Biden’s Proposed Tax Updates
Welcome to Accounting and Accountability!
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Restaurant Revitalization Fund
That's right. And one of the reasons why we're number one is because we share a lot of fun things so I want to start with something I love, you know, giving away money and helping businesses that are in need, and one industry that needs help are the restaurants, YES. Restaurants, got hit hard. Big time. Yeah, so we have the Restaurant Revitalization Fund, if you will, that’s come out. It's being administered through the SBA and it opened up Monday, March 3, 2021. This is huge. Restaurants, food trucks…you can be like a takeout establishment. It is a pretty broad list, like caterers are in it. It's, you know, it's not just available to a brick and mortar restaurant, basically. So, you definitely want to familiarize yourself with, with that and see if you qualify. So, on Monday you could apply for this - $5 million per location, max of $10 million, that a big M there. Huge. They predict,, like all funds that this might go pretty quick. Yeah, so it seems to me that it's going to go pretty quick. Now there are some groups that are getting priority. Right. Okay, so things like women business owned or minority owned business, they're going to get the first 21 days of processing, they're going to get priority. BUT the SBA and other organizations are saying, apply anyway, because you're going to get in line. Right. So, don't wait the 21 days because you might have waited too long. Exactly. And some of the parameters are you have to show a reduction in revenue, obviously, and most restaurants will from during the pandemic. Right. And the grant would up to the amount of reduction in revenue to the caps that you set. Now, just everybody has to understand if you've got PPP that has to come off of that number. So, basically, it's like the 2019 compared to 2020. If you have that loss, let's say $100,000 loss, or difference, and you subtract a PPP of let's say $50,000, then you're eligible for $50,000 correct? Correct. And it's just going to be treated just like PPP, so you don't have to pay income tax on it. Yeah - forgiven no strings attached once you qualify. That's it. That’s pretty sweet. And I think if I remember right, you haven't to like 2023 to spend the money on the different things you have to spend the money on which is very broad. Right, and definitely by 2023, you know anyone who’s getting this won't have an issue. And one of the reasons why is because most of the fundings we're seeing - like the PPP - May 31st it's done. The ERTC, which is the Employee Retention Tax Credit, that's done at the end of this year, 2021. The Paid Sick Leave Credit is done September 30th so a lot of funding that has been provided to companies is ending by the end of this year, so the idea is going into 2022 and 2023 restaurants wouldn’t have any problem using the funds. And the list is pretty big. Like some of those other credits, you were limited to wages, rent, utilities, but from what I understand from this, it can be your cost of goods sold. Yeah, it’s a pretty broad category of expenses you can spend it on.
So, I don't know if you heard Tammy, yesterday, the Governor of Delaware announced that May 21st all the capacity restrictions will be lifted, and the social distancing goes from six to three feet, so that will help a lot of restaurants in this area. We’re rooting for you restaurants. We are, we are.
What’s in President Biden’s Proposed American Families Plan?
Well, speaking of exciting news. I know we have been promising our listeners that we will keep them up to date on any potential legislative changes and I say “potential” because what Brian and I are about to talk about has not been signed into law, so I do want to stress that. But, as always Faw Casson is on the leading edge of getting these changes out to you, and we've gotten a little more guidance on what this could look like. Yeah, there's some additional….so you know Biden has come out with the American Families Plan and he's basically saying “this is what I want to do”. Yes. And so if this goes through these are the highlights of the things that we might see happen before the end of the year. Right.
Higher Child Tax Credit
One of the big ones that has already happened and that some of you may see is the Child Tax Credit as it stands right now, you can get a $2,000 per child credit, and the phase outs were lifted back when we had some reform, back in 2017 for 2018. The Adjusted Gross Income limits were lifted for when you could qualify for this and it was lifted quite high to $400,000 for married filing joint and $200,000 for everybody else. Well, now they're calling the Child Tax Credit, a Higher Child Tax Credit, and that's exactly what it is - it's higher. And they're talking about making it fully refundable whereas before there were some calculations about how if you didn't pay tax at all, you may not get it. Then it was expanded that you could get up to $1,400 of the $2,000. Well, now they're talking about basically making it fully refundable and when we talk about fully refundable, we mean you get it even if you don't have taxes. So, it's possible you could get money back that you never paid, you know, paid in. So, at the present, though, the Child Tax Credit, you know, expansion, only applies for 2021 but now they're talking about extending this. And this is how it looks. So, age 6 to 17 now before it was limited, but 6 through 17 - before it was up-to. It's now $3,000 per child. And for younger children, younger than 6 years of age, it's $3,600 per child. So, it's definitely been enhanced, and as you and I brought up before, now again, they're proposing to extend. I do want to stress that. But the part that has already been into play is the increased amount that's in play right now because as we have discussed in prior podcast, taxpayers are going to start getting get refunds this summer, you know, for that Child Tax Credit, so this is just going to be extended through potentially 2025. And it's going to be these higher numbers. Yes, I didn’t see any mention of, if it is extended are they going to continue to do those advanced type payments? I don't know if they're gonna keep doing that. It might just be a one and done for the Pandemic. Then we [your tax professional team] would have to reconcile when we do your 2021 return. Yep, so that's good for families with dependent children.
