Author: Carrie Christensen

KT Insights
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Tax Tips: Extension Deadline

This year Tax Day returns to its regularly scheduled deadline with individual returns being due April 18th.  The extra three days are a result of IRS offices being closed on April 15th in observance of Emancipation Day.  If you are not able to file your tax return by the deadline, you can file for a six-month extension.  The most important thing to know about filing an extension is that it is an extension to file, but not to pay.  If you owe for 2021, you still need to pay that to the IRS by April 18th or be subject to penalties and interest. 

Consult with your tax professional at Ketel Thorstenson about this or other tax matters because each situation is different. Don’t navigate the difficult and ever-changing tax codes and legislation on your own.  Ketel Thorstenson CPAs and tax professionals receive advanced training and continuing education all year long to keep our service on the forefront of the tax industry.

April 12, 2022
| Carrie Christensen
KT Insights
 |

Tax Tips: Expanded Child Care Credit – Taxpayer-Friendly Changes for 2021

The American Rescue Plan Act of 2021 (ARPA) makes major, but temporary, changes to the Child and Dependent Care Credit (CDCC).

CDCC Basics

If you have one or more qualifying individuals (usually your children) under your wing, you’re eligible for the CDCC.

The credit covers eligible expenses that you pay to care for one or more qualifying individuals so you can work, or (if you’re married) so both you and your spouse can work. If you’re married, to claim the CDCC, you generally must file a joint Form 1040 for the tax year in question.

Qualifying individuals are defined as your under-age-13 child, stepchild, foster child, brother or sister, step-sibling, or descendant of any of these individuals. The child must live in your home for over half the year and must not provide more than half of his or her own support.

A handicapped spouse or handicapped dependent who lives with you for over half the year can also be a qualifying individual.

Eligible expenses include payments to a day-care center, nanny, or nursery school. Costs for overnight camp don’t qualify. K-12 costs don’t qualify either because those are considered education expenses rather than care expenses. But costs for before-school and after-school programs can qualify. Costs of domestic help can also qualify, as long as at least part of the cost goes toward care of a qualifying individual.

The temporary changes available for the 2021 tax year only are summarized below.

Credit Is Potentially Refundable

For 2021, the CDCC is refundable if your main residence is in the U.S. for more than half the year. For joint-filing married couples, either spouse can meet this requirement.

Credit Will Be Much Bigger for Many Families

For 2021, the dollar limits on the amount of eligible expenses for calculating the CDCC are increased to $8,000 if you have one qualifying individual (up from $3,000) or $16,000 if you have two or more qualifying individuals (up from $6,000).

For 2021, the maximum credit rate is increased to 50 percent (up from 35 percent). The credit rate is reduced by one percentage point for each $2,000 (or fraction thereof) of AGI in excess of $125,000. So, the rate is reduced to 20 percent if your AGI exceeds $183,000.

For 2021, the maximum CDCC if you have AGI of $125,000 or less is $4,000 for one qualifying individual ($8,000 x 50 percent) or $8,000 for two or more qualifying individuals ($16,000 x 50 percent). Under the “regular” rules for tax years before and after 2021, the maximum credit amounts are only $1,050 and $2,100, respectively.

For 2021 the maximum CDCC if you have AGI of more than $183,000 is $1,600 for one qualifying individual ($8,000 x 20 percent) or $3,200 for two or more qualifying individuals ($16,000 x 20 percent), compared to $600 and 1,200, respectively, for tax years before and after 2021.

Credit Rate Is Further Reduced or Eliminated for High-Income Taxpayers

For 2021, the credit rate is 20 percent if your AGI is between $183,001 and $400,000. But once your AGI exceeds $400,000, a second credit-rate-reduction rule kicks in. Your rate is reduced by one percentage point for each $2,000 (or fraction thereof) of AGI in excess of $400,000. So, the rate is reduced to 0 percent if your AGI exceeds $438,000.

Consult with your tax professional at Ketel Thorstenson about this or other tax matters because each situation is different. Don’t navigate the difficult and ever-changing tax codes and legislation on your own.  Ketel Thorstenson CPAs and tax professionals receive advanced training and continuing education all year long to keep our service on the forefront of the tax industry. Call us today for guidance on tax planning, tax return preparation, and tax legislation affects or questions.

April 5, 2022
| Carrie Christensen
KT Insights
 |

100% Meals Deduction for 2021 and 2022

Since 1986, lawmakers have limited business meal deductions—most recently to 50 percent. This was meant to prevent the abusive “three martini lunch.”

