December 31st is quickly approaching. And, once it arrives, you will not be able to put any strategies in place to maximize your tax savings for 2020. Have you taken all the steps necessary to maximize your tax savings for this year?
Make sure you have with this panel discussion led by Mike Glickman during which Tom Gibson, CPA, and Kami Elhert, Paralegal, discuss:
Mike Glickman: My name is Mike Glickman, and I’d like to welcome you to TSP Family Office’s Year-End Tax Tips for, 2020. Here we are in the last quarter of 2020, and boy, what a year it’s been. We’ve endured a national pandemic. We’re going through a presidential election. And social injustice has been front and center in the news lately. With all of that going on, it’s easy to lose sight of another very important thing that we should all be thinking about: Year-end tax preparation. Today we’re going to be talking about exactly.
I am joined by Tom Gibson, our firm’s lead CPA, and Kami Elhert, one of our client relationship managers. Tom and Kami, please say hello to everybody.
Tom Gibson: Hello. Good to talk to you all this morning. I’m Tom Gibson. I’ve been with the firm nine years. I’m a CPA who does tax planning here at Tax Saving Professionals.
Kami Elhert: I am Kami Elhert, one of the client relationship managers here, as well as a paralegal. They like to call me in the documentation guru. And I’m looking forward to talking about the supporting documents and giving some of those year-end tax tips.
Glickman: Kami, let’s start with you. A lot has changed for many of our viewers today from 2019 to where we are today in 2020. Can you talk a little bit about some of those life changing events and things that they should be made aware of?
Elhert: Absolutely. You know, some of the life changing events that you absolutely want to make sure that you do speak to your tax professional about are getting married, having or adopting a baby, new business ventures, if you’ve purchased real estate, any new investments, if you’re planning on selling your business or retiring. These are all big life-changing events that do affect your taxes and will need to make your tax professional aware of.
Glickman: Now, in regard to other things that our audience should be thinking about, things like business deductions, what we would call our scorecard savings, Tom, can you talk a little bit about that?
Gibson: Yeah, absolutely. We’re going to be in November here in another week or so and we need to start thinking about putting the bow on the scorecard deductions for 2020. You all have heard me say more than once, there’s a right way to take a deduction and there are several hundred wrong ways to take a deduction. One wrong way to try to take any deduction is to take it without the proper documentation.
We’re going to touch on a number of the scorecard strategies that our clients commonly use. Kami is going to walk through the documentation behind those, and we’re going to make sure that you’re able to enjoy the holidays this year because we’ve taken a lot of these steps out of the process.
The first one, which the majority of our clients utilize, is the tax-free rent strategy. That’s the strategy where you rent out your home to the business. You can hold up to 14 meetings per year. The income that you receive from that rental transaction is not includable in your taxable income. However, your business gets to deduct the rent expense. So, this is one where we get to double dip just a little bit. Kami, what are the pieces of documentation that a client needs for this particular strategy?
Elhert: Well, one of the most important ones that I do talk about a lot is the actual lease agreement. The contract really substantiates the agreement between the business and the homeowner to have the meetings in their home for that time. You do want to make sure that the proper lease is in place addressing where the actual leases being taken out of. If the home is being rented from the client, you want to make sure that all business addresses and personal addresses are included as well as the daily rental rate for those meetings.
Now, when we talk about that daily rental rate, in addition to the lease, you want to make sure that you’re substantiating that rate. We do go around to various conference rooms and get at least two different quotes from the various conference rooms to make sure that we’re obtaining a really comparable rate. This rate should not be pulled out of what you think your home should be rented for. You really should go around and make sure that the rate is comparable for the space that you are requesting inside of the lease. We are not asking for a home office in the lease. We are looking for a conference room that does have an LCD screen, access to the internet, as well as a TV screen for any broadcasting and things of that sort.
Based on those quotes, we will take an average to obtain the rate. And again, doing this yearly is really important. Especially with COVID businesses are going out of business, unfortunately, and making sure that those rates are still comparable every year will help substantiate that deduction.
Glickman: Kami, with regard to tax-free rent, you mentioned something very important here. You mentioned how important it is to get several different rates. What do you recommend in terms of the number of rates you should get? Is it two? Is it three? Is it the more, the better?
Elhert: I would say at the very least two, but given the area as well, maybe in a bigger city you’re able to obtain a few more whereas if you’re in a rural, trying to obtain two rates 60 miles out, would not really be comparable or something that you could see somebody traveling to. It should be logical. It should really make sense for the area.
Gibson: Kami, another question I know that comes up a lot when we’re working with clients is if they have two homes. They’ve got their main residence and a cabin. Any special things folks should keep in mind about that?
Elhert: I think we used to think of vacation homes as just homes that we traveled to once in a while. Now with Airbnb, VRBO, HomeAway, all of those being really relevant, the one caveat I would say is, as long as your documentation – the lease – is in place for renting out that home, you will want to keep in mind that that additional home cannot be rented out for more than those 14 days. Otherwise, it’s just not eligible to receive a deduction under that IRS code.