Higher Tax Rates for High Income Earners
Some of you out there might not like this next one, but he wants to…and he said this in his campaign… he wants to raise the highest individual income tax rate, which is currently 37% to 39.6% which was the previous rate before the Tax Jobs Creation Act was passed back in late 2017. He had mentioned over 400,000. What we're thinking is people over $450,000, single and $510,000 married filing joint - not a big swing there. No, that’s really tight. So, that could be a huge increase. I mean, it’s 2.6% but that could be a big deal.
Another one that's really important here is the Long Term Capital Gains. For years, you sell a piece of property that qualifies for Capital Gains you were at 15% then they got raised to 20% for certain individual higher income levels. He wants to raise that to 39.6% for Capital Gains - basically folks that make more than a million dollars. So that doesn't mean a million-dollar gain, that means if your income’s a million bucks, or more…. Not including the gain. Correct. You could potentially sell something with a gain of $500,000, that's not going to go in the mill. It might! It might, okay, so we’re not sure. So, he hasn't really said that but how I read it was, if I'm at a million bucks, no matter what my Capital Gains might be 39.6%. Now the other thing of that is too, is there gonna be some sort of phase in? Maybe a portion of my gains will be lower and then the rest will be 39.6%. And with that, most Capital Gains, if it's not like a trade or business, you have to tack on to 3.8% Medicare Tax. NOW you're looking at 43.4%. Without even factoring in your state income tax. Yes. Let's factor in state income tax there. Depending on the state you live in you can be at 50% easy, on a Capital Gains. And we often get a lot of questions over the years, for many, many years, “how can I get Capital Gains treatment on this transaction?” Well, depending on your income levels, that’s a moot point.
And I tell you, Brian, just to add on to what you're sharing. One of the strategies we tell clients all the time with Capital Gains is people say “Well, how do I get out of it?” And you know, with some of them you just can't, and there is no such thing as kind of reinvesting anymore. But there is still something called a Section 1031: Like Kind Exchange. So, a Like Kind Exchange allows you to sell like kind property. So, for example: I have a rental and I'm gonna buy a rental. I have land I'm going to buy land. It's not for like stocks, you know, nothing like that - traded securities - but for real property. So, I have real property and I'm going to sell it, and let's say I have a gain of $500,000, but I find a piece of property that I want to buy for a million. If I do a proper 1031, with a proper closing, and have a Qualified Intermediary and hold my money, and I go to closing on the new property, I can actually defer that gain into the new property. So that's a strategy we give people all the time. Well, speaking of potential reform, they are talking about capping like kind swaps or exchanges, if you will, at $500,000, and expanding that 3.8% surcharge tax that you were talking about, to cover other types of income. So right now is 3.8% this is on primarily investment income like you just talked about: interest, dividends, capital gains, rental property… But now they're talking about expanding that 3.8% and possibly taking and reducing that strategy we've talked about in the past with like kinds. So, they're already like one step ahead of our strategy. Right, so $500,000 is a lot of gain, okay, but, you know, if you've got property that you’ve had for years: a lot of farmland, a highly appreciated property… and the question is, is the first $500,000 going to be counted? And I think it will based on this but, yeah, and then the rest of it. Well, or would you have to do the full amount of the light kind to qualify? Right, right. What if it was only $500,000? Could you take the rest out in cash? Maybe not. So, it could be a little complicated. Yeah, so that's a big deal, because Like Kind Exchanges have been very advantageous for a lot of folks. We've had a lot of clients that we've taken through that.
