Newsletter from
Steve Richardson & Company, Certified Public Accountants

March 27, 2020

Dear Friends and Clients:

Essential Services

The City of Tuscaloosa and Mayor Maddox consider CPA Firms to be ‘essential services’.  CPAs will play an important role in the efficient distribution of Covid-19 economic benefits.  Our clients need us; we are here for you!

When people are out of work, tax refunds become very important. Too many people in our society live pay-check to pay-check.  Some of our trade and craftsmen are self-employed or otherwise exempt from unemployment.  People are already going hungry; it is going to get worse.  Many small businesses will disappear forever. This crisis is going to hurt – bad.  What are we going to do?  Unfortunately, I do not have good answers.

Covid-19 is frightening. 

I have read estimates that the economic shut down in the USA is costing the economy one-trillion dollars a month! Wow!  The post Covid-19 economic recovery could take five or six years.

The post Covid-19 world will not be the same.

The new law is 800 Pages!

I can’t pretend that I’ve read all 800 pages.  This law is a beast; I mean to say, it is complicated.  There is a lot I do not know.

The ‘I do not know’ part will cause me to write more newsletters.  I plan to write follow-up newsletters for individuals, small businesses and for the church and non-for-profit sector.

The CARES Act

On March 25, by unanimous vote, the Senate passed the third of four coronavirus relief law (CARES Act, H.R. 748, ‘The Act’)

A few additional tax provisions were included in the bill that will prove helpful. These provisions related to:

• the non-taxability of certain loan forgiveness,
• advance refunding of certain tax credits and
• the suspension of certain aviation taxes

I will write more about these as I know more.  The non-taxability of loan forgiveness and advanced refunding of certain tax credits could prove very helpful.  I’m even ok with the suspension of certain aviation taxes; we do need to keep the commercial air carriers flying.

Individual recovery rebates/credits

The crux of the CARES Act is Covid-19 relief direct to individuals.

Under the CARES Act, an eligible individual is allowed an income tax credit for 2020 equal to the sum of:

• $1,200 ($2,400 for eligible individuals filing a joint return) plus
• $500 for each qualifying child of the taxpayer (the child tax credit); the credit is refundable.

As rapidly as possible

These are complicated calculations that related to the 2020 tax year.  The law indicates that the IRS will do these calculations and send money out “as rapidly as possible”, whatever that means.

There is good news

Most eligible individuals won’t have to take any action to receive an advance rebate from IRS. This includes many low-income individuals who file a tax return to claim the refundable earned income credit and child tax credit.

Direct Deposit

IRS may make the rebate electronically to any account to which the payee authorized, on or after Jan. 1, 2018, the delivery of a refund of federal taxes or of a federal payment.

IRS Notification

No later than 15 days after distributing a rebate payment, IRS must mail a notice to the taxpayer’s last known address indicating how the payment was made, the amount of the payment, and a phone number for reporting any failure to receive the payment to IRS.

More Good News!

Tax credits are complex, data driven, calculations.  The IRS will make errors.  The Act has a Get-Out-Jail-Free card!  If the taxpayer received an advance rebate during 2020 that was less than the credit to which the taxpayer is entitled for 2020, the taxpayer will be able to claim the balance of the credit when filing the 2020 return. If, on the other hand, the advance rebate received was greater than the credit to which the taxpayer is entitled, the taxpayer won’t have to pay back the excess. That is because the 2020 credit can’t be reduced below zero.

I hope this means what I think it means.  I think it means this: if the IRS calculates a larger credit than you are entitled to, you do not have to pay it back!  Cool!

No 10% additional tax for coronavirus-related retirement plan distributions

This does not mean that you should withdraw all your retirement savings! Please don’t!!

A coronavirus-related distribution is any distribution (subject to certain dollar limits), made on or after January 1, 2020, and before December 31, 2020, from an eligible retirement plan to a qualified individual. A qualified individual is:

• Who is diagnosed with the virus SARS-CoV-2 or with coronavirus disease 2019 (COVID-19) by a test approved by the Centers for Disease Control and Prevention (CDC),
• Whose spouse or dependent (as defined in Code Sec. 152 ) is diagnosed with such virus or disease by such a test, or
• Who experiences adverse financial consequences as a result of being quarantined, being furloughed or laid off or having work hours reduced due to such virus or disease, being unable to work due to lack of child care due to such virus or disease, closing or reducing hours of a business owned or operated by the individual due to such virus or disease, or other factors as determined by the Secretary of the Treasury.

A qualified individual should be most of us.

O-yeah; can’t be more than $100,000 and the income tax on the qualified distributions can be paid over three tax years.

RMD requirement waived for 2020

Need I say more?

$300 above-the-line charitable deduction

Theoretically this is to encourage charitable giving in these bleak times.  I think it’s silly.  I mean $300! Give me a break.  Make it $3,000 or even $30,000 and now we can make a difference.

