a drafting error, however, neither first-year bonus depreciation for QIP nor 15-year straight-line depreciation made it into the actual statutory language of the TCJA. The only way to fix the mistake was to make a so-called technical correction to the statutory language.

Error fixed

Because the CARES Act made that correction, QIP is now included in the Internal Revenue Code’s definition of 15-year property. In other words, it can be depreciated over 15 years for federal income tax purposes.

In turn, that classification makes QIP eligible for first-year bonus depreciation. So, real estate owners can now claim 100% first-year bonus depreciation for QIP placed in service in 2018 through 2022.

The technical correction has a retroactive effect for QIP that was placed in service in 2018 and 2019. Before the correction, QIP placed in service in those years generally had to be treated as nonresidential real property and depreciated over 39 years using the straight-line method.

15-year vs. bonus depreciation

Claiming 100% first-year bonus depreciation for QIP expenditures makes sense if your primary objective is to minimize taxable income for the year the QIP is placed in service. But should that be your primary objective? Here are three reasons you might choose to depreciate QIP over 15 years, rather than claim 100% first-year bonus depreciation:

  1. You may qualify for a lower tax rate on any gain from depreciation. When you sell property for which you’ve claimed 100% bonus depreciation for QIP expenditures, any taxable gain up to the amount of the bonus depreciation is treated as higher-taxed ordinary income rather than lower-taxed long-term capital gain. Under the current federal income tax regime, ordinary income recognized by an individual taxpayer can be taxed at rates as high as 37%.

In contrast, if you depreciate QIP over 15 years using the straight-line method, the current maximum individual federal rate on long-term gain attributable to that depreciation is “only” 25%. The gain is so-called “unrecaptured Section 1250 gain,” which is basically a special category of long-term capital gain. Higher income individuals may also owe the 3.8% net investment income tax on both ordinary income gain and long-term gain attributable to real estate depreciation.

The point is, claiming 100% bonus depreciation for QIP expenditures on a property can cause a higher tax rate on part of your gain when you eventually sell the property. Of course, if you don’t anticipate selling for many years, this consideration is less important.

  1. Depreciation deductions may be more valuable in future years. When you claim 100% first-year bonus depreciation for QIP expenditures, your depreciation deductions for future years are reduced by the bonus depreciation amount. If tax rates go up (or you end up in a higher tax bracket), you’ve effectively traded more valuable future-year depreciation write-offs for a less-valuable first-year bonus depreciation write-off. Of course, there’s no certainty about where future tax rates are headed.
  2. Claiming 100% bonus depreciation may lower your deduction for qualified business income (QBI) from a pass-through entity. Under the Section 199 deduction, sole proprietors and individual taxpayers who own pass-through entities, such as partnerships, S corporations, and limited liability companies treated as sole proprietorships, partnerships or S corporations for tax purposes, can claim a federal income tax deduction for up to 20% of QBI from the business activity. However, the Sec. 199 deduction from an activity can’t exceed 20% of net income from that activity for the year, calculated before the Sec. 199 deduction.

Net income from the activity of renting out nonresidential property will usually count as QBI. But claiming 100% first-year bonus depreciation for QIP expenditures for the property will lower the net income and potentially result in a lower Sec. 199  deduction.

In addition, the Sec. 199 deduction for a year can’t exceed 20% of your taxable income for that year, calculated before the Sec. 199 deduction and before any net capital gain (net long-term capital gains in excess of net short-term capital losses plus qualified dividends). So, moves that reduce your taxable income — such as claiming 100% bonus depreciation for QIP expenditures — can potentially have the adverse side effect of reducing your allowable Sec. 199 deduction.

The Sec. 199 deduction may be a use-it-or-lose it proposition, because it’s scheduled to expire after 2025. And it could disappear sooner, depending on political developments. If you forgo claiming bonus depreciation, your Sec. 199 deduction may be higher — and the foregone depreciation isn’t lost. You’ll just deduct it in later years when write-offs also might be more valuable because tax rates are higher.

Amended return opportunity

It’s also important to keep in mind that the CARES Act’s technical correction retroactively affects how you can depreciate QIP that was placed in service in 2018 and 2019. So, you may benefit from amending your 2018 or 2019 federal income tax returns already filed. Contact your tax advisor to determine the right course of action based on your situation.

