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What someone should do if they missed the July 15 deadline to file and pay


While the federal income tax-filing deadline has passed for most people, some taxpayers haven’t filed their 2019 tax returns yet.


If a taxpayer is entitled to a refund, there’s no penalty for filing late. Penalties and interest will begin to accrue on any remaining unpaid tax due as of July 16, 2020.


Anyone who didn’t file and owes tax should file a return as soon as they can and pay as much as possible to reduce penalties and interest. Electronic filing options, including IRS Free File, are still available on through Oct. 15, 2020 to prepare and file returns electronically.


Taxpayers should then review their payment options. The IRS has information for taxpayers who can’t pay taxes they owe.


Some taxpayers may have extra time to file their tax returns and pay any taxes due. This includes some disaster victims, military service members and eligible support personnel in combat zones.


Filing soon is very important because the late-filing penalty and late-payment penalty on unpaid taxes adds up quickly. However, in some cases, a taxpayer filing after the deadline may qualify for penalty relief. For those charged a penalty, they may contact the IRS by calling the number on their notice and explain why they couldn’t file and pay on time. 


Additionally, taxpayers who have a history of filing and paying on time often qualify for administrative penalty relief. A taxpayer will usually qualify if they have filed and paid timely for the past three years and meet other requirements. For more information, see the first-time penalty abatement page on


State filing and payment deadlines may be different from the federal July 15 deadline. A list of state tax division websites is available through the Federation of Tax Administrators.


The IRS is processing tax returns, issuing refunds and accepting payments. Taxpayers who mail or who have already mailed a tax return will experience a longer wait.  There is no need to file a second tax return or call the IRS.


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All taxpayers should know the telltale signs of common tax scams


Every year scammers add new twists to well-known tax-related scams and 2020 is no exception.


Taxpayers should remember that the IRS generally first mails a bill to a taxpayer who owes taxes. There are special circumstances when the IRS will call or come to a home or business.


Here are some tips to help taxpayers spot scams and avoid becoming a victim.


Email phishing scams

  • The IRS does not initiate contact with taxpayers by email to request personal or financial information.
  • For ways to avoid these scams read tips from the Department of Homeland Security.
  • For additional tips, check out Taxes. Security. Together.


Taxpayers should report IRS, Treasury or tax-related suspicious online or email phishing scams to They should not open any attachments, click on any links, reply to the sender or take any other actions that could put them at risk.


Phone scams

The IRS and its authorized private collection agencies will never:

  • Leave pre-recorded, urgent or threatening messages.
  • Threaten to immediately bring in local police or other law-enforcement groups to have the taxpayer arrested for not paying, deported or revoke their licenses.
  • Call to demand immediate payment using a specific payment method such as a prepaid debit card, gift card or wire transfer. The agency doesn’t use these methods for tax payments.
  • Ask for checks to third parties. The agency has specific instructions on how to pay taxes.
  • Demand that taxes be paid without giving the taxpayer the opportunity to question or appeal the amount owed.


Criminals can fake or spoof caller ID numbers to appear to be anywhere in the country. Scammers can even spoof an IRS office phone number or the numbers of various local, state, federal or tribal government agencies.

If a taxpayer receives an IRS or Treasury-related phone call, but doesn’t owe taxes and has no reason to think they do, they should:


If a taxpayer owes tax or thinks they do, they should:


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Attention teachers: Those school expenses might be tax deductible

School may look a little different this year, but eligible teachers and other educators can still deduct certain unreimbursed expenses on their tax return next year.


Who is considered an eligible educator:

The taxpayer must be a kindergarten through grade 12 teacher, instructor, counselor, principal or aide. They must also work at least 900 hours a school year in a school that provides elementary or secondary education as determined under state law.


Things to know about this deduction:

Educators can deduct up to $250 of trade or business expenses that were not reimbursed. As teachers prepare for the school year, they should remember to keep receipts after making any purchase to support claiming this deduction.
The deduction is $500 if both taxpayers are eligible educators and file their return using the status married filing jointly. These taxpayers cannot deduct more than $250 each.
Qualified expenses are amounts the taxpayer paid themselves during the tax year.
Examples of expenses the educator can deduct include:

  • Professional development course fees
  • Books
  • Supplies
  • Computer equipment, including related software and services

Other equipment and materials used in the classroom



Working Virtually: Use multi-factor authentication to protect accounts; Part 2 of Security Summit tips for tax professionals


WASHINGTON — With heightened threats during COVID-19, the Internal Revenue Service and Security Summit partners today called on tax professionals to select multi-factor authentication options whenever possible to prevent identity thieves from gaining access to client accounts.


Starting in 2021, all tax software providers will be required to offer multi-factor authentication options on their products that meet higher standards. Many already do so. A multi-factor or two-factor authentication offers an extra layer of protection for the username and password used by the tax professional. It often involves a security code sent via text.


Using multi-factor authentication is the second in a five-part series called Working Virtually: Protecting Tax Data at Home and at Work. The public awareness initiative by the IRS, state tax agencies and the private-sector tax industry – working together as the Security Summit – spotlights basic security steps for all practitioners, but especially those working remotely or social distancing in response to COVID-19.


“Cybercriminals continue to find new ways to try accessing tax professional and taxpayer data. The multi-factor authentication option is an easy, free way to really step up protection of client data,” said IRS Commissioner Chuck Rettig. “All tax software products will make it a feature, and it’s part of a larger effort to protect taxpayers and the tax community.”


Of the numerous data thefts reported to the IRS from tax professional offices this year, most could have been avoided had the practitioner used multi-factor authentication to protect tax software accounts.


Thieves use a variety of scams – but most commonly by a phishing email – will download malicious software, such as keystroke software. This malware will eventually enable them to steal all passwords from a tax pro. Once the thief has accessed the practitioner’s networks and tax software account, they will complete pending taxpayer returns, alter refund information and use the practitioner’s own e-filing and preparer numbers to file the fraudulent return.


However, with multi-factor authentication, it’s unlikely the thief will have stolen the practitioner’s cell phone so he would not receive the necessary security code to access the account. This protects the tax pro’s account information.


Practitioners can download to their mobile phones readily available authentication apps offered through Google Play or the Apple Store. These apps will generate a security code. Codes also may be sent to practitioner’s email or text but those are not as secure as the authentication apps. Use a search engine for “Authentication apps” to learn more.


In additional to tax software accounts, practitioners should use multi-factor authentication wherever it is offered. For example, cloud storage providers and commercial email products offer multi-factor protections as do social media outlets. IRS e-Services



Special tax benefits for members of the military and their families


Members of the military may qualify for special tax benefits. For instance, they don’t have to pay taxes on some types of income. Special rules could lower the tax they owe or allow them more time to file and pay their federal taxes.


Here are some of these special tax benefits:

  • Combat pay exclusion: If someone serves in a combat zone, part or all of their pay is tax-free. This also applies to people working in an area outside a combat zone when the Department of Defense certifies that area is in direct support of military operations in a combat zone. There are limits to this exclusion for commissioned officers.
  • Other nontaxable benefits: Base allowance for housing, base allowance for subsistence and uniform allowances are among several government pay items excluded from gross income, which means they are not taxed.
  • Moving expenses: Some non-reimbursed moving expenses may be tax deductible. To deduct these expenses, the taxpayer must be a member of the Armed Forces on active duty and their move must be due to a military order or result of a permanent change of station.
  • Deadline extensions: Some members of the military – such as those who serve overseas – can postpone most tax deadlines. Those who qualify can get automatic extensions of time to file and pay their taxes.
  • Earned income tax credit: Special rules allow military members who get nontaxable combat pay to choose to include it in their taxable income. One reason they might do this is to increase the amount of their earned income tax credit. People who qualify for this credit could owe less tax or even get a larger refund.
  • Joint return signatures: Both spouses must normally sign a joint income tax return. However, if military service prevents that from happening, one spouse may be able to sign for the other or get a power of attorney. Service members may want to consult with their installation’s legal office to see if a power of attorney is right for them.
  • Reserve and National Guard travel: Members of a reserve component of the Armed Forces may be able to deduct their unreimbursed travel expenses on their return. In order to do so, they must travel more than 100 miles away from home in connection with their performance of services as a member of the reserves.


ROTC allowances: Some amounts paid to ROTC students in advanced training are not taxable. However, active duty ROTC pay is taxable. Th



IRS: New law provides relief for eligible taxpayers who need funds from IRAs and other retirement plans 

WASHINGTON − The Internal Revenue Service provided a reminder today that the Coronavirus Aid, Relief, and Economic Security (CARES) Act can help eligible taxpayers in need by providing favorable tax treatment for withdrawals from retirement plans and IRAs and allowing certain retirement plans to offer expanded loan options.

Can I get money from my retirement account now?

Under the CARES Act, individuals eligible for coronavirus-related relief may be able to withdraw up to $100,000 from IRAs or workplace retirement plans before Dec. 31, 2020, if their plans allow. In addition to IRAs, this relief applies to 401(k) plans, 403(b) plans, profit-sharing plans and others.


These coronavirus-related withdrawals:

  • May be included in taxable income either over a three-year period (one-third each year) or in the year taken, at the individual’s option.
  • Are not subject to the 10% additional tax on early distributions that would otherwise apply to most withdrawals before age 59½,
  • Are not subject to mandatory tax withholding, and
  • May be repaid to an IRA or workplace retirement plan within three years.


Can I take out a loan?

Individuals eligible to take coronavirus-related withdrawals may also, until Sept. 22, 2020, be able to borrow as much as $100,000 (up from $50,000) from a workplace retirement plan, if their plan allows. Loans are not available from an IRA.
For eligible individuals, plan administrators can suspend, for up to one year, plan loan repayments due on or after March 27, 2020, and before Jan. 1, 2021. A suspended loan is subject to interest during the suspension period, and the term of the loan may be extended to account for the suspension period.
Taxpayers should check with their plan administrator to see if their plan offers these expanded loan options and for more details about these options.



Who is eligible?

 To be eligible for COVID-19 relief, coronavirus-related withdrawals or loans can only be made to an individual if:

  • The individual is diagnosed with the virus SARS-CoV-2 or with coronavirus disease 2019 (collectively, COVID-19) by a test approved by the Centers for Disease Control and Prevention (including a test authorized under the Federal Food, Drug, and Cosmetics Act);
  • The individual’s spouse or dependent is diagnosed with COVID-19 by such a test; or
  • The individual experiences adverse financial consequences as a result of:
    • The individual being quarantined, being furloughed or laid off, having work hours reduced, being unable to work due to lack of childcare, having a reduction in pay (or self-employment income), or having a job offer rescinded or start date for a job delayed, due to COVID-19;
    • The individual’s spouse or a member of the individual’s household (that is, someone who shares the individual’s principal residence) being quarantined, being furloughed or laid off, having work hours reduced, being unable to work due to lack of childcare, having a reduction in pay (or self-employment income), or having a job offer rescinded or start date for a job delayed, due to COVID-19; or
    • Closing or reducing hours of a business owned or operated by the individual, the individual’s spouse, or a member of the individual’s household, due to COVID-19.


New law provides relief for eligible taxpayers who need funds from IRAs and other retirement plans

WASHINGTON − The Internal Revenue Service provided a reminder today that the Coronavirus Aid, Relief, and Economic Security (CARES) Act can help eligible taxpayers in need by providing favorable tax treatment for withdrawals from retirement plans and IRAs and allowing certain retirement plans to offer expanded loan options.

Can I get money from my retirement account now?

Under the CARES Act, individuals eligible for coronavirus-related relief may be able to withdraw up to $100,000 from IRAs or workplace retirement plans before Dec. 31, 2020, if their plans allow. In addition to IRAs, this relief applies to 401(k) plans, 403(b) plans, profit-sharing plans and others.
These coronavirus-related withdrawals:

  • May be included in taxable income either over a three-year period (one-third each year) or in the year taken, at the individual’s option.
  • Are not subject to the 10% additional tax on early distributions that would otherwise apply to most withdrawals before age 59½,
  • Are not subject to mandatory tax withholding, and
  • May be repaid to an IRA or workplace retirement plan within three years.


Can I take out a loan?

 Individuals eligible to take coronavirus-related withdrawals may also, until Sept. 22, 2020, be able to borrow as much as $100,000 (up from $50,000) from a workplace retirement plan, if their plan allows. Loans are not available from an IRA.
For eligible individuals, plan administrators can suspend, for up to one year, plan loan repayments due on or after March 27, 2020, and before Jan. 1, 2021. A suspended loan is subject to interest during the suspension period, and the term of the loan may be extended to account for the suspension period.
Taxpayers should check with their plan administrator to see if their plan offers these expanded loan options and for more details about these options.


Who is eligible?

To be eligible for COVID-19 relief, coronavirus-related withdrawals or loans can only be made to an individual if:

  • The individual is diagnosed with the virus SARS-CoV-2 or with coronavirus disease 2019 (collectively, COVID-19) by a test approved by the Centers for Disease Control and Prevention (including a test authorized under the Federal Food, Drug, and Cosmetics Act);
  • The individual’s spouse or dependent is diagnosed with COVID-19 by such a test; or
  • The individual experiences adverse financial consequences as a result of:
    • The individual being quarantined, being furloughed or laid off, having work hours reduced, being unable to work due to lack of childcare, having a reduction in pay (or self-employment income), or having a job offer rescinded or start date for a job delayed, due to COVID-19;
    • The individual’s spouse or a member of the individual’s household (that is, someone who shares the individual’s principal residence) being quarantined, being furloughed or laid off, having work hours reduced, being unable to work due to lack of childcare, having a reduction in pay (or self-employment income), or having a job offer rescinded or start date for a job delayed, due to COVID-19; or
    • Closing or reducing hours of a business owned or operated by the individual, the individual’s spouse, or a member of the individual’s household, due to COVID-19.




What taxpayers should do if they get a letter or notice from the IRS

Every year the IRS mails letters or notices to taxpayers for many different reasons.

