Are you Maximizing Your Tax Deductions and Minimizing Your Taxes?

By Len Green, CPA and John Wollenberg, CPA

In horse racing, the contest is not over until the horse crosses the finish line. The same is true with maximizing your tax deductions and minimizing your taxes. For those who think it is too late to save on your 2021 taxes, we are here to tell you, it is not!

With over 40 years' experience saving our clients taxes along with our knowledge of the new tax laws, we are confident the following information will help you as you approach the 2021 home stretch and allow you to hit the wire a winner.

Impact of Recent Tax Acts on The Horse Industry

Recent tax acts contain favorable developments for depreciating and expensing yearlings, breeding stock, farm equipment and other property.

  • Bonus Depreciation: An increase in bonus depreciation allows a write-off to increase from 50% to 100%. Accordingly, you are now permitted to fully expense purchases in the first year for yearlings, breeding stock and farm equipment. Used property can now also qualify.

A few weeks still remain for 2021 asset additions with the potential benefit of a full tax write-off.

  • IRC §179 Deduction: The maximum amount that may be expensed has been increased from $500,000 to $1,050,000. The phase-out threshold has been increased from $2 million to $2.6 million.
  • Farm Equipment: The useful life has been reduced from seven years to five years and the 200% declining balance method can now be used.
  • Racehorses: Certain thoroughbreds can still be depreciated as 3-year property. Even if business equipment (or horses) are purchased before year-end, they still qualify for tax benefits.

2021 Year-End Tax Planning Strategies

Due to the new administration in our nation's capital and the uncertainty of whether or not proposed tax law changes will be forthcoming, year-end tax planning for 2021 is more important than ever.

Steps Available for Individual Taxpayers

  1. Capital Gains: President Biden is proposing, for future years, an increase from 20% to 39.6% on capital gains for taxpayers with income above $1 million. Accordingly, if you are contemplating a sale of horses or real estate, you should consider accelerating the transaction into 2021 rather than waiting until 2022.

Even for taxpayers with income below the $1-million threshold, if you have realized capital gains in 2021, along with unrealized losses, you might want to trigger those losses before year-end to offset your gains, thereby reducing your tax liability.

On the flip side, if you have realized losses, consider taking some gains, as the deduction for capital losses is limited to $3,000 in any given year.

  1. Retirement Plan Alerts: First, required minimum distributions are reinstated for Year 2021.  Please be sure to have sufficient taxes withheld.

Second, plan participants who turn 70 1/2 in 2021 or later, do not need to take required distributions until the year in which they turn 72.

Third, you are now permitted to contribute to a traditional IRA after age 70 1/2 as long as you have earned income.

Fourth, contributions to a Keogh Plan or a one-person 401(k) Plan can be significant and save you substantial 2021 tax dollars if set up before Dec. 31, 2021.

A SEP-IRA is another flexible alternative. A SEP can be set up before the filing date of your 2021 tax return, yet still provide you with a 2021 deduction.

  1. Avoid the Underpayment of Estimated Tax Penalty: If you have not prepared a 2021 income tax projection, you should have your advisor do so. If your 2021 projection shows a balance due, request that a disproportionate amount of withholding be taken from your December paychecks, year-end bonus or retirement plan distribution, rather than paying a comparable significant amount with a fourth quarter estimated tax voucher.

This withholding approach is more favorable than writing a check because taxes that are withheld in December are deemed to be “thrown back” and treated as evenly spread through the calendar year. This enables you to catch up on any shortfall and still avoid a penalty for the first three quarters.

  1. Business Losses: Of great importance, 2021 business losses are capped at $262,500 for single taxpayers and $524,000 for joint returns. Please take these loss limitations into consideration when preparing your 2021 income tax projections.
  2. Maximize the Pass-Through Business Income Deduction: This tax saving deduction allows certain taxpayers to deduct 20% of their qualified business income. To maximize the deduction, you should take action steps to qualify your taxable income so it is below this new provisions' phase-out thresholds.
  3. Charitable Contributions: Non-itemizing married couples filing jointly can now deduct up to $600 of cash charity for 2021.

Steps Available for Business Taxpayers

  1. Maximize Available Depreciation: Businesses should consider making expenditures that qualify for 100% first year bonus depreciation. Generally, both new and used depreciable assets are eligible. The full first year write-off is allowed even if the asset is purchased late in the year and even if the deduction gives rise to a taxable loss.