The ins and outs of the easing of loss limitation rules

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To provide businesses and their owners with some relief from the financial effects of the COVID-19 crisis, the Coronavirus Aid, Relief, and Economic Security (CARES) Act eases the rules for claiming certain tax losses. Here’s a look at the — mostly temporary — modifications.

Liberalized rules for NOL carryforwards

The CARES Act includes favorable changes to the rules for deducting net operating losses (NOLs). First, it eases the taxable income limitation on deducting NOLs.

Under an unfavorable provision included in the 2017 Tax Cuts and Jobs Act (TCJA), an NOL arising in a tax year beginning in 2018 or beyond and carried forward to a later tax year couldn’t offset more than 80% of the taxable income for the carryforward year (the later tax year), calculated before the NOL deduction.

For tax years beginning before 2021, the CARES Act removes the TCJA taxable income limitation on deductions for prior-year NOLs carried forward into those years. So NOL carryforwards to tax years beginning before 2021 can be used to fully offset taxable income for those years.

For tax years beginning after 2020, the CARES Act allows NOL deductions equal to the sum of:

  • 100% of NOL carryforwards from pre-2018 tax years, plus
  • The lesser of 1) 100% of NOL carryforwards from post-2017 tax years, or 2) 80% of remaining taxable income (if any) after deducting NOL carryforwards from pre-2018 tax years.

As you can see, this is a complicated rule. But it’s more taxpayer-friendly than what the TCJA allowed. This favorable change is permanent.

Carrybacks allowed for certain NOLs

Under another unfavorable TCJA provision, NOLs arising in tax years ending after 2017 generally couldn’t be carried back to earlier tax years and used to offset taxable income in those earlier years. Instead, NOLs arising in tax years ending after 2017 could only be carried forward to later years. But they could be carried forward for an unlimited number of years.

Under the CARES Act, NOLs that arise in tax years beginning in 2018 through 2020 can be carried back for five years. For example, a taxpayer could carry back an NOL arising in 2020 to 2015 and recover federal income tax paid for that year. That could be very beneficial, because the federal income tax rates for both individuals and corporations were higher before the TCJA rate cuts took effect in 2018.

When advantageous, taxpayers can elect to waive the carryback privilege for an NOL and, instead, carry the NOL forward to future tax years. In addition, barring a further tax-law change, the no-carryback rule will come back into play for NOLs that arise in tax years beginning after 2020.

Excess business loss rules postponed

Another unfavorable TCJA provision disallowed current deductions for so-called “excess business losses” incurred by individuals and other noncorporate taxpayers in tax years beginning in 2018 through 2025.

An excess business loss is one that exceeds $250,000 ($500,000 for a married joint-filing couple). These limits are adjusted annually for inflation.

The CARES Act removes the excess business loss disallowance rule for losses arising in tax years beginning in 2018 through 2020.

Barring a further tax-law change, the excess business loss disallowance rule will come back into play for losses that arise in tax years beginning in 2021 through 2025. Any disallowed excess business loss for one of those years will be carried forward to the following year and can be deducted under the rules for NOL carryforwards.

Amended return opportunities

These taxpayer-friendly CARES Act changes can affect prior tax years for which you’ve already filed returns. Amended returns may be needed to benefit from the changes. Contact your tax professional for more information.

Relaxed limit on business interest deductions

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To provide tax relief to businesses suffering during the COVID-19 pandemic, the Coronavirus Aid, Relief, and Economic Security (CARES) Act temporarily relaxes the limitation on deductions for business interest expense. Here’s the story.

TCJA created new limitation

Before the Tax Cuts and Jobs Act (TCJA), some corporations were subject to the so-called “earnings stripping” rules. Those rules attempted to limit deductions by U.S. corporations for interest paid to related foreign entities that weren’t subject to U.S. income tax. Other taxpayers could generally fully deduct business interest expense (subject to other tax-law restrictions, such as the passive loss rules and the at-risk rules).

The TCJA shifted the business interest deduction playing field. For tax years beginning in 2018 and beyond, it limited a taxpayer’s deduction for business interest expense for the year to the sum of:

  • Business interest income,
  • 30% of adjusted taxable income (ATI), and
  • Floor plan financing interest expense paid by certain vehicle dealers.