There are other changes to the tax code designed to enhance charitable giving but, frankly, these relate to wealthy people.  My wealthy clients most often customize their annual giving plans with my direct assistance.

Student Loans!

This is a hot button issue.  The law allows for an employer to pay up to $5,250 per year on an employee’s student loans under an educational assistance program for the employee’s education – Tax Free!  Unfortunately this does not include the student loans or education of employee spouses or dependents.

Not too bad but not nearly enough either.

More to come

This is only one of four major bills related to the Covid-19 crisis.  I will release additional information as I am able to study the materials.

Best regards,

Steve Richardson, CPA

Newsletter from
Steve Richardson & Company, Certified Public Accountants

February 24, 2020

Lying is, generally speaking, a bad idea

To our clients and friends,

He should have known better!

To our clients and friends, Recently a law professor at the University of Minnesota was convicted of lying to the IRS. The judge said, Ed Adams “knew more than most” that he broke the law

Lying is, generally speaking, a bad idea. Most people do not know that lying to the IRS can also be a crime.  Ed Adams knew and lied anyway.

Judge Donovan Frank said Adams deserved a harsher sentence than the one year of probation that prosecutors requested because of his role as a tenured professor who should be setting an example for up-and-coming lawyers.

“You clearly knew more than most that what you were doing was illegal and unethical,” said Frank.

Obviously, there is more to this case than one law professor lying to the IRS that led to the sweetheart plea-bargain deal offered by the prosecution. Mr. Adams was indicted in 2017 as a mastermind of a complicated embezzlement scheme that bilked millions of dollars from investors. Adams pleaded guilty to only a misdemeanor offense last October, and prosecutors dropped 17 other counts. A sweetheart deal, indeed!

A “complicated scheme” implies to me compatriots and co-conspirators. I wonder how many of Mr. Adam’s cohorts are facing prison time as a part of this sweetheart deal?

Lying is, generally speaking, a bad idea

Lying to the IRS can be a go-to-jail serious crime.

Don’t lie!

This is not nearly as obvious as it may seem on the surface. Never lie to any federal, state or local official, especially an officer of the law. If someone with a badge wants to ask you questions, the only word from your mouth is “lawyer”. Innocent or not makes “zero” difference!

The 5^th Amendment

We have the 5^th Amendment for our protection. We have a 100% protected legal right to say nothing! If you cannot be 100% truthful and candid with legal officials and authorities, rely upon the 5^th!

The 5^th Amendment is a powerful individual right. It is your job as a citizen to know when, where and how to use this important personal right.

————————————————————————-

Subscribe to Steve’s Email Updates 

Newsletter from
Steve Richardson & Company, Certified Public Accountants

October 21, 2019

To Our Clients and Friends:

Stubborn-Super-Steve!

Much to my physician’s consternation, I’m not an “outstanding patient”. I’m well now, but I’ve been sick for ten hard days. My Physician told me that if I didn’t rest, I would “relapse”. Frankly, I didn’t believe him. What should have been a five-day illness turned into a ten-day illness because I failed to follow good professional advice.

I thought that the “rest” part of recovery doesn’t apply to Mr. Stubborn Super-Steve. Boy-Howdy was I wrong! Good professional advice is important. I will try to be a better patient but Mr. Stubborn Super-Steve will very likely show-up again as it has so many times in the past.

It is important to follow good professional advice!

We have a few CPA Firm clients a bit like Mr. Stubborn Super-Steve. Thankfully, not too many. Most of our clients are “outstanding”! That phrase, “outstanding clients” may need to be defined; an “outstanding client” is one who acts upon our advice and pays their bills on time. When our clients follow our advice, it does pay off!

We do more than tax returns. We look at retirement planning, cash flow issues, investment management, employee and personnel, and other issues as they present themselves.

Right now, we (our clients and their CPA Firm) need to do a bit of year-end tax planning.

2019 and 2020 Tax Planning

With year-end approaching, now’s the time to take steps to cut your 2019 tax bill. Here are some relatively foolproof year-end tax planning strategies to consider, assuming next year’s general election doesn’t result in retroactive tax changes that could affect your 2020 tax year.

Year-end Planning Moves for Individuals

Here are some strategies that may lower your individual income tax bill for 2019.

