With most tax planning, there are certain strategies that are generally effective and shouldn’t be ignored. The same holds true for estate planning. Here are three essential estate planning strategies to consider that may help you achieve your goals.
1. Use an ILIT to hold life insurance
Do you own an insurance policy on your life? Then be aware that a substantial portion of the proceeds could be lost to estate taxes if your estate is large enough to be liable for them. The exact amount will depend on the estate tax exemption available at your death as well as the estate tax rates that apply.
However, if you don’t own the policy, the proceeds won’t be included in your taxable estate. One effective strategy for keeping life insurance out of your estate is to set up an irrevocable life insurance trust (ILIT) to buy and hold the policy.
If you already own your life insurance policy, you can transfer the policy to an ILIT. But watch out for the “three-year rule,” which provides that certain assets, including life insurance, transferred within three years of your death are pulled back into your estate and potentially taxed.
2. Place assets in a credit shelter trust
Designating your spouse as your sole beneficiary may seem like a good strategy. But doing so can waste your estate tax exemption.
Suppose you leave everything to your spouse. There will be no current estate tax at your death because of the unlimited marital deduction (assuming your spouse is a U.S. citizen). When your spouse dies, however, the assets transferred to him or her at your death will be included in his or her taxable estate (assuming the assets remain intact). A portion of your spouse’s estate could be subject to estate tax, depending on a variety of factors such as the size of your spouse’s total estate and the estate tax exemption available at his or her death.
You can preserve your exemption and reduce or even eliminate estate taxes by placing assets in a credit shelter trust. If properly structured, the trust provides your spouse with income for life — and access to the principal as needed — but the assets aren’t included in his or her estate. Plus, your own exemption shields the trust assets from estate tax.
3. Take advantage of a gifting strategy
Don’t underestimate the tax-saving power of making gifts. Currently, the annual exclusion is $15,000 per recipient ($30,000 if you split gifts with your spouse).
Annual exclusion gifts can be more effective because, unlike lifetime exemption gifts, they don’t reduce the amount of wealth you can transfer tax-free at death under your estate tax exemption. Gifting, whether under the annual exclusion or lifetime exemption, also removes future appreciation from your taxable estate.
Work with a pro
There’s much you need to consider when developing or reviewing your estate plan. Contact us so you can keep your plan on the right track.
© 2021 Covenant CPA
Are you wondering whether alternative energy technologies can help you manage energy costs in your business? If so, there’s a valuable federal income tax benefit (the business energy credit) that applies to the acquisition of many types of alternative energy property.
The credit is intended primarily for business users of alternative energy (other energy tax breaks apply if you use alternative energy in your home or produce energy for sale).
The business energy credit equals 30% of the basis of the following:
- Equipment, the construction of which begins before 2024, that uses solar energy to generate electricity for heating and cooling structures, for hot water, or heat used in industrial or commercial processes (except for swimming pools). If construction began in 2020, the credit rate is 26%, reduced to 22% for construction beginning in calendar year 2023; and, unless the property is placed in service before 2026, the credit rate is 10%.
- Equipment, the construction of which begins before 2024, using solar energy to illuminate a structure’s inside using fiber-optic distributed sunlight. If construction began in 2020, the credit rate is 26%, reduced to 22% for construction beginning in 2023; and, unless the property is placed in service before 2026, the credit rate is 0%.
- Certain fuel-cell property the construction of which begins before 2024. If construction began in 2020, the credit rate is 26%, reduced to 22% for construction beginning in 2023; and, unless the property is placed in service before 2026, the credit rate is 0%.
- Certain small wind energy property the construction of which begins before 2024. If construction began in 2020, the credit rate is 26%, reduced to 22% for construction beginning in 2023; and, unless the property is placed in service before 2026, the credit rate is 0%.
- Certain waste energy property, the construction of which begins before January 1, 2024. If construction began in 2020, the credit rate is 26%, reduced to 22% for construction beginning in 2023; and, unless the property is placed in service before 2026, the credit rate is 0%.