Business interest expense is defined as interest on debt that’s properly allocable to a trade or business. However, the term trade or business doesn’t include the following excepted activities:

  • Performing services as an employee,
  • Electing real property businesses,
  • Electing farming businesses, and
  • Selling electrical energy, water, sewage disposal services, gas or steam through a local distribution system, or transportation of gas or steam by pipeline, if the rates are established by a specified governing body.

Interest expense that’s disallowed under the limitation rules is carried forward to future tax years indefinitely and treated as business interest expense incurred in the carry-forward year.

Small business exception

Many businesses are exempt from the interest expense limitation rules under what we’ll call the small business exception. Under this exception, a taxpayer (other than a tax shelter) is exempt from the limitation if the taxpayer’s average annual gross receipts are $25 million or less for the three-tax-year period ending with the preceding tax year. Businesses that have fluctuating annual gross receipts may qualify for the small business exception for some years but not for others — depending on the average annual receipts amount for the preceding three-tax-year period.

For example, if your business has three good years, it may be subject to the interest expense limitation rules for the following year. But if your business has a bad year, it may qualify for the small business exception for the following year. If average annual receipts are typically over the $25 million threshold, but not by much, judicious planning may allow you to qualify for the small business exception for at least some years.

Special rules for partnerships and S corporations

The interest expense deduction limitation rules get more complicated for businesses operating as partnerships, limited liability companies (LLCs) treated as partnerships for tax purposes and S corporations.

Basically, the limitation is calculated at both the entity level and at the owner level. Special rules prevent double counting of income when calculating an owner’s ATI for purposes of applying the limitation rules at the owner level.

IRS proposed regs set forth the special rules for applying the business interest expense limitation to partnerships and S corporations and their owners. The rules are complex and present significant compliance challenges.

Favorable CARES Act changes

The CARES Act generally allows businesses, unless they elect otherwise, to increase the interest expense deduction limitation to 50% of ATI for tax years beginning in 2019 or 2020. Businesses can also elect to use 2019 ATI to calculate the 2020 ATI limitation, which can allow for a larger deduction if 2020 ATI is less, which may be the case for many businesses.

For partnerships (including LLCs treated as partnerships for tax purposes), the 30% of ATI limitation remains in place for tax years beginning in 2019 but is 50% for 2020. Disallowed partnership business interest expense from a partnership’s 2019 tax year is allocated to partners and carried over to their 2020 tax years.

Unless a partner elects otherwise, 50% of carried-over partnership business interest expense from 2019 is deductible in the partner’s 2020 tax year without regard to the business interest expense limitation rules. The remaining 50% is subject to the normal limitation rules, calculated at the partner level, for carried-over partnership business interest expense. Like other businesses, partnerships can elect to use 2019 ATI to calculate the 2020 ATI limitation.

Help is available

As you can see, the business interest expense limitation rules are complicated. The temporarily relaxed limitations can allow affected businesses to reduce their federal tax liabilities for 2019 and 2020. However, for partnerships and partners, limitation rules are relaxed only for 2020. Your tax advisor can help your business take advantage of the relaxed rules for business interest expense deductions and benefit from other tax relief measures made available by the CARES Act.

© 2020

Small Business Best Practices for the Remainder of 2020

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This article discusses some of the best business practices that your business can partake in order to ensure or maintain results during this hard time. From knowing the weaknesses of your products to having a playbook and the right tools, these tips can be very useful as we continue on in 2020. Be sure to check out this article to view the full list!

To view this article, click HERE to access the original content.

Successful Employee Recruitment Strategies

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This article is aimed at helping small businesses grow in the right direction through the recruitment process. Some of the best practices outlined in this link are identifying what your vacant jobs entail, advertising, and holding introductory calls. Be sure to check out this link and review all of the strategies because recruitment is a vital key for success in any small business.

To view this article, click HERE to access the original content.

Family Business Trends in a Post-COVID-19 World

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This article discusses how the coronavirus pandemic has impacted the national economy, and in particular, family enterprises. However, being educated on emerging trends such as the rise of small cities, an increase in digitalization, and a slowdown in globalization can help your family business get back on the right track.

To view this article, click HERE to access the original content.

Thinking of Dumping Old Tax Records?

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Tired of having all those old tax records taking up drawer or closet space and collecting dust. Want to dump as much as you can? People often ask how long records must be kept and the amount of time IRS has to audit a return after it is filed.

