ACCOUNTING
WHAT’S IN THE CONSOLIDATED APPROPRIATIONS ACT, 2021 (THE CAA, 2021) TAX RELIEF?
We hope that you are keeping yourself, your loved ones, and your community safe from COVID-19. The Consolidated Appropriations Act, 2021 (the CAA, 2021), signed into law on Dec. 27, is a further legislative response to the coronavirus (COVID-19) pandemic. The CAA, 2021, contain numerous provision related to individual and business income tax.
PART A – TAX PROVISIONS BENEFITTING INDIVIDUALS
NEW RECOVERY REBATE/ECONOMIC IMPACT PAYMENT
The Act provides for a refundable recovery rebate credit for 2020 that will paid in advance to eligible individuals, often automatically, early in 2021.These payments are in addition to the direct payments/rebates provided for in earlier federal legislation, which were called Economic Impact Payments (EIP).
The amount of the rebate is $600 per eligible family member – $600 per taxpayer ($1,200 for married filing jointly), plus $600 per qualifying child. Thus, a married couple with two qualifying children will receive $2,400, unless a phase-out applies. The credit is phased out at a rate of $5 per $100 of additional income starting at $150,000 of modified adjusted gross income for marrieds filing jointly and surviving spouses, $112,500 for heads of household, and $75,000 for single taxpayers.
Treasury must make the advance payments based on the information on 2019 tax returns. Eligible taxpayers who claimed their EIPs by providing information through the non-filer portal on IRS's website will also receive these additional payments.
Nonresident aliens, persons who qualify as another person's dependent, and estates or trusts don't qualify for the rebate. Taxpayers without a Social Security number are likewise ineligible, but if only one spouse on a joint return has a Social Security number, that spouse is eligible for a $600 payment. Children must also have a Social Security number to qualify for the $600-per-child payments.
Taxpayers who receive an advance payment that exceeds the amount of their eligible credit (as later calculated on the 2020 return) will not have to repay any of the payment. If the amount of the credit determined on the taxpayer's 2020 return exceeds the amount of the advance payment, taxpayers receive the difference as a refundable tax credit.
DEDUCTIONS
The Act makes permanent the 7.5%-of-adjusted-gross-income threshold on medical expense deductions, which was to have increased to 10% of adjusted gross income after 2020.
Mortgage insurance premium deduction is extended by one year. The Act extends through 2021 the deduction for qualifying mortgage insurance premiums, which was due to expire at the end of 2020. The deduction is subject to a phase-out based on the taxpayer's adjusted gross income.
Above-the-line charitable contribution deduction is extended through 2021; increased penalty for abuse. For 2020, individuals who don't itemize deductions can take up to a $300 above-the-line deduction for cash contributions to "qualified charitable organizations." The Act extends this above-the-line deduction through 2021 and increases the deduction allowed on a joint return to $600 (it remains at $300 for other taxpayers).
Extension through 2021 of allowance of charitable contributions up to 100% of an individual's adjusted gross income. In response to the COVID pandemic, the limit on cash charitable contributions by an individual in 2020 was increased to 100% of the individual's adjusted gross income. (The usual limit is 60% of adjusted gross income.) The Act extends this rule through 2021.
EXCLUSIONS FROM INCOME
Exclusion for discharge of qualified mortgage debt is extended, but limits on amount of excludable discharge are lowered. Usually, if a lender cancels a debt, such as a mortgage, the borrower must include the discharged amount in gross income. But under an exclusion that was due to expire at the end of 2020, a taxpayer can exclude from gross income up to $2 million ($1 million for married individuals filing separately) of discharge-of-debt income if "qualified principal residence debt" is discharged. The Act extends this exclusion through the end of 2025, but lowers the amount of debt that can be discharged tax-free to $750,000 ($375,000 for married individuals filing separately).
PART B – TAX PROVISIONS BENEFITTING BUSINESS
PAYCHECK PROTECTION PROGRAM LOANS
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Businesses are now allowed to deduct expenses associated with their forgiven PPP loans.
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The new law provides $284.45 billion to reopen and strengthen PPP for first and second time borrowers and reauthorizes the program through March 31, 2021.
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Develops a process for a small business to receive a second PPP if the small business has less than 300 employees and can demonstrate a revenue reduction of 25 percent in any calendar 2020 quarter as compared to 2019 calendar quarter.
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Creates a simplified PPP loan forgiveness application for loans under $150,000 whereby the borrower signs and submits a one-page certification that requires the borrower to list the loan amount, the number of employees retained, and the estimated total amount of the loan spent on payroll costs.
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Expands the list of eligible expenses to include covered operations (software, cloud computing and other human resources and accounting needs), PPE, covered supplier costs and damage costs due to public disturbances.
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Repeals the CARES Act provision that requires borrowers to deduct their EIDL Advance from their PPP loan forgiveness amount.
EXTENSION OF THE EMPLOYEE RETENTION CREDIT
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Beginning on Jan. 1, 2021 and through June 30, 2021, the provision:
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Increases the payroll tax credit rate from 50 percent to 70 percent of qualified wages.
