Required Minimum Distributions and Charitable Contributions

For those who are required to take a minimum required distribution (“RMD”) from an IRA, charitable donations may be the answer. An individual can offset the tax liability from an RMD by making a qualified charitable donation if he does not need the cash at the time of the distribution.

If an individual takes the RMD in a normal situation, the distribution goes towards taxable income. By using charitable donations, individuals can avoid receiving funds subject to tax while also avoid jumping into a higher tax bracket from the taxable distributions. If the funds are transferred directly to the charity, then the individual does not have to pay tax on the distribution, and the individual’s taxable income does not increase either.

Also, if individuals donate appreciated capital assets, they can avoid paying the capital gains tax and reduce taxable Required Minimum Distributions. Rather than donating plain cash, if individuals donate appreciated securities, they do not have to pay the tax on the gains and still receive the benefit of the fair market value of the donation because this offsets the RMD, and therefore the tax liability associated with the distribution.

There may be timing benefits that could result in major tax savings for 2021 due to COVID-19 that are the exception to the general rule. The government has suspended the requirement for people to take the required IRA payouts for 2020. In other words, you do not have to take your required minimum distribution for 2020 as a way to combat the economic impact of the coronavirus.

This may mean major tax savings for people who typically donate from their IRA to charities. Since there is no RMD for 2020 due to the CARES Act and charitable donations count towards the required distribution, it may be best for individuals to post pone donations until 2021 or later. In other words, rather than donating cash or capital assets in 2020 and having no RMD to offset, individuals could wait and make a larger donation when they are required to take RMD again. This way, taxpayers are able to reduce taxable income when the RMD comes due.

RMD will be required again in 2021 (in all likelihood), but perhaps it may be best to hold off even longer on making qualified charitable donations. For instance, individuals should make the largest donation when the taxable income outside of RMD is the highest. This way, taxpayers are able to take advantage of avoiding an increase in taxable income by offsetting the RMD and avoid reaching an even higher tax bracket.

This strategy to donate a higher dollar value donation may help reduce taxes in 2021 simply by holding off a little bit longer until mandatory distributions kick back in next year.  Please remember this article is not intended to be tax or legal advice and you should always consult directly with your tax attorney or tax advisors.  You can contact the McGuire Law Firm to speak directly with a tax attorney regarding any of your tax issues.

When Identity Theft Impacts Your Taxes

Identity theft can result in tax related issues as well as financial problems, so it is important to respond immediately so that the IRS can correct any fraudulent issues. Depending on whether the taxpayer or IRS discovers the fraudulent activity determines how the case is handled.

Typically, the IRS is the first to notice if there has been identity theft and will not process the return until it contacts the taxpayer. There are three types of letters the IRS may send in an identity theft situation – Letter 5071C, Letter 4883C, and Letter 5747C.  The first is the Letter 5071C which allows taxpayers to electronically verify their identity online. The Letter 4883C is sent to taxpayers and notifies them to call the IRS and verify whether they filed the tax return or not. Finally, Letter 5747C is issued for taxpayers who have experienced a data breach and need to verify their identity in person. These three letters essentially provide for an online, phone, and in person tier of identity protection.

Most frequently, if the IRS identifies the problem first, then it will send a Letter 4883C which requests verification of your identity within 30 days. These letters are issued when the IRS detects suspicious activity and are aimed to prevent any fraud. The IRS may require the proper taxpayer to file a paper return if a false return was filed on his behalf.

Taxpayers who discover the identity theft themselves without notification from the IRS should file a paper return if unable to file an electronic return. Also, the taxpayer needs to file Form 14039 – Identity Theft Affidavit and attach it to a paper return.  The IRS will reply with an acknowledgement letter and then the case will be transferred to the Identity Theft Victim Assistance organization if another return has already been filed on the taxpayer’s behalf. This organization works to correct any fraudulent returns filed as well as correct any personal information that is incorrect and update the taxpayer’s tax records to remove the fraudulent return.

Note, the IRS will mark a taxpayer’s information with having suffered from identity theft in order to prevent future issues. The IRS may also place taxpayers in the Identity Protection PIN program to provide another level of security to the taxpayer’s tax records. The taxpayer will receive a new IP PIN that must be entered on the appropriate year’s tax return and this number will change from year to year.

