Small Business Taxes Made Easy, Fourth Edition

By Eva Rosenberg

Discover how to increase your deductions, reduce what you owe, boost your profits, and build a dynasty

As if doing your business taxes weren’t complicated enough, you now have the Tax Cuts and Jobs Act to contend with. While this major overhaul throws a monkey wrench into the works, it provides unprecedented opportunities to keep even more of what you earn—if you’re up to speed on what the new law means and how to navigate it.

Small Business Taxes Made Easy has been fully updated to provide the knowledge, insights, and tools your business need to get ahead of the curve this tax season. You’ll learn everything you need to know for:

• Saving money on taxes and boosting your profits
• Building an increasingly profitable business, with the right advisory team
• Navigating the complex tax maze without losing the bank
• Setting up a business plan following the new tax guidelines to minimize tax payout
• Using record-keeping techniques that increase deductible expenses
• Learn to reduce audit risk – or to survive audits successfully
• Spotting errors in 1099s and handling them properly

Providing a thorough look into the Taxpayers First Act, this thorough guide delivers important insights into the marijuana tax dichotomy, updated information about self-rentals, and a deep dive into the Wayfair decision—which affects the collection of sales tax.

Whatever kind of business you run, Small Business Taxes Made Easy will help you stay in compliance while taking full advantage of all possible deductions, loopholes, profit opportunities, and more.

• Language: English
• Publisher: McGraw-Hill Education
• Release date: Mar 31, 2020
• ISBN: 9781260468199

Eva Rosenberg

Eva Rosenberg, BA, EA, (Northridge, CA) known as the Internet's TaxMama, publishes the popular TaxMama.com website, cited by Consumer Reports magazine as a top tax advice site, and a LIFE Magazine Editors Pick. Dean of TaxMama's Online Enrolled Agent Review Course, Eva is training a new breed of tax professionals to pass the annual Internal Revenue Service license examinations. TaxMama's tax professionals learn to understand and serve small businesses and accounting firms.

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INTRODUCTION

A Letter from Eva Rosenberg to You, the Business Owner

Dear Entrepreneur,

(Yes, you. If you’re starting or operating a business, please start thinking of yourself right now as an entrepreneur.)

Since the first edition of this book was first published in 2004, TaxMama has received many letters or emails from business owners with two themes:

1.  I wish I had read this book before starting my business. It would have saved me a fortune in time, money, taxes—and errors.

2.  Even though I’ve been in business for many years, this book has helped me cut my taxes and increase my profits. It’s my new business bible.

Why are people saying things like that? Because Small Business Taxes Made Easy is a book you can use on a day-to-day basis to keep your business on a path to profits and success. So, please do exactly that.

Many books on the market tell you how to organize your business records, prepare your tax returns, even how to make decisions or choices. Some are excellent.

So why does the world need yet another book on small business taxes? Because even the best books focus primarily on the record-keeping or legal aspects of small business taxes. For your business to succeed, you must also understand how the reporting requirements can be used to improve your business management, provide better decision-making tools, and increase your profits. Providing that information is what makes this book different.

With all the resentment and resistance toward paying taxes and toward the flood of reporting requirements, you’ve got to see what’s in it for you. What do you get from your investment of time and money? It doesn’t only benefit the IRS and your state and local governments.

While each chapter of this book explains tax concepts and responsibilities, it also helps you understand how you benefit from following those guidelines.

You’re not in business to supply a flood of paperwork to the government. Nor are you sweating blood trying to meet your business, financial, and family obligations in order to buy your tax pro a new BMW.

You’re in business to have more control of your life and time; to earn more money than you could on a job; and to build a future—and a legacy—for your family and future generations.

Otherwise, why work so hard? Just go back to your traditional nine-to-five job. Seriously, there’s more to running a business than appears on the surface. Some people make it appear effortless—and they often go out of business quickly as a result. Others make it seem a gargantuan burden—and they end up hating every minute of it. They destroy their family and relationships in the process, blaming everyone else for their failures.