• Game Generous Standard Deduction Allowances. For 2019, the standard deduction amounts are $12,200 for singles and those who use married filing separate status, $24,400 for married joint filing couples, and $18,350 for heads of household. If your total annual itemizable deductions for 2019 will be close to your standard deduction amount, consider making additional expenditures before year-end to exceed your standard deduction. That will lower this year’s tax bill. Next year, you can claim the standard deduction, which will be increased a bit to account for inflation.
  • Charitable Deductions. Deferring and doubling up on charitable donations, in alternating tax years, is actually easy to do with minimal planning. There are venerable well established organizations set up to assist donors. One of my favorites is the National Christian Foundation.
• Carefully Manage Investment Gains and Losses in Taxable Accounts. If you hold investments in taxable brokerage firm accounts, consider the tax advantage of selling appreciated securities that have been held for over 12 months. The maximum federal income tax rate on long-term capital gains recognized in 2019 is only 15% for most folks, although it can reach a maximum of 20% at higher income levels. The 3.8% Net Investment Income Tax (NIIT) also can apply at higher income levels.
  • With the instability of the looming 2020 elections, I recommend accelerating your capital gains into 2019 while we have tax law clarity and favorable tax rates.
• Take Advantage of 0% Tax Rate on Investment Income. For 2019, singles can take advantage of the 0% income tax rate on long-term capital gains and qualified dividends from securities held in taxable brokerage firm accounts if their taxable income is $39,375 or less. For heads of household and joint filers, that limit is increased to $52,750 and $78,750, respectively. While your income may be too high to benefit from the 0% rate, you may have children, grandchildren, or other loved ones who will be in the 0% bracket. If so, consider giving them appreciated stock or mutual fund shares that they can sell and pay 0% tax on the resulting long-term gains. However, if you give securities to someone who is under age 24, the Kiddie Tax rules could potentially cause some of the resulting capital gains and dividends to be taxed at the higher rates that apply to trusts and estates.
• Give away Winner Shares or Sell Loser Shares and Give away the Resulting Cash. Don’t give away loser shares (currently worth less than what you paid for them) to relatives. Instead, you should sell the shares and book the resulting tax-saving capital loss. Then, you can give the sales proceeds to your relative. On the other hand, you should give away winner shares to relatives. These principles also apply to donations to IRS-approved charities.
  • If you gift stock, never gift a stock that is worth less than you paid for it!
  • Gifting stock that has an appreciated in value to charity or to a relative can be a very good tax planning strategy.
• Convert Traditional IRAs into Roth Accounts. The best profile for the Roth conversion strategy is when you expect to be in the same or higher tax bracket during your retirement years. The current tax hit from a conversion done this year may turn out to be a relatively small price to pay for completely avoiding potentially higher future tax rates on the account’s earnings.
  • This is one of my favorite ways to take full advantage of the lower Trump Tax Rates. I have assisted clients in moving a bunch of IRAs into ROTH accounts at minimal tax costs.
• Take Advantage of Principal Residence Gain Exclusion Break. Home prices are on the upswing in many areas. More good news: Gains of up to $500,000 on the sale of a principal residence are completely federal-income-tax-free for qualifying married couples who file joint returns ($250,000 for qualifying unmarried individuals and married individuals who file separate returns). To qualify for the gain exclusion break, you normally must have owned and used the home as your principal residence for a total of at least two years during the five-year period ending on the sale date.
• Don’t Overlook Estate Planning. Thanks to the Tax Cuts and Jobs Act (TCJA), the unified federal estate and gift tax exemption for 2019 is a historically huge $11.4 million, or effectively $22.8 million for married couples. Even though these big exemptions may mean you’re not currently exposed to the federal estate tax, your estate plan may need updating to reflect the current tax rules.
  • I should write an article on estate planning. Way too many people believe that with the estate and gift tax exemptions being $11.4 million (or $22.8 million) for married couples that estate planning is no longer necessary. Not-True!
  • Good estate planning has never been about cutting the estate taxes.
  • Good estate planning has always been about smoothing the transition of even modest wealth and assets over subsequent generations and to insure the survivability of “legacy businesses”.
  • Good estate planning is being a blessing to your children and to your children’s children.
  • People with modest wealth can accomplish a lot with simple estate planning!

Year-end Planning Moves for Small Businesses

If you own a business, consider the following strategies to minimize your tax bill for 2019.