Gibson: Let’s say it really is a vacation home. Can they get 14 days for each home or how does that work?
Elhert: No. The whole total is no more than 14 meetings per year. If you rent it out for 15, then I believe it becomes passive income and you do have to pay taxes.
In addition to those meetings, I did want to make sure that everybody is aware that for those meetings being held in the home, you also want to make sure that you’re documenting those meetings. It’s not just about having the lease, but also about properly documenting those meetings being held.
You want to make sure that you are addressing where the meetings are being held, what day they are being held, who attended the meeting, as well as discussion topics that were covered over during that meeting. Going over and reviewing the previous meetings is also a great way to keep that business responsibility and making sure that you’re constantly reviewing what is going on with the business. Signing and dating those meetings notes, either the date of the meeting or the day following once you’ve had a chance to review and approve, is also very important. And you want to make sure that all of those meetings that have been held in the home have meeting minutes along with the invoices. This is a business transaction. This is not just you having a dinner in your home and talking business. This is making sure that, if the IRS were to come in and discuss the meetings in the home, you have completely covered all the bases. You have the agreement between yourself and the home for the lease agreement. You then have the meeting minutes, as well as the invoices that are attaching that transaction and making sure that those are being paid in a timely manner.
Glickman: And Kami, to Tom’s earlier question, if there are in fact two separate homes – you’ve got your primary residence and then a vacation home – do the rates that are applied have to be the same across the board, or can they be two separate rates?
Elhert: They absolutely should be two separate rates. If you were going into another area and having another lease, I would highly recommend obtaining quotes and going through the steps as you did with the first home, with your primary residence. Those rates should not be the same unless they’re probably down the street from each other, which wouldn’t be much of a vacation anyway.
Gibson: Another deduction that most of our clients are already taking: Automobile expenses. A number of you have vehicles that are in your business and you are deducting those expenses in some fashion, either using the actual method or the standard mileage method, but Kami, are there some easy ways to track mileage as well as keep up with business receipts?
Elhert: I think business receipts and dinner receipts are probably the low hanging fruit. One that gets disallowed more frequently than others from the IRS, even though as business owners we’re definitely having meals and speaking about business probably more often than the IRS is, but a great way and a great app that we recommend for keeping those business receipts is Shoeboxed. It’s great. Not only that, but it’s pretty catchy.
If you think about bringing in all of your receipts in a shoe box to your account many years ago, I think there are still people that do that, or you just don’t keep the receipts. Nowadays the receipts that you get the ink runs out as soon as I put them in my wallet and I’m not sure if the IRS would even allow that receipt. But one way to use Shoeboxed is download the app and when you’re having that lunch or dinner with your coworker or discussing business, pull out your phone after you’ve signed your receipt, snap a picture through the app, and now that receipt is saved to the cloud. It can integrate into QuickBooks as well. It’s a really easy tool to use and an easy way to keep those records clean as well as available if ever needed in the future.
Mile IQ is another great one that I highly recommend. It’s a great way to actually keep track of your miles as far as business and personal use if you are deducting through the actual mileage reimbursement. It runs in the background of your phone. Once you stop your vehicle, it’ll pop up and say, “Is this business or personal?” You’ll swipe one way or the other. At the end of every week, you actually get an emailed report. At the end of every month, you get an emailed report of how many miles were business, how many were personal, and then you can gauge the percentage as well if you are using the actual method.
Two really great apps that I think really help eliminate some of that dreaded record receipt keeping that often just falls by the wayside and is something again that the IRS wants you to let fall by the wayside so they can disallow it.
Gibson: And Kami, what if someone has a separate credit card for their business and they put all of the business transactions on that credit card? Do they still need to keep receipts?
Elhert: I highly recommend it. Tom, you’ve given the example before, where if you go to Home Depot and put $1,000 worth of paint because you’re going to paint the building on there and you run that through the business, there’s really no way for the IRS to know that you didn’t just go buy a new patio set because there’s nothing outlining or just describing the items that were purchased. So, yes, I would highly recommend keeping all of those receipts and making sure that you are itemizing them. You want to make sure that all of your business and personal transactions are not marrying together in any way, shape or form.
Gibson: Exactly. And the IRS can allow deductions based on your credit card statement. There’s a very famous tax court case, the Cohan Rule named after George M. Cohan, great American songwriter who wrote songs like Yankee Doodle Dandee, I’m a Grand Old Flag. He was a horrible record keeper. And he was audited. The IRS, in that case, the court ruled that there could be additional forms of documentation. Just a piece of advice: You don’t want to ever put yourself in a position where the IRS has to allow you to do something. If you’ve got your records in order, you’ve got everything ready to go, then you’re not asking permission. You’re just exercising your rights as taxpayer, which is always a better position to be.
Glickman: And Kami, in regard to Mile IQ and Shoeboxed, it sounds like they are two fantastic apps, indispensable tools. Is there a certain timeframe the results are saved save or is it indefinite? How far back can a client go and check on those receipts?