How long to keep the records depends on the circumstances! In most cases, the federal statute of limitations can be used to help you determine how long to keep records. With certain exceptions, the statute for assessing additional tax is 3 years from the return due date or the date the return was filed, whichever is later.

However, the statute of limitations for many states is one year longer than the federal limitation. The reason for this is that the IRS provides state taxing authorities with federal audit results. The extra time on the state statute gives states adequate time to assess tax based on any federal tax adjustments.

In addition to lengthened state statutes clouding the recordkeeping issue, the federal 3-year rule has a number of exceptions:

  • The assessment period is extended to 6 years instead of 3 years if a taxpayer omits from gross income an amount that is more than 25 percent of the income reported on a tax return.
  • The IRS can assess additional tax with no time limit if a taxpayer: (a) doesn’t file a return; (b) files a false or fraudulent return in order to evade tax; or (c) deliberately tries to evade tax in any other manner.
  • The IRS gets an unlimited time to assess additional tax when a taxpayer files an unsigned return.

If no exception applies to you, for federal purposes, you can probably discard most of your tax records that are more than 3 years old; add a year or so to that if you live in a state with a longer statute.

 

Examples: Susan filed her 2016 tax return before the due date of April 17, 2017 (the 15th fell on weekend). She will be able to safely dispose of most of her records after April 17, 2020. On the other hand, Don filed his 2016 return on June 1, 2017. He needs to keep his records at least until June 1, 2020. In both cases, the taxpayers may opt to keep their records a year or two longer if their states have a statute of limitations longer than 3 years.

Important note: Even if you discard backup records, never throw away your file copy of any tax return (including W-2s). Often the return itself provides data that can be used in future tax return calculations or to prove amounts related to property transactions, social security benefits, etc. You should also keep certain records for longer than 3 years.

These records include:

  • Stock acquisition data. If you own stock in a corporation, keep the purchase records for at least 4 years after the year you sell the stock. This data will be needed in order to prove the amount of profit (or loss) you had on the sale.
  • Stock and mutual fund statements where you reinvest dividends. Many taxpayers use the dividends they receive from a stock or mutual fund to buy more shares of the same stock or fund. The reinvested amounts add to basis in the property and reduce gain when it is finally sold. Keep statements at least 4 years after final sale.
  • Tangible property purchase and improvement records. Keep records of home, investment, rental property, or business property acquisitions AND related capital improvements for at least 4 years after the underlying property is sold.

Tax return copies from prior years are also useful for the following:

  • Verifying Income. Lenders require copies of past tax returns on loan applications.
  • Validate Identity. Taxpayers who use tax-filing software products for the first time may need to provide their adjusted gross incomes from prior years’ tax returns to verify their identities.

The IRS Can Provide Copies of Prior-Year Returns – Taxpayers who have misplaced a copy of a prior year’s return can order a tax transcript from the IRS. This transcript summarizes the return information and includes AGI. This service is free and is available for the most current tax year once the IRS has processed the return. These transcripts are also available for the past 6 years’ returns. When ordering a transcript, always plan ahead, as online and phone orders typically take 5 to 10 days to fulfill. Mail orders of transcripts can take 30 days (75 days for full tax returns). There are three ways to order a transcript:

  • Online Using Get Transcript. Use Get Transcript Online on IRS.gov to view, print or download a copy for any of the transcript types. Users must authenticate their identities using the Secure Access process. Taxpayers who are unable to register or who prefer not to use Get Transcript Online may use Get Transcript by Mail to order a tax return or account transcript.
  • By phone. The number is 800-908-9946.
  • By mail. Taxpayers can complete and send either Form 4506-T or Form 4506T-EZ to the IRS to receive a transcript by mail.

Those who need an actual copy of a tax return can get one for the current tax year and for as far back as 6 years. The fee is $50 per copy. Complete Form 4506 to request a copy of a tax return and mail that form to the appropriate IRS office (which is listed on the form).

If you have questions about which records you should retain and which ones you can dispose of, please give our office a call.

What You Need to Know About Health Savings Accounts

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The Health Savings Account (HSA) is one of the most misunderstood and underused benefits in the Internal Revenue Code. Congress created HSAs as a way for individuals with high-deductible health plans (HDHPs) to save for medical expenses that are not covered by insurance due to the high-deductible provisions of their insurance coverage.