Here are some do’s and don’ts for taxpayers who receive one:

  • Don’t ignore it. Most IRS letters and notices are about federal tax returns or tax accounts. Each notice deals with a specific issue and includes specific instructions on what to do.
  • Don’t panic. The IRS and its authorized private collection agencies do send letters by mail. Most of the time, all the taxpayer needs to do is read the letter carefully and take the appropriate action.
  • Don’t reply unless instructed to do so. There is usually no need for a taxpayer to reply to a notice unless specifically instructed to do so. On the other hand, taxpayers who owe should reply with a payment. has information about payment options.
  • Do take timely action. A notice may reference changes to a taxpayer’s account, taxes owed, a payment request or a specific issue on a tax return. Acting timely could minimize additional interest and penalty charges.
  • Do review the information. If a letter is about a changed or corrected tax return, the taxpayer should review the information and compare it with the original return. If the taxpayer agrees, they should make notes about the corrections on their personal copy of the tax return and keep it for their records.
  • Do respond to a disputed notice. If a taxpayer doesn’t agree with the IRS, they should mail a letter explaining why they dispute the notice. They should mail it to the address on the contact stub included with the notice. The taxpayer should include information and documents for the IRS to review when considering the dispute. People should allow at least 30 days for the IRS to respond.
  • Do remember there is usually no need to call the IRS. If a taxpayer must contact the IRS by phone, they should use the number in the upper right-hand corner of the notice. The taxpayer should have a copy of their tax return and letter when calling the agency.
  • Do avoid scams. The IRS will never contact a taxpayer using social media or text message. The first contact from the IRS usually comes in the mail. Taxpayers who are unsure if they owe money to the IRS can view their tax account information on




Working Virtually: Use a virtual private network to secure remote locations; Part 3 of Security Summit tips for tax professionals


WASHINGTON — As more tax professionals consider teleworking during COVID-19, the Internal Revenue Service and the Security Summit partners today urged practitioners to secure remote locations by using a virtual private network (VPN) to protect against cyber intruders.


A VPN provides a secure, encrypted tunnel to transmit data between a remote user via the Internet and the company network. As teleworking or working from home continues during the coronavirus, VPNs are critical to protecting and securing internet connections.


Using virtual private networks is the third in a five-part Security Summit series called Working Virtually: Protecting Tax Data at Home and at Work. The security awareness initiative by the IRS, state tax agencies and the private-sector tax industry – working together as the Security Summit – spotlights basic security steps for all practitioners, but especially those working remotely or social distancing in response to COVID-19.


“For firms expanding telework options during this time, a virtual private network is a must have,” said IRS Commissioner Chuck Rettig. “We continue to see tax pros fall victim to attacks every week. These networks are something you can’t afford to go without. The risk is real. Taking steps now can protect your clients and protect your businesses.”


Failure to use VPNs risks remote takeovers by cyberthieves, giving criminals access to the tax professional’s entire office network simply by accessing an employee’s remote internet.


Tax professionals should seek out cybersecurity experts if they can afford it. If not, practitioners can search for “Best VPNs” to find a legitimate vendor, or major technology sites often provide lists of top services. Remember, never click on a “pop-up” ad marketing security product. Those generally are scams.


The Department of Homeland Security’s Cybersecurity and Infrastructure Security Agency (CISA) also encourages organizations to use VPNs. CISA also offers this advice:

  • Update VPNs, network infrastructure devices and devices being used to remote into work environments with the latest software patches and security configurations.
  • Alert employees to an expected increase in phishing attempts.
  • Ensure information technology security personnel are prepared to ramp up these remote access cybersecurity tasks: log review, attack detection, and incident response and recovery.
  • Implement multi-factor authentication on all VPN connections to increase security. If multi-factor is not implemented, require teleworkers to use strong passwords
  • Ensure IT security personnel test VPN limitations to prepare for mass usage and, if possible, implement modifications—such as rate limiting—to prioritize users that will require higher bandwidths.




Here’s what taxpayers need to know about the home office deduction


The home office deduction allows qualifying taxpayers to deduct certain home expenses on their tax return. With more people working from home than ever before, some taxpayers may be wondering if they can claim a home office deduction when they file their 2020 tax return next year.


Here are some things to help taxpayers understand the home office deduction and whether they can claim it:

  • Employees are not eligible to claim the home office deduction. 
  • The home office deduction Form 8829 is available to both homeowners and renters.
  •  There are certain expenses taxpayers can deduct. They include mortgage interest, insurance, utilities, repairs, maintenance, depreciation and rent.
  • Taxpayers must meet specific requirements to claim home expenses as a deduction. Even then, the deductible amount of these types of expenses may be limited.
  • The term "home" for purposes of this deduction:
    • Includes a house, apartment, condominium, mobile home, boat or similar property.
    • Also includes structures on the property. These are places like an unattached garage, studio, barn or greenhouse.
    • Doesn’t include any part of the taxpayer’s property used exclusively as a hotel, motel, inn or similar business.
  •  There are two basic requirements for the taxpayer’s home to qualify as a deduction:
    • There must be exclusive use of a portion of the home for conducting business on a regular basis. For example, a taxpayer who uses an extra room to run their business can take a home office deduction only for that extra room so long as it is used both regularly and exclusively in the business.
    • The home must be the taxpayer’s principal place of business. A taxpayer can also meet this requirement if administrative or management activities are conducted at the home and there is no other location to perform these duties. Therefore, someone who conducts business outside of their home but also uses their home to conduct business may still qualify for a home office deduction.
  • Expenses that relate to a separate structure not attached to the home will qualify for a home office deduction. It will qualify only if the structure is used exclusively and regularly for business.
  • Taxpayers who qualify may choose one of two methods to calculate their home office expense deduction:
    • The simplified option has a rate of $5 a square foot for business use of the home. The maximum size for this option is 300 square feet. The maximum deduction under this method is $1,500.
    • When using the regular method, deductions for a home office are based on the percentage of the home devoted to business use. Taxpayers who use a whole room or part of a room for conducting their business need to figure out the percentage of the home used for business activities to deduct indirect expenses. Direct expenses are deducted in full.




Credit card companies put aside billions for CECL and coronavirus

By Michael Cohn

The six largest credit card issuers have set aside billions of dollars worth of reserves in response to the novel coronavirus as well as the adoption of the Financial Accounting Standards Board’s new credit losses standard.

A report released last Friday by Moody’s Investors service examined how much American Express, Bank of America, Capital One Financial, Citigroup, Discover Financial Services and JPMorgan Chase are putting aside for the new accounting standard, also referred to as CECL for the Current Expected Credit Losses model it follows, in addition to the COVID-19 pandemic.


All the top banks have been confronting the challenge amid the pandemic of estimating future losses along with the effectiveness of government support programs during this time of uncertainty, giving rise to comparability issues across firms. Nevertheless, all six banks have substantially increased their reserves, which Moody’s views as a positive for their bondholders.


The CECL standard has added extra complications along with the economic fallout from the coronavirus, which has made it difficult for many consumers to pay their credit card bills. CECL took effect for the large publicly traded companies in January before the pandemic began spreading across the U.S., but as part of its efforts to provide some relief from the impact of COVID-19, FASB voted to defer the effective date of CECL and several of its other standards for private companies, smaller reporting companies and nonprofits, giving extra time to credit unions and small banks to get ready for the new standard. Last year, FASB also extended the timelines for CECL and several other standards (see story). The Senate also included a provision to give banks extra time to implement CECL in the CARES Act in response to the pandemic (see story). Several banking regulators, including the Federal Reserve, the Federal Deposit Insurance Corporation and the Office of the Comptroller of the Currency, also provided relief on regulatory capital requirements for CECL in March.


Nevertheless, the combined impact of the coronavirus and the CECL standard are putting pressure on banks, according to the Moody’s report. “The reserve builds have sharply reduced profitability at the banks, which have all also stopped share repurchases,” said the report. Each bank has faced the challenge of estimating future losses as well as the effectiveness of government support programs during this time of uncertainty, giving rise to comparability issues across firms. Nonetheless, all six firms have substantially increased reserves, which is positive for their bondholders.”


The report noted that a big part of the reserve build at the six banks is driven by their exposure to credit cards, which typically have higher charge-offs than most other types of bank loans. The longer average loan life is also driving higher than average CECL loss reserves for credit cards. The average allowance for credit card loan losses for the six biggest credit card banks in the U.S. has almost tripled from just under 4.0 percent of credit card loans outstanding as of the end of 2019 to just under 11 percent as of the end of the second quarter of 2020.

Financial analysts can help ferret out these detailed comparisons and highlight them. Otherwise, investors may need to seek out information on their own in some cases about the impact of the pandemic and accounting standards on financial reporting, according to one expert. “If companies don’t give you things, you need to ask questions as an investor to understand,” Sandy Peters, head of financial reporting policy at CFA Institute, told Accounting Today. “They obviously have a view and they have built that view into estimates for impairment testing, allowance for credit losses and the like, so they have some view of the future, but are they telling you that view more explicitly, or are they just embedding it in the measurements that are included in their financial statements that you have to decode?”




The work-from-home tax crisis we have to see coming

By Shaun Hunley


The living room is the new conference room, and it could lead us down a sticky path when it comes to taxes. As COVID-19 upended the world this past spring, 98 percent of businesses in the U.S. went to a work-from-home model, and some CEOs — like Barclays’ Jes Staley — predicted crowded corporate offices with thousands of employees “may be a thing of the past.”


But as business leaders and elected officials alike seek to find some footing on this uncharted terrain, they seem to encounter an unintended consequence of our “new normal” in almost every direction. For companies that have gone remote, one of those is the development of a large, work-from-home tax nexus.


Working in one municipality and living in another is nothing new. Telecommuting has been the way of the world at many large national and multinational companies for years. And for even longer, residents of area suburbs around the country have made the trek over bridges, across rivers and through tunnels to their nearby city in another state.


But just like the world wasn’t quite expecting to move tens of millions of people to online work stations at their kitchen table overnight this past March, some companies haven’t been able to get their arms around what their next tax season will look like with a large chunk of their workforce working in one state and living in another.


Tomorrow’s problem

Right now, that admittedly seems fairly trivial. With debates ongoing about whether to re-open schools, how to handle a growing need for hospital resources, and enacting health and safety guidelines for those who have to return to offices, the idea of this new work-from-home nexus is probably low on the priority list in every C-suite. But as we’ve seen over the last few months, the situation about the future of the workplace is very fluid and the effects can have massive implications. Those advising businesses on their tax strategies need to be ready for this crunch.


Typically, tax nexus is based on where employees physically perform services (although other factors can come into play). For example, an employee at a New York City-based business will have income tax withheld for New York, and the business will also have income tax nexus in New York because its workers are physically housed in the city.


But if that same New York City business now has the majority of its employees performing their tasks at their homes in New Jersey, it now has an income tax nexus in the state of New Jersey, meaning it would technically need to file there as well. Fortunately, some states (including New Jersey) have announced that nexus won’t be asserted if employees are working from home solely due to COVID-19-related closures or social distancing policies. However, not all states have taken this position or provided specific guidance.


Managing this situation can get really sticky in states that have similar income tax laws, but tax rates that are different. For example, California has a much higher tax rate than its closest neighbors; the same can be said for Illinois.


As we inch closer to the fall, and states start to operate with the specter of any further shutdowns looming overhead, along with the very real possibility of many of their workers becoming permanent telecommuters, business accounting could get much more complicated. On top of that, some states will undoubtedly suffer a bigger shortfall in their tax coffers.


Proceeding with caution

While the world may not have been expecting this spring’s mass exodus for our respective home offices, getting ahead of this issue with the benefit of some foresight is a must. We can never again use the excuse that we just didn’t anticipate this kind of action. Unfortunately, some businesses will be able to adapt more easily than others.


While large firms will have more employees to consider, they have the resources to throw behind a comprehensive study to fully understand their state-level tax exposures. But some smaller companies may not want to — or simply cannot afford to — pay for a full nexus study to identify where they should file.


If a company is currently deciding whether to change its work-from-home policy, senior leaders need to look into tax consequences before they make a permanent decision. The financial effects can be significant. For example, if a company has nexus in a certain state and doesn’t file income tax returns in that state, the state can go after that company indefinitely with no statute of limitations. Why? Because the statute of limitations is generally based on the date a company filed. That combination of virtually unlimited look-back and the potential for reduced tax revenue in certain business-heavy states could create a recipe for future tax headaches for businesses for many years to come.


Ultimately, there is no way around this without hyper vigilance. Accounting firms are going to have to delve deeply into the intricacies of each of their client’s businesses because those that don’t know all the states their clients operate in, how many employees work in different jurisdictions, and other important details, are doomed to see severe complications next reporting season. On top of everything we’ve already endured, this is one headache that — if we’re proactive — we can avoid.




Taxpayer Advocate can help with stimulus payments

By Jeff Stimpson


The Taxpayer Advocate Service will soon help taxpayers with Economic Impact Payment issues in certain situations.


Previously, the IRS did not have a process to resolve EIP cases. “Given … recent changes, TAS will now accept cases for taxpayers whose EIP issues fall within one of the categories described and otherwise meet TAS criteria,” said National Taxpayer Advocate Erin Collins. “This is a welcome change.”


The service begins Aug. 10.


The IRS — though it hasn’t “agreed to resolve all missing EIP issues now,” according to the TAS — has established procedures to correct EIPs for eligible individuals who:

  • Used the non-filer tool and claimed at least one qualifying child but did not receive the qualifying child portion of the EIP.
  • Filed a Form 8379 and did not receive their EIP.
  • Had an EIP based on a 2018 or 2019 return where the IRS adjusted the return for a math error that negatively impacted the original amount of the EIP.
  • Were victims of ID theft and didn’t receive an EIP or didn’t receive the correct EIP amount.
  • Didn’t receive an EIP because they filed a joint return with a deceased or incarcerated spouse.


The TAS will also soon be providing specifics to assist taxpayers in understanding whether their EIP will be corrected now or they will need to wait until they file their 2020 tax return in 2021, as well as more details about whether taxpayers with EIP issues qualify for TAS assistance.




Biden’s $775B plan paid for with real estate taxes

By Tyler Pager


Joe Biden on Tuesday unveiled a $775 billion plan to bolster childcare and care for the elderly that would be financed by taxes on real-estate investors with incomes of more than $400,000 as well as increased tax compliance by high-income earners.


The Biden campaign did not fully explain how the plan for a “caring economy” would be financed, but officials highlighted some tax breaks they would seek to eliminate to raise revenue.


In particular, a senior campaign official said a Biden administration would take aim at so-called like-kind exchanges, which allow investors to defer paying taxes on the sale of real estate if the capital gains are reinvested in another property. The official also said they would prevent investors from using real-estate losses to lower their income tax bills.