Then there are those people who start up, and everything goes right. Life is good. Family and social relationships remain solid, and they maintain balance in their lives. That’s what I want for you.

Listening to the news, you often hear when large businesses fail. You’re probably still shaking your head over the whole dot-com bust several years ago, wondering how all those businesses failed after raising millions of dollars in venture capital or through their initial public offering. Well, the venture capitalists learned a hard lesson from that, too. And they are far more discerning about how they invest their funds these days. So, if you want their investment in your business, you will need to show well-thought-out structures and planning.

The businesses that failed went wrong in one, or all, of three ways:

1.  They didn’t have a realistic business plan.

2.  They didn’t plan for success.

3.  They were run by immature and inexperienced people who simply blew all the money without looking for reasonable returns on their spending.

You’re buying this book to avoid all those mistakes. Use this book to learn from others’ failures and successes. Please, make a commitment to devote all the time and resources needed to make your business work.

Otherwise, put this book back on the shelf. It’s not for you.

Using This Book

I didn’t write this book to bore you, bully you, or enable your failure.

If you can’t make a serious commitment to create your business plan, set up and use a proper accounting system, and be ethical in tax reporting—please don’t start the business. You’ll earn much more, with less effort, less stress, and less risk, with a job working for someone else. Really, you will.

Let Me Tell You a Story About a Very Successful and Brilliant Film Editor

Marie was at the top of her industry, earning a healthy six-figure income. She was popular with the filmmakers and knew she could attract clients if she went out on her own. In fact, her own employer was willing to subcontract to her. Sounds good, right? And it was, at first. Marie always had enough work to support the costs of hiring several editors and other staff members. Unfortunately, she hired a good friend as her office manager and bookkeeper. Sally did a great job. Until she didn’t. Sally was an alcoholic and, well, let’s say she got distracted. Bills weren’t being paid. Worst of all, payroll taxes weren’t being paid. By the time Marie called me, in a panic, she needed to cover close to $50,000 worth of delinquent payroll taxes! Fine—I had a good friend managing a bank, and we got her a quick line of credit to get her out of trouble with the IRS and state of California. But from then on, she was never able to get the right administrator—and stressed out for years, with one business problem after another. Marie learned that she just wasn’t good at running a business, with all the myriad of administrative nonsense. But she was great as a film editor and team manager. Finally, she decided to leave the bureaucracy to someone else and got reemployed. Since then, she’s had the opportunity to be the head of the production team designing visual effects for an Academy Award–winning film, edit many TV shows with which you are familiar, and create compelling trailers for many films.

So be honest with yourself. If you’re not a capable administrator, maybe you should just renegotiate your compensation or position at work—or look for a better job, if you’re unhappy at work.

But if you still want to start a business (or stay in a business you’ve already started), here’s your next important consideration. Take into account how much you could earn on a job or on the money you’re investing to get this business going. Even if you borrow the money, think of how many hours of work it will take to pay it back.

Those are called opportunity costs. It’s important to understand what you’re giving up to start your business. When I started my business, I knew what I was getting into. I relish the independence and the lack of office politics. I love my clients, the people I work with, and the people whom I consult. And I am free to turn down clients when my instincts suggest they will be trouble (whether professionally or personally). Despite being constantly behind in my workload, I rejoice in the flood of new work and fresh ideas that comes pouring in each day from friends and readers.

Here are the two most important things I want you to know going in:

•    Love what you do.

•    Don’t delude yourself into thinking your goal is to pay the least amount of tax possible. Your real goal is to end up with the highest disposable income possible—and to be in great physical and mental health when you get there.

That’s what I’d like to help you achieve.

You’re about to learn how following the IRS’s rules for small business owners will make you richer, happier, and less stressed.

TaxMama’s warning: Although I can make changes at the IRS, I can’t change grammatical rules. So wherever you see web addresses (URLs) in this book that seem to have colons, commas, or periods as the last character, ignore that final character when typing them into your browser. If you are using an electronic edition, links that span more than one line often break when you click on them. You might have to retype the link into your device.