This article has been prepared by John McGuire.  John is a tax attorney at The McGuire Law Firm assisting individuals and business with various IRS issues, tax planning and other taxation matters related to partnerships, corporations and individuals.  Feel free to contact The McGuire Law

 

 

 

CARES Act Q&A

President Trump signed the Coronavirus Aid, Relief, and Economic Security Act “CARES Act” into law which provides relief funds to help stimulate the economy from the impact of the COVID-19 pandemic. Small businesses that would like to apply for a loan with reduced interest and potential forgiveness should apply through the Economic Injury Disaster Loan program on the Small Business Association website.  Below is are some of the frequent issues and questions we have received regarding the act.  Please make sure you consult directly with your attorney regarding any specific questions related to your business.

 Who is eligible for the Coronavirus disaster program loan and what is considered a small business?

Small businesses in every state are eligible to apply for a low interest loan due to the impact of Coronavirus. According to the CARES Act, business with fewer than 500 employees are eligible for loans under 7(a) of the Small Business Act.[1] Sole proprietors, independent contractors, and other self-employed individuals are eligible to received covered loans under the CARES Act.[2]

 

What is the maximum loan amount?

The maximum dollar amount for business loans under the CARES act is the lesser $10,000,000 or the following formula. Take the average monthly payments for payroll costs for the year prior to the date the loan is made multiplied by 2.5 and add the amount of outstanding loans made during the period from January 31, 2020 and ending on the date the loans are eligible for refinancing.[3] Note, this formula is slightly different for seasonal businesses, so unless an election is made, these seasonal business use payroll costs averages for the 12-week period beginning February 15, 2019.[4]

 

How may I spend my small business loan from the CARES Act?

According to the CARES Act Sec. 1102, loans provided by the federal government under the stimulus package may be used for payroll, employee salaries, mortgage interest payments, rent, utilities, and interest on other debt obligations that were incurred before the covered period.[5] Note, the covered period is February 15, 2020 and ends on June 30, 2020.[6]

 

Will my loan be forgiven under Section 1105 of the CARES Act?

Section 1106(b) of the CARES Act provides for forgiveness of indebtedness for several costs and payments including payroll, mortgage interest, covered rent obligation payments and utilities.

 

Typically, whenever a loan is forgiven, it is considered as relief of indebtedness and will be included as gross income for that taxable year. Section 1106(c) notes that the forgiven debt for purposes of the CARES Act specifically will be considered canceled indebtedness by lenders but Section 1106(i) will exclude the relief from gross income for tax purposes.

 

Note, the amount of loan forgiveness may be reduced by certain reductions in salaries or layoffs so maintaining the number of employees helps insure maximum loan potential from the Act.

 

What is considered a payroll cost?

Payroll costs are defined in the CARES Act through the Paycheck Protection Program and include payments to employees that are salaries, wages, commissions or other similar compensation, payment for cash tips, payment for vacation/medical/sick leave, group health care payments and insurance premiums, retirement benefit payments, and payments of state/local tax assessed based on employee compensation.[7] Similarly, payroll costs

for sole proprietors include wages, income and net earnings from self-employment that does not exceed $100,000 for 1 year as prorated during the covered period by the Act.[1]

 

How do I apply for the small business loan from the CARES Act?

First, download, the Business Loan Application (Form 5), the Home or Sole Proprietor Loan Application (SBA Form 5C), and the Economic Injury Disaster Loan Supporting Information (Form P-019) from the SBA website. Depending on the specific business, there may be additional forms required but a Disaster Assistance loan officer will request these.

For all non-profit businesses, in addition to the Disaster Business Loan application, you need to file the Tax Information Authorization (IRS Form 4506T). Also, attach a complete copy of the most recent Federal Income Tax return including all schedules for the business. Attach a Personal Financial Statement (SBA Form 413) for each partner, managing member, and principal owner owning 20% or more of the business. Small business also should include a Schedule of Liabilities listing all fixed debts (SBA Form 2202).

For sole proprietorships, you need to file SBA Form 5C and IRS Form 4506T.

Next, fill out the forms and upload the completed forms to the SBA website, email them to disasterloans@sba.gov, or mail them to the following address:

U.S. Small Business Administration

Processing and Disbursement Center

14925 Kingsport Rd.

Ft. Worth, TX 76155-2243

 

You can contact The McGuire Law Firm to speak directly with a tax attorney and business attorney regarding your businesses needs and the taxation issues related to the CARE Act.  We wish everyone the best during the troubling time.