Biden is scheduled to deliver a speech on the policies Tuesday afternoon in New Castle, Delaware.


The proposal is the third plank of the Democratic nominee’s economic plan. It calls for universal preschool for three- and four-year-olds. It also eliminates the waiting list for home and community services under Medicaid, offers low-income and middle-class families a tax credit of as much as $8,000 to help pay for childcare and increases pay for caregivers and early childhood educators.


Senior campaign officials said Biden’s plan is informed by his experience as a single father after his first wife died in a car accident. If elected, Biden would immediately provide states and cities with fiscal relief to keep workers employed and crucial public services running, including direct care and child care services.


The plan would add 3 million jobs in the care and education sectors, including 150,000 community health workers in underserved communities. It also emphasizes investments in building childcare facilities. But the plan also calls for substantial resources in an innovation fund to help expand home- and community-based alternatives to institutional care.


On Monday, Biden teased his “caring economy” plan at a fundraiser hosted by Blackstone Group President Jonathan Gray, telling donors he wanted to make it easier for elderly Medicaid recipients to receive care at home.


Children of elderly parents “might not be able to cure their mother’s Alzheimer’s but they can make sure she doesn’t break her hip. Walk through the house and install handrails in the right spots in the bathroom or fix the doors so she doesn’t get stuck when she tries to open it,” he said.


Biden also defended his broader economic agenda, which includes a push for more union jobs, telling the high-dollar donors, “I hope I don’t offend any of you by that, but I really think it is totally consistent with a market economy and moving forward.”


Last week, Biden called for investing $2 trillion over four years on clean energy and setting a 100 percent clean-electricity standard by 2035. The first part of the economic plan is intended to foster manufacturing and American innovation.




Regs proposed for simplified small-biz rules

By Jeff Stimpson


The IRS has issued proposed regulations to adopt the simplified tax accounting rules for small businesses under the Tax Cuts and Jobs Act. The proposals adjust thresholds, clarify terms, and give guidance for small businesses’ methodologies when seeking certain exemptions.


For tax years beginning in 2019 and 2020, these simplified rules would apply for taxpayers having inflation-adjusted average annual gross receipts of $26 million or less (a.k.a. the gross receipts test). Taxpayers classified as tax shelters cannot use the rules even if they meet the test.


Before the tax reform in 2017, certain taxpayers could determine whether they were eligible to figure taxable income under the cash method of accounting by meeting a different gross receipts test: If the taxpayer’s average annual gross receipts for all prior taxable years did not exceed $5 million.


Accounting methods. After the TCJA, a taxpayer meets the gross receipts test and can use the cash method if average annual gross receipts for the three-taxable-year period ending immediately before the current taxable year are $25 million (adjusted for inflation) or less.


The TCJA also exempted taxpayers meeting the gross receipts test from the uniform capitalization rules and added an exception to the requirement to use an inventory method if their inventory is treated as non-incidental materials and supplies, or in accordance with the applicable financial statement. If they do not have an AFS, taxpayers can use their books and records. The proposed regs implement these statutory changes and clarify definitions.


Exemption calculations. The proposed regulations also provide guidance for small businesses with long-term construction contracts and the requirements for exemption from the percentage-of-completion method and the uniform capitalization rules. For taxpayers with income from long-term contracts reported under the percentage-of-completion method, guidance is provided for applying the look-back method after repeal of the corporate Alternative Minimum Tax and enactment of the Base Erosion and Anti-abuse Tax (BEAT).


The regs await filing for public inspection and publication in the Federal Register.




Does cloud hosting still make sense?

By Ted Needleman


The terms “cloud hosting” and “cloud computing” are often used interchangeably, but they are not really the same thing — though in most cases, both approaches are modeled on a client/server relationship. The question remains whether hosted applications still remain a viable solution in today’s cloud computing environment, or whether it is time to move to an entirely cloud-based environment for your and your clients’ application needs.

Cloud-based solutions have become immensely popular. An application such as QuickBooks Online has been written specifically to operate entirely online on a network of servers dedicated to processing multiple instances of the application for different users. The specific server used for a client at any one time is determined by load balancing the network, directing the application to be run on a server that isn’t operating near its limits. In some cases, the cloud-based application is a newer version or update of an existing in-house or desktop application. In other cases, such as Oracle NetSuite or Sage Intacct, the application has been developed specifically to be run in the cloud environment, and has no identical or older in-house version.


Cloud hosting is a different story. With cloud hosting, most of the time you are renting the ability to run an application that may have been developed for use on an in-house server on someone else’s server, located remotely. With many cloud-hosting plans, you are running on a specific server with an application that is reserved for just your use (single tenant), or using a single instance of the software and underlying resources that serves multiple customers (multi-tenant).


Both approaches, cloud hosting and cloud computing, are a form of managed IT services where the hardware, operating system and application are managed, maintained and administered by another vendor. This eliminates the need for much of the overhead required to run applications in-house on your or your clients’ hardware and software.


The software-as-a-service (SaaS) model has been around for a long time, with the term first appearing in the 1990s. But the client/server model, which has multiple users accessing the same remote server or network of servers, was deployed as far back as the 1960s, when it was called time-sharing.


The question we wanted to answer is whether cloud hosting is still relevant in these days of cloud computing, and if so, under what circumstances. For our answer, we surveyed four vendors that provide cloud-hosting services, as well as industry experts Jim Bourke and Randy Johnson. Here’s what we found out.

All kinds of applications

One of the most compelling reasons for the popularity and longevity of hosting is the wide variety of applications that are available using this approach. While you won’t find every application being offered in a hosted variation, there is enough legacy software being offered on hosted servers to keep this model a logical choice for a user who prefers to continue using an application originally designed with an in-house client/server model in mind. And in many cases, a hosted legacy application offers many of the advantages that managed IT services provide, including the reduced need for capital investments and support services, both which are important considerations in today’s work-from-home business environment.


When it comes to the more popular applications, Roman Kepczyk, a CPA and director of firm technology strategy at Right Networks LLC, shared a list: “We find the top product used by both firms and their clients definitely being accounting applications. The latest CPA Firm Management Association survey identified QuickBooks Desktop, QuickBooks Online, Sage Intacct and Xero as being the most prevalent accounting products within accounting firms. This is then followed by the payroll providers, with ADP, Paychex, Gusto and Intuit Payroll most often selected. After that we see expense reporting applications such as Tallie, Expensify and Concur. For managing payables, is easily the most dominant product we see utilized by both firms and their clients.”


Cetrom president and CEO Christopher Stark also listed some of the popular applications that his company hosts: “Most frequently, clients are requesting our customizable application hosting services for, in no particular order, the CCH suite of products, Thomson Reuters’ Practice Management CS, CaseWare, Sage and Intuit’s QuickBooks and Lacerte.”


Other cloud hosting vendors provided similar lists. “We find most of our clients are interested in hosting not only practice management applications such as OfficeTools but also tax prep software, document management solutions and accounting software such as QuickBooks,” explained Lindsay Pinkos, senior product marketing manager at AbacusNext. “Many clients host QuickBooks not only for the firm itself but also their clients’ QuickBooks in a collaborative environment that is accessible to the clients.”


James Zachman, president of Cloudvara, added, “The primary applications that we find popular for accountants (and their clients) range from various versions of Intuit QuickBooks, Sage, Lacerte, ProSeries, Drake, TimeSlips, Fishbowl inventory management, ACT, MSO and many other applications.”


Easy peasy

One concern that many firms and clients have with transitioning from an in-house approach to a hosted approach in the cloud is how major an undertaking it might be. According to the vendors we spoke with, it’s probably less problematic than you might suppose.


“It’s very simple to transition non-cloud applications such as QuickBooks Desktop, CCH Engagement or Lacerte from a local computer to a hosted solution provider, as the hosting companies are running the exact same software and just adding and managing their unique remote access capabilities and support (along with security, disaster recovery and managing updates),” said Kepczyk.


AbacusNext’s Pinkos added, “The transition from a desktop solution to a cloud-hosting solution should be seamless when using a virtual desktop solution like Abacus Private Cloud. A hosted environment that utilizes remote desktop protocol mimics the experience of a traditional desktop environment with the security, mobility and accessibility of a cloud. This makes for a short learning curve for staff and minimal disruption to productivity.”


According to Cloudvara’s Zachman, “Most transitions from desktop to hosted are quite simple to replicate. The ‘real question’ relates to negating client downtime and inconvenience. Thus, we have established a highly reliable process to accommodate the transition and avoid any disruption in work efforts. This primarily relates to our level of communication and our 24/7 support team. Depending on a client’s ongoing work effort and aversion to downtime, we typically schedule our transition efforts for evening and weekends.”

Is hosting always best?

The four vendors offer cloud-based hosting of popular accounting-oriented applications. But they are also not shy about occasionally recommending that a client or potential client consider the alternative of a native cloud app.


“We would advise any CPA firm using robust applications that require remote access, security, controlled updates, etc., to move to a true cloud-based hosted solution for optimal performance, security and stability,” said Cetrom’s Stark.


And Right Network’s Kepczyk also is not averse to recommending cloud-based rather than cloud-hosted applications in some circumstances. “Some native cloud applications are considered best of breed, and better meet the specific requirements of the firms we consult with,” he said. “For instance, XCM for workflow, Thomson Reuters GoFileRoom/AdvanceFlow, and CCH Axcess Tax/Document are all natively cloud and work effectively with hosted applications creating a ‘hybrid’ environment which is very common today. We often see specific tax or assurance niche applications that firms rely upon don’t have a comparable cloud-based alternative, so it has to be hosted (i.e., CCH Engagement, Lacerte and QuickBooks Desktop). In these instances, the hosting provider makes the application function similar to a cloud-based solution and integrates them with the other cloud-based solutions.”

A bad thing with good effects

There’s little doubt that the current pandemic has had a huge effect on the way businesses operate, AbacusNext’s Pinkos told us, and this is also true when it comes to hosting applications on the cloud: “We are seeing many firms previously using on-premise solutions make the move to a hosted environment, needing to be suddenly virtual. I would anticipate that firms will look at a long-term solution to enable remote work and implement a business continuity plan that includes accessibility and security utilizing cloud hosting as part of their firm operations moving forward.”


Cetrom’s Stark added, “In terms of new client activity, we have seen a major uptick as a result of the en masse shift to remote-work life. Many firms are realizing the need for business continuity, not only during the current health crisis but how this situation can be applied to any unexpected disaster situation. We have to be prepared for the next disaster, as our staff and clients depend on that availability.”


“The COVID-19 pandemic has taught us many things about how we live our daily lives, travel, and how we do business,” Pinkos pointed out. “In a post-COVID world, the way that firms collaborate with clients will be different, and it is time to start thinking about what the new service model will be to stay competitive and assist their clients in getting back to business. Implementing a cloud solution that allows staff to stay safe and healthy while still being able to deliver high-touch services will be essential.”

And the answer is …

Our vendors and industry experts all agree that hosted applications not only still make sense, but will continue to offer a viable alternative for some time to come.


“So does cloud hosting make sense?” asked Jim Bourke, a partner and managing director of advisory services at Top 100 Firm Withum. “Absolutely yes! If you are using a non-cloud-based technology, a cloud-hosting vendor can host that legacy for you, making it accessible to you and your staff. It’s a much better solution than trying to host that technology behind your bricks-and-mortar.”


Randy Johnston, executive vice president of K2 Enterprises, added, “When SaaS products were first written in the late 1990s, we expected features and adoption rates that were much faster than has occurred. Feature deficiency was a problem with many of the new solutions. Our current forecast is that feature-complete systems will arrive by 2025. However, not all solutions will be converted to SaaS applications. So, what do you do with traditional products? You must host them somewhere!”


Right Network’s Kepczyk agreed, but feels that both hosted and cloud-native applications will eventually replace much of today’s in-house solutions. “Moving to the cloud is a matter of ‘when’ not ‘if,’ so we suggest firms get a quote for moving those applications that are better in a native cloud environment, and a quote for managing everything else in a hosted environment, so they can make an informed decision,” he said. “We believe that hosting will be around for a long time, as certain applications don’t have a comparable cloud alternative and the reality is that many firms and their clients don’t want to change from these applications, so hosting provides an obvious solution.”


However, Cetrom’s Stark cautioned, “When it comes down to it, it’s important to first identify your top IT challenges today. Are you currently facing challenges that are impacting your ability to work efficiently? Are you unhappy with the services you are getting with another provider? Do you have aging infrastructure, etc.? But notably, we caution and advise all clients (current and prospective) to think deeply about their IT security and how your current IT setup could have a major impact on how you are able to respond to a cyber event. It’s not about planning for ‘if’ but ‘when.’ Who’s handling your data security? Do you have multiple reliable data backups using different methods, separate from the network? Are you actively educating your staff and clients about IT security best practices — because they are likely your weakest link. It’s best to go the extra mile today to protect yourself in the future.”


The bottom line is that if your firm or your clients are running legacy applications hosted on the cloud, you’re not taking a second-best approach to running a truly cloud-based solution. Rather, you’re taking a viable approach given your and your clients’ needs.




IRS finalizes rules on business interest expense deduction limits

By Michael Cohn


The Internal Revenue Service released the final regulations and other guidance on the limitation on the deduction for business interest expenses under the Tax Cuts and Jobs Act of 2017, which was amended by the CARES Act earlier this year.


The 2017 tax overhaul limited the business deduction as a way of helping pay for the $1.5 trillion set of tax cuts, but the $2 trillion legislative package approved in March by Congress temporarily eliminated some of the restrictions as a way to help businesses cope with the impact of the novel coronavirus pandemic.


Under the TCJA, for tax years starting after Dec. 31, 2017, business interest expense deductions are generally limited to the sum of:

  • The taxpayer’s business interest income;
  • 30 percent (or 50 percent, as applicable) of the taxpayer’s adjusted taxable income; and,
  • The taxpayer’s floor plan financing interest expense.


However, the business interest expense deduction limitation won’t apply to certain small businesses whose gross receipts are $26 million or less, electing real property trades or businesses, electing farming businesses, and certain regulated public utilities. The $26 million gross receipts threshold applies for the 2020 tax year and will be adjusted annually for inflation.


A real property trade or business, or a farming business, can elect to be exempted from the business interest expense limitation. However, taxpayers can’t claim the additional first-year depreciation deduction for certain types of property held by the electing trade or business.