Comparing a Job and a Business

Be sure to understand these distinctions between a job and a business. People starting out on their own rarely realize just how many things they’ve taken for granted on a job. These are the things that just happened invisibly, in the background, taken care of by your employer’s infrastructure. Even if you felt as though you were doing most of it for him or her, when you’re on your own, the sidebar will show you just how many more things you’ll need to oversee—things that will drain your time, patience, and resources.

One of the biggest complaints from people working for others is that they do not have control over their income. Their bosses can cut their commissions, territories, or bonuses at will—and often do. When you’re in business for yourself, if you earn it, you reap the rewards.

Before we continue, if you’re presently an employee, please read one of TaxMama’s TaxQuips about what employees give up when they want to switch to owning their own business—even if they are assured about getting a stream of income by contracting with their former employer (http://iTaxMama.com/What_U_Lose_Self_Employed). With the current provisions of the Tax Cuts and Jobs Act (TCJA) that prevent employees from deducting all their job-related expenses (though 2025), this switch to self-employment is tempting. But, please remember Marie’s story. Not everyone is cut out to run a business and to live a less-structured life.

Be sure to read the previous lists to understand the additional demands that owning a business places on you—and your family. Think deeply how all the extra time you spend working will affect your relationships with your parents, spouse, children, and friends. Will you miss the important moments in your children’s lives? Or will your business give you the freedom to be present? Before you tackle a new business, visualize how your life will look and feel once you’ve embarked on this challenge.¹

Did you want a little more hand-holding? Join me at Wolters Kluwer’s CCH CPELink—https://www.cchcpelink.com/teamtaxmama. We are starting a series of classes based on the chapters in this book. You can ask questions about your own business during these classes.

Meanwhile, remember to use the downloadable To-Do Lists at http://www.YourBusinessBible.com to help you stay focused and organized.

If you’re still prepared to go forward, if I can’t talk you out of it, if you’re getting really excited about your business—then let’s get to work.

You’re going to do great!

Join me for your adventure in building a business—and a legacy.

Best wishes,                       

Eva Rosenberg, MBA, EA

Your TaxMama                 

1 Robert MacPhee, Manifesting for Non-Gurus, 2010.

LIGHTEN UP

You’re about to venture into dangerous and terrifying territory—the World of Taxes.

It’s not as bad as you think. Get comfortable with the humor and ironies in this ever-shifting world. It will make all the onerous rules easier to bear.

Believe it or not, these quotes come to you courtesy of the Internal Revenue Service and other fine folks. Come back to this page any time your spirits need a boost of humor.

Did you ever notice that when you put the words The and IRS together, it spells THEIRS?

—Unknown

He who gets his tax advice out of a Cracker Jack box doesn’t always get crackerjack advice.¹

—LINDA DORFMONT, Enrolled Agent

I like to pay taxes. With them I buy civilization.

—OLIVER WENDELL HOLMES JR., US Supreme Court Justice

The government that robs Peter to pay Paul can always depend on the support of Paul.

—GEORGE BERNARD SHAW, Irish playwright

Taxes are indeed very heavy, and if those laid on by the government were the only ones we had to pay, we might more easily discharge them; but we have many others, and much more grievous to some of us. We are taxed twice as much by our idleness, three times as much by our pride, and four times as much by our folly.

—BENJAMIN FRANKLIN, Poor Richard’s Almanac

Alexander Hamilton started the US Treasury with nothing, and that was the closest our country has ever been to being even.

—WILL ROGERS, writer and humorist

The only difference between a tax man and a taxidermist is that the taxidermist leaves the skin.

—MARK TWAIN, writer and humorist

Excellence is a good habit. But do not strive for perfection—it will prevent you from ever finishing anything.

—EVA ROSENBERG, Your TaxMama

The seven deadly sins . . . food, clothing, firing, rent, taxes, respectability, and children. Nothing can lift those seven millstones from man’s neck but money; and the spirit cannot soar until the millstones are lifted.

—GEORGE BERNARD SHAW, Irish playwright

The hardest thing in the world to understand is the income tax.

