Month: December 2021

Say goodbye to the employee retention credit (ERC) for the fourth quarter. Lawmakers giveth, and lawmakers taketh away.

In this case, what lawmakers did is pitiful. It’s like magic: now you see it, now you don’t.

On March 11, 2021, the American Rescue Plan Act of 2021 became Public Law 117-2. This new law extended the ERC to the third and fourth quarters of 2021.

On November 15, 2021, the Infrastructure Investment and Jobs Act became Public Law 117-58 and ended the ERC three months early, retroactive to September 30, 2021.

Lawmakers did not kill the fourth-quarter 2021 ERC for start-up businesses. That tax benefit survived. Thank goodness!

Still, you cannot consider any retroactive repeal of a tax law to be good tax policy. And this retroactive repeal was done only nine months after passage. It is disgraceful.

But don’t let this bad news deter you from claiming the credit for 2020 and for the first three quarters of 2021. You may remember that the remaining credits can add up to $26,000 per employee.

And keep in mind that there’s no mad rush—you have time. You can claim the ERC anytime during the three-year statute of limitations.

If you need my help getting your ERC, please call me on my direct line at 408-778-9651.

• By Leon Clinton
• December 14, 2021

Real estate values have surged in many parts of the country and are still surging in some areas. That’s good news if you’ve been holding raw land for investment. 

You might be ready to cash in by subdividing and developing your acreage and selling off parcels for big profits. Great, but what about taxes? 

Good question, because there’s a big issue to consider.   

The Tax Issue

When you subdivide, develop, and sell land, you’re generally deemed for federal income tax purposes to be acting as a dealer in real property who is selling off inventory (developed parcels held for sale to customers).

That’s not good, because when you’re classified as a dealer for tax purposes, all of your profit from land sales—including the part attributable to pre-development appreciation in the value of the land—is considered ordinary income. So, it’s taxed at your regular federal rate, which (for now) can be up to 37 percent. 

You may also get hit with the 3.8 percent net investment income tax (NIIT), which (for now) can push the effective federal rate up to as high as 40.8 percent (37 percent + 3.8 percent). Ugh! 

Seeking a Better Tax Result

It sure would be nice if you could pay lower long-term capital gains rates on at least part of your land sale profits. 

For now, the maximum federal rate on long-term capital gains is 20 percent. With the 3.8 percent NIIT added on, the maximum effective rate (for now) is “only” 23.8 percent (20 percent + 3.8 percent). That’s a lot better than 40.8 percent.

Fortunately, there’s a way to qualify for favorable long-term capital gain treatment for the pre-development land appreciation, assuming you really and truly have held the land for investment. 

In other words, this assumes you’re not already classified as a real property dealer. 

But profits attributable to the later subdividing, development, and marketing activities will be considered ordinary income collected in your capacity as a real property dealer. Oh well. 

Since pre-development appreciation is often the biggest part of the total profit, you should be overjoyed to pay “only” 20 percent or 23.8 percent on that piece of the action. The rest of this article explains a way to achieve this tax-saving goal.  

Form an S Corporation to Function as a Developer Entity 

Say you form a new S corporation. 

Then you sell your appreciated raw land to the S corporation for its pre-development fair market value (FMV). Great idea! As long as you’ve 

• held the land for investment rather than as inventory as a real property dealer, and 
• held it for more than one year, 

then the sale to the S corporation will qualify for lower-taxed long-term capital gain treatment. 

So, for now, you’ll lose (at most) “only” 23.8 percent of your whopping long-term gain to the feds. 

After buying the land from you, the S corporation then subdivides and develops the property, markets it, and sells it off. The profits from these activities are ordinary income that’s passed through to you and taxed at your personal rates. 

But this is a great tax-saving deal when the land is highly appreciated to start with.  

To sum up, the S corporation developer entity strategy allows you to lock in favorable long-term capital gain treatment for the pre-development appreciation of the land while paying higher ordinary income rates only on the additional profits from development and related activities. Good strategy.  