Taxpayers have to use Form 8990, "Limitation on Business Interest Expense Under Section 163(j)," to calculate and report their deduction and the amount of disallowed business interest expense to carry forward to the next tax year.


Along with the final regulations, the IRS also issued extra guidance related to the business interest expense deduction limitation. The proposed regulations spell out additional guidance on different business interest expense deduction limitation issues not addressed in the final regs, including more complex issues pertaining to the amendments made by the CARES Act. Subject to some restrictions, taxpayers can rely on some of the rules in the proposed regs until final regulations implementing the proposed regulations are published in the Federal Register.


Comments and requests for a public hearing on the proposed rules need to be received within 60 days of the date of filing for public inspection with the Federal Register.


Another piece of new guidance, in Notice 2020-59, has a proposed revenue procedure that offers a safe harbor permitting taxpayers who are engaged in a trade or business that manages or operates qualified residential living facilities to treat it as a real property trade or business solely for purposes of qualifying as an electing real property trade or business. Comments on the proposed revenue procedure must be sent by Sept. 28, 2020.


Other new guidance comes in the form of Aggregation FAQs that offer a general overview of the aggregation rules that apply for purposes of the gross receipts test, and that apply to decide whether a taxpayer is a small business that’s exempt from the business interest expense deduction limitation.




Resilience means having a backup plan for the backup plan

By Kimberly Ellison-Taylor


With economic uncertainty, a pandemic, and concerns around race and equity topping daily headlines, existing initiatives to transform and innovate across people, processes and technology have become more amplified.

COVID-19 didn’t create the concepts of economic volatility or racial inequality — but it did reveal them. As a nation, we are working together to minimize the related health and business impacts of these challenges by leveraging a diverse set of ideas, strategies and skill sets.


In June, I published an article on LinkedIn that shared my thoughts on how we all must work together to challenge status quo thinking and also recognize that people are the most valuable resource inside an organization. In an ideal world, we wouldn’t need to mention diversity characteristics at all. But until that time, we must commit to promoting diversity and inclusion in the workplace — because it’s that diverse thinking that will make our businesses more resilient and impactful long after COVID-19 has subsided.


It is anyone’s guess what will happen in the upcoming weeks, months or years. But one thing is certain: The current environment is giving us the opportunity to re-imagine our business models, customer engagement and corporate growth strategies. At any moment, businesses can be disrupted by things we didn’t expect. And if anything, the first half of 2020 has certainly reinforced that organizations must be prepared for multiple scenarios.


Scenario planning isn’t a new notion, but we often think about it when it’s too late — after the events have occurred with negative results. Too often, many chalk it up to something that only large organizations do. However, detailed planning and analysis are indispensable in any size organization. Fundamentally, scenario planning covers key questions that include: What is happening from a macro or micro-economic perspective? What are the most likely scenarios we should plan for? Based on the above likely scenario, how is that going to affect my business in particular? Ultimately, how can we position our business to survive or thrive under these potential scenarios? What are the KPIs we should be monitoring?


Some say that we can’t fully predict the future, but we can prepare for it. I couldn’t agree more. Scenario planning creates a “story” around each possible situation and allows leaders to fill in the gaps and unknowns. It doesn’t just make you think about the obvious drivers; it also forces consideration of what’s not top-of-mind. And let’s not forget about our people. In turbulent times, team members are needed to maintain and grow operations more than ever. When there are multiple backup plans, it’s easier to earn the confidence of team members and inspire trust in the future direction of the business. It also enables finance professionals to play a critical role for C-suite leaders and internal stakeholders who expect relevant information to drive strategic decision-making.


However, you can’t anticipate changes, trends and business outcomes without the right technology and processes in place to do so. So, how do you get started? Here are a few considerations on your journey to greater influence and insight:.


Determine a focal point

There are several areas your business could focus on during times of uncertainty, so it’s important to prioritize and not “boil the ocean.” Choosing a focal point will provide direction and make the process more realistic and actionable. However, it’s important that your focal point not include assumptions. For instance, asking “What services will our customers request in 2025?” is better than “How can we further enhance the revenue of a specific area?” because the latter presumes that specific area will still be relevant and/or required — which isn’t a given.


Keep it high level

Identify the internal and external drivers that could likely affect your business. That could be anything from technology adoption and changes in consumer spending patterns to a global pandemic and civil disorder. But try not to get too granular because, as situations evolve, your team must be able to pivot scenarios at a moment’s notice — which is increasingly difficult as scenarios become more complex. In order to remain nimble, it’s also important to create a tight-knit team, while still ensuring a broad range of backgrounds and opinions are represented. The urgency of each scenario will help determine the number of team members and at what levels.


Assess the uncertainties

You don’t know what you don’t know. But outlining the things you’re uncertain about, as well as thinking through the likelihood and possible impact of each (both in the long- and short-term) will allow you to begin your scenario-planning journey with full awareness of where additional effort is needed. Involve key stakeholders to think through the true plausibility of each unknown and focus your team’s efforts appropriately. This is where technology proves extremely valuable. Cloud-based scenario planning and automation can reveal the blind spots that humans sometimes miss, and can help assess the implications with models that would be difficult otherwise.


Limit the number of scenarios

While it’s easy to get excited about the insights that could be revealed, I’d recommend sticking to no more than four scenarios. Examples might be “fast recovery,” “moderate recovery,” “moderate recovery but disrupted supply chain” or “slow recovery.” Spend equal time examining each scenario — even if one or two scenarios are far more likely. The value of scenario planning is to be as ready as possible when the unlikely happens. Thoroughly evaluating all options ensures the business is prepared even for unlikely scenarios.


Leverage technology to compare scenarios

Scenario planning in today’s environment requires a disciplined, automated approach that includes complex modeling capabilities. The ability to model scenarios side by side is a key capability that should be considered when determining what technology works best for your organization. It’s also important to consider any industry-specific capabilities you may require, such as the ability to run models based on geography, sales channels or product lines. You can also evaluate risk and perform stress testing across each scenario using a type of data modeling known as a Monte Carlo simulation. This capability enables you to explore a range of outcomes across multiple variables and is especially helpful when a high degree of uncertainty and assumptions exist.


Create backup plans

As I noted, there will be unknowns in scenario planning. Therefore, it’s key to develop a contingency plan for various possible outcomes. When determining the tactics for each scenario, be sure to consider the backup plan for the backup plan, as this will ultimately reduce costs, risks and disruptions if something completely unexpected occurs.


As we think about the remainder of 2020, from the impact of the pandemic to the difficult but necessary racial equality conversations that must occur, we must consider various possible events and prepare for their impact on our organizations. We hope that worst-case scenarios will never happen, but hope is not a strategy and there are some probabilities that only technology can fully assess. Scenario planning is not optional — certainly not if we want our businesses to remain viable in an unpredictable environment. We don’t know what the next normal will bring, but we can ensure that our businesses — equipped with scenario planning technology and the most productive and inclusive teams possible — are around to consider what’s next.




States see no aid from Senate GOP for swelling budget gaps

By Shruti Date SinghAmanda Albright


The economic stimulus plan released by Senate Republicans offers no new money for states and cities to cope with swelling budget shortfalls, leaving them to contend with a grave financial crisis that’s already forcing them to slash spending, furlough workers and delay projects as tax revenue disappears.


Senate Majority Leader Mitch McConnell and other top Republicans on Monday released a $1 trillion package, setting off negotiations with Democrats. The plan doesn’t include additional funding to address states and local government deficits, a stark contrast to the approximately $1 trillion that Democrats included in the bill the House passed in May. It does loosen restrictions on the use of previously allocated funds and would provide about $105 billion in funds for schools and $16 billion for expenses tied to COVID-19 testing.


But without broader aid from Washington, the budget crisis building in state capitals and city halls threatens to worsen the economic downturn by forcing governments to cut spending deeply, fire workers or raise taxes. After the last recession over a decade ago, such steps exerted a major drag on the recovery for more than two years, according to Commerce Department figures.

“It’s a big mistake to leave out funding for state and local governments because state and local governments are in dire need of funding,” said Lucy Dadayan, who tracks local finances for the Urban-Brookings Tax Policy Center. “The bottom line is the federal government should really act fast and help the state and local governments because we are in a national crisis.”


Most states have already allocated the bulk of funding they received from the CARES Act, limiting the impact of a GOP plan allowing that money to be used to fill budget gaps — instead of just covering virus-related costs, the National Conference of State Legislatures said in a statement on Tuesday.


“For many states it will take years to recover from the abrupt drop-off in revenue caused by this pandemic,” the group said.


States alone are projected to face budget shortfalls of about $555 billion through 2022, according to the Center on Budget and Policy Priorities.


While any aid in the Republican plan was expected to fall far short of what Democrats proposed — given their intention to hold the overall cost of the stimulus to $1 trillion — Wall Street analysts and local officials are counting on some money from Washington. Bank of America Corp. analysts have said they expect as much as $400 billion in aid by the third quarter, while Morgan Stanley has forecast they will get as much as $500 billion.

Any deal between Republicans and Democrats that ultimately leaves out such aid will deal a fresh hit to many states, including California, that have been counting on federal funds. State and local governments have already cut nearly 1.5 million jobs since the pandemic shutdowns began.


According to Moody’s Investors Service, as of July, five states enacted temporary spending plans, allowing them to briefly avoid some difficult decisions as they contended with the uncertainty of the coronavirus and waited for federal aid. That includes New Jersey, where lawmakers passed a three-month stopgap spending plan. Governor Phil Murphy has warned that tax increases may be necessary to cope with the fiscal fallout from the pandemic if no help arrives.


California’s budget deferred $12.9 billion in payments to schools and community colleges and borrows $9.3 billion from other funds to avoid steep cuts in the hope that Washington would send additional aid by October. Illinois, the lowest-rated state, relied on borrowing to plug its budget gap.


The leader of the American Federation of State, County and Municipal Employees union, Lee Saunders, said in a statement on Monday that Senate Republicans are “seemingly content to let state and local governments go bankrupt.”


The head of the National League of Cities, Clarence Anthony, said the Republican proposal “is out of touch with the grim reality facing communities large and small across the nation.”


“There will be no national economic recovery without a clear commitment from the federal government to address the staggering revenue shortfalls and skyrocketing costs that local governments have been forced to incur,” he said in a statement. The Republican proposal ignores “economists who have cautioned lawmakers about the devastating long-term impacts of failing to address local government revenue shortfalls.”

— With assistance from Erik Wasson and Laura Litvan




Under Armour falls after founder, CFO are named in SEC probe

By Richard Clough


Under Armour Inc. said a pair of top executives, including founder Kevin Plank, has been named in a federal probe of the company’s accounting, sending shares of the athleticwear maker down.


Plank and Chief Financial Officer David Bergman received Wells Notices informing them that the U.S. Securities and Exchange Commission is likely to “allege certain violations of the federal securities laws,” Under Armour said Monday in a regulatory filing. Under Armour also received a notice informing it that the agency may file an enforcement action against the company.


The disclosure expands upon comments from the company in November, when it revealed that it had been under federal investigation for more than two years. The situation has roiled the Baltimore-based company as it has grappled with lackluster sales amid the coronavirus pandemic and a CEO change, with Plank (pictured) handing the reins to Patrik Frisk earlier this year.

Under Armour and the executives “maintain that their actions were appropriate,” according to the latest filing. They intend to respond to the Wells Notices and “engage in a dialogue” with the SEC to resolve the matter.

The Wells Notices, which the SEC uses to inform investigation subjects that it intends to bring enforcement actions against them, relate to sales that were allegedly pulled forward during a period from the third quarter of 2015 through the end of 2016, Under Armour said. The SEC is “focused on the company’s disclosures regarding the use of pull-forward sales in order to meet sales objectives,” but it is not alleging revenue recognition violations, the company said.


Under Armour fell 1.3 percent to $10.77 a share at 9:34 a.m. Monday in New York. The shares slumped 49 percent this year through Friday.




Financial satisfaction fell to five-year low amid coronavirus, says AICPA

By Michael Cohn


The American Institute of CPAs reported Thursday that its Personal Financial Satisfaction Index declined 55 percent in the second quarter of the year, a level not seen since 2015, as the COVID-19 pandemic continued to ravage consumer finances.


The Q2 2020 Personal Financial Satisfaction index (PFSi) measures 15.2, an 18.5-point decline from Q1, making it the biggest quarterly drop in the history of the index. The previous record decline was a 16.3-point drop in Q4 2007. The financial satisfaction of average Americans is now similar to levels seen in early 2015 on the index.


A big factor behind that decline is the historic increase in unemployment, which reached levels not seen since the Great Depression a few months ago. While the unemployment rate rose last month and in May, it is likely to fall again as businesses that reopened start closing again as the novel coronavirus ravages states across the country.


The quarter-over-quarter PFSi decline reflected the 246 percent (75 point) increase in underemployment. That factor more than doubled from the previous quarter, exceeding its former peak during the fourth quarter of 2009 to reach a new record high. The Q2 level measures data through the middle of June.


The second biggest contributor to the PFSi decline from the prior quarter was the AICPA’s CPA Outlook Index, which indicated a 68 percent (35 point) drop. The CPA Outlook Index echoes the expectations of CPA executives in the year ahead for their companies and the U.S. economy, based on a survey conducted from May 5 to 27. Its decrease was mainly driven by a sharp decline in optimism about the U.S. economy’s outlook over the next 12 months. Factoring into the PFSi decrease was a 32 percent (25 point) drop in the job openings factor which uses U.S. Bureau of Labor Statistics data that measures through April.


“Finding yourself unemployed or experiencing a sudden loss of income from your business warrants revisiting your financial plan immediately and updating your monthly budget,” said Dave Stolz, chair of the AICPA’s PFS Credential Committee, in a statement Thursday. “It is essential to understand the available COVID-related government assistance such as business loans from the Paycheck Protection Program and federal unemployment benefits and incorporate them into a revised financial plan.”


The situation is likely to grow even worse, with the enhanced unemployment benefits of up to $600 per week from the CARES Act set to expire at the end of this month. Congress has not yet reached an agreement on extending the benefits beyond the end of July, and the amount of the benefit is likely to be reduced even if it is extended.


In contrast, at the start of this year, Americans were experiencing record high levels of personal financial satisfaction. While the PFSi experienced a record decline in the second quarter of this year, its current value of 15.2 is still 55.5 points above its all-time low of -40.3 set in the third quarter of 2011, when Americans were still emerging from the lingering impact of the Great Recession.