Elhert: It is actually indefinite. It goes out to the cloud. It can also integrate into your QuickBooks as well so those records will actually download into your QuickBooks. So you’re able to capture that and have the information always. It’s a great tool. And with Mile IQ, if you’ve actually purchased the Microsoft suite, you’re able to get the full version for no additional cost. So another added bonus there.
Glickman: Excellent. Suffice to say, Kami, you’d highly recommend that our clients take advantage of that.
Elhert: I do. They’re just so easy. And being in the world of always having our phones available, it’s not an added extra step to your day. If you’re going to pull out your credit cards, a lot of times we have our credit card attached to our phone.
Gibson: Another strategy that a number of our clients make use of is the home office deduction. Now many of you have S corporations or partnerships. We take that deduction a little bit differently. It’s taken under an accountable reimbursement plan but, whether you’re a sole proprietor and we’re doing it the traditional way, or you’re an S-corporation shareholder and we’re doing it as a reimbursement under an accountable plan, the rules are basically the same.
At this point the relationship managers have requested measurements of your home. That’s ground zero. And we’ve calculated that your home office footprint is a certain percentage and you’re eligible then to reimburse yourself with things like utilities, homeowners, insurance, trash collection, cleaning. So, Kami, what documentation normally is required for the home office deduction?
Elhert: You said it first; it is that accountable plan. Not only does the accountable plan help with the home office reimbursement, but it’s actually a required plan that the IRS did put in place. It is in place to help the IRS understand the reason for your reimbursement. So it is a very lengthy plan. It’s also very detailed so that it can allow various expenses to be reimbursed. This is a very important plan that you should review and update and make sure that your company is following every year because it is a plan that the IRS will ask for.
If you are reimbursing for certain things and they ask for that accountable plan and you do not have it in place, they can then disallow it.
Gibson: Or worse yet, you’ve got a plan in place and you’re not abiding by it. That is another problem.
Elhert: Getting familiar and understanding your accountable plan is very important.
And it’s also a great tool. It really does help structure your business. If you’re a first-time business owner or you’re a professional, a dentist or a doctor, maybe business into your forte but saving lives is, this accountable plan is really great because it outlined and gives you the actual verbiage that you need to understand how you should be running your business. And it does allow you to do this every year. We would suggest and highly recommend that this structure be thought through and gone through every year.
Like Tom mentioned, in addition to the accountable plan for the home office, we do ask for measurements. Measurements for the home office are pretty easy to do. It’s a four-step process. We’re going to ask for the total square footage of your home, then have you measure that actual home office. There’s a little area that we would like you to also measure, which is common areas: Stairways, hallways, foyers, things of that nature, as well as any adjoining restroom to that home office.
In addition to actually obtaining those measurements, we recommend you take pictures of that home office. Not just for documentation purposes, but really to prove that this is an actual home office. There should not be beds in your home office. With children e-learning as well as doing hybrid school this year and who knows for how many more years to come, we want to make everybody aware that children should not be having school in your home office. It should be used exclusively for your business. So having the sleepovers or the guest once in a while come in and stay in that home office just would not pass muster as far as the IRS is concerned.
And then as Tom said, based on those measurements that you do provide to us, we are able to then add those into the home office tracker, which allows a calculation to give us the percentage of the home office that you can then reimburse through that accountable plan for the various items.
Now along with that reimbursement, I just want to touch on transactions. Reimbursing properly is also included in that accountable plan. You want to make sure that you’re reimbursing in a timely manner. Timely to us with a home office reimbursement would be at the very least every three months. Monthly would be ideal. If you have a smaller footprint, a percentage may not be the most detrimental, but at least quarterly. The IRS likes transactions, and the bottom line is you wouldn’t be able to not pay your electric bill for an entire year and still have your electricity turned on. That’s how you need to think about it. This is a business transaction, and that’s how it always should be thought about. A personal business transaction. How would you treat another business if it wasn’t your personal business? The more transactions, the better.
Gibson: I just notice we’ve got a really good question on the home office. “My husband has been forced to work from home full-time since March. And the question is, do I increase the home office space rent and or reimbursement for office furniture that we had to buy?”
There are kind of two sides to the home office to deduction. There’s what Kami just talked about where we’re reimbursing for some expenses associated with the home that typically you really wouldn’t get any tax deduction for at all. This question has to do with, we’ve had to buy some additional furniture and things for our home office.
What Kami was talking about were indirect expenses. Remember any direct expenses for the home office are things that you’re doing that only benefit the home office. That could be new furniture, cabinetry, bookshelves, flat screen TV, computers, anything like that. You should pay for that through the business and deducted it in the business.
You’re not really reimbursing yourself. Just cut to the chase; if you need a new PC or a new Mac for the home office, pay for it through the business and deducted it there. But that’s a great question.
Elhert: I just want to clarify a little bit on that as well. It is a business deduction. If you were sent home as a W-2 employee, does that affect it, Tom? Is there an accountable plan in place for W-2 employees that are now forced to go home? How does that work and has the CARES Act addressed any of that?