—ALBERT EINSTEIN, physicist

The only thing that hurts more than paying an income tax is not having to pay an income tax.

—THOMAS DEWAR, First Baron Dewar

A good tax return is like a good mystery novel. You follow the clues, make deductions, and arrive at a profitable conclusion.

—EVA ROSENBERG, Your TaxMama

Post Tax Season Blues,

an original poem by TaxMama, for April 15 of each year.

I finally filed my tax return.

Through sleepless nights, how my eyes burn.

I dug and searched before I filed.

But let me tell you, I am riled.

I work too hard and pay a ton.

But, hey, . . . for now, my tax return’s done.

. . . is yours?

Visit TaxMama.com for more humor in the Money Funnies column http://taxmama.com/category/asktaxmama/money-funnies. Please feel free to submit your clean jokes, too.

HOW TO USE THIS BOOK

At the beginning of each chapter, you will find a To-Do List and Questionnaire. Read the list and keep it in mind while you read the chapter. As you go along, perform the tasks on the list. If you put everything you do into this book, it will become your business bible. In fact, you can pick up a complete set of these To-Do Lists at www.YourBusinessBible.com.

•    Enter the dates you complete the tasks.

•    Enter the dates you schedule the meetings.

•    Set the deadlines.

•    Enter the answers to the questions.

•    Fill out the forms.

•    Enter the relevant ID numbers as you apply for the licenses or government IDs and programs.

•    Make copies of all relevant documents and place them behind the To-Do List page.

•    Use the resources at the end of each chapter to help you save taxes, operate your business, and increase your profits.

Incidentally, as you may have realized, tax laws change constantly, and most deductions, exemptions, and limits change annually. In fact, by the time this book reaches your hands, there may already be changes and updates. To get a quick summary of the updates, please visit www.YourBusinessBible.com.

Note About Links in This Book

As you go through the book, you will find that it is full of resources. The links and contact information for all the resources in each chapter will be found at the end of each chapter, to avoid cluttering up the text as we go along.

Many of the URLs in this book start out with iTaxMama.com. These are tiny.cc URLs that allow me to edit the underlying link. Too often, links on the Internet change, especially on the IRS website. So if one of these links doesn’t work, please let me know and I can fix the underlying link without needing to change the link in the book. Ain’t technology grand!

Disclosure: Some of the links in the book go to sites that pay me a commission. I don’t recommend the sites because of the commission. They are recommended because they are good resources. But getting a referral fee never hurts. In fact, it’s a good idea for you to learn how to use affiliate marketing yourself—both to earn commissions and to build a referral base to help you sell your products or services. A good place to learn about this is at Affiliate Summit, http://iTaxMama.com/AffiliateSummit.

PROLOGUE

Update on the Latest Tax Laws

When it comes to taxes, we live in ever-changing landscape. Even when we think we are up-to-date, some legislation or court comes along and changes the entire picture. In fact, just before this book went to print, we got a whole new set of changes. We were able to hold the presses long enough to include all the relevant changes in this Prologue and throughout the book.

Incidentally, about the most recent set of laws that were passed—the House and Senate versions of these laws have been, more or less, ready since May and July. Consider asking your legislators why they couldn’t get their acts together to pass the SECURE Act early enough in the year so everyone doesn’t have to rewrite all their software (including the IRS) and so it is possible to get some explanations and procedures from the IRS before tax season. Remember, when your refunds are being held up, the blame falls squarely on the shoulders of your Senators and Representatives—not the IRS.

As I write this introduction, I will give you a list of the most current laws our businesses need to take into consideration. The chapters in this book have been updated to take these laws into account. Since laws will continue to change, please subscribe to TaxMama.com to get news and updates throughout the year.

Although these laws also affect your personal tax returns, for now, we will primarily focus on the business effects:

•    In December 2015 Congress passed a comprehensive set of laws—the PATH Act of 2015—Protecting Americans from Tax Hikes Act of 2015 https://www.finance.senate.gov/download/summary-of-the-protecting-americans-from-tax-hikes-path-act-of-2015. You will see references throughout the book using only the acronym PATH Act.