According to a separate survey of AICPA members who are CPA financial planners, they have been busy helping clients make sense of the provisions in the CARES Act. The vast majority of financial planners (90 percent) advised clients on Paycheck Protection Program loans, while 79 percent advised their clients on economic impact payments, also known as “stimulus checks.” Fifty percent of the survey respondents indicated that they had helped clients file for Federal Pandemic Unemployment Compensation.





How to structure multiple businesses

By Nellie Akalp


If you have clients who own more than one business, how they structure those companies can affect them from the legal and tax perspectives.


As an accounting professional, you will likely be the person they'll talk with to understand the tax implications. It also will be helpful for them to speak with an attorney for guidance on the legal ramifications.


To help your clients understand some of the considerations to think about when structuring multiple businesses, let's look at three possible ways many entrepreneurs approach the situation:


1. Have a single corporation or LLC and create individual DBAs (“Doing Business As,” also known as a “fictitious name” or “assumed name") for each business line that the company operates.


2. Form separate corporations or LLCs for each business.


3. Create a holding company and form separate corporations or LLCs beneath it for each business.

Each approach has pros and cons, so clients will want to weigh each option carefully before deciding on the route to travel.


Three ways to legally structure multiple businesses:

1. Single business entity with multiple DBAs

With this approach, business owners form one LLC or corporation and then file DBAs for each line of business that will operate under that entity.


For example, let’s imagine a business owner has formed an LLC for her retail store called “Fashion Accessories by Liz, LLC,” and then wants to set up an online clothing boutique. The LLC could file a DBA for something like, “Dress Like You Mean It Boutique.” This would enable Liz to market and manage each business line separately (each accepting payments and writing checks in its independent name, etc.).

Because there is just one registered business entity to maintain, this way of managing multiple business lines would keep setup and ongoing compliance formalities minimal. For instance, Liz would only need to apply for one Employer Identification Number, and her LLC's profit and loss (including that of her DBA) would get reported through her personal tax returns. Other compliance requirements might also exist, depending on the type of business and where it's located. However, this scenario is generally less complicated compared to other ways of setting up multiple businesses.


With DBAs under a single LLC or corporation, they get personal liability protection through their registered business entity. It’s important to realize, though, that multiple DBAs under a corporation or LLC are not insulated from each other's legal or financial debts. All are considered to be the same legal and tax entity, and all are liable.


2. Form separate LLCs or corporations for each business unit

Another option your clients might want to consider is forming individual LLCs or corporations for each business they wish to operate. In this case, each business is its own standalone entity.


This approach can be attractive to those who want to isolate each business's legal and financial risks to its own liabilities rather than assume the risk of all of the entrepreneur's business operations.


Using my earlier example, if someone were to sue Fashion Accessories by Liz, LLC, then Dress Like You Mean It Boutique, LLC would not be liable for the other company’s legal or financial debt. Same goes if Dress Like You Mean It Boutique, LLC were sued; Fashion Accessories by Liz, LLC would be shielded if the other business ran into legal or financial hardship.


Real estate investors will often choose this approach, forming an LLC for each property that they own, to protect each individual investment from the potential liabilities of the others.


A potential disadvantage of starting and maintaining separate LLCs or corporations is that each entity must formally register with the state, obtain an EIN, designate a registered agent, etc. Also, each entity must submit its own ongoing annual compliance forms and fees. And, as you know well, there will be more tax forms to deal with because each company must file its profits and losses separately.


3. Create a holding company with separate LLCs or corporations beneath it

This approach involves one holding company (LLC or corporation) that forms other LLCs or corporations beneath it.


Structuring multiple businesses by forming a holding company with subsidiaries may be attractive to entrepreneurs in the following situations:

  • The business owners want to start a new business and have their existing company fund it.
  • The business owners wish to spin off one of their companies.
  • The business owners want to have one of their business lines acquired by another company.


This way of operating multiple businesses helps centralize control over the companies, protect individual business lines from the liabilities of the others and provide flexibility for growth. However, it may lead to more complicated legal and tax ramifications.


Each to their own — the importance of considering each client’s unique situation

With entrepreneurs' circumstances varying widely, clients need qualified accounting and legal guidance when exploring how to set up multiple businesses. As your clients’ trusted advisor, you have the knowledge and insight to direct them on the matters you specialize in and point them in the direction of the right resources to address other issues and concerns. They have a lot riding on their decision — so they should cover all of the bases before making decisions that can potentially affect their long-term success.




Ex-policeman who killed George Floyd charged with tax evasion

By Michael Cohn


Derek Chauvin, the former Minneapolis police officer who was fired for kneeling on the neck of George Floyd until he died, sparking worldwide protests, has been charged with multiple counts of felony tax evasion over five years.


Washington County Minnesota Attorney Pete Orput said Wednesday that Chauvin, 44, and his wife Kellie May Chauvin, 45, both of Oakdale, Minnesota, have been charged with nine counts of multiple tax-related felonies. The charges came after an investigation conducted by the Minnesota Department of Revenue and Oakdale Police Department.


Chauvin is also facing charges for Floyd's death, along with three other police officers, who have all been fired by the Minneapolis Police Department. Video footage from May of Chauvin kneeling on Floyd’s neck for nearly nine minutes as Floyd pleaded, “I can’t breathe,” when arresting him for using a counterfeit $20 bill sparked Black Lives Matter protests across the U.S. and other parts of the globe. Chauvin has been charged in that case with second-degree murder, third-degree murder and manslaughter.


According to the latest complaint about the tax evasion charges, revenue investigators initiated a review into the Chauvins in June for failure to timely file Minnesota individual income tax returns from 2016 to 2019 and fraudulently filing tax returns from 2014 to 2019. The complaints allege that the Chauvins knew of their obligation to file state income tax returns due to their filings in previous years and from multiple correspondences sent in 2019 by the department regarding their missing 2016 individual income tax return. The complaints state that the Chauvins, who were both employed at the time, failed to file income tax returns and pay their state income taxes, underreported and underpaid taxes on income generated from various employments each year, and failed to pay proper sales tax on a vehicle purchased in Minnesota.

"When you fail to fulfill the basic obligation to file and pay taxes, you are taking money from the pockets of citizens of Minnesota,” Orput said in a statement Wednesday. “Our office has and will continue to file these charges when presented. Whether you are a prosecutor or police officer, or you are a doctor or a realtor, no one is above the law."


"The vast majority of taxpayers voluntarily comply with Minnesota tax laws," said Department of Revenue Commissioner Cynthia Bauerly. "However, the department will work with our partners in law enforcement to help ensure that Minnesota’s tax laws are administered fairly and everyone pays the right amount, no more no less."


Kellie Chauvin filed for divorce shortly after Floyd's death. Her attorney and Derek Chauvin's had no comment when contacted, according to the Associated Press.




Biden attacks $50B real estate tax break in jab at Trump

By Patrick ClarkJohn GittelsohnNoah Buhayar


Joe Biden is threatening to eliminate a tax benefit worth billions of dollars to the real estate industry in an attack on President Donald Trump, a property developer who has boasted about using the tax code to his advantage.

The plan would target a provision for avoiding capital gains taxes on property sales to raise cash for childcare and elderly services. Known as the like-kind exchange, the tactic allows investors to roll the proceeds of real estate sales into future purchases, shielding investors from taxes on their profits.


The strategy is projected to save investors $51 billion between 2019 and 2023, according to Congress’s Joint Committee on Taxation. Whether or not it is repealed, the proposal lets Biden contrast his bid to help single parents and aging Americans with Trump’s career in real estate.


“Part of this is political, in the sense that people are looking specifically at real estate, because of the president’s ownership of the asset and also because of the sense that real estate owners have been particular winners during this administration,” said Chris Mayer, co-director of the Paul Milstein Center for Real Estate at Columbia Business School.


The bid to end the real estate tax benefit emerged, with very few details, as part of Joe Biden’s economic plan. The next administration will be looking for ways to raise revenue to fill holes in the budget from the COVID-19 shutdown.


The like-kind exchange rule has existed in the tax code for many decades, and until recently applied to things like industrial equipment and rental cars. Congress closed the loophole for most industries in the Tax Cuts and Jobs Act of 2017, the Trump administration’s signature legislation, but left it open for real estate.


Kushner Cos., the real estate firm once run by Trump’s son-in-law and adviser Jared Kushner, has been a beneficiary of the strategy. In 2017, the company bought a New Jersey apartment complex with the proceeds from a Toledo, Ohio property sale using a like-kind exchange, Bloomberg reported.


It’s not the only benefit in the tax code that primarily benefits property investors. Real estate developers can claim write-offs for losses on borrowed money. They also get to claim depreciation on buildings, which, unlike farm equipment or factory machinery, generally increase in value. During a televised presidential debate in 2016 with Hillary Clinton, Trump said he used depreciation to reduce taxes. “I love depreciation,” he said.


For their part, real estate investors say that like-kind exchanges improve liquidity in the market, and eliminating the benefit would reduce the number of transactions that could generate tax revenue. They also point out that the industry is already reeling from the fallout of the COVID-19 pandemic, which has shuttered hotels and shopping malls and led property owners to skip payments on billions of dollars of debt.


“I am not sure kicking our critical industry when it is already down in the dumps makes a lot of sense,” said Bruce Stachenfeld, the chairman of Duval & Stachenfeld LLP, a real estate-focused law firm in New York. “I wonder if it might make more sense to pick an industry that is doing really well right now to pay for these programs.”


On Monday, Biden teased his “caring economy” plan at a fundraiser hosted by Blackstone Group Inc. President Jonathan Gray, telling donors he wanted to make it easier for elderly Medicaid recipients to receive care at home.


On its merits, the like-kind exchange — sometimes referred to as a “1031” exchange for its tax code designation — is difficult to defend, according to some tax experts.


“There are big real estate investors who are very comfortable with the idea that they don’t pay taxes,” said Steve Wamhoff, director of federal tax policy at the left-leaning Institute on Taxation and Economic Policy. “They think it’s shocking to think their industry would have to operate without subsidy from the IRS.”

— With assistance from Tyler Pager




New York’s taxes will stalk you even if you fled during the pandemic

By Ben Steverman


As far as the taxman is concerned, home is where the heart is.


That’s the difficult message accountants and lawyers are delivering to clients these days, after the COVID-19 pandemic scattered New Yorkers across the country. The city levies its own income tax of as much as 3.876 percent in addition to the state’s top rate of 8.82 percent, and people often assume that they can avoid paying by spending more than half the year somewhere else. Nope.


In reality, New York state uses five primary criteria to determine a taxpayer’s residency status: The home they live in, their business ties, where they spend their time, family connections and the so-called “teddy bear test,” which is where they keep the items near and dear to them like artwork, heirlooms and pets.

Many families that recently left New York, the epicenter of the virus’s first U.S. wave, had merely loaded up their cars or hopped on planes with a couple of suitcases.


“There’s more to changing your residence from New York than just staying out of state for a period of time,” said Yvonne Cort, a partner at law firm Capell Barnett Matalon & Schoenfeld. “You need to make the new place your home — with all the sentiments that go with that word.”


To be considered a non-resident for tax purposes, people need to prove they uprooted their lives and cut ties with New York in a way that won’t be easy to undo in a year or two. Getting a driver’s license or registering to vote somewhere else generally isn’t enough. Enrolling children in a new school, however, could improve your case.


“Nobody wants to disrupt their kids’ lifestyle. That’s more important than taxes to most parents,” said Wayne Berkowitz, a lawyer and CPA at Berdon LLP, an accounting and advisory firm in New York. “If you don’t have school-age children, it’s going to be quite a bit easier” to change residency.


Still, some New Yorkers have successfully avoided payments by moving to other states. Last year, billionaire Carl Icahn — a native of Queens — disclosed he was moving both his home and business to Florida, which doesn't have an income tax. About 63,000 New York State residents moved to Florida in 2018, according to the most recent U.S. Census Bureau data.


But proving you’ve left New York is much more difficult if you still own or rent a place in the city — and many would-be movers tell advisers they don’t want to sell at the moment. “The market in New York City is not exactly hot right now,” said Jennifer White, a partner at law firm Reed Smith in New York.


Another issue is that audits of 2020 aren’t likely to occur for a few years — by which time many taxpayers could undercut their case by returning to their pre-COVID haunts.


“We enforce the law. We try to ensure that all taxpayers are paying their share,” Darren Dopp, a spokesman for the New York State Department of Taxation and Finance, said in a statement. “If someone isn't fulfilling their tax obligation, that burden gets shifted to other taxpayers and that isn’t fair.”




White households got stimulus checks faster than Black families

By Laura Davison


With Congress about to debate whether to send another round of relief payments to individuals, a study has found that the last batch of stimulus checks arrived at wealthier, White households more quickly than to those of Blacks and Hispanics.


Nearly seven in 10 adults said that they received their coronavirus economic stimulus payments, approved by Congress in March, as of late May.


Among Whites, 74 percent reported getting payments by then, compared to 69 percent who were Black and 64 percent who were Hispanic, according to a study from the Urban Institute released on Thursday.

Hispanic households were largely affected because U.S. citizens were barred from receiving payments if their spouses were undocumented immigrants, according to the data.


The disparities tracked along income lines, as well, according to the data, with nearly 78 percent of eligible adults above the federal poverty level reporting receiving their payment by late May, compared with 59 percent of people below the poverty level, according to the data.


Part of the lag was probably because some individuals with lower incomes aren’t required to file tax returns, so the Internal Revenue Service had to build a database from scratch and relied on individuals to proactively self-report their data.


The racial and income gap in who received a $1,200 stimulus payment within the first six weeks of the IRS sending the money raises questions for Congress as it gears up for negotiations about more economic aid. Lawmakers are considering sending a second wave of checks later this summer or autumn in response to a pandemic that has disproportionately affected communities of color and lower-income workers.


Dueling plans

Democrats are pushing for another $1,200 payment for adults earning as much as $75,000, or twice that for a couple, plus an additional $1,200 per child. They have also sought to expand the eligibility requirements, including citizens whose spouses are undocumented immigrants.


Republicans have said they want a more targeted approach, and Senate Majority Leader Mitch McConnell has suggested the payments should only go to those making less than $40,000.