Gibson: Well, normally when we think of it, it is the business owner who is the W-2 employee. And the expense would always, whether it is a shareholder employee or another employee, if it’s for the convenience of the business then it would be a deductible expense. Now I wouldn’t recommend deciding that you need a hot new gaming PC, and then try to get your boss to reimburse you for that. You probably want to get permission instead of depending on getting forgiveness. But yes, even at my house I’ve got things that the company has bought to help me when I do need to work from home. So that’s perfectly acceptable.
Glickman: That brings up another really good point. You talked a little bit earlier about the importance of having a dedicated home office space, where it is in fact truly dedicated for the purpose of doing and conducting business. How would you treat weekends? In other words, if Monday through Friday during normal business hours, it is in fact dedicated to all business and business only, what about weekends on Saturdays and Sundays? Would it be acceptable by the IRS to do other things in there unrelated to business?
Gibson: I would keep it strictly business. And even on the weekends because the accountable plan basically is treating that as an extension or a satellite office of the main business. I wouldn’t come down to my office on the weekend and have a social event just because it was the weekend. I would apply that same rule of thumb to the home office as well.
One other thing though, because people can get really paranoid about the home office today and Kami does an excellent job of scaring people. Sometimes I’ll get questions like, “Is it okay if I have pictures of my family in my office?” Sure, that’s perfectly fine. You know, can I check my personal email on the company computer? Well, if you’re allowed to do that in the main office, it’s not really any different doing it in your home office.
You want to be reasonable about things and, I know in our company, we’re allowed a certain amount of latitude. Some of us take maybe a little bit more in what our offices look like. And that’s fine. Just let the policy for the main office guide the home office.
And here’s another question, “What if you have two spouses? Can they share the home office?” If they’re both employees of the same company, I don’t see that being a problem. If we have two separate businesses, we will probably want to have two separate home office spaces. If that is not doable, we would probably give some guidance on the appropriate entity out of which we want to take that deduction.
I’ve given the example, if there was a real estate company right around the corner from us, I wouldn’t have a real estate agent come over here and use my office when I’m out to lunch. So again, it probably wouldn’t be appropriate in the home office. A good rule of thumb is a hundred percent business, a hundred percent of the time. You’ll never get in trouble that way.
Now Kami has mentioned this couple of times, but I just want to reiterate it because we’re coming up on one where, some of you, it is the Achilles heel. We’re going to talk about hiring your children to work in the business. And one of the common things that people will tell us when we say we need to get the kids on the payroll, we need to do a catch-up payroll, we need to get them on the same pay cycle as the rest of your employees is, “Oh, I’ll just write a check at the end of the year.” And invariably, the people who say that, in January after they’ve forgotten to write that check at the end of the year will be asking me, “Tom, what can I do?” And the answer is nothing. At that point, you can’t do anything to correct that mistake. So, we are huge fans of set it and forget it when it comes to tax-free rent, the home office deduction, and particularly when it comes to hiring the children.
Kami, what is the documentation that we typically use to support this deduction?
Elhert: Plain and simple, it’s an employment agreement. If we’re going to hire the children, we want to make sure that all of the information is outlined as well as their roles and responsibilities.
Again, this is a binding contract. It’s an employment agreement. We’re going to outline the employee’s name, address, as well as the company that they’re being employed by, the company’s address, definitely review their roles and the services that they’ll be rendering, as well as their duties and responsibilities.
Hire dates are included in that information. You always want to make sure that you include their salary amounts or hourly wage, as well as the payment basis. Will they be paid weekly, monthly, bi-monthly?
The one other thing to make sure that you do include in that agreement is the governing law information. What state is this agreement coming out of and joining into? That’s all very important information and necessary in any contract law. Also, if the child is under the age of 18, they obviously cannot join into an agreement so they will need to have a legal guardian sign on their behalf and entering them into that information.
Once you have that employment agreement, you want to make sure that you are given a W-4 for the children because they should not be paying taxes at that time, at that stage in their life depending on their age.
They should have a custodial account set up if they are under the age of 18. That way, their money is separate from them because they are employed and receiving that. And we always want to make sure that their paychecks do match their salary amounts, making sure that employment agreement is matching exactly what payroll has on file.
Glickman: And Tom, when we talk about hiring the kids, I’m sure a question on a lot of folks minds is, “They’re are kids, right? We want to pay them as much as humanly possible because we love them. That’s what we do.” But would you advise them to be paid either straight annual salary or hourly. Does it matter either way? What’s more acceptable?
Gibson: Normally, in the employment agreements, we set them up on the salary and the salary needs to be reasonable based on the job that they’re doing. Now for children under the age of 14, with just very, very few exceptions, normally they’re going to be limited to corporate modeling. Our goal, ultimately, is to pay them at least the amount of the standard deduction for a single person, which for this year is $12,400.