But on December 27, 2020, in an effort to help the restaurant industry due to the COVID-19 pandemic, lawmakers enacted a new, temporary 100 percent business meal deduction for calendar years 2021 and 2022.

To qualify for the 100 percent deduction, you need a restaurant to provide the food or beverages.

The law requires only that the restaurant provide the food and beverages. You don’t have to pay the money directly to the restaurant. For example, you qualify for the 100 percent deduction if you order a restaurant meal that’s delivered by Door Dash.  The delivery fee and tip are also 100% deductible.  And yes, alcoholic beverages are also deductible.

But as under prior law, your deductible business meals must be ordinary and necessary business expenses.

You must be present at the business meal, and you must provide the business meal to a person with whom you could reasonably expect to engage or deal with in the active conduct of your business, such as a customer, client, supplier, employee, agent, partner, or professional advisor, whether established or prospective.

Remember, to qualify for the 100 percent deduction, you need a restaurant. The IRS recently provided definitions and examples of what is and is not a restaurant.

A restaurant is “a business that prepares and sells food or beverages to retail customers for immediate consumption, regardless of whether the food or beverages are consumed on the business’s premises.” It is not any of the following:

  • Grocery stores
  • Specialty food stores
  • Beer, wine, or liquor stores
  • Drug stores
  • Convenience stores
  • Newsstands
  • Vending machines or kiosks

In general, the 50 percent limitation applies to business meals from the sources listed above.

The use of a restaurant creates the 100 percent deduction.

Per diem meal allowance – The IRS has stated that taxpayers may treat the per diem meal allowance as being attributable to food or beverages provided by a restaurant for tax years 2021 and 2022.  The per diem rate for 2021 is $64 per day unless the location qualifies as a high-cost locality, and in that case, the rate is $74 per day.

Consult with your tax professional at Ketel Thorstenson about this or other tax matters because each situation is different. Don’t navigate the difficult and ever-changing tax codes and legislation on your own. Ketel Thorstenson CPAs and tax professionals receive advanced training and continuing education all year long to keep our service on the forefront of the tax industry. Call us today for guidance on tax planning tax return preparation, and tax legislation affects or questions.

March 8, 2022
| Carrie Christensen
KT Insights
 |

Real Estate Sales – Ordinary Income or Capital Gain?

How are sales of real estate such as land and buildings reported on your tax return? Is the net income (or loss) taxed as ordinary income or capital gain? The answer is that it “depends.” The determination is based on the facts and circumstances of the situation and the intention of the taxpayer. There is no bright-line test.

Which is preferable – ordinary income or capital gain? You might automatically assume the answer is capital gain, especially if the real estate has been held for more than one year prior to the sale and qualifies for lower long-term capital gains rates. Yes, ordinary income tax rates are higher than long-term capital gain rates, but there are various nuances that must be considered when reporting the sale of real estate as ordinary income versus capital gain.

Sale taxed as ordinary income

Pros

  • Allowed to deduct ordinary and necessary business expenses to reduce net income
  • Eligible for the 20% qualified business income deduction
  • If a loss, can deduct entire loss

Cons

  • Subject to self-employment tax
  • Taxed at higher rate

Sale taxed as capital gain

Pros

  • Taxed at lower rate (if long-term)
  • Not subject to self-employment tax

Cons

  • Can only deduct costs that increase basis in property, or property taxes
  • If a loss, the current year deduction may be limited
  • Not eligible for the 20% qualified business income deduction

The root of the determination is whether or not you are in the business of buying and selling real estate. If the answer is yes, the sale is classified as ordinary income. If the answer is no, the sale is classified as capital gain. How is this determination made? Who gets to decide? You? Your CPA? While you and your CPA will likely discuss the details of your situation and come to a decision as to how to report the sale on your tax return, the ultimate decision rests with the IRS.

The following nine criteria from a 2012 tax court case can be used as a guide for factors that the IRS may consider when determining if income is classified as ordinary or capital gain. It is unclear how many of the tests must be passed for the sale to be considered as qualifying for capital gain treatment.