• Establish a Tax-favored Retirement Plan. If your business doesn’t already have a retirement plan, now might be the time to take the plunge. Current retirement plan rules allow for significant deductible contributions. Contact us for more information on small business retirement plan alternatives, and be aware that if your business has employees, you may have to cover them too.
• Take Advantage of Generous Depreciation Tax Breaks. 100% first-year bonus depreciation is available for qualified new and used property that is acquired and placed in service in calendar year 2019. That means your business might be able to write off the entire cost of some or all of your 2019 asset additions on this year’s return. So, consider making additional acquisitions between now and year-end.
• Cash in on Generous Section 179 Deduction Rules. For qualifying property placed in service in tax years beginning in 2019, the maximum Section 179 deduction is $1.02 million. The Section 179 deduction phase-out threshold amount is $2.55 million.
• Time Business Income and Deductions for Tax Savings. If your business is conducted via a pass-through entity, the traditional strategy of deferring income into next year while accelerating deductible expenditures into this year makes sense if you expect to be in the same or lower tax bracket next year. On the other hand, if you expect to be in a higher tax bracket in 2020, take the opposite approach. Accelerate income into this year (if possible) and postpone deductible expenditures until 2020.
• Maximize the Deduction for Pass-through Business Income. For 2019, the deduction for Qualified Business Income (QBI) can be up to 20% of a pass-through entity owner’s QBI, subject to restrictions that can apply at higher income levels and another restriction based on the owner’s taxable income. Because of the various limitations on the QBI deduction, tax planning moves (or non-moves) can have the side effect of increasing or decreasing your allowable QBI deduction.
• Watch out for Business Interest Expense Limit. Thanks to an unfavorable TCJA change, a taxpayer’s deduction for business interest expense for the year is limited to the sum of (1) business interest income, (2) 30% of adjusted taxable income, and (3) floor plan financing interest paid by certain vehicle dealers. Fortunately, many businesses are exempt from this limit. We can help you determine if an exemption applies.
• Claim 100% Gain Exclusion for Qualified Small Business Stock. There is a 100% federal income tax gain exclusion privilege for eligible sales of Qualified Small Business Corporation (QSBC) stock that was acquired after 9/27/10. QSBC shares must be held for more than five years to be eligible for the gain exclusion break. Contact us if you think you own stock that could qualify.

This letter only covers some of the year-end tax planning moves that could potentially benefit you, your loved ones, and your business. Please contact us if you have questions, want more information, or would like us to help in designing a year-end planning package that delivers the best tax results for your particular circumstances.

Best regards,

Steve Richardson, CPA

The Kirkwood Letter

Newsletter from
Steve Richardson & Company, Certified Public Accountants

September 30, 2019

The Kirkwood Letter

With permission and for fun reasons, I am titling this letter the “Kirkwood” letter in honor of a client couple that showed good initiative in including me in a family discussion about investment options related to modest and irregular gifts of cash from grandparents to their infant children.  I was honored to be included in that discussion.  The amounts of money involved are “modest” and most young couples would inappropriately jump to the conclusion that there is no good investment option with “modest” and “irregular” funds.  There are in fact a number of excellent investment options that fit this cash flow scenario. 

The investment strategy we discussed and settled on for this family is additional unscheduled mortgage payments.  This strategy fits the Kirkwood family perfectly.  It also fits with my philosophy that parents need to be in a position of financial strength before they try to help their children financially.

With college educations skyrocketing in costs, family financial strength is more important than ever.  The plan is simple but unexpectedly powerful!

This investment strategy builds upon an indisputable financial principal: good financial behavior, over long time horizons, will always pay off.  Few investment are more long-term that a house and a mortgage.

Please take the few minutes necessary to read this short memo.  This investment strategy is deceptively simple but do not under estimate its effectiveness. 

Why Accelerated Mortgage Pay-Down Is a Good Investment Strategy

The notion of paying down one’s home mortgage balance faster than required is not a new idea. However, even those who are well schooled in personal finance may be surprised to discover how powerful this idea can be. This release prepares you to raise the issue and explain it to clients who might be interested. Before getting started, please note the following key points:

•   The accelerated mortgage pay-down idea can only work for clients who have positive cash flow and/or available cash. It is not for folks who are struggling to pay their monthly bills.

•   The idea is only appropriate for clients who are looking for a very conservative, risk-free way to invest some surplus funds. Obviously, clients who want to earn (and believe they can earn) 8% to 10% annually are not going to be very excited about the idea of expending cash to earn 3.5% or 4% (or whatever their exact mortgage interest rate may be) by paying off their home mortgage early.

•   Finally, the idea is far more powerful when the client intends to continue pumping the monthly accelerated mortgage pay-down amount into a retirement account after the mortgage has been paid off.

With these thoughts in mind, here is a more detailed analysis in the form of sample scenarios.

Sample Scenario: Accelerated Pay-down Strategy Makes Good Financial Planning Sense

Phil, your 45-year-old client, is in good financial shape. He has cash on hand and positive monthly cash flow after paying his bills. Even better, he expects to be in the same position for the foreseeable future. Assume Phil has a $400,000 balance on a recently refinanced 30-year first mortgage on his home that charges 4% interest. (We know the current rates are lower for qualified borrowers, but that may not last forever. Plus, we want to keep things simple to illustrate the points we will make in this release.)

Phil’s monthly payment for principal and interest is only $1,910, but he has a whopping 30 years to go before the mortgage will be paid off (if he sticks to the prescribed monthly payment schedule). That means Phil will be a wizened 75 years old when the mortgage is finally extinguished.