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Expands eligibility for the credit by reducing the required year-over-year gross receipts decline from 50% to 20% and provides a safe harbor allowing employers to use prior quarter gross receipts to determine eligibility.
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Increases the limit on per-employee creditable wages from $10,000 for the year to $10,000 for each quarter.
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Increases the 100-employee delineation for determining the relevant qualified wage base to employers with 500 or fewer employees.
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BUSNESS MEAL DEDUCTION
The Act provides that expenses for business-related food and beverages provided by a restaurant are 100% deductible if they are paid or incurred in calendar years 2021 or 2022, instead of being subject to the 50% limit that generally applies to business meals.
Sanjay Gupta, CPA, FCA, who has 33 years of experience in accounting and taxes is based in Plantation. He can be reached at [email protected] or visit www.sanjayguptacpa.com
FINANCE
Key Estate Planning Documents You Need
There are five estate planning documents you may need, regardless of your age, health, or wealth:
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Durable power of attorney
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Advance medical directives
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Will
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Letter of instruction
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Living trust.
The last document, a living trust, isn't always necessary, but it's included here because it's a vital component of many estate plans.
Durable power of attorney
A durable power of attorney (DPOA) can help protect your property in the event you become physically unable or mentally incompetent to handle financial matters. If no one is ready to look after your financial affairs when you can't, your property may be wasted, abused, or lost.
A DPOA allows you to authorize someone else to act on your behalf, so he or she can do things like pay everyday expenses, collect benefits, watch over your investments, and file taxes.
There are two types of DPOAs: (1) an immediate DPOA, which is effective immediately (this may be appropriate, for example, if you face a serious operation or illness), and (2) a springing DPOA, which is not effective unless you have become incapacitated.
Caution: A springing DPOA is not permitted in some states, so you'll want to check with an attorney.
Advance medical directives
Advance medical directives let others know what medical treatment you would want, or allows someone to make medical decisions for you, in the event you can't express your wishes yourself. If you don't have an advance medical directive, medical care providers must prolong your life using artificial means, if necessary. With today's technology, physicians can sustain you for days and weeks (if not months or even years).
There are three types of advance medical directives. Each state allows only a certain type (or types). You may find that one, two, or all three types are necessary to carry out all of your wishes for medical treatment. (Just make sure all documents are consistent.)
First, a living will allows you to approve or decline certain types of medical care, even if you will die as a result of that choice. In most states, living wills take effect only under certain circumstances, such as terminal injury or illness. Generally, one can be used only to decline medical treatment that "serves only to postpone the moment of death." In those states that do not allow living wills, you may still want to have one to serve as evidence of your wishes.
Second, a durable power of attorney for health care (known as a health-care proxy in some states) allows you to appoint a representative to make medical decisions for you. You decide how much power your representative will or won't have.
Finally, a Do Not Resuscitate order (DNR) is a doctor's order that tells medical personnel not to perform CPR if you go into cardiac arrest. There are two types of DNRs. One is effective only while you are hospitalized. The other is used while you are outside the hospital.
Will
A will is often said to be the cornerstone of any estate plan. The main purpose of a will is to disburse property to heirs after your death. If you don't leave a will, disbursements will be made according to state law, which might not be what you would want.
There are two other equally important aspects of a will:
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You can name the person (executor) who will manage and settle your estate. If you do not name someone, the court will appoint an administrator, who might not be someone you would choose.
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You can name a legal guardian for minor children or dependents with special needs. If you don't appoint a guardian, the state will appoint one for you.
Keep in mind that a will is a legal document, and the courts are very reluctant to overturn any provisions within it. Therefore, it's crucial that your will be well written and articulated, and properly executed under your state's laws. It's also important to keep your will up-to-date.
Letter of instruction
A letter of instruction (also called a testamentary letter or side letter) is an informal, nonlegal document that generally accompanies your will and is used to express your personal thoughts and directions regarding what is in the will (or about other things, such as your burial wishes or where to locate other documents). This can be the most helpful document you leave for your family members and your executor.
Unlike your will, a letter of instruction remains private. Therefore, it is an opportunity to say the things you would rather not make public.
A letter of instruction is not a substitute for a will. Any directions you include in the letter are only suggestions and are not binding. The people to whom you address the letter may follow or disregard any instructions.
Living trust
A living trust (also known as a revocable or inter vivos trust) is a separate legal entity you create to own property, such as your home or investments. The trust is called a living trust because it's meant to function while you're alive. You control the property in the trust, and, whenever you wish, you can change the trust terms, transfer property in and out of the trust, or end the trust altogether.
Not everyone needs a living trust, but it can be used to accomplish various purposes. The primary function is typically to avoid probate. This is possible because property in a living trust is not included in the probate estate.
Depending on your situation and your state's laws, the probate process can be simple, easy, and inexpensive, or it can be relatively complex, resulting in delay and expense. This may be the case, for instance, if you own property in more than one state or in a foreign country, or have heirs that live overseas.