  1. The taxpayer’s purpose in acquiring the property
  2. The purpose for which the property was subsequently held
  3. The taxpayer’s everyday business and the relationship of the income from the property to the taxpayer’s total income
  4. The frequency, continuity, and substantiality of sales of property
  5. The extent of developing and improving the property to increase sales revenue
  6. The extent to which the taxpayer used advertising, promotion, or other activities to increase sales
  7. The use of a business office for the sale of property
  8. The character and degree of supervision or control the taxpayer exercised over any representative selling the property
  9. The time and effort the taxpayer habitually devoted to sales of property 

It is important to note that property held as inventory for sale to customers is not considered a capital asset, and as such, does not qualify for capital gain treatment. The sale of unimproved real estate has caused many disputes between taxpayers and the IRS. The IRS has attempted to limit this area of controversy by providing that a single tract of land with no substantial improvements that is owned for more than five years will not, under certain circumstances, be considered held primarily for sale to customers. Therefore, it will be capital gain property—even if it had been subdivided. However, if a taxpayer subdivides the land or engages in activities incident to the subdivision or sale, it is likely to be inventory and subject to ordinary rates if sold within five years.

If you are considering selling real property, such as land or a building, consult your KTLLP advisor to discuss the tax implications relevant to your specific situation.

January 12, 2022
| Carrie Christensen
KT Insights
 |

Expansion of Cryptocurrency Reporting

Investing in cryptocurrency is becoming increasingly mainstream and will likely become a permanent part of the U.S. financial ecosystem.  There are currently over 8,600 forms of cryptocurrency, with Bitcoin being by far the most popular, commanding over 68% of the market share.  Major retailers such as Microsoft, Home Depot, and Overstock are now accepting Bitcoin as payment for goods and services. 

For years, investors have avoided paying capital gains tax on cryptocurrency trades and sales.  This is due to the lack of financial reporting by cryptocurrency exchange brokers.  IRS Commissioner Charles Rettig estimates the annual “tax gap” to be $1 trillion, in part from unregulated cryptocurrency.  Congress is attempting to decrease the tax gap by expanding the reporting requirements for cryptocurrency transactions.  

On August 10, 2021, the Senate passed the Infrastructure Investment and Jobs Act.  As of the date of this writing, the bill still needs to be approved by the House and signed off by the President.  The bill contains a provision to expand reporting requirements for brokers of cryptocurrencies.  The expanded reporting is expected to generate $28 billion in tax revenue over the next 10 years. 

The proposed Act defines cryptocurrency as a digital asset which is a specified security.  Brokers of specified securities are required to provide customer information to the IRS including the customer’s cost basis and any gain or loss realized when the customer sells or exchanges the digital asset.  This expansion to include cryptocurrency as a specified security would go into effect for assets acquired on or after January 1, 2023.  If this bill is signed into law, you can expect to receive 1099 broker statements in early 2024 reporting your cryptocurrency gains and losses.  These gains and losses would be reported on your 2023 tax return.

Despite current absence of 1099 reporting, crypto transactions create taxable events that must be reported.

When do you owe taxes on your crypto?  Taxable events relating to cryptocurrency include the following:

  • Trading crypto for U.S. Dollar
  • Trading one crypto for another crypto
  • Using crypto to purchase goods or services
  • Mining crypto
  • Receiving crypto as a reward

How are crypto transactions taxed?  Here is what happens when cryptocurrency is traded or sold:

  • Gain or loss is realized from the trade or sale
  • The gain or loss is measured by the change in dollar value between the cost basis when the crypto is purchased and the proceeds received when the crypto is disposed
  • If the crypto was held for one year or less, the gain or loss is considered short-term and is taxed at ordinary income tax rates
  • If the crypto was held for more than one year, the gain or loss is considered long-term and is taxed at capital gains tax rates generally ranging from 15% to 23.8%, depending on your overall income

How can taxes on crypto gains be minimized?  Many of the tax reducing strategies available for publicly traded securities are also available for cryptocurrencies.  Some strategies are:

  • Engaging in Tax Loss Harvesting:  Sell cryptocurrency that has decreased in value to offset gains
  • Investing for the Long Term:  If possible, hold cryptocurrency for more than a year before selling at a gain to take advantage of lower long-term capital gains rates
  • Donating to Charity:  By donating appreciated digital assets directly to a charity, you avoid paying capital gains tax on the gain and enjoy a tax deduction equal to the fair market value of the cryptocurrency (assuming you itemize your deductions)

The world of cryptocurrency is still evolving, but rest assured that the experts at Ketel Thorstenson, LLP are here to help you along the way.  Please contact us with any questions or concerns.

September 24, 2021
| Carrie Christensen
KT Insights
 |

Provisions in Biden’s Tax Proposal that May Cost You Money

President Biden’s proposed tax plans contain many provisions that could affect the amount of income tax you pay in the near future. His plans contain provisions to increase taxes for wealthier Americans which will help fund infrastructure spending and proposed tax cuts for lower income Americans. 

