What do COVID-19, major hurricanes and West Coast wildfires have in common? All three have attracted scam artists, who have bilked disaster victims, charitable donors, insurance companies and government agencies out of billions of dollars. Also, all of these disasters — and the criminals who take advantage of them — are the focus of The National Center for Disaster Fraud (NCDF). Let’s take a look at what this partnership between the U.S. Justice Department and various law enforcement and regulatory agencies does to investigate and prevent fraud.
Investigate and prevent
The NCDF was established in 2005 after Hurricane Katrina to combat the massive fraud schemes that emerged as financial aid poured into the Gulf region. The agency now coordinates investigations into all kinds of natural and manmade disaster fraud. It also helps to prevent perpetrators from finding victims.
Recently, the NCDF posted on its website tips for charitable donors who want to help victims of Hurricane Ida (justice.gov/disaster-fraud). For example, the agency urges people to avoid making cash donations, writing checks to individuals or donating via wire transfer.
COVID and other opportunities
COVID-19-related fraud — including dishonest Paycheck Protection Program (PPP) loan requests and phishing schemes offering fake “miracle” drugs — makes up the bulk of current NCDF complaints. In recent weeks, the Justice Department has announced the indictment and sentencing of a roster of COVID criminals.
This includes a Georgia woman who pleaded guilty to bank fraud after seeking $7.9 million in PPP loans for four medical practices she controlled. In another ambitious scheme, a Texas man submitted 15 fraudulent PPP applications to eight different lenders, seeking a total of $24.8 million.
Of course, criminals will capitalize on any opportunity. A California man received $26,000 in relief funds from the Federal Emergency Management Agency (FEMA) after falsely claiming a trailer burned in the Camp Fire was his primary residence. Earlier this year, a Florida woman was sentenced to more than six years in prison for using stolen identities to file five applications for FEMA disaster assistance that was intended for actual victims of Hurricane Irma.
Calls for help
Agencies investigating disaster fraud depend on tips from ordinary people who’ve witnessed or are victims of these crimes. The NCDF hosts a 24/7 telephone hotline (866-720-5721) and accepts Web form complaints at justice.gov/DisasterComplaintForm. Also, if you believe disaster fraud has delivered a double whammy to you or family members, contact us for more information on how to fight back.
© 2021 Covenant CPA
The week of September 13-17 has been declared National Small Business Week by the Small Business Administration. To commemorate the week, here are three tax breaks to consider.
1. Claim bonus depreciation or a Section 179 deduction for asset additions
Under current law, 100% first-year bonus depreciation is available for qualified new and used property that’s acquired and placed in service in calendar year 2021. That means your business might be able to write off the entire cost of some or all asset additions on this year’s return. Consider making acquisitions between now and December 31.
Note: It doesn’t always make sense to claim a 100% bonus depreciation deduction in the first year that qualifying property is placed in service. For example, if you think that tax rates will increase in the future — either due to tax law changes or a change in your income — it might be better to forgo bonus depreciation and instead depreciate your 2021 asset acquisitions over time.
There’s also a Section 179 deduction for eligible asset purchases. The maximum Section 179 deduction is $1.05 million for qualifying property placed in service in 2021. Recent tax laws have enhanced Section 179 and bonus depreciation but most businesses benefit more by claiming bonus depreciation. We can explain the details of these tax breaks and which is right for your business. You don’t have to decide until you file your tax return.
2. Claim bonus depreciation for a heavy vehicle
The 100% first-year bonus depreciation provision can have a sizable, beneficial impact on first-year depreciation deductions for new and used heavy SUVs, pickups and vans used over 50% for business. For federal tax purposes, heavy vehicles are treated as transportation equipment so they qualify for 100% bonus depreciation.
This option is available only when the manufacturer’s gross vehicle weight rating (GVWR) is above 6,000 pounds. You can verify a vehicle’s GVWR by looking at the manufacturer’s label, usually found on the inside edge of the driver’s side door.
Buying an eligible vehicle and placing it in service before the end of the year can deliver a big write-off on this year’s return. Before signing a sales contract, we can help evaluate what’s right for your business.
3. Maximize the QBI deduction for pass-through businesses
A valuable deduction is the one based on qualified business income (QBI) from pass-through entities. For tax years through 2025, the deduction can be up to 20% of a pass-through entity owner’s QBI. This deduction is subject to restrictions that can apply at higher income levels and based on the owner’s taxable income.
For QBI deduction purposes, pass-through entities are defined as sole proprietorships, single-member LLCs that are treated as sole proprietorships for tax purposes, partnerships, LLCs that are treated as partnerships for tax purposes and S corporations. For these taxpayers, the deduction can also be claimed for up to 20% of income from qualified real estate investment trust dividends and 20% of qualified income from publicly traded partnerships.
Because of various limitations on the QBI deduction, tax planning moves can unexpectedly increase or decrease it. For example, strategies that reduce this year’s taxable income can have the negative side-effect of reducing your QBI deduction.
These are only a few of the tax breaks your small business may be able to claim. Contact us to help evaluate your planning options and optimize your tax results.