If you have a 4-year- old, we probably won’t be able to pay them that much because there are some limitations. Once they hit age 14, under federal and most state labor laws, they’re essentially, apart from dangerous job duties, able to do pretty much anything an adult can do and we can bump them up to the full $12,400. But we’re paying for a job. We’re not paying for the time. So, we much prefer for them to be on salary. It just makes it a little bit simpler. And, as I mentioned a moment ago, if you came on board as a client in the first part of April and the child had actually been doing the work, they just hadn’t been being paid up to that point, we’ll do a catch-up payroll to get them caught up for the year. But then we want them to be on exactly the same pay cycle as the rest of your employees. That way you don’t have to remember to do it. And honestly, apart from setting up the custodial bank account, and in some cases signing on behalf of the child, hiring your child is not really any different than adding any other employee to the payroll.
And now Mike, you said, “We want to pay as much as we can because we love them.” I’m glad Tax Saving Professionals follows the same rule of thumb, but you can’t do that. The value of the services that child is providing can’t be more than you would pay a third party to do that same job. The fact that they’re your child really can’t enter into the equation.
Elhert: The location can, Tom. A corporate model in Los Angeles or Orange County, California, the pay rate and cost of living is much higher than it would be if you were in South Bend, Indiana. Those do factor in it as well.
Glickman: It sounds like as overarching theme is it’s got to be reasonable. Whatever you decide to pay them, it has to make sense.
Glickman: And then, Tom, what happens when our kids get old enough to go off to college? Can they still be on our payroll or at that point, once they leave the home, can they no longer work for us?
Gibson: No, absolutely. We have number of college students who are on payroll in their parents’ company, doing social media coordinator duties, doing background and reputation checks on the business and on their parents, all of which can obviously be done remotely. And normally they pay well, and they don’t interfere with the actual purpose that the child was at college for, which is to get an education.
The other advantage of keeping them on the payroll is when they come home for the holidays or for summer break, they are employees. So, when they come home, you want to have their performance review. If they’re doing corporate modeling, that’s the right time of year to take family photos, which you use on social media and maybe on your website. And this allows you to deduct those plane tickets and costs to get them home from school.
It all works together. We are huge fans of having the entire family on the payroll in some fashion because, particularly for the scorecard deductions, it just makes it so much easier to implement those. And that brings us to our next point. Next month, we’re going to do a deep dive on travel. But I do want to mention annual meetings and annual reports. As a lot of you know, we will incorporate your annual meeting for your corporation or your LLC into a family vacation that you’re going to take anyway.
I want to talk about it in a little bit different light here. If you have a corporation, you are required by law in all 50 States to have an annual meeting. It is not a suggestion. It’s not just a good idea. It’s an absolute requirement and not having one puts your corporate veil at risk. It jeopardizes the entire reason that you went to the trouble of setting up the corporation in the first place.
I’ll let Kami speak to this because she sees it more than I do. Kami, how many times have we been working on a client’s entity structure and we start looking up the corporations and LLCs and found out that there’s something amiss as far as their filings with the state?
Elhert: It absolutely happens more often than you would think. Even though you get notices from the state letting you know that your annual report is due, everybody leads very busy lives and stuff goes by the wayside. It’s that simple to forget it. And now you are administratively dissolved. That is a major no-no when you’re trying to run a business. You want to make sure that your filings with the state, with the IRS, are always timely and done correctly. Having an annual meeting and going over and making sure that your information is documented is absolutely crucial.
What information will be needed for that annual meeting? Again, who attended? Where did you go? Where was this held? What topics were discussed? Were there any dates that you were not able to perform any business while you were at your annual meeting?
Tom talked about the annual meeting a little bit, but we’ll just say it: Business travel is not Regulated. There’s no limit on the amount of business travel that you can do with the IRS. Same thing with the annual meeting. There’s nothing that says your annual meeting has to take place in the state that your business is out of. However, you do want to make sure that this is an actual business meeting.
You want to make sure that you’re discussing pertinent information for the business: Company overviews, discussing P&Ls, reviewing your annual report, and filing it on the day that you have that annual report. These are all great habits to get into and to include in your annual meeting, like Tom said, it’s absolutely necessary.
It’s not a question of should you have your annual. It is a question of how will you have it? How will you structure it properly so that everything is really getting handled during that meeting that should be.
Gibson: And just a warning here. A lot of folks have found that it’s easy to set up an LLC, easy to do it yourself, with LegalZoom. And a lot of folks for convenience’s sake will use a filing company and that filing company is going to take care of the annual reports and such for you. You can go ahead and do that, and they take care of first year. Then the next year you get these bogus letters from companies telling you that you need to send them money because so and so is due. A year later, you get the email from the actual company that you’ve used, and you’re so used to seeing these false ones, you just pitch it in the garbage. If you’re going to set up an entity, you want to be the one who gets the letter from the state telling you that your annual report is due, not some filing company.
And again, I don’t necessarily recommend setting up your own entities. It’s more complicated than Robert Shapiro lets on in the television commercial. You probably want to get some help from us or from an attorney to do that. But you definitely want to be the one who receives the correspondence. If you get a letter from the state of Florida, you’re going to pay more attention to it than if it is from XYZ corporate services.