HSA as a Retirement Vehicle – Although the tax code refers to these plans as “health” savings accounts, an HSA can act as more than just a vehicle to pay medical expenses; it can also serve as a retirement account. For some taxpayers who have maxed out their retirement plan options, an HSA provides another resource for retirement savings—one that isn’t limited by income restrictions in the way that IRA contributions are.

Since there is no requirement that the funds be used to pay medical expenses, a taxpayer can pay medical expenses with other funds, allowing the HSA to grow (through account earnings and further tax-deductible contributions) until retirement. In addition, should the need arise, the taxpayer can still take tax-free distributions from the HSA to pay medical expenses. Unlike traditional IRAs, no minimum distributions are required from HSAs at any specific age.

Withdrawals from an HSA that aren’t used for medical expenses are taxable and subject to a 20% penalty, with one exception: an individual age 65 or older will pay income tax on non-medical related distributions from their HSA but won’t owe a penalty for using the funds for other than medical expenses.

 

Example: Henry, age 70, has an HSA account from which he withdraws $10,000 during the year. He also has unreimbursed medical expenses of $4,000. Of his $10,000 withdrawal, $6,000 ($10,000 – $4,000) is added to Henry’s income for the year, and the other $4,000 is both tax- and penalty-free. If Henry had been 64 years old or younger, he’d be taxed on the $6,000 and pay a penalty of $1,200 (20% of $6,000).

Eligible Individual – To be eligible for an HSA in a given month, an individual:

  1. must be covered under an HDHP on the first day of the month;
  2. must NOT also be covered by any other health plan (although there are some exceptions);
  3. must NOT be entitled to Medicare benefits (i.e., generally must be younger than age 65); and
  4. must NOT be claimed as a dependent on someone else’s return.

Any eligible individual—whether employed, unemployed or self-employed—can contribute to an HSA. Unlike with an IRA, there is no requirement that the individual have compensation, and there are no phase-out rules for high-income taxpayers. If an HSA is established by an employer, then the employee and/or the employer can contribute. Not just family members but any other person can make contributions to HSAs on behalf of eligible individuals. Both employer contributions and employee contributions made via the employer’s cafeteria plan are excluded from the employee’s gross income. Employees who make HSA contributions outside of their employers’ arrangements are eligible to take above-the-line deductions—that is, they don’t need to itemize deductions—for those contributions.

The Monetary Qualifications for an HDHP:

Minimum Annual Deductible Maximum Annual Out-Of-Pocket Expenses
Coverage 2020 2021 2020 2021
Self-Only $1,400 $1,400 $6,900 $7,000
Family $2,800 $2,800 $13,800 $14,000

Health Savings

Example: Family Plan Does Not Qualify: Joe has purchased a medical insurance plan for himself and his family. The plan pays the covered medical expenses of any member of Joe’s family if that family member has incurred covered medical expenses of over $1,000 during the year, even if the family as a whole has not incurred medical expenses of over $2,800 during that year. Thus, if Joe’s medical expenses are $1,500 during the year, the plan would pay $500. This plan does not qualify as an HDHP because it provides family coverage with an annual deductible of less than $2,800.

Example: Family Plan Qualifies: If the coverage for Joe and his family from the example above included a $5,000 family deductible and provided payments for covered medical expenses only if any member of Joe’s family incurred over $2,800 of expenses, the plan would then qualify as an HDHP.

Maximum Contribution Amounts – The amounts that can be contributed are determined on a monthly basis and are calculated by dividing the annual amounts shown below by 12. Thus, if an individual’s health plan only qualified that person for an HSA for 6 months out of the year, then that person’s contribution amount would be half of the amount shown.

 

Maximum Annual Contribution
Year 2020 2021
Self-Only $3,550 $3,600
Family  $7,100 $7,200

 

In addition to the amounts shown, an eligible individual who is age 55 or older can contribute an additional $1,000 per year.

How HSAs are Established – An eligible individual can establish one or more HSAs via a qualified HSA trustee or custodian (an insurance company, bank, or similar financial institution) in much the same way that an individual would establish an IRA. No permission or authorization from the IRS is required. The individual also is not required to have earned income. If employed, any eligible individual can establish an HSA with or without the employer’s involvement. Joint HSAs between a husband and wife are not allowed, however; each spouse must have a separate HSA (and only if eligible).

