Tom Talks Taxes - December 11, 2020

Act now on coronavirus-related distributions and reasonable compensation

Welcome to my new newsletter. I hope you find the content useful and enjoyable. I will be publishing it every other week going forward (I wanted to say biweekly, but apparently that means either twice per week or twice per month, as I learned here).

Coronavirus-Related Distributions

To get the special tax benefits from a coronavirus-related retirement distribution, the distribution must occur on or before December 30, 2020. That is not a typo — December 31, 2020 is too late.

Based on the statute and Notice 2020-50, millions upon millions of taxpayers will qualify for a coronavirus-related distribution. Tax professionals, in my opinion, must try to qualify EVERY retirement account distribution as a coronavirus-related distribution by asking good questions.

While the ability to spread the taxable income over three years is beneficial, the repayment option is key. A taxpayer can repay a coronavirus-related distribution within three years of the distribution date and pay no tax on it. Qualifying a distribution preserves this future right, even if the taxpayer elects to pay the tax on the entire distribution in tax year 2020.

Reasonable Compensation in the New Year

Paul Hamann and Jack Saleski at RCReports have an excellent ten point guide for year-end reasonable compensation planning on their blog.

S corporation owners should have reasonable compensation planning as part of their overall tax planning every year, and this year especially due to COVID-19. Many S corporation owners receive poor advice in this area, leading to either very low salaries (where they reduce Social Security benefits and risk recharacterization of distributions as wages) or extremely high salaries (where they overpay payroll taxes).

Paul and Jack will have an informative reasonable compensation primer in the January/February 2021 edition of EA Journal.

Final Regulations on Like-Kind Exchanges

The Treasury Department issued final regulations, effective December 2, 2020, related to the Tax Cuts and Jobs Act changes to §1031 like-kind exchanges. In a nutshell, for exchanges after December 31, 2017, a taxpayer can only get tax-deferral for real property. This begs two questions:

  1. What is real property?

  2. Does an exchange still qualify for tax-deferral if personal property, like furniture, is also transferred?

The final regulations define real property for like-kind exchange purposes rather expansively:

  • Land,

  • Improvements to land (including inherently permanent structures and their structural components),

  • Water and air space superadjacent to land,

  • Certain intangible interests in real property (such as a leasehold or option), and

  • Property classified as real property under state and local law.

In addition, a taxpayer qualifies for a like-kind exchange even if personal property is included in the transfer provided that the total fair market value of the personal property is 15% or less of the aggregate fair market value of the real properties transferred. Reminder: the personal property is still “boot” and creates taxable gain, potentially. This provision simply says the remainder of any gain gets tax-deferral.

I’ll be discussing these regulations in my tax update classes this year.

My Upcoming Education Events

California Society of Enrolled Agents - San Fernando Valley Chapter, December 14, 2020

  • Tax Planning for Business and Rental Owners (2 CE)

Bradford Tax Institute, December 16, 2020 - Virtual

  • 15 Solutions to IRS Problems (2 CE)

Compass Tax Educators, December 17, 2020 - Virtual

  • 2020 Tax Update: Businesses (3 CE)

New Jersey Society of Enrolled Agents, December 18, 2020 - Virtual

  • §199A Problems and Planning (2 CE)

Washington State Society of Enrolled Agents, January 7-8, 2021 - Virtual

  • Federal Tax Update (8 CE)

Indiana Society of Enrolled Agents, January 8-9, 2021 - Virtual

  • Federal Tax Update (6 CE)

California Society of Enrolled Agents - South Bay Chapter, January 13, 2021 - Virtual

  • Federal Tax Update (6 CE); California Tax Update (2 CE)

California Society of Enrolled Agents - North Bay Chapter, January 14-15, 2021 - Virtual

  • Federal Tax Update (6 CE); California Tax Update (2 CE)

Tax Talk Today, January 19, 2021 - Virtual

  • Federal Tax Update (3 CE)

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Coming Soon

The Christmas edition on December 25, 2020 will list my favorite tax books — the ones you need to have in your stocking this year!