bookmark_borderRepairs or Capital Improvements?

Repairs
Property repair is any work that’s done to fix damage or deterioration. Repairs are meant to reinstate the property to the condition it was in before the damage occurred. However, some damage can’t be fixed through repair but replacement. In this case, the work is sometimes considered a capital improvement and treated differently when filing tax returns.

Capital Improvements
This is defined as any work done to better the state of the property beyond the original condition. Not only do capital improvements increase the property value but also extend its expected life. Also, capital improvements raise the income-generating capability of the property. They include additions, extensions, or changes in the character of the property (i.e through remodeling or renovations). Replacements, even when the original components are damaged beyond repair, are capital improvements.

To differentiate between capital improvement vs. repairs or maintenance work, you just have to consider whether the job increases the property value beyond the original or simply restores it to the value it was in before the damage or change occurred. Maintenance jobs can end up being capital improvements when the damage is extensive because a simple repair won’t suffice in fixing the problem. In this case, you should list the expense as a capital improvement as opposed to repair or maintenance work.

Posted in Tax

bookmark_borderEmployee Retention Credit

Q. A business associate of mine just told me about a tax credit available to employers who have kept employees on through the pandemic. What is this tax credit all about? Does my business qualify?

A. The Employee Retention Credit (ERTC) is a refundable credit that “eligible” employers can claim on “qualified wages”, including group health insurance costs, paid to employees between March 13, 2020 and September 30, 2021. The credit is claimed on either an original Form 941 or an amended Form 941-X. The rules for 2020 are somewhat different from the rules for 2021.

For 2020, you are an eligible employer for purposes of the credit (on a quarterly basis) if either of the following is true:
1. Your business was suspended or had to reduce business hours due to a government order.
2. Your business had a significant decline in gross receipts.

A significant decline in gross receipts begins:
On the first day of the first calendar quarter of 2020 for which an employer’s gross receipts are less than 50% of its gross receipts for the same calendar quarter in 2019.

The significant decline in gross receipts ends:
On the last day of the first calendar quarter following the calendar quarter in which gross receipts are more than 80% of its gross receipts for the same calendar quarter in 2019.

The credit is equal to 50% of up to $10,000 per quarter, per year in qualified wages paid to each employee (i.e., the maximum credit in 2020 for each employee is $5,000).

For 2021, you are an eligible employer for purposes of the credit if either of the following is true:
1. Your business was fully or partially suspended or had to reduce business hours due to a government order.

2.

  • For Q1, your business had a reduction in gross receipts of at least 20% compared to the same quarter in 2019 OR
    a 20% reduction in gross receipts from the previous quarter Q4 2020 compared to Q4 of 2019.
  • For Q2, your business had a reduction in gross receipts of at least 20% compared to the same quarter in 2019 OR
    a 20% reduction in gross receipts from the previous quarter Q1 2021 compared to Q1 of 2019.
  • For Q3, your business had a reduction in gross receipts of at least 20% compared to the same quarter in 2019 OR
    a 20% reduction in receipts from the previous quarter Q2 2021 compared to Q2 of 2019.
  • The credit is equal to 70% of up to $10,000 in qualified wages paid to each individual employee per quarter (i.e., the maximum credit in 2021 for each employee is $7,000 x 4 quarters = $28,000).

Conclusion

As you can see, there are many ways to qualify for the Employee Retention Credit (ERC) using gross receipts. If your business fails the gross receipts test, you may still qualify if your business was suspended by government order for part or all of a quarter.

“Qualified wages” are defined as:
. Wages in excess of the wages included on your PPP loan forgiveness application.
. Group health insurance costs.
. Wages other than wages paid to a more than 50% “owner”.
. Wages other than wages paid to any employees during the period when your business was suspended

Note that because of the attribution rules involved, ownership is calculated both directly and indirectly.
Indirect ownership is attributed to close relatives, whether or not they are direct owners (family attribution).

Note that when you file the income tax return for your business, you’ll have to reduce the deduction for employee wages by the amount of qualified wages claimed for the ERTC. The same is true for health insurance costs. If your business has already filed a 2020 income tax return, an amended business return will have to be filed, which will also necessitate an amended personal return.

Posted in Tax

bookmark_borderFiling for a deceased taxpayer

Q. I need to file a tax return for my brother who passed away three months ago. I am the executor of his estate. He was not married. Unfortunately, he didn’t keep good records, and I don’t have any of his information. What can I do?

A. You will need what is called a “Wage and Income Transcript” from the IRS. Your accountant will need 1) a signed power of attorney from you as executor, 2) a copy of the death certificate, 3) a copy of the “short certificate” from the court OR a copy of the will, 4) your name, address and social security number (in the event of a possible refund).

Posted in Tax

bookmark_borderReturning an economic impact payment

Q. My husband and I received $2,400 in May of 2020, but he passed away in March of 2020? What should I do?

If you received a paper check, and you have not cashed it:

  1. Write “Void” in the endorsement section on the back of the check.
  2. Mail the voided Treasury check immediately to the appropriate IRS location listed below.
  3. Don’t staple, bend, or paper clip the check.
  4. Include a brief explanation stating the reason for returning the check. 