Qualified Medical Expenses – To be non-taxable and penalty-free, distributions must be for unreimbursed expenses paid by the HSA account owner, their spouse, or dependents for medical expenses that have the same definition as medical expenses for purposes of the medical itemized deduction.

Amounts paid for medicine or drugs are qualified medical expenses for HSA distribution purposes only if the medicine or drug is prescribed (determined without regard to whether such a drug is available without a prescription) or insulin.

The qualified medical expenses must be incurred only after the HSA has been established, and medical expenses paid or reimbursed by HSA distributions cannot also be claimed as medical expenses for itemized deduction purposes.

Generally, health insurance premiums are NOT qualified medical expenses for HSA purposes, except for the following:

  • Qualified long-term care insurance (but only up to the amount of the annual age-based limit that applies for deducting long-term care premiums as medical expenses);
  • COBRA health care continuation coverage;
  • Health care coverage while receiving unemployment compensation; and
  • For individuals age 65 or over, premiums for Medicare A, B, or D, Medicare HMO, and the employee share of premiums for employer-sponsored health insurance, including premiums for employer-sponsored retiree health insurance (but not Medigap policies).

Menstrual Products – Effective for tax years 2020 and later, the CARES Act added a provision that permits tax-free reimbursement from health savings accounts for costs of menstrual products.

Telehealth – The rule has been that taxpayers may only make contributions to HSAs while they are covered by a high-deductible health plan. However, the CARES Act allows a high-deductible health plan to provide telehealth and remote care services without a deductible for 2020 and 2021.

If you have questions related to the medical tax benefits of an HSA or how an HSA can supplement your retirement planning, please call our office.

Wealth Transition and Succession Planning: Best Practices for Businesses During COVID-19

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Regardless of the type of business you’re running, it’s safe to say that you’ve likely already been impacted by the ongoing COVID-19 pandemic that is making its way across the globe. With no complete end to the situation in sight, many have begun to try to settle into whatever this “new normal” actually is. They’re resuming their regular activities (at least as much as possible) and are once again attempting to continue to follow the path that they set for themselves and their organizations at the beginning of the year.

This, of course, presents its own fair share of challenges. Once you get your doors opened back up again, you may start to think about other important events down the line: valuations and appraisals, risk assessments, and succession planning.

Thanks in no small part due to COVID-19, many private enterprises and even family-owned businesses have been forced to dramatically rethink their points of view on these and other important wealth transition and succession planning topics. Not only that, but when you consider that roughly $68 trillion is set to be passed down from Baby Boomers to their beneficiaries over the next ten years – an unprecedented transfer of wealth – it’s clear that these are issues that must be assessed sooner rather than later.

Business Valuations in a COVID World

One of the more unfortunate impacts that COVID-19 has had in the last few months involves a decrease in small business values across the board. The fact that both actual and expected revenues and earnings have likely decreased for many organizations, coupled with an increase in interest-bearing debt and liquidity issues in the market at large, all have a lot to do with this issue.

At the same time, it is entirely possible to mitigate risk to that end by keeping a few key things in mind. First and foremost, focus your attention on cash flows, the cost of capital, and growth as much as possible. One of the most critical considerations for a proper business valuation in these times involves figuring out what, exactly, a recovery from COVID-19 will look like for your organization.

Obviously, certain industries have bounced back faster than others. Likewise, there are certain things that we just cannot know right now – like when a vaccine will be available and what effect that will have on the world. But you can focus on a few key areas – like whether you will experience a full recovery or only a partial recovery, and how long that impact will last – to make better determinations about projected cash flow and other growth-related factors.

On the plus side, all of this represents a unique opportunity for many people to take advantage of low small business valuations to minimize things like estate and gift taxes. Lower business valuations allow business owners like yourself to transfer a greater portion of your business assets and reduce your taxable estate. So, from that perspective, you’ll be able to gift assets against your lifetime exemption that would have previously been considered a taxable event had COVID-19 not occurred at all.

Mitigating Risk and Protecting Your Legacy

In general, you need to remember what the major goals of wealth transition and succession planning actually are: you’re attempting to preserve as much of your wealth AND your business as possible. It’s about making a plan that you can follow over time, yes – but it’s also about being flexible enough to evolve that plan as conditions can (and likely will) change.