This next one Tammy is huge in my opinion. We have a lot of clients and a lot of folks that are running around right now, revisiting their estate plan. Absolutely. Right now, the state exemption is $11.58 million, meaning if you pass away and you're worth less than $11.5 million, there's no estate tax. And that’s your lifetime gift exemption as well. And if you're married it's almost over $23 million. That’s huge! Estate planning kind of dropped off when that came out, because, you know, a lot of people don't reach those levels. Well what Biden wants to do is reduce – he originally mentioned reducing the exemption to $3.5 million but that has seemed to quiet down a little bit. What he's talking about now is getting rid of the step up in basis and what that means is if someone inherits property from you at your death, they receive it as cost basis at the fair market value of that date of death. This means, so like let's say Tammy, you had a piece of property that you paid $100,000 for, and many years go by and you pass away and your daughter inherits it, it’s worth a million, so it's a million in her hands. So, if she sells it tomorrow for a million she pays no tax, you didn't pay any tax because you were under the exemptions. Well, now he wants to get rid of that, for gains over a million dollars, filing single or $2 million filing for couples. So that means, if you've got highly appreciated property that's worth over a million, which we have a ton of clients that their businesses are worth more than that, and their heirs inherit it, they're going to have to pay tax on that at the time of inheritance either through estate tax, or through a Capital Gains at that time, depending on how they shake this out. No wonder they really hadn't come back with the $3.5M, because why would you? Yeah! I mean if you're doing this, you've kind of eliminated the, the $11M. Yeah. This this is scary and this is huge because you're right, we have always been taught, you know, and the philosophy is you plan for today and not the crystal ball. But I can tell you this is putting people in a tailspin. And this is just my opinion - Yes, they're going to catch a little bit of revenue because unfortunately you're going to catch people who just couldn't do enough planning around this and they passed away and got caught, you know, in that reduction. But what it's going to do is just going to propel people to, you know, plan and strategize and that's going to be our job to help them do that. And what we don't know, is if they pass this bill, will it be retroactive to the beginning of this year? Most professionals that I've talked to say “no”, but you don't know that. Yeah. So, you know a lot of people were scrambling because they can give away $11.5 million right now…. Why wouldn’t you gift this year? … there's been some discussion of, well, are they going to make like a clawback? Well, that $11.5M doesn't count now. The general consensus is “No”. If you've given away your $11.5M you’re good. So we're running around, a lot of estate attorneys, a lot of business valuations are being done right now to see what that what they can give away, so we'll keep you up to date on that, but that's a huge topic. I must say of all these, that is probably the biggest one. It’s huge, just huge…. and the Capital Gains. Yeah, the Capital Gains…I mean to be up around 50% with state?? That’s insane.
Well, I have one other quick thing for you. I don't know if everybody remembers but back in 2017 when the new tax reform, the Tax Jobs Creation Act, was passed, they basically - you used to be able to deduct the entire amount of your state income taxes. All your state and real estate taxes, no there was no cap. Well, they capped that $10,000, so we have a lot of high income clients who pay a lot of state taxes, so they lost huge deductions. Now there were some AMT issues, but not always. Well, there's a big push by a lot of the states right now, and there has been, and they're really pushing the Democrats right now to remove that cap. But then the speculation is “Well Biden's trying to make higher income individuals and couples pay more tax. Is he really going to do that?” He hasn't really talked about it. And you know that it's good that you bring this up because what this did is it made a lot of high income taxpayers that used to be able to itemize, didn't itemize, so if they lift this, you know, $10,000 cap, think then how many more are going to be in the folds of being able to itemize. And this is really a tax decrease, and you’re right, it's the tax decrease for the party that they intended not to, you know, and I don't mean political party, I mean, group of taxpayers. Well, and just so you know, there's a couple states who have passed laws that if you are a business, you can pay the state tax based on that business at the entity level and deduct it. Now, just you know Faw Casson is always looking at this stuff and we've actually been trying to talk to our representatives to get that same law passed in Delaware. So, if you're if you're talking to your representatives, tell them about that because we want a bill passed so you can do that.
