Tax

Best Choice: De Minimis or 179 Expensing – or Bonus Depreciation?

You may not have considered the choices you have for deducting the assets that you buy for your business. 

To create some perspective, let’s say you have seven employees who now work at least two days a week from home because of COVID-19. To facilitate this working at both the office and the home, you purchased seven laptop computers at a cost of $2,179 each.

You have five choices for deducting the computers:

1. De minimis expensing
2. Bonus depreciation
3. Section 179 expensing
4. Modified accelerated cost recovery system (MACRS) depreciation
5. Straight-line depreciation

You have four things to consider:

1. What is the maximum you can deduct this year, and what if you want to deduct less?
2. How does this affect your Section 199A deduction if you operate as a proprietorship, a partnership, or an S corporation? (C corporations don’t qualify for the Section 199A deduction. If you operate as an LLC, you are one of the four taxable entities (proprietorship, partnership, or C or S corporation.)
3. If you file as a proprietorship on Schedule C of your Form 1040, is there a self-employment tax issue when you sell the computers?
4. How does your choice affect your local, county, and state personal property taxes?

As you can see, there’s much to consider. That’s why you have me. If you are going to buy assets for your business this year and you want my insights, please call me on my direct line at 408-778-9651.

• By Leon Clinton
• October 20, 2020

Trade-In on a New SUV – Reimbursement by Corporation

When it comes to vehicles, there’s much to think about.

For example, the rules on vehicle trade-ins have totally changed. 

To illustrate, let me tell you about a trade-in Joyce completed last month. She traded in her three-year-old vehicle on a new SUV with a gross vehicle weight rating (GVWR) of 6,075 pounds. 

The dealer granted her a trade-in value of $13,000 and paid off the $16,000 remaining note on the old vehicle.

Under the tax law, after the Tax Cuts and Jobs Act, this is a sale of the old vehicle traded in and a purchase of the new SUV. So, we have two different transactions. In this story, I’m going to deal with only the trade-in. 

Joyce used the vehicle that she traded in 70 percent for business, drove it 41,000 total miles, and used IRS mileage rates to calculate her business vehicle deductions. She paid $50,000 for the vehicle in 2018. Here’s how we calculated her tax-deductible loss:

Calculation. Because we believe it is easier, we use 100 percent for the calculations and then use the 70 percent business percentage to find the final amount—the deductible loss, in this case.

Depreciation. Within the IRS standard mileage rate is a component for depreciation. For example, the 2020 standard mileage rate is 57.5 cents a mile, with 27 cents for depreciation incorporated in that rate.

Trade-in. The dealer allowed $13,000 as the fair market value of the trade. This operates as cash when Joyce makes her purchase of the new SUV. In addition, the dealer paid off the existing note, so the total value of the trade for gain and loss purposes is $29,000 ($13,000 + $16,000).

Deductible loss. The $6,951 loss is an ordinary loss that Joyce reports on IRS Form 4797.

The important part of Joyce’s story is that her trade-in, like all trade-ins of vehicles and other personal property, is a sale. And that means there’s a taxable gain or loss.

If you are thinking of trading in your vehicle or other personal property, make sure to consider the taxable gain or loss. If you would like my help, please call me on my direct line at 408-778-9651.

• By Leon Clinton
• October 17, 2020

The Payroll Protection Program (PPP) rules—they keep a-changin’. 

During the past month, the Small Business Administration (SBA) issued a new set of frequently asked questions (FAQs) and a new interim final rule, which in combination create the following good news for the Payroll Protection Program (PPP):

• More forgiveness. The $20,833 cap on corporate owner-employee compensation applies to cash compensation only. It’s not an overall compensation limit as the SBA had stated in its prior interim guidance. Under this new rule, the owner-employee can add retirement benefits on top of the cash compensation, creating a new higher cap.
• Escape owner status. You are not an owner-employee if you have less than a 5 percent ownership stake in a C or an S corporation. Therefore, the cap on forgiveness for this newly defined non-owner-employee is not $20,833 but rather $46,154.

The new rules override prior guidance and have significance for PPP loan forgiveness today—and perhaps for obtaining additional loan monies retroactively (if Congress reinstates the PPP along with a new second round for businesses that suffered a big drop in revenue).

Here’s one example of how the new rules benefit John, an S corporation owner.

Example. John, the sole owner and worker, operates his business as an S corporation. His 2019 W-2 shows $140,000 in Box 1, of which $20,000 is for health insurance. In addition, the S corporation pays state unemployment taxes of $500 on John’s income and contributes $20,000 to his pension plan.

Based on the facts in the example, the corporation is eligible for up to $25,000 of PPP loan forgiveness, as follows:

• $20,833 on John’s salary (the cap), which the corporation pays to John at his regular rate in less than 10 weeks during the covered period;
• $4,167 on John’s retirement ($20,000 x 20.83%); and
• zero on the unemployment taxes because they were paid out in January, before the covered period began.

Advantage. Prior guidance limited forgiveness to $20,833. John’s S corporation gains $4,167 in additional forgiveness thanks to the new FAQs, assuming that the S corporation’s loan amount is $25,000 or more (which is possible).

The good news in the new guidance is that the corporate retirement contributions on behalf of owner-employees now count for additional forgiveness when the owner-employee has cash compensation greater than $100,000. And with the C corporation, the new guidance allows health insurance for the owner-employee.

Remember, I am always here for you. If you would like to discuss your PPP with me, don’t hesitate to call me on my direct line at 408-778-9651.

• By Leon Clinton
• October 14, 2020