Being 75 years old before your mortgage is paid off probably does not sound so great to most folks. Collecting a guaranteed, risk-free 3.5% or 4% (or whatever rate applies) return by paying down one’s mortgage quicker (thus avoiding the interest that would otherwise be charged on the principal that is paid off early) probably sounds like a solid investment idea to many homeowners. After all, the stock market is looking rather frothy, and fixed income investments are currently paying pitiful interest rates.

Impact of Mortgage Interest Deductibility

One argument that may be mounted against the accelerated mortgage pay-down idea is that your client will lose tax deductions because interest charges will go down more rapidly than if he or she sticks to the scheduled monthly payments. This is true, but so what? Consider the following points:

•   The TCJA imposed stricter limitations on home mortgage interest deductions for 2018-2025.

•   The greatly increased standard deduction for 2018-2025 means that many more clients won’t be claiming itemized deductions. Even if they itemize, the larger standard deduction reduces the incremental tax benefit from itemizing.

Impact of Future Inflation or Deflation

While the accelerated mortgage pay-down strategy will yield guaranteed results, it is not foolproof. If we have a period of roaring inflation, paying down a mortgage with a relatively low interest rate earlier than required may no longer make sense. In this situation, it may be better to stop the accelerated pay-down program, allow the mortgage term to stretch out, and pay the remaining balance back with cheaper inflated dollars.

On the other hand, the accelerated pay-down strategy will work great during a period of deflation because the mortgage is being paid down sooner when dollars are cheaper rather than later when dollars are more expensive.

Big Advantage to “Continuing” the Program
after
Mortgage Is Paid Off

The accelerated mortgage pay-down strategy can clearly be beneficial in and of itself because interest charges are avoided, and debt is eliminated from the client’s personal balance sheet. Another advantage is your client can stop and restart the program anytime he or she wants (for example, when inflation or deflation strikes). However, the biggest payoff from following the strategy will probably be reaped by folks who have the cash flow and self-discipline to continue the program even after the mortgage is extinguished. This involves taking the monthly amount that was previously dedicated to the accelerated mortgage pay-down strategy and stuffing it into a retirement savings account (whether taxable or tax-advantaged).

In our sample scenario, let’s say Phil pays $3,500 per month under the accelerated mortgage pay-down program instead of making the scheduled monthly payment of $1,910. He will pay off his $400,000 mortgage balance in about 12 years, at age 57, instead of paying it off in 30 years, at age 75. He will earn a guaranteed 4% rate of return because that is the interest rate he avoids on the accelerated principal payments.

If Phil continues the program after the mortgage is paid off by putting $3,500 a month into a retirement savings account that earns 4% annually for another eight years, he will have accumulated about $395,000 at age 65. This seems like a much better plan than sticking with the status quo and making mortgage payments until age 75.

More Sample Scenarios

Here are some additional illustrations of how the accelerated mortgage pay-down strategy can work.

Faster Pay-Down. Now say 45-year-old Phil pays $4,500 per month under the accelerated mortgage pay-down program instead of making the scheduled monthly payment of $1,910. He will pay off his $400,000 mortgage balance in eight years and ten months, at age 54, instead of paying it off in 30 years, at age 75. He will earn a guaranteed 4% rate of return because that is the interest rate he avoids on the accelerated principal payments.

If Phil continues the program after the mortgage is paid off by putting $4,500 a month into a retirement savings account that earns 4% for another 11 years, he will accumulate about $745,000 by age 65. Sweet! Once again, this seems like a much better plan than sticking with the status quo and making mortgage payments until age 75.

Really Fast Pay-Down. Now say 45-year-old Phil pays $5,000 per month under the accelerated mortgage pay-down program instead of making the scheduled monthly payment of $1,910. He will pay off his $400,000 mortgage balance in about seven years and ten months, at age 53, instead of paying it off in 30 years, at age 75. He will earn a guaranteed 4% rate of return because that is the interest rate he avoids on the accelerated principal payments.

If Phil continues the program after the mortgage is paid off by putting $5,000 a month into a retirement savings account that earns 4% for another 12 years, he will accumulate a little over $920,000 by age 65. Wow! That would be great!

Slower Pay-Down. Let’s now be a bit less ambitious and assume that 45-year-old Phil pays $2,500 per month under the accelerated mortgage pay-down program instead of making the scheduled monthly payment of $1,910. This only requires an additional payment of $590 per month. Under our basic assumptions, Phil should have absolutely no problem doing this. Paying $2,500 per month will allow Phil to pay off his $400,000 mortgage balance in about 19 years and two months, at age 64, instead of paying it off in 30 years, at age 75. He will earn a guaranteed 4% rate of return because that is the interest rate he avoids on the accelerated principal payments.