•    In 2017, Congress gave us the Tax Cuts and Jobs Act (TCJA), which became law on December 22, 2017. http://docs.house.gov/billsthisweek/20171218/CRPT-115HRPT-%20466.pdf. You will see references throughout the book using only the acronym TCJA.

•    On February 2, 2018, Congress passed the Bipartisan Budget Act of 2018. https://www.congress.gov/115/bills/hr1892/BILLS-115hr1892enr.pdf. This was mostly an Extender Bill, extending some tax provisions through the end of the year. Most of these provisions have expired.

•    On July 1, 2019, Congress passed the Taxpayer First Act (TFA) https://www.congress.gov/bill/116th-congress/house-bill/3151. This law primarily affects representation, not preparation of returns.

•    On December 20, 2019, Congress passed the 715-page law called the Further Consolidated Appropriations Act. It includes two tax-related provisions that affect individual and small business taxpayers: the Setting Every Community Up for Retirement Enhancement Act (SECURE Act) and the Taxpayer Certainty and Disaster Tax Relief Act (TCDTRA). (To save time, we’ll be calling it the SECURE Act.) https://www.congress.gov/bill/116th-congress/house-bill/1865/text.

Some changes are permanent. Some are temporary and may get renewed or extended every few years. And some phase out gradually, over time. Let’s start with the permanent changes.

C Corporations

Tax Rate—The tax rate is now a flat 21 percent—all those other nasty brackets are gone. This includes personal service corporations.

Alternative Minimum Taxes (AMT)—This tax is permanently repealed for corporations. (But not for individuals.)

Dividends Received Deductions—A corporation that receives dividends because they own stock in another corporation has always gotten a break. They could avoid paying taxes on most of those dividends—to avoid triple taxation. (Tax paid by the corporation issuing the dividends; tax paid by the corporation receiving the dividends; and tax paid by the shareholders of the corporation that received the dividends.)

•    If the corporation receiving the dividends owns 20 percent or more of the paying corporation, the exclusion from income is 65 percent of the dividends (down from 80 percent).

•    If the receiving corporation owns less than 20 of the paying corporation (think about buying stock through a brokerage), the exclusion from income is 50 percent of the dividends (down from 70 percent).

Qualified Small Business Stock (QSBS) Exclusion from Income—This makes owning or forming a C corporation very attractive. For qualified stock purchased after September 27, 2010, and held for more than five years, you can exclude 100 percent of the capital gains—up to $10 million. The PATH Act made this provision permanent. And it also eliminated the alternative minimum taxes that were previously assessed on the untaxed gains. You can learn more about this in Chapter 3.

S Corporations

Built-in Gains Tax (BIG)—When a C corporation elected to become an S corporation, it may have had some untaxed increases in the values of some assets. That’s called a built-in gain. In the past, if the S corporation sold that property within 10 years after electing S status, the corporation would have to pay an extra BIG tax. The PATH Act reduced that time frame to five years. We don’t really get into this in this book, but you can find information on the IRS website at http://iTaxMama.com/Built_In_Gains_Tax.

Partnerships

Technical Terminations Eliminated—In the past, if 50 percent or more of a partnership interest changed hands—for any reason—the partnership was considered terminated. This could apply equally if a partner died and heirs took over his or her interest, or if shares in the partnership were sold. This was such an inconvenient law—and most small businesses didn’t even realize that was the case. So they didn’t terminate the partnership and start a new one. The TCJA eliminated this annoying technical termination.

Businesses in General

Section 199A—The 20 Percent Qualified Business Income Deduction—This is a tax deduction, not a tax credit. This gets deducted after all the income has been computed and reduced by either the standard deduction or the itemized deductions. The next line after those deductions is the Section 199A deduction. This is available to sole proprietorships, partnerships, S corporations, certain trusts, and limited liability companies (LLCs) filing their tax returns as any of these entities. There are income limitations for Specified Service Trades or Businesses. For more details, read Chapter 5.