The IRS says that 159 million payments, worth more than $267 billion, were distributed by early June. There’s still about $30 billion left to be distributed. Some individuals who haven’t gotten the payments yet may have to wait until next tax season to file a claim with the IRS to get the money.


The study said the IRS could more quickly reach some of those individuals who aren’t required to file tax returns if they partner with state agencies that administer Medicaid or nutritional assistance benefits.


The report also said that the Treasury Department could make better use of prepaid debit cards, rather than paper checks or direct deposit, to get the money to people who do not have bank accounts. Additionally, the IRS required that individuals submit their bank account or address information about where to send the payments via online portals, which prevented people without internet access from entering their most recent information.




Bitcoin investor sues IRS for seizing private financial data

By Michael Cohn


A Bitcoin investor in New Hampshire has filed a lawsuit against the Internal Revenue Service after he received a letter from the IRS inquiring about his digital currency holdings.


The IRS has been cracking down on cryptocurrency holders, receiving the names of approximately 13,000 customers of the Coinbase exchange after issuing John Doe summonses in 2018, after a protracted court battle. Last year, the IRS also wanted to issue summonses to another cryptocurrency exchange, Bitstamp, but a judge ordered the IRS to limit its summonses, as it was forced to do with Coinbase as well (see story).

In the latest lawsuit, which was announced Wednesday by the New Civil Liberties Alliance (NCLA), a nonpartisan, nonprofit civil rights group, a New Hampshire resident, James Harper, is suing the IRS, arguing that the agency is overreaching by demanding and seizing private financial information from third parties without any judicial process in defiance of the Fourth and Fifth Amendments and statutory protections.


The NCLA complaint argues that Harper has paid all applicable taxes and reported all of his trades related to Bitcoin holdings ever since 2013, when he first began to invest in the cryptocurrency. Over the years, all his transactions occurred through three digital virtual currency exchanges: Coinbase, Abra and Uphold. He claims they contractually promised to protect his private information, but he was surprised when on Aug. 9, 2019, he received a letter from the IRS informing him that the agency had obtained his financial records without any specific suspicion of wrongdoing. He is one of 10,000 virtual currency owners who received such a letter, according to the IRS website.


The lawsuit claims the IRS obtained Harper’s records without a valid subpoena, court order or judicial warrant based on probable cause. The Fourth Amendment to the U.S. Constitution protects “the right of the people to be secure in their … papers … against unreasonable searches and seizures.” In this case, according to the NCLA, the IRS violated the Fourth Amendment by issuing an informal demand for Harper’s financial records from a third party even though it lacked any particularized suspicion that he had violated any law. The IRS did not respond to a request for comment.


The complaint also said the IRS violated the Due Process Clause of the Fifth Amendment by seizing Harper’s private financial information from third-party cryptocurrency exchange without first giving him notice and an opportunity to challenge the seizure of his property. From the beginning, according to the NCLA, the IRS acted in violation of the statute of special procedures by third-party summonses by failing to notify Harper of the summons and making a “gross, baseless, and arbitrary judgment” that he may not comply with IRS tax obligations. The NCLA believes the case will present the opportunity to correct the course of constitutional privacy law.


“The expectation is that when you enter into an agreement with a third party, the third-party and the government will respect contractual rights,” said NCLA litigation counsel Caleb Kruckenberg in a statement Wednesday. “But the law in this case has departed from cherished Constitutional principles and the fundamental understanding that prohibited peeking into a person’s private papers without the use of a judicially-approved subpoena. Not only did the IRS demand and seize Mr. Harper’s information, but it is unlawfully holding on to that data without any judicial process. NCLA is going to right this wrong.”




The pros and cons of moving to the cloud

By Andrew Lassise


There has been much talk in recent years about migrating your accounting firm to the cloud. With the recent outbreak of COVID-19, it has become even more appealing as the work-from-home movement is in full force.

While it is a hot buzzword, many do not understand what it means to move to the cloud. Essentially, moving to the cloud means that you do not need to physically be in an office in order to access centralized data. This can be your client’s tax returns, documents, spreadsheets, and anything else that in the past you needed to login at your desk in the office to access.


Change is never easy, but during these unprecedented times it may be a good idea for you to migrate your firm to the cloud. Some organizations are opting to dip their toes in the water and do a hybrid solution, where the main server is cloud-based, but the other machines are still physical.


While there are a huge number of advantages to moving to the cloud, there are some cons that are associated with it as well.


To help you decide which is best for your firm, weigh the following pros and cons.


Pros: Access anywhere with internet

The huge advantage of cloud versus on-premise (on-prem) is that you have full access to your firm from any device connected to the internet. This means that you can be in quarantine in your living room and have the exact same setup and security that you have in your actual office.


Pros: No hardware required

The second huge advantage to migrating to the cloud is that physical hardware is not required. Full servers can cost thousands of dollars and require electricity, cooling, and upkeep. Then, without warning, one piece of hardware can fail and stop your whole firm from operating.

Since cloud technology does not require moving parts, it is impossible for something to break due to normal wear and tear.


Pros: Easy to upgrade

With on-prem servers, you will be “stuck” with technology that is becoming more and more obsolete as each day passes. At a trade show in the 1980s, Bill Gates allegedly said that 640K of RAM would be more memory than anyone will ever need on a computer. Today, you can’t buy a cheap Walmart laptop with less than 4GB of RAM (that's 6,250 times more powerful than his prediction).

As software becomes more and more complex, computing power needs to constantly be upgraded. Being on the cloud changes upgrading performance from needing a technician to come in, purchase correct parts and a hefty on-site visit fee, to simply clicking a button on a drop-down menu and voila — faster machines!


Pros: Disaster recovery

Having a cloud-based firm makes disaster recovery a breeze. With traditional on-premise servers, if there is a problem with the server, a restore can take anywhere from a few hours to a few weeks depending on the size of the amount of data lost and the action that caused the issue to occur.

With a cloud-based solution, it is very easy to simply click “undo” and restore your company back to the state it was in a few hours ago, suffering very little down time as the result of a catastrophic incident.


Pros: OPEX versus CAPEX

As servers and computers can be very expensive upfront costs, they are usually categorized as capital expenditures and depreciated. With a cloud-based organization, you only pay for what you use, and can scale up and down very easily. This makes your computer system an operating expense, just like any other SaaS product or utility that your business usually pays for on a monthly basis.

It is also important to note the scalability where if you have spikes in usage, like tax season, you can dedicate more resources, and in the off-season, you can turn off machines to save money.


Cons: Requires high speed and stable internet connection

Even though we are in the Information Age, there are some areas of the country and the world that are not able to have the high-speed internet that is required for a cloud-based operation to run smoothly. If you are currently using satellite or a hot spot for internet access, then cloud is most likely not for you.

Test your current internet speed at If you currently are below 50 MBPS, then cloud may be out of the question. If you must pay per GB of data from a hotspot, this will be unreasonably expensive to maintain.


Cons: Price

Pound for pound, a run-of-the-mill $800 business computer with a shelf life of five years equivalent that is hosted and running 24/7 in the cloud can cost over $5,000 over the same five-year period. There are a lot of ways that you can reduce the cost by not having the machine run 24/7, having it off during weekends, etc., but do realize that it is a different expense that needs to be managed accordingly.


Cons: Complicated setup

While there have been major improvements over the past few years in migrating existing on-premise organizations to the cloud, it is still a complicated process that isn’t a simple drag and drop. Risking your entire database hoping that you can figure it out or trusting your nephew who is a “computer whiz” who has never done a cloud migration is not a viable solution.


Cons: You may still need tech support

A common misconception is that since there are no moving parts, the machines never break. The operating system is the cause of most computer issues, and that is the same software, cloud or physical. So if you have issues opening a PDF file with a physical computer, that exact same problem will still exist in the cloud. You cut out physical hardware failure, not software or user error.




5 ways land can shelter income

By Roger Russell


COVID-19 has caused a bloodbath on Wall Street and uncertainty in other investment classes, but for decades land has provided a safe haven for capital preservation during times of economic turmoil. In the post-pandemic economy, CPAs and their land-investor clients should understand what tax shelter options are available to them to protect their acquisitions.


Tax sheltering and land investing go hand-in-hand, according to Jason Walter and Clint Flowers, founder/CEO and partner, respectively, of National Land Realty.


“That’s because there [is] a myriad of tax sheltering options from which to choose,” said Walter. These include like-kind (Section 1031) exchanges, Delaware statutory trusts, depletion of tax basis, step-up in basis, retirement accounts, and conservation easements. Which ones are utilized all depends on the needs of the investor.”


1. Section 1031 exchange and DSTs

A 1031 exchange (a.k.a. a like-kind exchange), involves the exchange of an asset for another replacement asset without generating a current tax liability from the sale of the first asset. “Land is one of the types of investment real estate assets that is allowed to be exchanged,” said Walter. “This can easily be done through conventional sales and acquisition models, but also through Delaware statutory trusts, which allow investors to own a fractional interest in a certain property with other investors. Investing in a DST allows you to be a passive investor and diversify your real estate portfolio through investments across many different types and number of properties.”


DSTs are popular for the ownership of apartment buildings, according to Walter. “The DST allows multiple people to invest in a trust: For example, 30 investors might invest a million dollars each to buy an apartment building.”


2. Depletion of tax basis

Then there is the route offered by the depletion of tax basis, said Flowers: “For example, if you purchase timberland conventionally through a mortgage or for cash, and it has 4,000 MBF (thousand board feet) of merchantable timber worth $1 million on the day you bought it, you can convert that 4,000 MBF of timber into $1 million of income over time through one or more timber sales without incurring any tax consequences or capital gain.”


“It’s not a gain — it’s merely a recovery of capital,” said Flowers. “The timber was just converted to a liquid form. Every subsequent dollar after that would be taxed at the applicable long-term capital gain rate. Certain activities can add to the cost basis, enabling the holder to do deplete again later or capitalize in the year of the expense.”


3. Step-up in basis

This is the traditional step-up in basis when the owner of an asset passes away. The heirs receive the asset with a cost basis equal to the fair market value at the date of death. “For example, if an investor purchases land for $5,000 an acre and passes away when its current fair market value is $8,000 per acre, the heirs will receive it with a cost basis of $8,000 per acre,” said Flowers. “They would incur no penalty in selling the property unless their net income from the sale exceeds $8,000 per acre, and only the amount over $8,000 per acre would be subject to any capital gains tax, providing $3,000 an acre in tax shelter.”


4. Retirement accounts

Land can also be held in an IRA or 401(k), according to Flowers. “In the case of an IRA, it will have to be a self-directed IRA. For 401(k)s, you cannot invest directly into the 401(k) account, but will have to roll over your 401(k) into an IRA and then use the proceeds towards the investment” he said.

The IRA shelter is strictly limited to land that is used for investment purposes, according to Flowers: “So this is not the right choice for people looking to offset improvement costs of a cabin or lodge.”


5. Conservation easement

Conservation easements have been in the news lately, as the IRS has sought to thwart their use in abusive syndicated tax shelter transactions. However, the legitimate use of conservation easements is still recognized by the IRS.


“The IRS recognizes the important role of legitimate conservation easement deductions in incentivizing land preservation for future generations,” the IRS said in IR-2020-152, on July 13, 2020.


“Conservation easements resemble a deed restriction, but on a larger scale,” said Flowers. “Through this method, investors donate certain rights to the benefit of a charitable land trust. These rights are typically related to subdivision development, mining, or surface uses that might adversely affect the subject property’s wildlife or ecological benefit to the public, including air quality, water quality, etc. The more rights you donate, the bigger the tax shelter achieved. Through a conservation easement, anywhere from 50 to 100 percent of the donor’s adjusted gross income can be sheltered for up to 16 years.”


In addition to the tax shelter, conservation easements also offer donors the opportunity to set a positive example for their community. “And many times, they would have taken these conservation steps in order to make the best use of the land anyway,” Flowers noted.


Of course, given the current IRS focus, it’s very important for CPAs to distinguish between legitimate and abusive conservation easements. Rickard Jorgensen, president and chief underwriting officer of CPAGold, sees conservation easements as spiking the next wave of malpractice claims against accountants and tax preparers. This can take the form of a referral source to a syndicated conservation easement promoter; an aggressive deduction in the tax returns of a high-net-worth individual or a conservative deduction in the tax returns of an HNW individual.


“We recommend that a CPA firm should plan to take steps to mitigate the possibility of a claim arising from abusive syndicated conservation easement transactions,” he said.


Walter and Flowers agreed: “We’re highly involved in the integrity of the industry,” said Flowers. “If you buy and manage property and it has a higher and better use value, you can donate and achieve a nice tax deduction for doing something you would do anyway, that’s perfect — what it was designed for. But if you buy with the sole intent of achieving a return on a conservation easement, that most likely violates the charitable intent rule.”




New York sees push to tax stock trades

By Martin Z. Braun


Democrats in New York, the world’s financial capital, may finally have the right moment to resurrect the state tax on stock trades.


One-fifth of the state’s revenue is disappearing, leaving a projected four-year deficit of $61 billion. Progressive Democrats are on the ascent in the state legislature. Stock trading has surged. And taxing it would raise $13 billion a year to avert painful cuts to government services during a pandemic that’s exaggerating economic and racial inequality.


“If ever there was an opportune moment for New York to resurrect its stock transfer tax, it’s now,” said Andrew Silverman, a Bloomberg Intelligence analyst. “The state legislature is probably more amenable now than at any time in decades.”

Last month, about 100 members of the 213 members of the New York legislature signed a letter saying the state should raise taxes on the rich before cutting spending to balance the budget. Other Democratic proposals include raising taxes on billionaires, large corporations and second-home purchases of $5 million or more.


One benefit to the stock-transfer tax is that much of it would come from wealthy out-of-state residents who execute trades in New York, said Phil Steck, a Democratic Assemblyman from Schenectady. He has received more than 20 co-sponsors for his bill to repeal the 100% rebate on the tax, which remains on the books but was effectively killed off in 1981 when the New York Stock Exchange considered leaving.


In 2016, the wealthiest 10 percent of Americans owned 84 percent of stocks, according to a study by New York University Professor Edward Wolff.


“Every single significant exchange in the world has a financial transaction tax save one, which is Germany, and they’ve proposed it there,” Steck said. “Is the London Stock Exchange out of business? Have they moved to Dublin?”