- Certain offshore wind facilities with construction beginning before 2026. There’s no phase-out of this property.
The credit equals 10% of the basis of the following:
- Certain equipment used to produce, distribute, or use energy derived from a geothermal deposit.
- Certain cogeneration property with construction beginning before 2024.
- Certain microturbine property with construction beginning before 2024.
- Certain equipment, with construction beginning before 2024, that uses the ground or ground water to heat or cool a structure.
Pluses and minuses
However, there are several restrictions. For example, the credit isn’t available for property acquired with certain non-recourse financing. Additionally, if the credit is allowable for property, the “basis” is reduced by 50% of the allowable credit.
On the other hand, a favorable aspect is that, for the same property, the credit can sometimes be used in combination with other benefits — for example, federal income tax expensing, state tax credits or utility rebates.
There are business considerations unrelated to the tax and non-tax benefits that may influence your decision to use alternative energy. And even if you choose to use it, you might do so without owning the equipment, which would mean forgoing the business energy credit.
As you can see, there are many issues to consider. We can help you address these alternative energy considerations.
© 2021 Covenant CPA
President Biden signed the $1.9 trillion American Rescue Plan Act (ARPA) on March 11. While the new law is best known for the provisions providing relief to individuals, there are also several tax breaks and financial benefits for businesses.
Here are some of the tax highlights of the ARPA.
The Employee Retention Credit (ERC). This valuable tax credit is extended from June 30 until December 31, 2021. The ARPA continues the ERC rate of credit at 70% for this extended period of time. It also continues to allow for up to $10,000 in qualified wages for any calendar quarter. Taking into account the Consolidated Appropriations Act extension and the ARPA extension, this means an employer can potentially have up to $40,000 in qualified wages per employee through 2021.
Employer-Provided Dependent Care Assistance. In general, an eligible employee’s gross income doesn’t include amounts paid or incurred by an employer for dependent care assistance provided to the employee under a qualified dependent care assistance program (DCAP).
Previously, the amount that could be excluded from an employee’s gross income under a DCAP during a tax year wasn’t more than $5,000 ($2,500 for married individuals filing separately), subject to certain limitations. However, any contribution made by an employer to a DCAP can’t exceed the employee’s earned income or, if married, the lesser of employee’s or spouse’s earned income.
Under the ARPA, for 2021 only, the exclusion for employer-provided dependent care assistance is increased from $5,000 to $10,500 (from $2,500 to $5,250 for married individuals filing separately).
This provision is effective for tax years beginning after December 31, 2020.
Paid Sick and Family Leave Credits. Changes under the ARPA apply to amounts paid with respect to calendar quarters beginning after March 31, 2021. Among other changes, the law extends the paid sick time and paid family leave credits under the Families First Coronavirus Response Act from March 31, 2021, through September 30, 2021. It also provides that paid sick and paid family leave credits may each be increased by the employer’s share of Social Security tax (6.2%) and employer’s share of Medicare tax (1.45%) on qualified leave wages.
Grants to restaurants. Under the ARPA, eligible restaurants, food trucks, and similar businesses that provide food and drinks may receive restaurant revitalization grants from the Small Business Administration. For tax purposes, amounts received as restaurant revitalization grants aren’t included in the gross income of the person who receives the money.
These are only some of the provisions in the ARPA. There are many others that may be beneficial to your business. Contact us for more information about your situation.
© 2021 Covenant CPA
Are you a business owner thinking about hiring? Be aware that a recent law extended a credit for hiring individuals from one or more targeted groups. Employers can qualify for a tax credit known as the Work Opportunity Tax Credit (WOTC) that’s worth as much as $2,400 for each eligible employee ($4,800, $5,600 and $9,600 for certain veterans and $9,000 for “long-term family assistance recipients”). The credit is generally limited to eligible employees who began work for the employer before January 1, 2026.