Elhert: And I’ve seen instances where the bogus letters come even two, three days after you’ve filed with the state. So, in addition to what you’ve already paid the state, they’re saying, “Oh, you need an additional fee.” The letter comes from the capital city. Tt looks like a legit letter. It’s really important that you weed through those letters and make sure that it’s an actual document from the state and not somebody alluding to being the state.
Glickman: Chris has a great question, and I think we can dive into this a little bit deeper. He’d like to know, if he’s got multiple corporations or LLCs, does he need to have an annual meeting for all of the entities? Or can he incorporate the annual meeting for each entity as part of a business trip?
Gibson: That’s a great question. For corporations, the annual meeting is a requirement. For LLCs, which are also a type of protected entity that gives the owner asset protection, most states don’t require an annual meeting, but we highly recommend it. No one ever complained about having too much documentation. And we highly recommend that you have an annual meeting for your LLC.
As far as having multiple meetings on a business trip, that’s perfectly acceptable. I’m just being honest with you. If you own 100% of an S corporation, your annual meeting, technically, ought to take about three minutes. You’re going to elect yourself as the president of corporation. You’re going to ratify all of the decisions that have been made up to this point. You’re not going to have a lot of discussion in the meeting if you’re the sole shareholder. So, it is perfectly acceptable to knock out several of those in the course of one trip.
The follow up to this is if your employees are required to be there as part of the meeting, obviously your expenses can be paid as legitimate business expenses. Spouses who are not employees, that’s a little bit different in that they are probably going to have to cover their expenses. There are a couple of different ways to do that. You can have the business pay for it and the employee reimburse you. Or you could have, particularly if it’s something like meals, the spouses pay for their own meals.
You can have company functions – a 4th of July cookout, a holiday party at the end of the year – and it’s okay to cover the spouses’ expenses for events like that. But if it’s hotel fees, plane tickets things like that, it becomes a little bit more problematic.
Glickman: Related to that, we have another question from a Randy. Randy says he doesn’t send out corporate annual meeting documentation to the state of Texas. However, he does fill out forms and pay his annual franchise tax. And his question is, “Is this the same thing that you’re talking about or is that something that’s unrelated?”
Gibson: Well, normally for corporations, you’re required to file an annual report. And on the annual report, it confirms the mailing address of the corporation. It confirms who the registered agent is for the corporation. And occasionally it will ask for a list of the officers of the corporation and their addresses and so on. To be honest, Kami, and I’m not sure if you even know the answer to this on a state-by-state basis, but do LLCs typically have a similar reporting requirement on an annual basis?
Elhert: They do. And I believe that franchise fee is through the state of Texas. I believe that when you are going in and into that franchise, that actually is filing the report, but I would have to look into that a little bit more. But I believe that would act as the same.
Gibson: To kind of round things out, on the scorecard, another deduction that a number of our clients take advantage of has to do with achievement awards. This is an opportunity for you to reward your employees, to do it in a way that is fully deductible to you and benefits the employee in the sense that they don’t have to include the value of their achievement award as part of their taxable income. Remember achievement awards can’t be cash and they can’t be anything that can easily be converted to cash, like gift cards, travel vouchers, tickets to sporting events or concerts. It needs to be some type of tangible item: A flat screen television, a set of golf clubs, a gas grill. Those would all be great achievement awards. Kami, what are the pieces of documentation we need for this?
Elhert: The most important is the written program executed by the officers of the business. The program outlined the specifics: What categories an employee is eligible for in the program, which are length of service, every five years an employee is eligible for the length of service award, and the safety achievement award, which is available only to employees who have an element of danger associated with their position. Clerical, admin, my job here, unfortunately I would not be eligible for the safety achievement award. Now the productivity award is all encompassing. It provides a lot more leeway for the employee and the employer to structure what defines a productive employee.
Now, just for easy math purposes, there is a carve out that allows this program to give an employee up to $1,600. However, the IRS likes to make things a little bit difficult. They say that the actual company average for this whole program cannot exceed $400. So easy math says, just provide employees up to $400. However, if you have an employee that’s been with you for a while and you want to make sure that they are given something beyond what everybody else is receiving, or they’ve been a great employee for you and you want to recognize that, we suggest giving a higher value amount to that employee. Then you need to make sure that the math does work so that the company average doesn’t exceed that $400, keeping in mind that $400 is not something that we think that you should provide to everybody. It really is at your discretion, the amount that you’d like to provide each individual employee.
In addition to having the actual program in place, you need to keep track of the actual achievement awards given. This will not only help with your math, but it helps with the record keeping that we were stressing. Once you have awarded your employees their achievement award, we highly recommend giving them an actual achievement award.
If you’re having a holiday party or a company party, make sure that pictures are taken of them with their award, put the picture on your Facebook or company website. This shows that an actual, meaningful presentation was given, which is another requirement the IRS has.
Glickman: And Tom, if I could, I just want to touch on something you talked about earlier. You talked about the importance of the achievement award being something tangible, like a flat screen TV. What about things like gift certificates to a restaurant or a sporting event, a football game? How would those be treated?