Oh my gosh, we are 12 days away from the end of tax season! But don't you worry if you have not gotten your taxes done and you want to drop them off, you still can, but you will be extended. And that's alright! It’s alright! “Extension” does not mean you're going to be audited, because guess what, knock on wood, I am knocking on wood. I have probably extended myself for the 30 years I've been in business, practically. And knock on wood, I've never been audited. And if I do get audited is not because I was on extension. There’s a real big misconception out there that because you file an extension, you're going to get audited. That is not true by any means. But it is an extension of time to file, not to pay. CORRECT. So, I will be sending off my, you know, either my check or go on to irs.gov. So, the IRS does not make a lot of things easy, but one thing they do make easy is paying them. You go to irs.gov, they're right on that screen to the left there's a box where you can make a payment, and it is really that easy, so make your payment. You have to make your payment. What we typically do is if you haven't gotten us your information and you're not talking to us throughout the year, which we like to for you to do, it might be we just say, “Tell me how much your income looks like it's been up, and we'll just estimate that number to get something in. You don't want to pay that late payment penalty. And the good news is, pay extra because you can then roll that into your next year’s 2021 estimates. That next estimate is June 15th. So why not just basically send maybe your June 15 estimate along with your May 17 extension, or close to it.
IRS Refunds Delayed
And you know what, Tammy? What? You know how you mentioned that the IRS will take payment real quick? Oh yeah. What about when refunds are coming? Is there anything going on with that right now? WELL, you know what, thanks for asking. I have some information on that. So, did you maybe file your 2020 return and you're waiting for your refund? It could be delayed. Guess what? The IRS is holding 16 million individual returns for manual processing. 16 million. Oh my gosh. That’s insane. Now there's a couple reasons why. They are trying to figure out the 2020 Earned Income Credit, showing some inconsistencies there, and they're also showing some inconsistencies with the Recovery Rebate Credits which are basically the stimulus payments. A lot of the new things that came out last minute they're having they're having to kind of manually process. Even though you e-filed, they are going in there and reviewing these things. Because you know we were asking clients, “what did you get for stimulus?” and they're like, “oh..?”, and rightly so. I mean they came in in April of 2020. Then they came in in December and then we're asking, and then they were also coming in in 2021. And then we had a mechanism to go online and check, but then the IRS flipped that- kind of abandoned it for 2020 – and made it for 2021. So, we had to rely on clients to report what they got, so I guarantee you, unfortunately, and it wasn't on purpose, but some returns got put through where maybe that Rebate Recovery Credit just wasn't, you know, applied for correctly. So that is causing some delays. So, again if you haven't gotten your refund, there's nothing wrong with your return. It's just if you took the Rebate Recovery Credit or the Earned Income Tax Credit, you could have some delays. And the IRS is still processing 2019 returns. Still. It’s insane. Speaking of that too, tell me how likely it is that I'm going to get through to the IRS? Tammy’s trying to tell you if you haven’t gotten your refund yet, well good luck trying to call the IRS to find out where your refund is. On the irs.gov website there is a button you can push to say, Where's My Refund. Yes, okay, but often times it just says it's being processed. So there's nothing there, so if you call, good luck. Kiplinger said “the agency's phone service is dismal.” That's putting it nicely. “As of April 10th IRS employees have answered only 2% of the calls to the 1040 number.” That means only one out of 50 calls have gotten through to a live operator and then you're on hold for a while, then sometimes they hang up on you even when you're on hold. I like the courtesy hang up. Thank you for the courtesy. So good luck with that. I can tell you it's frustrating for our clients and I know they turn to us for solutions. I mean I have some legitimate correspondence I need to do with the IRS and here's what's happening. The IRS has an automatic generator of notices. So they just automatically generate because the computer told them to. So, they mail those out. Well now we have to respond to them, and that's becoming a challenge. It's a huge challenge. And some of those are seizures and intent to levies and I know you're frustrated out there but you know we're doing the best we can. And now 2%? The problem is they're not even processing things that come in the mail. I mean, I had one where we had to paper file an extension. We mailed it certified mail March 12 and the IRS didn't get it till the 18th. They got a notice in the mail saying that they owed money of $490. I mean come on. It's just unbelievable. Now I did read somewhere that one of these tax increases, I think it's like you know they expanded 3.8% on other types of income. The intention is to use that to be able to hire, not to get through this, but to actually expand their audit footprint. Yes, to get more revenue. Biden really has an initiative to fund the IRS a little bit more. Yeah, but I think it's gonna be more for the audit, than to actually get some of this paperwork through them, you know, their pipeline.