If you would like to discuss how to put this strategy to work for you, please call me on my direct line at 408-778-9651.

• By Leon Clinton
• December 10, 2021

When you take advantage of the tax code’s offset game, your stock market portfolio can represent a little gold mine of opportunities to reduce your 2021 income taxes. 

The tax code contains the basic rules for this game, and once you know the rules, you can apply the correct strategies. 

Here’s the basic strategy:

• Avoid the high taxes (up to 40.8 percent) on short-term capital gains and ordinary income.
• Lower the taxes to zero—or if you can’t do that, then lower them to 23.8 percent or less by making the profits subject to long-term capital gains.

Think of this: you are paying taxes at a 71.4 percent higher rate when you pay at 40.8 percent rather than the tax-favored 23.8 percent. 

To avoid the higher rates, here are seven possible tax planning strategies.

Strategy 1

Examine your portfolio for stocks that you want to unload, and make sales where you offset short-term gains subject to a high tax rate such as 40.8 percent with long-term losses (up to 23.8 percent). 

In other words, make the high taxes disappear by offsetting them with low-taxed losses, and pocket the difference.

Strategy 2

Use long-term losses to create the $3,000 deduction allowed against ordinary income. 

Again, you are trying to use the 23.8 percent loss to kill a 40.8 percent rate of tax (or a 0 percent loss to kill a 12 percent tax, if you are in the 12 percent or lower tax bracket).

Strategy 3

As an individual investor, avoid the wash-sale loss rule. 

Under the wash-sale loss rule, if you sell a stock or other security and purchase substantially identical stock or securities within 30 days before or after the date of sale, you don’t recognize your loss on that sale. Instead, the code makes you add the loss amount to the basis of your new stock.

If you want to use the loss in 2021, then you’ll have to sell the stock and sit on your hands for more than 30 days before repurchasing that stock.

Strategy 4

If you have lots of capital losses or capital loss carryovers and the $3,000 allowance is looking extra tiny, sell additional stocks, rental properties, and other assets to create offsetting capital gains.

If you sell stocks to purge the capital losses, you can immediately repurchase the stock after you sell it—there’s no wash-sale “gain” rule.

Strategy 5

Do you give money to your parents to assist them with their retirement or living expenses? How about children (specifically, children not subject to the kiddie tax)?

If so, consider giving appreciated stock to your parents and your non-kiddie-tax children. Why? If the parents or children are in lower tax brackets than you are, you get a bigger bang for your buck by 

• gifting them stock, 
• having them sell the stock, and then
• having them pay taxes on the stock sale at their lower tax rates.

Strategy 6

If you are going to make a donation to a charity, consider appreciated stock rather than cash, because a donation of appreciated stock gives you more tax benefit.

It works like this: 

• Benefit 1. You deduct the fair market value of the stock as a charitable donation.
• Benefit 2. You don’t pay any of the taxes you would have had to pay if you sold the stock.

Example. You bought a publicly traded stock for $1,000, and it’s now worth $11,000. If you give it to a 501(c)(3) charity, the following happens:

• You get a tax deduction for $11,000. 
• You pay no taxes on the $10,000 profit.

Two rules to know:

1. Your deductions for donating appreciated stocks to 501(c)(3) organizations may not exceed 30 percent of your adjusted gross income.
2. If your publicly traded stock donation exceeds the 30 percent, no problem. Tax law allows you to carry forward the excess until used, for up to five years.

Strategy 7

If you could sell a publicly traded stock at a loss, do not give that loss-deduction stock to a 501(c)(3) charity. Why? If you sell the stock, you have a tax loss that you can deduct. If you give the stock to a charity, you get no deduction for the loss—in other words, you can just kiss that tax-reducing loss goodbye.

These stock strategies have a long history in tax planning. If you need my help with any of them, please call me on my direct line at 408-778-9651.

• By Leon Clinton
• December 7, 2021