Steer clear of the wash sale rule if you’re selling stock by year end
Are you thinking about selling stock at a loss to offset gains that have been realized during 2020? If so, it’s important not to run afoul of the “wash sale” rule. Under this rule, if you sell stock or securities for a loss and buy substantially identical stock or securities back within the 30-day period before or after the sale date, the loss can’t be claimed for tax purposes. The rule is designed to prevent taxpayers from using the tax benefit of a loss without parting with ownership in a significant way. Note that the rule applies to a 30-day period before or after the sale date to prevent “buying the stock back” before it’s even sold. We can answer any questions you may have.
Small businesses: Cash in on depreciation tax savers
The Section 179 deduction provides a tax benefit to businesses, enabling them to claim immediate deductions for qualified assets, instead of depreciating them over time. For 2020, the maximum deduction is $1.04 million, subject to a phaseout rule if more than $2.59 million of eligible property is placed in service during the tax year. Even better, the Sec. 179 deduction isn’t the only avenue for immediate tax write-offs for assets such as machinery and equipment. Under the 100% bonus depreciation tax break, the entire cost of eligible assets placed in service in 2020 can be written off this year. Contact us if you want more details about how your business can make the most of the deductions.
Lessons of 2020: Change management
The year 2020 has taught businesses many lessons. In the broadest sense, the COVID-19 pandemic and resulting economic impact have meant one thing: change. Thus, one lesson learned (or reinforced) is the importance of change management. This is a formalized approach to providing employees the information, training and ongoing coaching needed to successfully adapt to any modification to their day-to-day jobs. Workers often think that change compromises job security or status, while management may find resistance to change frustrating. Companies can avoid these negatives, and the resulting drops in productivity and morale, through carefully executed change management. Contact us for more info.
Employees: Don’t forget about your FSA funds
Many employees save taxes by placing funds in their employer’s health or dependent care flexible spending arrangements (FSAs). It’s a good time to review 2020 expenditures and project amounts to be set aside for 2021. A pre-tax contribution of $2,750 to a health FSA is permitted in 2020. To avoid forfeiture of your health FSA funds because of a “use-it-or-lose-it” rule, you must make eligible medical expenditures by the last day of the plan year (Dec. 31 for a calendar year plan), unless the plan allows an optional grace period. Like health FSAs, dependent care FSAs are also generally subject to a use-it-or-lose-it rule. Other rules and exceptions may apply. Contact us with any questions.
The importance of S corporation basis and distribution elections
S corporations may provide tax advantages over C corporations. This can be true if you expect the business to incur losses because C corp. shareholders generally get no tax benefit from losses. Conversely, S corp. shareholders can deduct their share of these losses on personal tax returns to the extent of their basis in the stock and any loans they make to the entity. So the ability to use losses that pass through from an S corp. depends on your basis in the corporation’s stock and debt. Be aware that there are some elections available to an S corp. or its shareholders that can affect the basis adjustments caused by distributions and other events. Contact us if you’d like more information.
Health Savings Accounts for your small business
Business owners know employee health care benefits are expensive. Therefore, your business may want to provide some of these benefits through an employer-sponsored Health Savings Account (HSA). For eligible individuals, HSAs are a tax-advantaged way to set aside funds (or have their employers do so) to meet future medical needs. An eligible employee must be covered by a “high deductible health plan.” For 2020 and 2021, a high deductible health plan has an annual deductible of at least $1,400 for self-only coverage, or $2,800 for family coverage. For 2020, an individual can contribute $3,550 in ($7,100 for a family) to an HSA. This is increasing to $3,600 and $7,200, respectively, for 2021.
Taking distributions from a traditional IRA
If you’ve built a nice nest egg in a traditional IRA (including a SEP or SIMPLE-IRA), it’s critical that you plan carefully for withdrawals from these tax-deferred retirement vehicles. For example, if you need to take money out of a traditional IRA before age 59½, distributions will generally be taxed and may also be subject to a 10% penalty. However, there are several ways to avoid the penalty (but not the regular income tax). Once you attain age 72, traditional IRA withdrawals must generally begin or you’ll be penalized. However, the CARES Act suspended the required minimum distribution rules for 2020. Contact us with traditional IRA questions and to analyze your retirement planning.
Putting the finishing touches on next year’s budget
By now, some businesses have completed their 2021 budgets while others are still crunching the numbers. As you put the finishing touches on your company’s spending plan for next year, be sure you’ve covered the finer points of the process. First, to position your budget for optimal success, ensure everyone on the leadership team has bought into common forecasting goals. Second, account for “variances” that could undermine your efforts. These include competitive, compliance and internal risks. Above all, save strategic planning initiatives for another day. Stay focused on the goal of creating a feasible, flexible budget. We can review your budgeting process and recommend improvements.
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