© 2021 Covenant CPA
As we approach the holidays and the end of the year, many people may want to make gifts of cash or stock to their loved ones. By properly using the annual exclusion, gifts to family members and loved ones can reduce the size of your taxable estate, within generous limits, without triggering any estate or gift tax. The exclusion amount for 2021 is $15,000.
The exclusion covers gifts you make to each recipient each year. Therefore, a taxpayer with three children can transfer $45,000 to the children every year free of federal gift taxes. If the only gifts made during a year are excluded in this fashion, there’s no need to file a federal gift tax return. If annual gifts exceed $15,000, the exclusion covers the first $15,000 per recipient, and only the excess is taxable. In addition, even taxable gifts may result in no gift tax liability thanks to the unified credit (discussed below).
Note: This discussion isn’t relevant to gifts made to a spouse because these gifts are free of gift tax under separate marital deduction rules.
Gift-splitting by married taxpayers
If you’re married, a gift made during a year can be treated as split between you and your spouse, even if the cash or gift property is actually given by only one of you. Thus, by gift-splitting, up to $30,000 a year can be transferred to each recipient by a married couple because of their two annual exclusions. For example, a married couple with three married children can transfer a total of $180,000 each year to their children and to the children’s spouses ($30,000 for each of six recipients).
If gift-splitting is involved, both spouses must consent to it. Consent should be indicated on the gift tax return (or returns) that the spouses file. The IRS prefers that both spouses indicate their consent on each return filed. Because more than $15,000 is being transferred by a spouse, a gift tax return (or returns) will have to be filed, even if the $30,000 exclusion covers total gifts. We can prepare a gift tax return (or returns) for you, if more than $15,000 is being given to a single individual in any year.)
“Unified” credit for taxable gifts
Even gifts that aren’t covered by the exclusion, and that are thus taxable, may not result in a tax liability. This is because a tax credit wipes out the federal gift tax liability on the first taxable gifts that you make in your lifetime, up to $11.7 million for 2021. However, to the extent you use this credit against a gift tax liability, it reduces (or eliminates) the credit available for use against the federal estate tax at your death.
Be aware that gifts made directly to a financial institution to pay for tuition or to a health care provider to pay for medical expenses on behalf of someone else do not count towards the exclusion. For example, you can pay $20,000 to your grandson’s college for his tuition this year, plus still give him up to $15,000 as a gift.
Annual gifts help reduce the taxable value of your estate. There have been proposals in Washington to reduce the estate and gift tax exemption amount, as well as make other changes to the estate tax laws. Making large tax-free gifts may be one way to recognize and address this potential threat. It could help insulate you against any later reduction in the unified federal estate and gift tax exemption.
© 2021 Covenant CPA
A business may be able to claim a federal income tax deduction for a theft loss. But does embezzlement count as theft? In most cases it does but you’ll have to substantiate the loss. A recent U.S. Tax Court decision illustrates how that’s sometimes difficult to do.
Basic rules for theft losses
The tax code allows a deduction for losses sustained during the taxable year and not compensated by insurance or other means. The term “theft” is broadly defined to include larceny, embezzlement and robbery. In general, a loss is regarded as arising from theft only if there’s a criminal element to the appropriation of a taxpayer’s property.
In order to claim a theft loss deduction, a taxpayer must prove:
- The amount of the loss,
- The date the loss was discovered, and
- That a theft occurred under the law of the jurisdiction where the alleged loss occurred.
Facts of the recent court case
Years ago, the taxpayer cofounded an S corporation with another shareholder. At the time of the alleged embezzlement, the other original shareholder was no longer a shareholder, and she wasn’t supposed to be compensated by the business. However, according to court records, she continued to manage the S corporation’s books and records.
The taxpayer suffered an illness that prevented him from working for most of the year in question. During this time, the former shareholder paid herself $166,494. Later, the taxpayer filed a civil suit in a California court alleging that the woman had misappropriated funds from the business.
On an amended tax return, the corporation reported a $166,494 theft loss due to the embezzlement. The IRS denied the deduction. After looking at the embezzlement definition under California state law, the Tax Court agreed with the IRS.
The Tax Court stated that the taxpayer didn’t offer evidence that the former shareholder “acted with the intent to defraud,” and the taxpayer didn’t show that the corporation “experienced a theft meeting the elements of embezzlement under California law.”
The IRS and the court also denied the taxpayer’s alternate argument that the corporation should be allowed to claim a compensation deduction for the amount of money the former shareholder paid herself. The court stated that the taxpayer didn’t provide evidence that the woman was entitled to be paid compensation from the corporation and therefore, the corporation wasn’t entitled to a compensation deduction. (TC Memo 2021-66)
How to proceed if you’re victimized
If your business is victimized by theft, embezzlement or internal fraud, you may be able to claim a tax deduction for the loss. Keep in mind that a deductible loss can only be claimed for the year in which the loss is discovered, and that you must meet other tax-law requirements. Keep records to substantiate the claimed theft loss, including when you discovered the loss. If you receive an insurance payment or other reimbursement for the loss, that amount must be subtracted when computing the deductible loss for tax purposes. Contact us with any questions you may have about theft and casualty loss deductions.
© 2021 Covenant CPA