The Definition of a Small Business—A business that has average annual gross receipts of $25 million or less for the past three years (increased by inflation). This affects several accounting rules and deductions for small businesses—like the next two provisions.

Accounting Rule Change—Businesses meeting the definition of a Small Business may elect to use the cash accounting method, instead of accrual. This applies even if your business has an inventory. Please read Chapter 4 for guidance.

Business Interest Deduction—The deduction for interest expenses is limited to 30 percent of business income for businesses with gross receipts in excess of the Small Business definition. Surprisingly enough, this may affect you if your business has losses (considered a tax shelter), or if you have pass-through investments, like partnerships or S corporations with losses. Read more on the IRS website’s FAQs, available at http://iTaxMama.com/Bus_Interest_163j.

Entertainment Expenses—These are no longer deductible at all. However, if you can get a separate invoice for the food and beverages at your entertainment event—those are still deductible as meals.

Lobbying Expenses—All deductions for this are eliminated. And if you pay dues to any organization that’s involved in lobbying, the part of the dues allocated to lobbying or political activities is not deductible. (OK, I admit that I am baffled by this one. I thought this was always the law. Perhaps it needed to be more specific?)

Section 1031 Exchanges—These tax-deferred exchanges are now limited to trades of business or investment real estate. We used to use this provision to exchange equipment and vehicles and to avoid paying taxes on the gains from the sale of the asset—something you commonly do is to trade in your business vehicle. It’s no longer an option to defer the gain from that transaction.

Transportation Fringe Benefits—These are no longer a tax-free benefit or deductible to the employer. There’s an exception when the transportation expenses are necessary for employee safety. So find a way to prove that the transportation fringe is related to employee safety. That shouldn’t be hard in the big city.

Bicycle Commuting Benefits—These are no longer a tax-free benefit. These payments must now be included in employees’ wages in order for an employer to continue to claim this deduction.

Qualified Moving Expenses—These are no longer a tax-free benefit. These payments must now be included in employees’ wages in order for an employer to continue to claim this deduction unless the costs are for active-duty military.

5Employee Awards—You can no longer give employee achievement awards of cash, gift cards, and other non-tangible personal property. Special rules allow an employee to exclude certain achievement awards from their wages if the awards are tangible personal property.

Self-Created Property—These assets do not get capital gains treatment if sold by any creator (the artist, writer, composer, inventor, etc.), or anyone to whom the creator gifted the property.

Long-Term Rental Agreements—Long-term was defined as 75 percent of the life of the building. The TCJA redefines long-term as 25 years.

Costs Related to Sexual Harassment Lawsuits—If there is a nondisclosure agreement as part of the settlement, none of the settlement payments are deductible to the payor.

Fines, Penalties, and Settlements—Congress has disallowed deductions for payments that the taxpayer establishes are either restitution (including remediation of property) or amounts required to come into compliance with any law that was violated or involved in the investigation or inquiry, that are identified in the court order or settlement agreement as restitution, remediation, or required to come into compliance. In other words, if you’re paying a fine of any kind for violating any laws—none of those payments are tax deductible.

Net Operating Losses (NOLs)—Can no longer be carried back. They are carried forward only. They are no longer limited to a 20-year carryforward. They may be carried forward indefinitely.

Depreciation—There are many changes to the depreciation deductions and capitalization rules. All kinds of depreciation have increased. See Chapter 6 for most of the relevant changes that apply to the average business. Take an in-depth course on capital assets and depreciation if you want to learn all the details. There are many.

Opportunity Zones—This is a new term Opportunity Zones. We have had similar concepts in the past, with different types of tax breaks. The current version is designed to allow businesses to defer paying taxes on certain kinds of income if they invest in depressed areas. They need to invest in or open a business in the area, or construct buildings, ideally to provide jobs and improve the economic conditions of specific areas. They can defer the gains until 2026. Or if they hold on to the investment for at least 10 years, they might be able to defer the gains permanently. Incidentally, you can roll over opportunity zone investments from one project to another. It’s rather complicated and we are not covering this topic in this book. Beware. I expect there to be a lot of sharks creating projects to steal investors’ money. So, please, please be careful. If you don’t understand the project and cannot actually see the business in operation, stay away. For more information about this tax break visit this area of the IRS website at http://iTaxMama.com/Opportunity_Zones.