Generally, an employer is eligible for the credit only for qualified wages paid to members of a targeted group. These groups are:
- Qualified members of families receiving assistance under the Temporary Assistance for Needy Families (TANF) program,
- Qualified veterans,
- Qualified ex-felons,
- Designated community residents,
- Vocational rehabilitation referrals,
- Qualified summer youth employees,
- Qualified members of families in the Supplemental Nutritional Assistance Program (SNAP),
- Qualified Supplemental Security Income recipients,
- Long-term family assistance recipients, and
- Long-term unemployed individuals.
You must meet certain requirements
There are a number of requirements to qualify for the credit. For example, for each employee, there’s also a minimum requirement that the employee must have completed at least 120 hours of service for the employer. Also, the credit isn’t available for certain employees who are related to or who previously worked for the employer.
There are different rules and credit amounts for certain employees. The maximum credit available for the first-year wages is $2,400 for each employee, $4,000 for long-term family assistance recipients, and $4,800, $5,600 or $9,600 for certain veterans. Additionally, for long-term family assistance recipients, there’s a 50% credit for up to $10,000 of second-year wages, resulting in a total maximum credit, over two years, of $9,000.
For summer youth employees, the wages must be paid for services performed during any 90-day period between May 1 and September 15. The maximum WOTC credit available for summer youth employees is $1,200 per employee.
A valuable credit
There are additional rules and requirements. In some cases, employers may elect not to claim the WOTC. And in limited circumstances, the rules may prohibit the credit or require an allocation of it. However, for most employers hiring from targeted groups, the credit can be valuable. Contact us with questions or for more information about your situation.
© 2021 Covenant CPA
Although electric vehicles (or EVs) are a small percentage of the cars on the road today, they’re increasing in popularity all the time. And if you buy one, you may be eligible for a federal tax break.
The tax code provides a credit to purchasers of qualifying plug-in electric drive motor vehicles including passenger vehicles and light trucks. The credit is equal to $2,500 plus an additional amount, based on battery capacity, that can’t exceed $5,000. Therefore, the maximum credit allowed for a qualifying EV is $7,500.
The EV definition
For purposes of the tax credit, a qualifying vehicle is defined as one with four wheels that’s propelled to a significant extent by an electric motor, which draws electricity from a battery. The battery must have a capacity of not less than four kilowatt hours and be capable of being recharged from an external source of electricity.
The credit may not be available because of a per-manufacturer cumulative sales limitation. Specifically, it phases out over six quarters beginning when a manufacturer has sold at least 200,000 qualifying vehicles for use in the United States (determined on a cumulative basis for sales after December 31, 2009). For example, Tesla and General Motors vehicles are no longer eligible for the tax credit.
The IRS provides a list of qualifying vehicles on its website and it recently added a number of models that are eligible. You can access the list here: https://bit.ly/2Yrhg5Z.
Here are some additional points about the plug-in electric vehicle tax credit:
- It’s allowed in the year you place the vehicle in service.
- The vehicle must be new.
- An eligible vehicle must be used predominantly in the U.S. and have a gross weight of less than 14,000 pounds.
There’s a separate 10% federal income tax credit for the purchase of qualifying electric two-wheeled vehicles manufactured primarily for use on public thoroughfares and capable of at least 45 miles per hour (in other words, electric-powered motorcycles). It can be worth up to $2,500. This electric motorcycle credit was recently extended to cover qualifying 2021 purchases.
These are only the basic rules. There may be additional incentives provided by your state. Contact us if you’d like to receive more information about the federal plug-in electric vehicle tax break.
© 2021 Covenant CPA
On March 27, President Trump signed into law another coronavirus (COVID-19) law, which provides extensive relief for businesses and employers. Here are some of the tax-related provisions in the Coronavirus Aid, Relief, and Economic Security Act (CARES Act).
Employee retention credit
The new law provides a refundable payroll tax credit for 50% of wages paid by eligible employers to certain employees during the COVID-19 crisis.
Employer eligibility. The credit is available to employers with operations that have been fully or partially suspended as a result of a government order limiting commerce, travel or group meetings. The credit is also provided to employers that have experienced a greater than 50% reduction in quarterly receipts, measured on a year-over-year basis.