The following highlights from Biden’s proposal may increase the amount of tax you owe:

Increase of top tax bracket

Currently, the top tax rate is 37%. Biden proposes to increase that to 39.6%. The 39.6% rate would apply to taxable income over $509,300 for married filing joint filers, $452,700 for single filers, $481,000 for head of household filers, and $254,650 for married filing separate filers beginning in tax year 2022.

Increase in long-term capital gains rate

Currently, long-term capital gains and qualified dividends are taxed at a maximum rate of 20% (or 23.8% including the net investment income tax if applicable). Biden proposes to increase this to 39.6% (43.4% including the net investment income tax) for taxpayers with taxable income over $1 million ($500,000 for married filing separately). If adopted, the increased rate is expected to be retroactive to April 28, 2021. This increase will be particularly painful for large one-time capital gains from selling a business or piece of property. Making matters worse, often long-term gains are purely as a result of inflation, and not really economic income.

Expand self-employment taxes

Under current law, many loopholes exist for pass-through business owners to avoid paying self-employment taxes. Self-employment earnings are taxed at a rate of 12.4% for Social Security tax (limited to $142,800 of earnings in 2021) and 2.9% for Medicare tax (unlimited), plus an additional 0.9% Medicare tax for high income taxpayers. 

Limited partners in a partnership are statutorily exempt from paying self-employment taxes on their share of the partnership income. Some partners claim limited partner status rather than general partner to avoid paying self-employment taxes. Some LLC members avoid paying self-employment taxes by claiming the treatment of a limited partner. While S-corporation shareholders are required to pay themselves a fair wage which is subject to employment taxes, their distributive share of the income is not subject to self-employment taxes. 

Biden plans to impose self-employment taxes on limited partners, LLC members, and S-corporation owners who materially participate in their business to the extent the income exceeds $400,000. This would be effective beginning in 2022. 

Expand net investment income tax (NIIT)

Under current law, taxpayers with income over certain thresholds ($200,000 for single and head of household and $250,000 for joint filers) are subject to a 3.8% tax on net investment income. Net investment income consists of interest, dividends, rents, capital gains, and income from businesses in which the taxpayer does not materially participate. 

The proposal is to make all pass-through business income (even if you actively participate) subject to the 3.8% NIIT for taxpayers with adjusted gross income (AGI) greater than $400,000. If you are an owner in a pass-through business (such as a partnership, LLC, or S-corporation) and your AGI exceeds $400,000, your business income from these sources would be subject to this additional tax.

Increase IRS enforcement efforts

Some experts estimate that the tax gap (the difference between the amount of tax due and the amount of tax paid) is as high as $1 trillion per year. Biden would like to give the IRS an additional $80 billion over ten years to increase IRS enforcement actions. This includes increasing audits, updating outdated technology, and expanding financial reporting requirements for financial institutions. The risk of being audited is expected to increase for taxpayers with taxable income over $400,000.

Limitation on deferred gains from Section 1031 like-kind exchanges

Currently, taxpayers owning real property such as land and buildings, either used in a trade or business or held for investment, can exchange the property for another “like-kind” real property and enjoy the benefit of deferring taxable gain (assuming certain conditions are met). The proposal is to limit the amount of deferred gain up to an aggregate maximum of $500,000 for single taxpayers and $1 million for married filing joint taxpayers.

Making the limitation of excess business losses permanent

The 2017 federal tax reform imposed a limitation on the amount of losses derived from an active trade or business that a taxpayer can use to offset other income such as wages and investment income. The CARES Act repealed this limitation for tax years 2018 through 2020. The limitation goes back into effect for tax year 2021 and is set to expire after tax year 2026. In 2021, excess business losses greater than $524,000 for married filing jointly and $262,000 for all other taxpayers will be suspended and carried forward to the next year. Biden proposes to make this limitation permanent.

While these are all just proposed changes and have not yet been made into law, your advisors at Ketel Thorstenson want to make you aware of potential tax law changes that may affect you and your business. Please contact Ketel Thorstenson with any questions or concerns.

June 28, 2021
| Carrie Christensen
KT Insights
 |

Tax Tip:100% Meals Deduction for 2021 and 2022

While qualifying business meals remain 50% deductible for 2020, the Consolidated Appropriations Act of 2021 (CAA) has expanded the deductibility of business meals and beverages to 100% for those provided by a restaurant in 2021 and 2022.