Rehabilitation Credits—For rebuilding and improving existing historic structures. The 10 percent credit for other buildings has been repealed. But the 20 percent credit for the historic structures remains in effect. The main difference is that the credit is taken over five years instead of in the year the building is placed into service. We will not be discussing this. You can find more information on the IRS website at http://iTaxMama.com/Rehab_Credit.

Wrongful IRS Levy—What a surprise. Sometimes the IRS levies funds or seizes assets from a taxpayer when they should not be doing so. Sometimes, it’s quite a battle to get the money back—or time runs out before the taxpayer understands how to get the money back. The TCJA give us additional time to file our claims. We now have up to two years. In fact, if the IRS has sold the assets they seized, we might still be able to get those back! We are not covering this. But I thought it was important for you to know. Read more on the IRS website at http://iTaxMama.com/Wrong_IRS_Levy.

Provisions That Expire

Meals—The biggest change here is the elimination of the 100 percent deduction for food provided by employers at the company’s facilities. That deduction has dropped to 50 percent. This provision will sunset after December 31, 2025. Note: The taxpayer must be present for the meals to be deductible. You cannot simply send a client off to a great restaurant and pick up the tab.

Employee Retention Credit Form 5884—https://www.irs.gov/instructions/i5884a. This is available to employers in certain disaster areas in 2017, 2018, and 2019. The employers can get up to $2,400 per employee that they retained after the relevant disaster (fire, flood, hurricane, etc.). This has been extended to December 31, 2020.

Employer Credit for Paid Family and Medical Leave—Employers who provide leave time (not sick pay) to their employees and continue to pay them for at least half of their wages for at least two weeks, up to 12 weeks, can qualify for this credit. This credit ranges between 12.5 and 25 percent of the wages of employees. This credit was extended by the SECURE Act through December 31, 2020. Please see Chapter 10.

Health Insurance Coverage Credit Form 8885—https://www.irs.gov/pub/irs-pdf/f8885.pdf. This has been extended for one more year, through December 31, 2020. We do not discuss this in Chapter 10 because the topic is somewhat complicated and is not often used by employers with fewer than 25 employees. But if you’re planning to add health care coverage for all your employees, this is definitely worth exploring. Since some states are mandating health insurance coverage, make sure to file for both the IRS and state credits.

Work Opportunity Tax Credit—This is a tax incentive for hiring disadvantaged workers—like veterans, disabled people, ex-felons, and so on. This credit was extended by the SECURE Act through December 31, 2020. See Chapter 10.

Business-Related SECURE Act Provisions

These all take effect for years after December 31, 2020, unless otherwise indicated.

Small Employer Pension Plan Credit Form 8881—https://www.irs.gov/forms-pubs/about-form-8881. The amount of the credit was raised from $500 to $5,000. This is for employers who start new pension plans after December 31, 2020. The credit is good for each year, for up to three years.

Small Employer Automatic Enrollment Credit (no form yet)—This credit is in addition to the Small Employer Pension Plan Credit. This is for employers that either set up a new pension plan or that add the automatic enrollment provision to an existing plan.

What is an automatic enrollment provision? That’s where all your new employees must automatically start contributing part of their paycheck to their own pension plan. Employees are allowed to opt out. But if they don’t read the hiring packet, they will see part of their paychecks disappearing into a retirement account. This is both good and bad for the individual employee. It forces savings. But not everyone can afford it. So read your employment packets when starting a new job.

Part-Timers May Contribute to 401(k)—Employers must now include part-time employees in their 401(k) plans, if they have worked for the company for at least 500 hours a year, for three years in a row. They must be age 21 by the end of the three-year period.

Multiple-Employer Plans (MEP)—Unrelated employers may now pool their resources to participate in shared health plans. Hopefully, this will help bring the costs down for all the employees.