The credit isn’t available to employers receiving Small Business Interruption Loans under the new law.
Wage eligibility. For employers with an average of 100 or fewer full-time employees in 2019, all employee wages are eligible, regardless of whether an employee is furloughed. For employers with more than 100 full-time employees last year, only the wages of furloughed employees or those with reduced hours as a result of closure or reduced gross receipts are eligible for the credit.
No credit is available with respect to an employee for whom the employer claims a Work Opportunity Tax Credit.
The term “wages” includes health benefits and is capped at the first $10,000 paid by an employer to an eligible employee. The credit applies to wages paid after March 12, 2020 and before January 1, 2021.
The IRS has authority to advance payments to eligible employers and to waive penalties for employers who don’t deposit applicable payroll taxes in anticipation of receiving the credit.
Payroll and self-employment tax payment delay
Employers must withhold Social Security taxes from wages paid to employees. Self-employed individuals are subject to self-employment tax.
The CARES Act allows eligible taxpayers to defer paying the employer portion of Social Security taxes through December 31, 2020. Instead, employers can pay 50% of the amounts by December 31, 2021 and the remaining 50% by December 31, 2022.
Self-employed people receive similar relief under the law.
Temporary repeal of taxable income limit for NOLs
Currently, the net operating loss (NOL) deduction is equal to the lesser of 1) the aggregate of the NOL carryovers and NOL carrybacks, or 2) 80% of taxable income computed without regard to the deduction allowed. In other words, NOLs are generally subject to a taxable-income limit and can’t fully offset income.
The CARES Act temporarily removes the taxable income limit to allow an NOL to fully offset income. The new law also modifies the rules related to NOL carrybacks.
Interest expense deduction temporarily increased
The Tax Cuts and Jobs Act (TCJA) generally limited the amount of business interest allowed as a deduction to 30% of adjusted taxable income.
The CARES Act temporarily and retroactively increases the limit on the deductibility of interest expense from 30% to 50% for tax years beginning in 2019 and 2020. There are special rules for partnerships.
Bonus depreciation for qualified improvement property
The TCJA amended the tax code to allow 100% additional first-year bonus depreciation deductions for certain qualified property. The TCJA eliminated definitions for 1) qualified leasehold improvement property, 2) qualified restaurant property, and 3) qualified retail improvement property. It replaced them with one category called qualified improvement property (QIP). A general 15-year recovery period was intended to have been provided for QIP. However, that period failed to be reflected in the language of the TCJA. Therefore, under the TCJA, QIP falls into the 39-year recovery period for nonresidential rental property, making it ineligible for 100% bonus depreciation.
The CARES Act provides a technical correction to the TCJA, and specifically designates QIP as 15-year property for depreciation purposes. This makes QIP eligible for 100% bonus depreciation. The provision is effective for property placed in service after December 31, 2017.
Careful planning required
This article only explains some of the relief available to businesses. Additional relief is provided to individuals. Be aware that other rules and limits may apply to the tax breaks described here. Contact us if you have questions about your situation.
© 2020 Covenant CPA
If you’re adopting a child, or you adopted one this year, there may be significant tax benefits available to offset the expenses. For 2019, adoptive parents may be able to claim a nonrefundable credit against their federal tax for up to $14,080 of “qualified adoption expenses” for each adopted child. (This amount is increasing to $14,300 for 2020.) That’s a dollar-for-dollar reduction of tax — the equivalent, for someone in the 24% marginal tax bracket, of a deduction of over $50,000.
Adoptive parents may also be able to exclude from their gross income up to $14,080 for 2019 ($14,300 for 2020) of qualified adoption expenses paid by an employer under an adoption assistance program. Both the credit and the exclusion are phased out if the parents’ income exceeds certain limits, as explained below.
Adoptive parents may claim both a credit and an exclusion for expenses of adopting a child. But they can’t claim both a credit and an exclusion for the same expense.