Steck’s bill calls for a tax of 1.25 cents on a sale of stock worth $5 or less a share to as much as 5 cents for stocks worth more than $20 per share. Revenue would be targeted to New York’s general fund for three fiscal years. Afterward, it would be used for infrastructure, with the Metropolitan Transportation Authority getting 25 percent.


Even so, the tax would draw opposition from banks and brokers. Wall Street is responsible for 17 percent of state tax revenue and 181,200 jobs, some of which could be jeopardized if trading volume falls, securities industry groups say. The Investment Company Institute said the tax would harm millions of moderate-income investors in mutual funds.


Freeman Klopott, a spokesman for Democratic Governor Andrew Cuomo’s budget office, said a tax could just cause firms to shift trading elsewhere.


“In the digital age it would be even easier for transactions to simply be moved out of state to avoid the tax,” he said.


A serious discussion of the levy may prompt threats by the New York Stock Exchange, owned by Atlanta-based Intercontinental Exchange, to relocate, according to Silverman, the Bloomberg Intelligence analyst.

Farrell Kramer, a spokesman for the NYSE, declined to comment.




Working from home is not a choice

By Jennifer Briggs


This was not a choice. People didn’t wake up one day and decide, “Hey, I want to start working from home! With my children, and maybe my spouse there as well!”


We were asked, during a crisis, to go home for safety reasons and we are trying to get our jobs done well.

In many ways, the accounting profession is fortunate to have the option of working from home with the use of technology. But technology is only so helpful when you don’t have childcare. The kids don’t care about your client portal or your exemplary Zoom meeting skills. They are stressed, too, and they need attention. They also like to be fed during the day. And did I mention that for several months they also needed to be educated and you had to become their Zoom call mentor and tutor? It’s been rough.


And now I’m hearing more and more about organizations telling their staff that as of x date, in the not-too-distant future, they will be required to have childcare if they’re working from home. During a global pandemic? That’s not as easy as it sounds. What if you don’t have family nearby who can help? What if you can’t find or afford a nanny? Or you just don’t feel safe having another person around your child? Did I mention that even as of July 10, many states still do not have clear guidance on back to school plans for kids in K-12? Even if they open, will they stay open?


And among this uncertainty, I’ve also heard expectations are creeping up — as in, employers are looking for pre-COVID productivity when nothing has significantly changed in many parts of the country. Hours haven’t been added to the day, and the work-life balance is still stressful for many families. I know people working in the middle of the night because it’s the only time they can concentrate, get everything done that needs to be done and manage what’s happening at home.


There are pros to the current situation (spending more time together, less commuting, less travel, etc.), and by all accounts, people are doing far better than their employers anticipated at working from home. Some staff even want to remain working at home after this crisis. That’s great — be proud of all that’s been learned and accomplished!

But, employers, please keep in mind that things are not back to normal. If you aren’t personally bearing the brunt of the childcare responsibilities right now, know that others are. Childcare has never been secure or easy in this country, and when systems get stressed, you see the flaws even more clearly.


Don’t make WFH sound like a perk; not yet. We’re still finding our way — it’s still difficult for a lot of families, it’s difficult for people without families, and there’s still so much we don’t know about the coming months.


I’ve been incredibly proud of the profession during this time. Not only for the work done on behalf of clients and companies, but in recognizing the mental health and personal difficulties many are experiencing. All I ask is that we remain aware of these challenges and don’t assume we are in a “new normal” that is working for everyone.




PPP expense deductibility from year to year

By Roger Russell


As of today, the Internal Revenue Service has ruled that expenses paid with forgiven Paycheck Protection Program loans are not deductible. But what if the loan is processed and expenses are paid in 2020, but the forgiveness determination is not made until 2021? Such circumstances are not only possible but likely to occur, according to Roger Harris, president and COO of Padgett Business Services.


“The loan recipient now has up to 24 weeks to spend the proceeds, so that’s six months added to the time they received the loan,” he said. “On top of that, you have to fill out an application asking for forgiveness, and furnish documents, and that will take some time. Once you give it to the bank, the bank has two months, and then the [Small Business Administration] has three months to make the decision. So it’s very possible to have expenses paid in one tax year, and the forgiveness determination made in the following tax year.”


Moreover, the forgiveness determination could well be after the deadline for filing the return for the year in which the expenses were actually paid.


 “When the expenses paid with the PPP loan proceeds were ruled to be nondeductible, most of us thought that was something we would deal with next tax season,” Harris said. “But the extension of time to use the proceeds to 24 weeks has created the likelihood that at least some loans will not be forgiven until after the filing date for next year’s returns. There are decisions to be made by fiscal-year taxpayers, and by almost all taxpayers who have to pay estimated taxes, who need to know the process they’re supposed to follow. If they get the loan in 2020 and forgiveness is complete in 2020, it’s a non-issue. But if it bleeds over into next tax year and goes past the filing deadlines, we need guidance.”


Harris posited this example: A small business with a fiscal year ending September 2020 receives a PPP loan for $100,000 on July 10, 2020. (The PPP resumed accepting applications on July 6, 2020, with a new deadline to apply for a loan set at Aug. 8, 2020.) By the end of 24 weeks, or Dec. 25, 2020, the small business has spent the entire amount on qualified expenses to have the loan forgiven. The small business completes the application for forgiveness and submits it to the bank on Dec. 30, 2020. The bank has 60 days to process the application, which would give it until March 1, 2021. When the SBA receives the bank’s submission, it has 90 days to respond, which means it may be nearly June 1, 2021, before the loan recipient receives the forgiveness determination.

“Taxpayer is responsible for filing a return for the fiscal year ending Sept. 30, 2020,” Harris said. “Expenses paid between the time the loan was funded and Sept. 30, 2020, might be nondeductible if the loan is forgiven, but the taxpayer won’t know that in time to file the return.”


 “For the new fiscal year beginning Oct. 1, 2020, expenses are being paid that likewise could be forgiven,” he continued. “The taxpayer doesn’t have the information necessary to calculate estimated tax payments during this time. If the estimated taxes paid are not enough because the business considered the expenses deductible, will penalties be charged?”


The same issues in the example may confront an individual taxpayer, Harris noted. “Should all taxpayers that might be affected file for extensions until they know the final status of their loan forgiveness application? Or should they all amend their return?”


“These are solutions to a problem that can be avoided if the position on deductibility is reversed,” he said.

“Most small-business people and practitioner groups would agree that the real answer is to allow those expenses to be deductible, in which case the problem disappears,” he said. “On May 5, 2020, the Senate Finance Committee sent a letter, which included the signature of the House Ways & Means Committee chairman, that stated they did not think the IRS ruling on non-deductibility was consistent with congressional intent. There’s clearly a large group of congressmen and senators who disagree with the ruling.”




Are active ETFs right for you?

A new rule is likely to lead to more active ETF choices for investors.



Key takeaways

  • A recent regulatory shift means that some ETFs no longer have to disclose holdings daily.
  • This will likely increase the availability of actively managed ETFs.
  • Actively managed stock ETFs had not previously been offered widely, due to the potential opportunity costs associated with daily holdings disclosure.


The growth in exchange-traded funds (ETFs) has been astronomical since the first ETF launched in 1993. US-domiciled ETFs alone have amassed well north of $4 trillion in assets under management. The last several years have been record-breaking, and that momentum does not seem to have slowed in 2020 despite COVID-19.


Many investors and financial advisors like ETFs because they can offer tax advantages compared to some other alternatives, can be traded intraday, and offer transparency into underlying holdings, among other potential benefits. The degree of transparency is the differentiator between the new active stock ETFs and the vast majority of ETFs in the market today.


A game changer for actively managed ETFs?


Many investors seek actively managed investments (like many mutual funds and ETFs) based on the belief that rigorous research, sophisticated portfolio construction, and expert trading may add value for shareholders. Actively managed ETFs are a portfolio of subjectively chosen investments by a fund manager, rather than those chosen via a rules-based index that defines a passively managed ETF. Essentially, active ETFs combine the potential benefits of an ETF structure with those of active management. The idea is to perform better than a benchmark index through flexible active management.


However, investments that combine the benefits of active stock picking and an ETF structure have not meaningfully taken off up to this point. Most fund managers have not broadly offered active ETFs because there are potential costs associated with full transparency in the form of daily holdings disclosure (which had historically been required of ETFs).


But something changed recently. The Securities and Exchange Commission (SEC) has granted an exemption to a handful of firms, allowing them to offer actively managed ETFs that are not required to disclose daily holdings. You may see these funds referred to as semi-transparent ETFs elsewhere. Investors can maintain transparency with access to most recent public holdings and, in some cases, into the fund’s current exposures and drivers of risk and return through daily proxy portfolios.1


The rule change will likely make actively managed equity ETFs more widely available in the marketplace. Of course most, if not all, of the existing risks associated with ETFs also exist for actively managed ETFs (see disclosures for important information on additional risks associated with active ETFs). However, this innovative ETF structure has the potential to allow investors to capture more of the outperformance that active managers seek to provide by mitigating some front-running and trading risks.


The risk of front-running


How might actively managed ETF investors benefit from this rule change? By revealing holdings too often, active managers risk signaling their investment intent to the market. This information could lead other market participants to "front-run" trading decisions—an act that can threaten the returns of both actively and passively managed strategies. When other market participants can detect a fund's upcoming purchase, as an example, they can get ahead of that trade and thus bid up the security's price, resulting in a potential reduction of the strategy’s returns.


With the recently approved non-transparent ETF, the relaxed holdings disclosure for active ETFs may allow fund managers to preserve more of the potential shareholder value associated with active management.

Academic research has demonstrated that the front-running of active investment strategies has had an impact on fund performance. Market participants have been able to exploit front-running opportunities using previously disclosed holdings.


Further, following a 2004 SEC policy change that required mutual funds to increase the frequency of holdings disclosure from semi-annually to at least quarterly, a 2015 study examined the impact of the shift on fund shareholders. The research showed that as fund managers revealed their trading activity to the market more frequently, some ability to deliver excess returns was lost—largely as a result of front-running.2 Consequently, front-running could be even more costly to active ETFs, which have historically disclosed their holdings more frequently (i.e., daily) than traditional mutual funds.


The value of research


As part of a fund's management fee, investors pay active managers to conduct company research to identify stocks that might outperform and those that might underperform. Such research decisions have the power to add to shareholder returns.


However, those returns may take time to materialize in trading activity across a suite of funds, as individual managers make investment decisions based on their specific portfolio construction and risk mandates. If these research insights are revealed to the market before the desired investment position can be established, that can erode the potential value.


Flexibility to trade over time may enhance performance


To determine how quickly to build or reduce a position, traders use their expertise to balance the cost of liquidity with the risk of not executing a trade all at once (should market volatility lead to significant price changes). Because mutual funds and ETFs often trade in large volumes, asset managers frequently spread trades out over multiple days to reduce costs.


Disclosing trading activity to the market while positions are still being built or reduced could allow for increased front-running and preclude cost-saving trading strategies, thus leading to lower net performance. Opportunistic or algorithmic trading strategies could reduce trading costs even further for actively managed ETFs that are not required to disclose holdings daily. ETFs that do not need to disclose holdings daily may benefit from the ability to implement trading strategies that preserve more of the potential active management value for shareholders.


Investment implications


The recent policy shift to enable some firms to offer ETFs without the requirement to disclose holdings daily may help reduce the potential costs to shareholders associated with full transparency. At the same time, these new ETF structures are designed to provide transparency into the funds’ holdings and drivers of performance.

This change may likely lead to greater access for investors who are seeking the benefits of ETFs and who believe in the potential of active management.




When can you retire?

Financial planning can illustrate how your retirement age may impact your finances.



Key takeaways

  • The age when you choose to retire can make a big difference for your financial outlook.
  • Retiring doesn't just mean a loss of one source of income, it could also mean changes in investment growth potential, expenses, and withdrawals.
  • The financial planning process can help to clarify the potential impact of different retirement dates.


People stop working for many different reasons. For some people, retirement happens for reasons outside their control—changes at work, family members impacted by COVID-19, personal health challenges, or other circumstances may dictate when they give up their jobs. For those who choose to stop working, the question of when they leave work is important: A few years of working can mean a big difference, both in terms of retirement lifestyle and finances.


The financial planning process can help illustrate what is at stake and identify some of the key questions that you should ask if you are considering when to stop working.


To demonstrate, let's look at a hypothetical couple, Bob and Kathy. Bob and Kathy decide to meet with a financial professional from Fidelity to review their options as they begin to discuss when to stop working. Fidelity and other financial companies offer a number of online tools for guidance as well as access to financial professionals. Bob and Kathy have a dedicated Fidelity advisor named Dylan as part of their relationship with Fidelity. The couple would like to retire early enough to travel extensively (once COVID-19 travel restrictions are lifted) and keep active, but they don't want to risk sacrificing their lifestyle.


When they meet with Dylan, he explains the basic planning process: First they will discuss Bob and Kathy's goals, then review the couple's current situation, and then Dylan will review the potential financial impact of a few different options.


The goals


Bob and Kathy are 60. Bob would like to retire so he can have more time to devote to the activities he loves, like caring for his grandchildren and volunteering with the historical society. Kathy is looking forward to having more time for the community farm where she is a board member. Prior to the COVID-19 pandemic, Bob and Kathy loved traveling, dining out, and the theater. They feel a bit nervous that they will have to scale back those parts of their lifestyle if they retire too soon—once things get back to normal.


Bob and Kathy are hoping to retire at 63, but they haven't really looked at what that means for their retirement finances and they are wondering if it would be worthwhile working a few years longer. Initially, Bob and Kathy wanted a financial plan that would fund retirement until their late 80s, but Dylan suggested planning until 96 due to longevity trends and their own health, so the couple decided to be prepared for a longer retirement.


The checkup


The couple has been saving for a long time, and has about $1,000,000 in savings of which roughly 75% is invested in stocks, 15% in bonds, and 10% in short-term investments. They have another $300,000 of equity in the house they own. Their income while working is $250,000 a year, and at age 67 they will each begin to collect $20,000 annually from Social Security. Their annual expenses are about $80,000 per year, which will grow with inflation over time.


The options


Dylan uses a financial planning tool to illustrate the couple's financial outlook if they retire at 65. The illustrations are based on market simulations. The software runs 1,000 different scenarios for the couple's retirement plan, using hypothetical outcomes based on the historic performance of stocks, bonds, and other investments. The goal is to look at lots of different possible outcomes and create a plan that may work even in challenging market conditions, since it is impossible to predict the actual return of the markets.