Gibson: They would be treated like compensation. Anything you can easily convert to cash then I’m assuming the assumption is, for example, you could scout the ticket, you could sell concert tickets. The IRS wants it to be some type of tangible item. I guess you could sell that too, but it might be a little bit harder to do.
One other thing, if you do have a management company, a C corporation that is providing services to the main business, you want to make sure that you get your invoice for the fourth quarter paid no later than December 31st of this year.
Now this year has been difficult. Mike alluded to that earlier. And in terms of projecting your income this year, it is a more difficult year this year than I have had in the previous years. The virus disrupted just about everyone’s business and this year I can’t take the June statement, double it and, and know that we’re going to be in the ballpark for what your income is going to be. Plus, the PPP funds and the way those are being treated for tax purposes also is a problem. Kami and Crystal are going to be reaching out to schedule forecast calls. What I need and what I have to have – otherwise there’s not really any sense of having to call – I need to have your 2019 business and personal returns. Those both should be complete at this point. I need to have your financial statements for the year, and we are going to request them in two steps. I’d like to have January through June. And then I would like to have July through September. We’re going to have to use the third quarter to project what we think the fourth quarter is going to look like. In addition, for those of you who are a high-net-worth W-2 employees, you’re not business owners, it’s imperative that we get your year-to-date check stubs prior to your forecast call and also any details on any expected bonuses that you’ll be receiving in the fourth quarter.
I mentioned the PPP funds. For those of you who are business owners who received PPP funds, the loan proceeds themselves are not taxable. However, they are not going to allow you at this point to deduct the expenses that you paid with the loan. So, it’s kind of a six of one, half dozen of another situation. To whatever extent you received PPP and HHS funds, for those of you who are healthcare providers, that is going to add back to your bottom line for this year. And, we need to have those numbers as well. We’re projecting your income for the real estate investment. That is the opportunity where you own a piece of property in a partnership with others that has development potential. You could hold the property; you could develop the property; or you could place the property into permanent conservation. Kami spearheads a lot of that for us. Kami, any major changes from prior years on the process?
Elhert: There have not been many changes. Charitable giving, Roth conversions, capital gains, all of these are really important for the income projections as well. So, for non-cash charitable giving? Tom, that is how much of your AGI?
Gibson: 50% of adjusted gross for this particular type of non-cash gift. The overall limit for cash gifts is actually 60% of adjusted gross.
Elhert: So, if you have additional charitable inclinations to your church or a non-for-profit, then that does exceed that. But Roth conversions, capital gains, all of that will factor into your income and is something that we should be aware of.
Providing those investment account statements is really important as well, as are balance sheets. PPP money, a lot of times, you know that you’ve gotten a large figure, but it’s not showing on your P&L. Balance sheets are a new request this year.
And then Roth conversions. If you do have questions on them, send your investment statements over to us and we’ll set up a meeting so that this can be discussed further with one of the tax professionals.
Gibson: If you’ve had your plan meeting this year, if you’ve listened to in on any of the client webinars – particularly the ones comparing the Trump versus Biden tax plans – you know that our expectations as a firm is that the tax rates are going to rise over the long term. And with the Roth conversion, we’re locking in the current tax rates. It really puts your retirement future out of the control of the politicians. We can deal with the issue now. Or maybe not the entire amount now, but stage it out to get you, to the greatest extent possible, into a tax-free environment for your retirement.
Glickman: I’m going to come back to a point that you mentioned earlier. You had talked about making projections and the difficulty or the increased difficulty with everything going on this year of making an accurate projection. Given the increased difficulty of making those projections, would you recommend overshooting a little bit or undershooting or what’s your feeling on that?
Gibson: Those of you who I’ve worked with for a number of years know I like for you to slide into home plate and then have less than $1,000 refund, or maybe have to write a check for $1,000. I really try to get it as close as I can. This year we’re going to err on the high side a little bit because the worst thing that will happen is, if you’ve got a little bit more charitable contribution, you won’t lose it. It’ll carry forward to next year. If we, if we undershoot, we can’t fix that.
I’m tending to assume the best-case scenario for income, and if it comes in a little bit lower than that, no harm, no foul.
Glickman: And Tom, if you do overshoot a little bit, what happens to that excess? Can that be applied in future years?
Gibson: Absolutely. You’ll be limited to the 50% of adjusted gross income for this year, but any excess would simply carry forward to next year, and we would take it into account in our computations for 2021.
Elhert: The last thing that I really wanted to touch on is not necessarily an end-of-year tax tip, but more about legacy planning because this will play a factor in your tax life eventually. Making sure that you do have a will in place. Creating a trust; making sure you understand what is going into the trust and how it is actually designed. Creating health care directives, assigning power of attorneys and reviewing beneficiaries at least every five years. A lot of things change. A lot of things can change in one year. This has been a really crazy year. So just making sure that all of that is really buttoned up is not just a tax tip, but a friendly reminder. Once all of those things are buttoned up, it really does make life so much easier, not just for those who are dealing with the loss of somebody, but also for those who have to pick up the pieces and carry on.