Older Individual. Finally, let’s now assume Phil is 55 instead of 45. Say Phil pays $4,000 per month under the accelerated mortgage pay-down program instead of making the scheduled monthly payment of $1,910. He will pay off his $400,000 mortgage balance in about ten years and two months, at age 66, instead of paying it off in 30 years, at age 85. He will earn a guaranteed 4% rate of return because that is the interest rate he avoids on the accelerated principal payments. This seems like a much better plan than sticking with the status quo and making mortgage payments until age 85.

Conclusion

You get the idea. With financial software, you can put together sample scenarios for clients who are interested in the accelerated mortgage pay-down concept. It often makes good sense from an overall financial planning perspective, and it delivers a guaranteed, risk-free rate of return. You can’t say that about too many other investment strategies.

Very truly yours,

Steve Richardson, CPA

Steve Richardson & Company, Certified Public Accountants

QBI Tax Planning Summary

May 21, 2019

To Our Clients and Friends:

This past tax season was a bit more challenging than most for several reasons.

• Congress initiated a massive tax overhaul that caused a number of unexpected changes in tax practice.
• The IRS was ‘out of work’ for 35 days at the beginning of tax season. Tax season got off to a slow and cranky start.
• The tax withholdings tables issued by the IRS and third party vendors such as QuickBooks and ADP were wrong!

I’m going to try and draft a series of letters about the actual day-to-day impact of the new tax law on our clients. Some of these letters will be simple, short and to the point. Others will be equally as important but a bit more complex.

Qualified Business Income Deduction (QBI)

This year we were surprised by how complex the “qualified business income deduction” would prove to be in practice. The QBI sounds simple. A business may get up to a 20% tax deduction for domestic business operations. It’s not that simple!

LLCs and S-Corps

Most small business entities are now organized as “pass-through” entities such as LLCs and S-Corps. The QBI is one step more difficult when a “pass-through” entity is involved.

Specified service trade or business

Small businesses face complex QBI rules. If a small business is a “specified service trade or business”, then if faces a daunting additional layer of rules.

A “specified service trade or business” is, according to the IRS,

“any trade or business involving the performance of services in the fields of health, law, accounting, actuarial science, performing arts, consulting, athletics, financial services, brokerage services, or any trade or business where the principal asset of such trade or business is the reputation or skill of professionals.”

The additional of rules applied to “specified service trade or businesses” will cause a “phase-out” of the QBI deduction based on income, which is $157,500 for individuals and $315,000 for married couples. Splitting income from a “specified service trade or businesses” to a non-“specified service trade or businesses” is subject to tight rules. Also, self-rentals tied to “specified service trade or businesses” are treated as if they too are “specified service trade or businesses”.

There are planning opportunities. These planning opportunities are narrow and require substantial lead time.

Rental Real Estate

Under the proposed safe harbor, a “rental real estate enterprise” would be treated as a trade or business for purposes of Sec. 199A if at least 250 hours of services are performed each tax year with respect to the enterprise.

Under limited circumstances, rental activities can be treated as subject to the Section 199A QBI Deduction.

But should your rental property be treated as Section 199A property?

There are a few problems with treating rental real estate as subject to the QBI rules.

1. If the properties lose money (not uncommon in rental real estate) one can have a “Negative QBI”. A negative QBI does nothing good. It is a direct reduction in the amount of available QBI deduction. If you have a pass-through entity making a profit (as LLC or S-Corp) a negative QBI adjustment reduces the value of the QBI deduction.
   1. This “negative QBI through some of our younger staff people a curve ball this past tax season.
2. The record keeping requirements for the 250-hours of personal services are onerous.

The QBI only helps a taxpayer if they are profitable.

Some rental properties are automatically subject to the 199A rules.

If you have an active trade or business that is not a -“specified service trade or businesses” and this active trade or business is engaged in a self-rental activity, then the rental property is subject to the 199A rules. Tax Planning: if you rent your own property for your business, make sure that the rents paid are high enough to show a rental profit.

QBI is complicated

These rules are complicated and frankly, I’m still learning the rules.  The IRS has been slow to provide guidance for the same reasons; the IRS is still trying to understand the QBI rules and the implications of the QBI rules.  We will be hearing more on this topic.

Conclusion

As always, we deeply appreciate all of our clients and friends.

Sincerely,

Steve Richardson, CPA

To Our Clients and Friends:

For a variety of reasons both personal, financial and political, medical insurance companies and Big Pharm are not on my happy list.  On a good day, I find them annoying.  On a bad day, I find them … very annoying!

In this short article, I am going to deal with managing the financial costs of medical insurance and Big Pharm as it relates to prescriptions. 

Most of you will not care about my political views on the topics of medical insurance and Big Pharm so I will leave that discussion at the end of this article. It will be easy for you to skip over.

The problem

Last week I discovered that my Medicare Supplemental Drug Policy will not cover a medication that I need.  The medication is expensive, without insurance, it is $300 a month; with a 20% co-pay under my old policy it would have been $60.  Remember that number: $60; it will become important a bit later on.