If you received a paper check and you cashed it, or if the payment was a direct deposit:

  1. Write a check payable to “U.S. Treasury” and mail it to the IRS. (See Economic Impact Payment Information Center — Topic I: Returning the Economic Impact Payment | Internal Revenue Service (irs.gov) for the correct address.)
  2. Write on the memo line “2020 EIP” and your social security number.
  3. Include a brief explanation of the reason for returning the EIP.
Posted in Tax

bookmark_borderPer capita tax

Q. What is the “Per capita” tax all about?

A. The Per Capita Tax is a flat rate local tax payable by all adult residents living within a taxing jurisdiction. For most areas “adult” is defined as 18 years of age and older, though in some areas the minimum age may differ. This tax is due yearly and is based solely on residency, it is NOT dependent upon employment or property ownership.  Municipalities and school districts were given the right to collect a $10.00 per capita tax under ACT 511, and School Districts an additional $5.00 under ACT 679 – School Tax Code.

If the taxpayer who received the bill is now deceased, just return the bill and note the date of passing.

Posted in Tax

bookmark_borderMeals & entertainment in 2020

Q. I run a small heating and air conditioning business. I have several employees. I understand the IRS changed some of the rules regarding the deductibility of meals and entertainment expenses in 2020. Could you provide a quick summary?

A. The changes began in 2018, under the Tax Cuts and Jobs Act. Some of the changes were modified by IRS regulations issued in 2020.

Entertainment expenses – no deduction
Dues to social, athletic, business or civic clubs – no deduction
Meals included with entertainment, but not separately stated – no deduction
Meals included with entertainment, but separately stated – 50%
Meals, business discussed during – 50%
Meals, business discussed only before or after – no deduction
Meals, business discussed during, only employees attending – 100%
Meals while traveling on business, whether or not alone – 50%
Meals provided to employees in a recreational or social activity – 100%
Snacks provided in an employee “break-room” – no deduction

Posted in Tax

bookmark_borderBond amortization / accretion

Q. What does my broker mean when he talks about bond amortization and bond accretion?

A. When a bond is bought at a premium, i.e., at a price higher than the face value of the bond, the premium must be amortized over the remaining life of the bond. This amortized amount reduces the income from the bond that gets reported on your tax return. The amortized amount is calculated using the constant yield method.

When a bond is bought at a discount, i.e., at a price lower than the face value of the bond, the taxpayer has a choice. He can report the discount as additional interest income in the year the bond matures (or is sold). Alternatively, he can elect, under Sec 1278(b), to include a pro-rata portion of the the discount over the remaining life of the bond. This is known as bond accretion.

Posted in Tax

bookmark_borderCovid-related retirement distributions

Q. I’m 47. My work hours were reduced this year (2020) because of Covid. I had to pull some money out of my IRA to make ends meet. Someone told me that the rules are different this year when it comes to IRA distributions. Is that true?

A. Yes, there are several changes:

1. The CARES Act suspended the 10% penalty for retirement plan distributions (up to $100,000 in the aggregate) made in 2020 to “qualifying” individuals. A qualifying individual is defined as someone who:

. Has tested positive and been diagnosed with COVID-19
. Has a dependent or spouse who has tested positive and been diagnosed with COVID-19
. Experiences financial hardship due to them, their spouse or a member of their household:
Being quarantined, furloughed or laid off or having reduced work hours
Being unable to work due to lack of childcare
Closing or reducing hours of a business that they own or operate
Having pay or self-employment income reduced
Having a job offer rescinded or start date for a job delayed

2. RMD’s are not required in 2020, and can be rolled back into the retirement plan (by 12/31/20).

3. A covid-related distribution can be included in income over a three-year spread. You have the option of repaying the distribution with three years from the date the distribution was received, in which case you will need to file amended returns for the year(s) you included 1/3 of the distribution in income.

4. Qualifying individuals self-certify the distribution as being covid-related.

5.This is true even if the 1099 reflects otherwise.

Posted in Tax

bookmark_borderUS citizen, UK resident, UK Pension

Q. I am a US citizen. I have lived and worked in the UK for years. I am about to retire on a pension from my UK employer. The UK allows me to take a 25% lump-sum distribution tax-free, before monthly payouts begin. I know the UK will tax my monthly payouts. My question is this: since I am a US citizen, do I have to pay US federal income tax on the lump-sum distribution and/or the monthly payouts?

A. The answer to this question depends on a proper interpretation of the tax treaty between the US and the UK. A quick reading of Article 17 of the treaty would lead one to conclude that pension benefits received by a resident of the UK are only taxable in the UK, and that benefits received tax-free in the UK are also tax-free in the US.

However, the treaty contains a so-called “saving clause”, the effect of which is to prevent certain income (including pension income) from escaping tax in both countries. A US citizen is subject to tax on worldwide income, unless that income is wages specifically excluded under the foreign earned income exclusion provision in the Internal Revenue Code.

So, yes, the US will tax both the lump-sum distribution and the monthly payouts. Keep in mind, however, that the US tax can be offset by the tax paid to the UK. If you also qualify for the foreign earned income exclusion, note that you cannot take the exclusion and the credit on the same dollar of income.

Posted in Tax

bookmark_borderMortgage interest

Q. A friend of mine told me the tax laws on deducting mortgage interest changed a couple years ago. I guess I missed that. Can you explain?

A. The tax laws did change, beginning in 2018. Here’s a quick rundown:
1. For your main home, interest is deductible on a mortgage of up to $750,000. ($1,000,000 if you bought the home before 12/15/17. )
2. Home equity interest is no longer deductible, unless used to buy/build/improve your main home.

Posted in Tax