Qualified adoption expenses
To qualify for the credit or the exclusion, the expenses must be “qualified.” These are the reasonable and necessary adoption fees, court costs, attorney fees, travel expenses (including amounts spent for meals and lodging) while away from home, and other expenses directly related to the legal adoption of an “eligible child.”
Expenses in connection with an unsuccessful attempt to adopt an eligible child can qualify. However, expenses connected with a foreign adoption (one in which the child isn’t a U.S. citizen or resident) qualify only if the child is actually adopted.
Taxpayers who adopt a child with special needs get a special tax break. They will be deemed to have qualified adoption expenses in the tax year in which the adoption becomes final in an amount sufficient to bring their total aggregate expenses for the adoption up to $14,300 for 2020 ($14,080 for 2019). In other words, they can take the adoption credit or exclude employer-provided adoption assistance up to that amount, whether or not they had $14,300 for 2020 ($14,080 for 2019) of actual expenses.
Phase-out for high-income taxpayers
The credit allowable for 2019 is phased out for taxpayers with adjusted gross income (AGI) of $211,160 ($214,520 for 2020). It is eliminated when AGI reaches $251,160 for 2019 ($254,520 for 2020).
Taxpayer ID number required
The IRS can disallow the credit and the exclusion unless a valid taxpayer identification number (TIN) for the child is included on the return. Taxpayers who are in the process of adopting a child can get a temporary number, called an adoption taxpayer identification number (ATIN), for the child. This enables adoptive parents to claim the credit and exclusion for qualified expenses.
When the adoption becomes final, the adoptive parents must apply for a Social Security number for the child. Once obtained, that number, rather than the ATIN, is used.
We can help ensure that you meet all the requirements to get the full benefit of the tax savings available to adoptive parents. Please contact us if you have any questions
© 2019 Covenant CPA
The U.S. economy depends on import and export markets to run as designed. After all, revenue from trade tariffs and duties contribute $30 billion annually to federal government coffers. Unfortunately, fraud regularly throws a wrench in the works of global trade, and individual businesses suffer. Your company might, for example, lose money if a seller ships substandard goods or it could get fleeced if it turns out that a shipment doesn’t exist.
The problem with letters of credit
To facilitate international trade, buyers and sellers often rely on documentary letters of credit (DLCs). For a fee, banks issue DLCs that pay sellers from buyers once the specified terms of the DLC are fulfilled. These documents theoretically shift risk to the bank offering the DLC.
According to the Uniform Customs & Practice for Documentary Credits, banks should work with “documents and not with goods, services or performance to which the documents may relate.” Therefore, sellers can present the documents specified in the DLC and receive payment, yet still defraud buyers.
To this end, a seller might:
Falsify documents about cargo status. Even though the seller receives payment under the DLC, the goods never materialize.
Sell substandard goods. Here, the seller ships goods made with lower-quality materials or less than the quantity ordered by the buyer.
Contract with more than one buyer. In this scenario, the cargo exists, but the seller “sells” it to multiple buyers. It collects payment for more than one shipment, but only one company receives the goods. Similarly, a seller might present duplicate bills of lading for the same cargo.
Solutions for protecting your business
So how can you engage in international trade and avoid crooked players? If you’re buying goods, research the seller’s background. Ask for and check references and contact the consulate general in the country where the seller is located. Third-party experts can also investigate the financial standing and business reputations of prospective international trade partners.
You might also engage an independent inspector to verify a shipment. If you include an inspection clause in your DLC, the bank will only issue payment to the seller after it receives the inspection certificate. Or, insert a clause in the DLC that allows you to inspect the goods yourself before payment is released.
Exporters should also be wary
If you’re exporting goods overseas, many of the same principles apply, including performing thorough research on your trade partner. Also, to prevent costly misunderstandings, make sure your contract includes a detailed list of buyer and seller responsibilities. For more information about exporting goods, visit the federal government’s export.gov site or contact us.
© 2019 Covenant CPA