A bit of related personal information and background

The advantages of having a long-term relationship with an outstanding primary care physician cannot be overstated.  For the past three or four years I have been developing a collection of minor symptoms that are collectively getting a bit more pronounced. My doctor said, ‘I think you are suffering from this medical condition and I am going to prescribe this medication to see if it is effective.’

Two things about this meeting surprised me:

1. The doctor’s diagnosis was 100% understandable; I had heard of the condition among my peers and it is not unusual in my age group.  I understand my condition; I can even pronounce its name!
2. The medication was immediately and remarkably effective!

So yea! Good diagnosis and good medication.

The problem

The problem, as I said, my supplemental drug policy will not pay for the drug.  A $300 a month payment for a necessary medication is more money than many of my peers can comfortably afford.  This is a problem!

My physician’s nurse, who called to give me the bad news, was as frustrated as I was. 

The propaganda and the exclusion

I mentioned to the nurse the possibility of having a local pharmacist compound the medication.  The nurse said,

“O-no; that’s not a good option. Compounding medication will be twice as expensive as the drug companies.  It will cost $600 or more to get this medication compounded and the insurance companies never pay for compounded medication.” 

It is a fact that medical insurance companies only pay for manufactured medications, i.e., Big Pharm!  They systematically exclude compounding pharmacies from any reimbursement whatsoever.

The propaganda (or marketing if you will) that is pervasive is that compounded medication is more expensive than Big Pharm manufactured medication.  This is 100% untrue.

My Compounding Pharmacist

CPAs are trained to be skeptical.  When someone presents me with an unsupported fact such as, “compounded medications are twice as expensive as manufactured drugs”, I want to verify the accuracy of that statement.  So; I called a compounding pharmacist and did a bit of price shopping.

My new pharmacist said this,

“Sure, I compound that medication every day. A monthly supply will be about $50, but, I have to tell you, your insurance company will not reimburse a compounded medication so you will have to pay full price.”

The exact same medication for $50 instead of $300!  The compounded medication will cost me $50; with full insurance coverage, the co-pay alone would cost me $60.  This is a serious pricing mismatch!

How to fight back against Medical Insurance and Big Pharm!

I asked my new pharmacist to call my primary care physician and discuss my case; the result is that prescription has now been transferred to my new pharmacist. 

Is this a massive blow against the machinations and machinery of the medical insurance industry and Big Pharm? No; it doesn’t even qualify as a little bitty blow.

But –

I accomplished two things:

1. I took care of my family’s finances
2. I sent my business to a compounding pharmacist.

It’s those professionals, the compounding pharmacist, who can strike a significant blow against Big Pharm. 

My recommendation is this: if the medical insurance industry and Big Pharm give you problems concerning your medication, investigate your local compounding pharmacist.

Skip the politics

Two things have influenced my politics on the topic of medical insurance and Big Pharm; one is an event that occurred 30-years ago, the other is a recent article written by an esteemed physician, Adam S. Richardson, Dermatology.   Esteemed in my eyes anyway, he is my son!

Thirty-years ago I was out of the country when I discovered that I left home without my high blood pressure medication.  Even with my insurance coverage, this medication was $160 a month.  I called back to my primary care physician (the same physician I still use) and ask him to call a local pharmacist in Jamaica.  A 30-day supply of my prescription was delivered to my guest house with a $7 bill (which included delivery).  Wow! Same drug; same packaging, same inserts, exactly the same.  $7 (not insured) verses $160 (with full insurance coverage).  I am delighted and also annoyed!

The policy of Big Pharm to overcharge US customers and undercharge non-US customers is a political issue for me.

Dr. Adam Richardson wrote an article for a respected dermatology journal one of the conclusions was that dermatology patients could be better served by more judicious use of local compounded medications because of the significant cost savings. 

One reason that I have a high level of respect for the medical profession is their commitment to a central unwavering concept; in the final analysis, it is the “Quality of Patient Care” that matters! 

Adam’s article points out an important issue: the cost of medication can compromise the quality of patient care. To any physician, that is an unacceptable outcome.

Employee Parking and the Rumored Tax on Churches!

The Rumored Tax on Churched (and other non-profits) for employee parking!

I’m getting a large number of inquiries from churches and other Section 501(c)(3) organizations about the new tax on employee parking and other transportation fringe benefits.

The Tax on Employee Parking:

Yes; it’s true, there is an odd-duck new tax policy, lurking in the new tax law, that will cause many churches and other Section 501(c)(3) organizations to pay taxes on employer provided parking.

Not to Worry!

It is highly unlikely that this new tax law will have any appreciable impact on churches and other not-for-profit organization here, in the Deep South.

How does being in the Deep South change a tax law?