Further, probate takes time, and your property generally won't be distributed until the process is completed. A small family allowance is sometimes paid, but it may be insufficient to provide for a family's ongoing needs. Transferring property through a living trust provides for a quicker, almost immediate transfer of property to those who need it.
Probate can also interfere with the management of property like a closely held business or stock portfolio. Although your executor is responsible for managing the property until probate is completed, he or she may not have the expertise or authority to make significant management decisions, and the property may lose value. Transferring the property with a living trust can result in a smoother transition in management.
Finally, avoiding probate may be desirable if you're concerned about privacy. Probated documents (e.g., will, inventory) become a matter of public record. Generally, a trust document does not.
Caution: Although a living trust transfers property like a will, you should still also have a will because the trust will be unable to accomplish certain things that only a will can, such as naming an executor or a guardian for minor children.
Tip: There are other ways to avoid the probate process besides creating a living trust, such as titling property jointly.
Caution: Living trusts do not generally minimize estate taxes or protect property from future creditors or ex-spouses.
IMPORTANT DISCLOSURES
Securities offered through Sage Point Financial, Inc., (SPF), member FINRA/SIPC. SPF is separately owned and other entities and/or marketing names, products or services referenced here are independent of SPF, Fixed and/or Traditional Insurance Services may be offered through Capital Insurance & Asset Protection LLC, which is not affiliated with SPF or registered as a broker-dealer.
Broadridge Investor Communication Solutions, Inc. does not provide investment, tax, or legal advice. The information presented here is not specific to any individual's personal circumstances. To the extent that this material concerns tax matters, it is not intended or written to be used, and cannot be used, by a taxpayer for the purpose of avoiding penalties that may be imposed by law. Each taxpayer should seek independent advice from a tax professional based on his or her individual circumstances. These materials are provided for general information and educational purposes based upon publicly available information from sources believed to be reliable — we cannot assure the accuracy or completeness of these materials. The information in these materials may change at any time and without notice.
Haren Mehta, managing partner of Capital Insurance & Asset Protection in Tampa, can be reached at (813) 679-5204 or email [email protected]
BUSINESS BUZZ
Agile Change Leadership or is it Management?
These past few months, companies have made decisions once thought almost impossible a decade ago. Technology was at the forefront in helping businesses make the right decisions, most of these actions have come from assertive agile leadership.
However, effective management is crucial for the smooth running of any organization, but we agree that management can sometimes be a hindrance to effective decision making and strategy. The bureaucratic nature of management involved in disseminating information or handling "strategic" need weighs disproportionately to the action. Most have no issues over "management" in an organization or the traditional hierarchical approach, but there must be a "review" about how different organizational processes are handled to be resilient in disruptive times.
Why Agile Change Leadership, why management?
At the height of the pandemic, many businesses were almost defunct for a lack of organizational direction despite the plethora of "management" decisions. Most times, the failure of organizational goals or ideas are from constant suffocation from management.
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Goals are the top priority
When there is a clear path for an organization or deadline, agile leadership allows you to set apart "special teams." This team is independent of others and reports directly to the manager creating the group.
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Think outside of the box
Although a very cliché term, one has to the stretch the imagination. Once unshackled from the different layers of traditional routines, the job becomes easy. Most companies employed tough decisions during the pandemic, including lean production, remote work, home deliveries, improved production collaboration, and many more.
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Give the power to the right people
Most ideas are locked in the abyss of bureaucracy and the many layers of "management." When power is in the hands of the right people, it is a direct implementation of Pareto's principle: 80 percent of the work comes from 20 percent of the efforts. It shows that management is not at the top of what an organization needs for making groundbreaking decisions.
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People-centric is better than system-centric
The systems that makeup management are a group of people working together. However, if more attention is centered on people rather than systems, there arises the paradox of a failing ordered system. Also, research shows how "personal factors" are greater determinants to the success of an organization compared to "systems."
There is more support for agile change leadership, still, it does not invalidate how crucial management is to an organization.
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It is a tested approach
While agile leadership changes could lead to unprecedented results, strong management is a recipe for continuous success. It knows what is right for the organization and continues to improve the system.
Management is also responsible for the current path any organization takes. Where management pursues “tested-and-trusted”, agile change leadership seeks efficiency.
Management is crucial in any organization; the absence of it means the death of the "institution". However, management is becoming too "traditional" for our current ever-progressive world. The IT revolution sweeping across all sectors means every organization must position itself to be relevant in the digital space. It is one of the numerous decisions that need agile change leadership.
How organizations choose to act on the lessons from the Covid pandemic depends on how "agile" it wants to be.
Dr. Karyn Mathura-Arthur is an agile implementation leader with experience in Operational Excellence, Continuous Process Improvement, Business Transformation, Process Engineering and Organizational Change Management across multiple industries (banking, insurance, healthcare, telecom, government, retail, etc.). For comments and suggestions, email [email protected]