Case in point: COVID-19’s impact on the supply chain. Even if your small business isn’t being directly impacted right now to the same degree as others, the same might not be true of your supply chain partners or even your largest customers. These could absolutely have a considerable impact on your own operations, and if your organization is particularly vulnerable to these types of issues, you need to start thinking about ways to mitigate them as soon as you can.

Likewise, you may be one of the lucky few businesses that wasn’t actually negatively impacted by COVID-19 at all. Some industries are absolutely thriving right now – with manufacturers of personal safety gear and even a lot of food and beverage manufacturers being among them.

If all of this describes your situation, it’s likely that you’ve seen a short-term increase in sales and, in all likelihood, profitability. How will this impact the future of your organization? Is this what the “new normal” looks like for you, or will you eventually return to pre-COVID levels in terms of sales and profitability? Do you have a way to determine this right now, or is time going to have to tell the story?

These are all critical questions that you need to try to answer to make the best possible decisions in terms of succession planning.

In the end, understand that wealth transition and succession planning were always complicated processes, and COVID-19 has not done anyone any favors. No matter what, you need to recognize that this is an inherently specific process: so much is impacted by your own unique circumstances and the facts surrounding your organization. Likewise, your end goals will play an important role in the decisions you make, along with how they may have changed in the last few months.

However, if you’re able to keep these core best practices in mind and look at things through this new pandemic lens, you’ll be able to create the right plan for your objectives with as few of the potential downsides as possible.

Individuals Have a New Opportunity to Receive $500 Economic Impact Payments for Their Children

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The Internal Revenue Service has announced it will reopen the registration period for federal beneficiaries with children who didn’t receive a $500 per child Economic Impact (stimulus) Payment earlier this year.

When to Apply – The IRS urges certain federal benefit recipients to use the IRS.gov Non-Filers tool between August 15 and September 30 to enter information on their qualifying children to receive the supplemental $500 payments.

Who Should Register – Those eligible to provide this information include people with qualifying children who receive Social Security retirement, survivor or disability benefits; Supplemental Security Income (SSI); Railroad Retirement benefits; and Veterans Affairs Compensation and Pension (C&P) benefits and did not file a tax return for 2018 or 2019.

The IRS anticipates the catch-up payments, equal to $500 per eligible child, will be issued by mid-October.

Already Used the Non-Filer Tool? – For those Social Security, SSI, Department of Veterans Affairs and Railroad Retirement Board beneficiaries who have already used the Non-Filers tool to provide information on their children, and who haven’t yet received the $500-per-child payment, no further action is needed. The IRS will automatically make a payment in October.

Haven’t Used the Non-Filer Tool? – For those who received Social Security, SSI, RRB or VA benefits and have not used the Non-Filers tool to provide information on their child or children, they should register online by Sept. 30 using the Non-Filers: Enter Payment Info Here tool, available exclusively on IRS.gov. However, anyone who filed or plans to file either a 2018 or 2019 tax return should file the tax return and not use this tool.

Any beneficiary who misses the Sept. 30 deadline will need to wait until next year and claim the Economic Impact Payment as a credit on their 2020 federal income tax return.

How Will Payment be Made? – Those who received their original Economic Impact Payment by direct deposit will also have any supplemental payment direct deposited to the same account. Others will receive a check. The status of the payments can be checked by using the Get My Payment tool on IRS.gov. In addition, a notice verifying the $500-per-child supplemental payment will be sent to each recipient and should be retained with other tax records.

Non-Filers – Those who are not required to file a tax return are still eligible to receive an Economic Impact Payment by using the Non-Filers’ tool – but they need to act by October 15 to receive their payment this year. Otherwise, they will need to wait until next year and claim it as a credit on their 2020 federal income tax return.

The Non-Filers tool is designed for people with incomes typically below $24,400 for married couples, and $12,200 for singles. This includes couples and individuals who are experiencing homelessness. People can qualify, even if they don’t work or have no earned income. But low- and moderate-income workers and working families eligible to receive special tax benefits, such as the Earned Income Tax Credit or Child Tax Credit, cannot use this tool. They will need to file a regular return.

If you have questions related to this child stimulus payment or stimulus payments in general, please give our office a call.