To be deductible, food and beverage expenses must meet all of the following criteria:

  • The expense is an ordinary and necessary expense of carrying on a trade or business
  • The expense must not be lavish or extravagant under the circumstances
  • The taxpayer, or an employee of the taxpayer, must be present when the food and beverages are provided
  • The food and beverages are provided to the taxpayer or a business associate, such as a customer, client, supplier, employee, agent, partner, or professional adviser, whether established or prospective.

For example, take-out from a restaurant is 100% deductible, but a meal catered by a grocery store would only be 50% deductible.

Consult with your tax professional at Ketel Thorstenson about this or other tax matters because each situation is different. Don’t navigate the difficult and ever changing tax codes and legislation on your own.  Ketel Thorstenson CPAs and tax professionals receive advanced training and continuing education all year long to keep our service on the forefront of the tax industry. Call us today for guidance on tax planning, tax return preparation, and tax legislation affects or questions.

March 3, 2021
| Carrie Christensen
KT Insights
 |

COVID-19 Related Retirement Distributions

The Coronavirus Aid, Relief, and Economic Security (CARES) Act (passed in March of 2020) contains many provisions intended to reduce taxpayers’ financial hardships associated with the COVID-19 pandemic.  One of the provisions of the Act concerns certain withdrawals from retirement accounts in 2020.  Normally, withdrawals from retirement accounts by taxpayers under age 59 ½ are subject to a 10% early withdrawal penalty.  Under the CARES Act, if certain requirements are met, the 10% penalty does not apply.

The maximum amount that may be withdrawn penalty-free is $100,000 per individual.  In order to qualify for penalty-free withdrawal, the following requirements must be met:

  • The distribution must be made to a qualified individual.  A qualified individual must meet one of the following requirements:
    • Diagnosis of COVID-19 by a test approved by the CDC
    • Experienced adverse financial consequences due to
      • being quarantined, furloughed or laid off
      • having work hours or pay reduced
      • having been unable to work due to a lack of child care
      • having owned or operated a business that has been closed
      • having a reduction in self-employment income
      • having a job offer rescinded or a start date delayed
  • The distribution must be made from an eligible retirement plan such as an IRA, 401(k), 401(a), 403(a), 403(b), or 457(b).
  • The distribution must have been made between January 1, 2020 and December 31, 2020.

While not subject the 10% penalty, the distribution is still taxable.  The CARES Act provides the option of reporting the entire distribution on the 2020 tax return or reporting the distribution ratably over three years.  For example, if you took retirement distributions of $75,000 in 2020, you would have the option to report $25,000 of income in each 2020, 2021, and 2022. 

In addition, the CARES Act allows a taxpayer to recontribute any portion of a COVID-19 related distribution to a qualified plan within three years from the date of receipt.  Any amount recontributed is considered a tax-free rollover and excluded from income.  Because of the three-year recontribution window, tax planning opportunities exist.  For example, if the funds are recontributed prior to filing the 2020 tax return, they are excluded from income.  This can be as late as October 15, 2021 if the return is extended.  If the funds are recontributed after filing the 2020 return, an amended return may need to be filed.  Several timing scenarios may occur.  Consult your tax advisor to determine the best course of action for your specific situation.

January 7, 2021
| Carrie Christensen
KT Insights
 |

Update on SD COVID Small Business and Non-Profit Grants

If you applied for Round One and/or Round Two of the South Dakota Small Business Grant Program, you may be expecting to receive your grant award this week.  While some businesses have begun receiving grant funds, many are still waiting.  The grant office initially stated that all grants would be awarded by December 30, 2020.  However, due to the addition of the second round of small business and non-profit grants, the review process is taking longer than originally anticipated.  The state will still be reviewing applications and performing financial verifications to determine final award amounts into January 2021, and payments will continue to be distributed in the new year.

December 29, 2020
| Carrie Christensen
KT Insights
 |

Changes Announced and Deadline Extended for South Dakota Small Business and Non-Profit Grants

This morning, Governor Noem announced changes to the Small Business Grants which utilize Coronavirus Relief Fund dollars to assist small businesses and start-up businesses, and small non-profit businesses. The updates will help even more businesses and include:

  • Increasing the maximum grant from $100,000 to $500,000
  • Decreasing the minimum threshold from $750 to $500
  • Broadening the eligibility requirement from reduction in business of more than 25% to a reduction in business of more than 15%

Additionally, the application deadline will be extended by one week, so the new deadline for applications will be October 30. 

For eligibility, bill details and application information click the link to our original Grant blog at https://www.ktllp.cpa/additional-grants-available-for-south-dakota-small-businesses-affected-by-covid-19/

October 22, 2020
| Carrie Christensen