Author: Leon Clinton

Tax

Secrets to IRS Penalty Forgiveness Using Reasonable Cause

The IRS can waive penalties it assessed against you or your business if there was “reasonable cause” for your actions.

The IRS permits reasonable cause penalty relief for penalties arising in three broad categories:

  1. Filing of returns
  2. Payment of tax
  3. Accuracy of information

Contrary to what you might think, the term “reasonable cause” is a term of art at the IRS. This seemingly simple phrase has a precise and detailed definition as it relates to penalty abatement.

Here are three instances where you might qualify for reasonable cause relief:

  1. Your or an immediate family member’s death or serious illness, or your unavoidable absence 
  2. Inability to obtain necessary records to comply with your tax obligation
  3. Destruction or disruption caused by fire, casualty, natural disaster, or other disturbance

Here are five instances where you likely do not qualify for reasonable cause penalty relief:

  1. You made a mistake.
  2. You forgot.
  3. You relied on another party to comply on your behalf. 
  4. You don’t have the money.
  5. You are ignorant of the tax law.

If you would like to discuss IRS penalty relief, please don’t hesitate to call me on my direct line at 

Tax

SEP IRA vs Solo 401(k): Which Should You Choose?

How do you multiply your net worth?

Let the government help.

Here’s how: with both the SEP IRA and the solo 401(k) retirement plans, your investment in your tax-favored retirement

  • creates tax deductions for the money you invest in the plan, 
  • grows tax-deferred inside the plan, and 
  • suffers taxes only when you take the money from the plan. 

Example. You invest $1,000 a month in your retirement. You are in the 40 percent tax bracket (combined federal and state), and you earn 10 percent on your investments. At the end of 30 years, you have $1.58 million in after-tax spendable cash, which comes from (in round numbers):

  • $1.2 million in after-tax cash from the retirement plan ($2 million gross less 40 percent in taxes—we’re taking the entire amount out of the plan in this example)
  • $380,000 in the side fund (created by investing the $400 of monthly tax savings—$1,000 deduction x 40 percent)

If you had no government help on the taxes and invested $1,000 a month in an investment that earned 10 percent (6 percent after taxes), you would have a little more than $950,000.

Winner. The retirement plan wins by $630,000—after taxes ($1.58 million vs. $950,000).

Okay, that’s the big picture. It tells you that tax-advantaged investing multiplies profits. So, do it.

If you would like to discuss your retirement options, please call me on my direct line at 408-778-9651.

Tax

If the SBA Makes Loan Payments on Your Behalf, Are You Taxed?

Are you one of the millions of businesses that have an outstanding non-disaster Small Business Administration (SBA) loan? These include

  • 7(a) loans (general small business loans of up to $5 million),
  • 504 loans (loans of up to $5.5 million to provide financing for major fixed assets such as equipment or real estate), and
  • microloans (short-term loans of up to $50,000 for small businesses).

If so, you have already benefited, or soon will benefit, from a little-known provision included in the $2 trillion Coronavirus Aid, Relief, and Economic Security (CARES) Act.

Lawmakers appropriated $17 billion so that the SBA could provide a temporary loan payment subsidy to businesses with these non-disaster SBA loans. Under this provision, the SBA automatically makes monthly loan payments on behalf of borrowers. There is no need to file an application.

Now, with the newly enacted stimulus law (December 27, 2020), lawmakers made this loan subsidy program even better. Its massive second stimulus bill expands the loan payments for up to 14 months for many businesses. It also extends the program to loans approved by the SBA as late as September 30, 2021.

Even better, the new law makes tax-free the SBA loan payments made on your behalf. And that’s not the end of the good news. Under this new law, you can deduct the interest and fees that were paid by the SBA on your behalf.

If you have any further questions or need my assistance, please call me on my direct line at 408-778-9651.

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