The illustrations suggest that if the couple does retire at 63, they would have a moderate probability of having their plan succeed; in this case that means in about  80% of the scenarios the couple would be able to meet their expenses and maintain their current lifestyle and still have some money left in their portfolio at the end of the plan. In an average market, defined in this case as the 50th percentile of the simulations, they could potentially leave a significant legacy, about $2.4 million in today's dollars.


On the other hand, some of the scenarios were more challenging. In about 20% of the scenarios, the couple would run short on money in their portfolio and need to make lifestyle changes to make ends meet, for instance selling a home or reducing spending. In a very difficult market scenario, defined in this case as the worst 2.5% of the scenarios, their portfolio would be used up with about $650,000 in expenses remaining during their plan.


The data in the chart is described in the text.


For illustration only. IMPORTANT: The projections and other information generated by eMoney Advisor regarding the likelihood of various investment outcomes are hypothetical in nature, do not reflect actual investment results, and are not guarantees of future results. Results may vary with each use and over time. eMoney Advisor is a diagnostic, web-based tool owned and maintained by eMoney Advisor, LLC, a Fidelity Investments company. See endnotes for important details about how these values were calculated and how median and downside markets were defined.


Bob and Kathy are worried; they don't want to sacrifice their lifestyle and don't feel comfortable with a plan that came up short in roughly 1 in 5 illustrative scenarios. Dylan runs another illustration, this time the plan assumes they work 2 years longer, to age 65. In this case, working longer allows the couple to continue making contributions to their savings, delay withdrawals, give their portfolio more time to potentially grow, and it shortens their retirement.


The illustration suggests that working 2 years longer significantly increases the chances of the plan succeeding. According to the illustration, the revised plan would let them maintain their current lifestyle in close to 95% of the scenarios, which feels like a strong plan to Kathy and Bob. Even in a challenging market, their portfolio could cover more of their expenses—the shortfall from their portfolio was reduced by about $400,000.


The data in the chart is described in the text.


For illustration only. IMPORTANT: The projections and other information generated by eMoney Advisor regarding the likelihood of various investment outcomes are hypothetical in nature, do not reflect actual investment results, and are not guarantees of future results. Results may vary with each use and over time. eMoney Advisor is a diagnostic, web-based tool owned and maintained by eMoney Advisor, LLC, a Fidelity Investments company. See endnotes for important details about how these values were calculated and how median and downside markets were defined.


Bob asks if working longer could let them spend more money once they do retire, so Dylan creates one more illustration. Again he models retirement at age 65, but in this scenario he increases the annual spending. The result is that the plan has about the same chance of success as retiring at 63, but the couple can spend an extra $10,000 each year.


Decision time


Bob and Kathy review the numbers with Dylan. They discuss some other options, including part-time work in retirement, different investment approaches, and potential risks to their plan. While Bob and Kathy are eager to start their retirement, they decide that they will be able to enjoy the lifestyle they want with less worry if they wait a little longer. Ultimately confidence in their plan is worth more to them than the increased spending.

Dylan reminds the couple that a lot can change over time and so the 3 decide to meet again each year to update the plan, or more often if there are any big changes in their family or finances.


The bottom line


There is no clear finish line when it comes to saving for retirement, especially during these uncertain times. The financial planning process may be able to help define your goals and illustrate some of the tradeoffs involved. As you make a plan, you can weigh the risks and benefits and make your own decision.




8 tax moves for 2020 to make now

The COVID-19 pandemic has impacted everything, including your taxes.



Key takeaways

  • Your income tax obligation could be different this year if your income went up or down significantly.
  • There are steps to take now to figure out how much you might owe, so you can try to avoid penalties and fees later on.
  • There are tax moves worth considering before the end of the year.


The year 2020 has been unusual in almost every way, and that will likely be true for most people's taxes this year.


In the months since COVID-19 started to ravage the world economy, nearly half of all Americans suffered a loss of income, according to a recent survey by in a new window


"You really have to pay attention to how much you have paid in so far, and how much are you likely to owe throughout the year or at the end of the year," says Christopher Williams, Principal at EY Private Client Services.


Here are some of the things you should consider:


1. Do a paycheck check-up

The IRS has a handy toolOpens in a new window to make sure you are having the right amount of taxes taken out of your paycheck for your federal tax payments. You'll have to do some back-of-the-envelope math to figure out what you owe for state taxes, as you will if you're currently unemployed.

"Gather up whatever paystubs and statements you have and see what the federal and state withholdings have been," says Matthew Kenigsberg, VP of Taxes and Investments at Fidelity.


2. Pay your estimated tax on unemployment benefits

At the middle of July 2020, more than 30 million AmericansOpens in a new window were collecting unemployment benefits, according to the Department of Labor. All those payments—state and federal—are taxable as income, and you may not have had any taxes already taken out.


To be safe from fees and penalties, you need to pay the lesser of 90% of what you owe by the tax filing deadline in 2021 or pay 100% of last year's payment due (110% for filers who make over $150,000 in adjusted gross income). You may also owe estimated taxes throughout the year. Otherwise, you could end up with both an underpayment penalty and a late penalty from the IRS, calculated when you file.


3. Recalculate your stimulus

If you did not qualify for the stimulus payment authorized by the CARES Act because your income was too high in 2018 or 2019, you might qualify for it in 2020 when you file your return if your income has declined. The payment is based on the return for this year, and there will likely be a worksheet with the IRS Form 1040 that reconciles your income and will add the CARES credit as a refund if you qualify.


Note: If your income went up in 2020 and you no longer qualify, you will not be asked to return any payments you might have received up to that point.


4. Look for tax savings

If you are working from home as a self-employed person—which includes many professionals like doctors and lawyers—you will want to keep track of the space you are using and any expenses you incur to file for a home office deduction.


For all those full-time employees working from home and having to buy desk chairs, printers, and other supplies—sorry, you are out of luck for a federal income tax deduction, as the one that would have covered you for home office and unreimbursed employee expenses was removed by the Tax Cuts and Jobs Act. (Note, however, that some states still allow it for state income tax purposes.)


Everyone will qualify for a new above-the-line tax deduction of $300 for charitable giving, and you can deduct even more if you itemize your expenses.


You will also want to watch your medical costs for the year. If you had a particularly low income year but also had high medical expenses, you might qualify for a deduction if they exceed 10% of your income and you itemize your deductions.


"It probably makes sense to track those receipts," says Williams.


5. Maximize your workplace retirement savings

If your income went up this year, or you just generally want to help reduce your tax liability in 2020, consider increasing your contribution to a 401(k) or any other pre-tax retirement accounts offered through your workplace. You can use a calculator like Fidelity's to see how your bottom line would be affected if you change your contribution level.


On the other end of the spectrum, if you took a hardship withdrawal loan, you will have to account for that on your taxes over 3 years, but not pay penalties. You also have those 3 years to return the money to the account, so if your situation stabilizes, as it has for 17% of the people surveyed, you can have a do-overOpens in a new window.


6. Pause your RMDs

The IRS now requires most people to start taking money out of their tax-deferred retirement accounts once they reach age 72, but that is on pause this year. If you are a 74-year-old who has $1 million saved in an IRA, that amounts to about $40,000 less in income for the year and could yield as much as $14,800 less in federal income tax for the year, depending on your financial situation.


"It's an opportunity for retirees to save on taxes or look into converting some of their tax-deferred savings to a Roth IRA," says Kenigsberg.


Tip: For more on RMD vacation strategies, read Make the most of your RMD vacation.


7. Stash your extra savings

If you skipped some vacations or haven't been spending as much, you may have some extra cash suddenly. In April, savings rates in the US hit a historic 33%Opens in a new window, according to the Bureau of Economic Analysis, up from 8% in April 2019.


Some ways to put those dollars to work for you in a long-term tax-savings way are to contribute to accounts like a Roth IRA, a 529 college savings plan or a health savings account, where the growth accrues tax-free.

You might also want to do some tax-loss—or tax-gain—harvesting: Look at the current balance of your investments throughout the year and make sure everything stays aligned with your goals as the stock market fluctuates. If not, then you can buy or sell stock to fit your needs.


Tip: Check out more ways to cut investment taxes.


8. Small-business concerns

If you are a small business owner, there are several tax-related scenarios that might come into play for you in 2020. If you applied for any of the government assistance through the Paycheck Protection Program or an Economic Injury Disaster Loan, there will be paperwork to reconcile.


If you had a shift in income, your ability to claim the Qualified Business Income Deduction might have changed. That is a 20% deduction for those who meet certain criteria.

More resources


The best place to start is with your most recent tax return, which you might just have filed by the July 15, 2020 deadline. No matter how you compiled that return—whether you used a professional or do-it-yourself tax software—there should be help available for sorting out what you need to do for 2020. Also, rules keep changing, so stay tuned to the news that will affect your personal situation and consult with a tax advisor for questions about your specific situation.




6 money myths debunked

Don't be bamboozled. Believing these myths could hurt your bottom line.



Key takeaways

  • Establish good saving habits. Be sure to save some money from every paycheck.
  • Invest your savings appropriately for your goals and time frame.
  • Debt isn't always bad but must be used responsibly.


There is no shortage of bad information out there—and falling for some of it can cost you money. It could be other people who steer you in the wrong direction, or it could be the things you tell yourself. Whatever the source, believing these myths could be hazardous to your financial health.


Get the truth behind these bits of financial misinformation.


Myth #1: It's not worth saving if I can only contribute a small amount.

In reality: If you start early, around age 25, saving 15% of your paycheck—including your employer’s match to your 401(k) if you have one—could help you save enough to maintain your current way of life in retirement. It sounds like a lot, but don’t lose your motivation if you can’t save that much. Don't be discouraged if you start later than age 25. Beginning to save right now and gradually increasing the amount you're able to put away can help you hit your goals.

Save as much as you can while still being able to pay for essentials like rent, bills, and groceries. Fidelity's budgeting guidelines may be able to help determine how much you can afford to save and spend.

  • Consider allocating no more than 50% of take-home pay to essential expenses (including housing, debt repayment, and health care).
  • Try to save 15% of pre-tax income (including employer contributions) for retirement.
  • Prepare for the unexpected by saving 5% of take-home pay in short-term savings for unplanned expenses.


Myth #2: The stock market is too risky for my retirement money.

In reality: It’s true that money in a savings account is safe from the ups and downs of the stock market. But it won't grow much either, given that interest rates on savings accounts are typically low. When it’s time to withdraw that money for retirement a few decades from now, your money won’t buy as much because of inflation. The stock market, however, has a long history of growth, making it an important component of your longer-term investment portfolio.


For instance, for a young person investing for retirement, a diversified investment strategy based on your time horizon, financial situation, and risk tolerance could provide the level of growth you need to achieve your goals.

There are a variety of ways to invest. Building a diversified portfolio based on your needs and the length of time you plan to be invested can be as complicated or as simple as you prefer. You can build your own diversified portfolio with mutual funds or exchange-traded funds—or even individual securities.


Even if you choose to manage your own investments, you may not be entirely on your own. 401(k) providers often offer example investment strategies that could give you ideas on how to build a diversified portfolio. You can invest in the funds in the model portfolio in the suggested proportions or you could use the models as a source of inspiration for your own investment ideas.


If you find investing daunting or don’t have the time to figure it out just yet, you might consider a managed account or a target-date fund for savings that are earmarked for retirement.


Myth #3: I’m young, so I don’t need to save for retirement now.

In reality: Retirement can feel very far away when you're young—but having all of those years to save can actually be incredibly powerful. That's because time and compounding are important factors in a retirement savings plan.


Compounding happens as you earn interest or dividends on your investments and reinvest those earnings. Because the value of your investments is then slightly higher, it can earn even more interest, which is then packed back into the investments allowing it to grow even more.


Over time, the value can snowball because more dollars are available to benefit from potential capital appreciation. But time is the secret ingredient—if you aren’t able to start saving early in your career you may have to save a lot more in order to make up for the value of lost time.


A tale of two investors


You can start by contributing to your 401(k) or other workplace savings plan. If your employer matches your contributions, make sure you contribute up to the match—otherwise you’re basically giving up free money. If you don’t have a workplace retirement account, consider opening an IRA to get started.

Read Viewpoints on Traditional or Roth account—2 tips to choose


Myth #4: There’s no way of knowing how much money I’ll need in retirement.

In reality: How much you’ll need depends entirely on your situation and what you plan to do when you leave the workplace.


But Fidelity did the math and came up with some general guidelines. Aim to save at least 15% of your pre-tax income every year—including employer contributions. To see if you’re on track, use our savings factor: Aim to have saved at least 1x (times) your income at 30, 3x at 40, 7x at 55, and 10x at 67.* Of course, everyone's situation is unique and you may find that you need to save more or less than this suggestion.


Read about all of Fidelity's retirement saving guidelines on Retirement roadmap


Don’t worry if you’re not always on track. Saving consistently, increasing your contributions when you’re able, and investing for growth in a diversified mix of investments could help you catch up over time.


Myth #5: All debt is bad.

In reality: It’s true that carrying a balance on your credit card or a high-interest loan can cost a lot—significantly more than the amount you initially borrowed. But not all debt will hold you back. In fact, certain types of debt, like mortgages and student loans, could help you move forward in life and achieve your personal goals.


Plus, the interest rates on mortgages and student loans are typically much lower than those on personal loans or credit cards, and the interest may be tax-deductible.


No matter what kind of debt you take on, make sure you shop around for the best rates and never borrow more than you can afford to pay back on time.


Myth #6: Credit cards should be avoided.

In reality: As long as you pay off your card balance in full each month to avoid interest, making purchases with credit can be worthwhile. Many credit cards offer a rewards program. If you make all your everyday purchases with your card, you could quickly rack up points you can redeem for cash, travel, electronics, or to invest.

Also, demonstrating that you use credit responsibly can help you increase your credit score, making it easier to buy a car or a home later on. It may even earn you a lower interest rate when you borrow in the future. It can be difficult to dig out of credit card debt, but if you control your spending and pay the card off every month, it could pay you back.


Disclaimer: This article is for general information purposes only, and is not intended to provide professional tax, legal, or financial advice. To determine how this or other information in this newsletter might apply to your specific situation, contact us for more details and counsel.


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