If you do not have an estate planning attorney, feel free to reach out to us and we’ll be happy to provide recommendations. Or if you have any questions while the will or trust is being drafted, we’d love to be a part of the conversation with the attorney. That way your entire team is really unified in the process.
Gibson: Absolutely. This something, when we talk about it on the planning meeting, where we have clients who have done an outstanding job with this, and we have clients who really would rather not think about it. It’s never pleasant to think about your own mortality. Nobody wants to do that. But if you have people depending on you, my dad used to call it the price of adulthood, those wills and trusts and stuff.
My dad passed away about 16 years ago, right after Thanksgiving. He was 64. And I remember going and taking care of some of those details with my mom that Kami mentioned. A person at the bank who I had literally known my entire life reached across, put his hand on top of my mom’s and said, “You don’t have to worry. He took really good care of you” That’s what you want your loved ones to remember about you.
Elhert: And what a relief I’m sure for you and your mom to know that this wasn’t going to be so much worse. How bad, how tragic because you just lose somebody and you’re dealing with that. And then they have to worry about living.
Glickman: Tom, you brought up a really good point. This is one of those things nobody likes to think about or talk about. Yet it’s something we all have to do. Having said that, is there a right time to start thinking about wills and mortality? What do you recommend?
Gibson: If you’re a single person, you still need to have a will. And we mentioned life changing events. If you are getting married, you need to have someone look at your will. If you are getting divorced, you need to have someone look at your will. If you’ve just had a child. All these things are occasions that should prompt us that life has changed; I’ve got more people counting on me now, or I maybe I don’t have quite as many as I did a year ago. You want to get those things taken care of.
Glickman: This has been tremendously beneficial. We’re bumping up against the end of our time here, but I did want to go through just a couple of last questions here.
This is from Chris and his question is, “Can you give a gift to an employee for their birthday? And then, does this gift need to be associated with some sort of an award?”
Gibson: You can certainly if you want. If you want the gift to not be included in your employee’s tax bill income, then you would want it to be a part of an achievement award program. There’s nothing in the plan document, nor in the Internal Revenue Code that says that it can’t coincide with a significant event in their life, be it their birthday, their work anniversary, things like that. And if you just want to buy the employee something out of the goodness of your heart and you don’t plan to deduct it then, then that’s okay, too.
But if you’re going to take a deduction for it, it would need to be through the achievement award plan.
Glickman: We talked earlier about wanting to pay our kids as much as humanly possible. But again, the term reasonable comes into play. The question is, “What are the appropriate ages that we could start thinking about paying our kids more? Are there certain milestones and what do those look like?”
Gibson: Normally, the big milestone is age 14. Now the one of the things that we obviously always want to keep our finger on the pulse of is, particularly for the corporate models, what reasonable compensation looks like in your area, because that can change over time. But as far as a trigger point for us, age 14 would be that point.
Elhert: I think a little bit with that, too, Tom, is we have had clients have their children on billboards. So, it also depends what type of print. Keep that in mind. If you’re running commercials, if you’re sending out pamphlets and things of that sort, if you make us aware that it’s being broadcast and not just updated on maybe a social media page every three to four months, that’s substantially more considered commercial use we can re-evaluate what that salary is in that area.
Glickman: One final point I want to circle back around to. We talked a lot about annual meetings, how to take that deduction properly. And the question is, “When we talk about annual meetings, how does international travel fit into that? Does it have to be purely domestic. Can we justify legitimately an international trip?”
Gibson: For the annual meeting, the requirement is that it be held in the United States or its territories. You may not have an annual meeting for U.S. corporation at a foreign destination.
But the U.S. and its territories does include the U.S. Virgin Islands, Puerto Rice, Guam if you’re so inclined. It’s still a fairly broad definition. And foreign travel just generally is more difficult to deduct because you have to have a specific business reason be in country. We’ll talk about this a little bit more on next month’s webinar. It’s not that it’s impossible to deduct foreign travel, but there’s a little bit more of a process than there typically is with domestic travel.
Glickman: I’d like to get your final thoughts. You’ve given people a lot to think about, a lot to work on. Kami, any final thoughts for our viewers today?
Elhert: make sure that those invoices and transactions are done. You’ve got until December 31st. We prefer that those transactions, invoices, documentation is all completed and signed before December 1st. And I would really take a hard look at reviewing all of those documents, making sure they’re signed, dated, executed; all of the various items that we went over are implemented and be invoiced and paid accordingly.
Gibson: This is one of those times of year where things can slip through the cracks. Everyone is busy and, and then we have the holidays thrown into the mix here. I would really encourage you to sit down this weekend, figure out what you have and have not done, and make a plan to get things taken care of.
A lot of you have administrative folks who are helping you implement the scorecard deductions anyway. Bring them into the process. There’s nothing that says you have to be the one to do all these things. Get some help and just get it done. You’ll be able to enjoy the holidays much more knowing that this is off your plate.
And you’ll enjoy our conversations in January and February a lot more because I won’t have to tell you, “Sorry. There’s nothing we can do about that.”
Glickman: If you have and questions or if we can be of assistance, please call us today at (772) 257-7888.