Certain Personal Provisions in the SECURE Act Relevant to This Book

Adoption Benefits—The SECURE Act added a new twist to adoption benefits. Taxpayers may withdraw up to $5,000 from their IRAs or retirement accounts without penalty after December 31, 2019. How does that work? Parents who adopt a child, or give birth to a child, may withdraw that $5,000, penalty-free, as long as the withdrawal is within 12 months of the date of birth or adoption. They don’t have to prove the money was used for the birth or adoption costs. The taxes on those distributions will still be due—but not the 10 percent early withdrawal penalty.

Section 529 Plans—The SECURE Act added two new provisions for these plans:

•    Costs related to registered apprenticeships qualify as educational costs.

•    Up to $10,000 may be withdrawn from a Section 529 plan to pay student loans. That total may be applied to principal or interest. And it’s only a once-in-a-lifetime limit. In other words, if you use $5,000 to pay toward a student loan in 2020, you still have up to $5,000 to use in the future. Incidentally, if any Section 529 funds are used to pay the student loan interest, the taxpayer cannot deduct that interest on their tax return.

A Few Words About the Taxpayer First Act (TFA)

The IRS is very excited about the passage of this set of laws. The IRS and the Taxpayer Advocate Service have been working hard to get some of these provisions passed. They are designed to improve things for taxpayers, believe it or not.

For instance, IRS Appeals will become a separate, independent division of the IRS. This will help you get more objective results when you file an appeal. Though I must tell you this. In all the years I have brought cases before IRS Appeals, in every instance, they were professional, ethical, and helpful. So, I think this takes some of the pressure off the Appeals team from having to deal with interactions or interference from other IRS divisions, like collections, . . . perhaps?

There are provisions requiring improved customer service to taxpayers. Don’t we all wish that would happen!

There are provisions to limit the IRS’s right to seize your property or to issue arbitrary summonses. Innocent spouses will get more of a fair break when they file for relief. Taxpayers who are living on disability or are low-income will not be bothered by the independent collection agencies that the IRS is allowed to use.

There is another provision making the IRS responsible to help taxpayers track down refunds that have been deposited to the wrong account. Presently, the IRS encourages taxpayers to get their refunds deposited directly into our bank accounts. Sometimes it goes to the wrong account. Why? Not generally because of any IRS error. The error comes from the taxpayer or tax preparer entering the wrong bank account (sometimes it’s off by one or two digits or a transposition). Perhaps the taxpayer provides the account number of an account they used to have. (One woman did that and more than $80,000 went to someone else’s account.) Due to this, the IRS doesn’t really have the power to recover the money from the person who received it. This is really something the bank should do because they allowed a deposit to go to an account with someone else’s name. (The account numbers and the names are required to match.) But . . . Congress put a provision into the Taxpayer First Act holding the IRS responsible for getting the money back to the taxpayer. It remains to be seen just how this will be implemented. In the meantime, to get your refunds, make sure you use the correct bank account number.

Whistleblowers may now get more information about the status of cases they submit the IRS. Until now, you submit a report and might never learn if the IRS followed up or not.

However, minimum late filing penalties are increased from $210 to $330 if there is an unpaid tax. The overall penalty is still 5 percent of the tax per month, up to 25 percent, when taxes are paid late.

Taxpayers who owe the IRS more than $50,000 (increased for inflation) and ignore IRS notices will get their passports revoked—or won’t be able to renew them. In the past, if they opened a case with the Taxpayer Advocate Service, the IRS would release the passports. However, due to manipulation, the IRS will only release passports if a payment plan is set up—and payments are kept up.

As you know, the IRS keeps closing Taxpayer Assistance Centers (TACs). They will have to provide substantial notice (90 days) to the community before closing any more TACs.

The IRS is also required to modernize and increase their cybersecurity measures. From my standpoint, one of the more useful provisions is expanding the electronic, do-it-yourself taxpayer tools. Since it really is so hard to reach someone at the IRS during filing season (practically all year), being able to log in and get information saves a ton of time. Better yet, I am waiting for the ability to respond to IRS