This new tax, on employer provided parking, will primarily impact high cost urban areas where parking is a difficult and expensive issue.  Here, in the Deep South, parking, especially parking at churches, is generally free (as in without a charge or parking fee).  Free is good!  Parking to get into my office is free.  I like free.

Fair Market Value

The tax on free parking provided to employees is based on the fair market value of the parking benefit.  The fair market value of parking is determined by ‘how much do you charge non-employees’ to park at the same or similar location.  In the Deep South, churches do not charge for parking.  It’s free! If it’s free, the value taxed to the employee for the same or similar parking is zero!

Background (background is important)

In the early 1990s, Congress wanted to provide incentives to use mass transit and limit the exclusion for employer-provided parking to a specified dollar amount, and enacted an exclusion for qualified transportation fringe benefits.  Ok; let me say that again in plain English: Congress wanted to use tax law to modify people’s behavior.  The congressional policy was to encourage them to use more mass transit and less automobiles for commuter traffic.

That rule changed for tax years beginning after 1997 when Congress provided that an employee could choose to reduce their compensation and then receive a nontaxable qualified transportation fringe benefit.  This policy shift lowered the income taxes on employees thereby saving them a tiny bit of money.

Nationwide, the use of employer-provided parking “exploded” as a tax-free fringe benefit.

This is an excellent example of how changes in tax policy can have a significant effect on personal and corporate behavior.

[One of my hobbies is reading ‘behavioral economics’; that is the economics of what causes the behavior of people to change.  It’s interesting. The “explosion” of employer provided parking as a tax-free fringe benefit is very much out of proportion to the actual economic value of the tax benefit.  The “explosion” of behavioral change is not a value based economic decisions; the decision is the perception of a “loop-hole” in the tax law.  I call it the “beat the system” economic response.]

By its nature, a benefit related to employer-provided parking, is enjoyed primarily by employees working in urban areas, where parking is expensive.  This change in tax policy will have minimal effect on churches and other Section 501(c) (3) organizations in the Deep South were parking is, generally speaking, cheap!

Politics or Economic?

The Trump tax law’s proposal to tax this benefit is the administrations belief that qualified transportation fringes (including employee parking) are primarily personal benefits and not directly related to a trade or business.  From a value based economic point of view, the administration is not wrong; but, tax law has never been, nor will it ever be, based on any coherent economic theory or policy.

The tax law is, and always will be, based on political policy with little, if any, lip service to value based economics.

Ok; its politics!

Notice the politics of this change in tax policy.  The policy is directed to employers and specifically a new target, non-for-profit employers such as churches and other Section 501(c) (3) organizations.  It is not targeted to individuals! Not wanting to eliminate an individual income tax exclusion, Congress decided to leave the exclusion in place and eliminate the employer’s expense deductions associated with this benefit. This, hypothetically, will not increase tax on individuals, who enjoy free employer parking, but, it will increase taxes on businesses who provide that parking.  I say “hypothetical” because no one expects free employer provided parking to survive for long if it is being taxed.

But; this is a tax on Churches!

Including churches, other tax-exempt and governmental organizations in this policy shift, where elimination of a tax deduction is not meaningful, Congress made the value of employer provided parking subject to unrelated business income tax.

A political faux pas

This is new policy; it is also invasive.  I suspect that there will be political push-back from the not-for-profit sector on this tax policy issue.  I do not expect this tax policy issue will remain in the law for long.  I suspect that no one in the Washington DC ivory tower realized that this was going to be a tax on the Church! Oops!

It’s complicated; the way tax law is structured, there is no neat way to simply exclude churches from this new tax policy. Churches, according to tax law, are Section 501(c)(3) entities. Churches have a few tax breaks that other, non-church, 501(c)(3) entities do not have, but, basically, churches and 501(c)(3) organization have the same set of laws with which they must comply. Because of churches are defined in tax law, carving out or otherwise excluding churches from the tax on employer provided parking will be difficult.

Limited Tax Planning

Basically, there is no easy way to mitigate the impact of this new tax on employer provided parking.

Some commentators suggest that the salary reduction provisions of qualified transportation fringes provide an opportunity to avoid the disallowed deduction rule, because it appears that the employee is funding the benefit. That will not work.

If an employee reduces future compensation on a pre-tax basis in exchange for the employer providing parking, the parking benefit is a provision of a qualified transportation fringe benefit, the costs of which would be disallowed.

Value of parking benefit

Because the employee exclusion amount is the fair market value (FMV) of the parking benefit provided, and the disallowed employer deduction is the cost of providing that parking benefit, questions arise regarding whether a value of $0 for qualified parking might eliminate the existence of the qualified transportation fringe benefit as the provision of the benefit by the employer is not a provision of anything of value.

IRS Notice 94-3 provides helpful info.  You can find it online is you want to study this issue in depth.  But why? This is boring stuff!!