Also, make sure you are taking bonus depreciation on all assets that are eligible. Many times assets are missed as to leasehold improvements on horses purchased in overseas sales or horses put into training but not yet raced.

An alternative is IRC §179 depreciation, where for 2021 the expense limit has been raised to $1,050,000 if the investment purchases do not exceed $2,600,000. Keep in mind that §179 expensing cannot give rise to a loss.

  1. Qualified Business Income Deduction (QBID): Certain business owners may be entitled to a deduction of up to 20% of their qualified business income. You should take whatever steps are possible to keep your taxable income below the phase-out thresholds. The rules are complex, so contact your tax advisor so they can help you maximize the use of the QBID.
  2. Active Business Requirements:
  3. Operate your horse activities in a business-like manner. We go so far as to recommend that you form a Limited Liability Company (LLC) before year end and definitely have a separate checkbook. Keep a record of your horse business activities.
  4. Consult with someone knowledgeable in the horse business to ascertain if you meet some of the nine tests “to qualify” as “active” and therefore put yourself in the position to take “full advantage” of any tax losses you may incur.

Possible Tax Law Changes Proposed by the Biden Administration

The best way to sum up President Joe Biden's tax plan would be to say he wants to raise taxes on “high-income” households and corporations.

  • Increase the corporate tax rate – The existing tax plan lowered the corporate rate from 35% to 21%. While Biden's camp generally agrees 35% was too high, the 21% rate will soon be raised, possibly to 26.5%.
  • Increase taxes on high earners – Biden would restore the 39.6% top marginal tax rate that was in effect prior to the 2018 tax year.
  • Phase out the pass-through deduction – Biden would phase out the 20% QBI deduction for taxpayers earning $400,000 or more.
  • Increase capital gains tax on high earners – Currently capital gains get lower tax rates than ordinary income, but Biden would change this for taxpayers earning more than $1 million.
  • Increase Social Security taxes – Biden would increase revenue to Social Security by imposing the 12.4% payroll tax (half of which is paid by the taxpayer) on all income above $400,000 in addition to the current structure of the tax.
  • Changes in Estate Planning – This portion of the proposed plan is less “straightforward.” One the one hand, you have the estate tax exemption of $11.7 million being reduced by 50%. On the other hand, there is less clarity regarding important items such as step-up in basis, business asset exemptions, capital gains, etc.

Clearly there will be changes, adjustments and alterations during the “negotiation period” prior to any changes being implemented. Also note that it is highly unlikely that any new laws will be made retroactively to 2021. Our best advice is to keep an open line of communication with your tax and financial advisors prior to making any updates to your estate planning.

The Green Group welcomes the opportunity to discuss your 2021 year-end tax savings strategies with you by phone at (732) 634-5100 and ask for Len Green, CPA, John Wollenberg, CPA, Ava Agbulos, CPA, Jeff Greene, CPA or Tracy Zhang, CPA.

In the meantime, stay well.

The post Are you Maximizing Your Tax Deductions and Minimizing Your Taxes? appeared first on TDN | Thoroughbred Daily News | Horse Racing News, Results and Video | Thoroughbred Breeding and Auctions.

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Kentucky Legislator Files Bill To Raise Taxes On HHR, ADW, Claims Racing Gets ‘A Sweetheart Deal’

Kentucky State Rep. Kim King (R-Harrodsburg) filed a bill in the state's legislature this week to raise tax rates on advance deposit wagering and historical horse racing handle in Kentucky, according to the Lexington Herald-Leader. After researching the issue, King said the current tax rate on ADW is far less than on live bets.

“I think they've really been getting a sweetheart deal and it needs to be updated,” King said.

King's bill would raise the tax rate on HHR activity from 1.5 percent of average daily handle to 3 percent and the rate on ADW from .5 percent to 3 percent. She believes the proposal could generate as much as $40 million for the state to spend on schools, health care and other projects.

King filed a similar bill last year but it did not get out of committee. Rep. Adam Koenig (R-Erlanger), who is a member of the Kentucky Horse Racing Commission's Equine Drug Research Council, opposes the measure, expressing concern that tax increases would be passed on to the bettor. Koenig is also chair of the House Committee on Licensing, Occupations and Administrative Regulations, where the bill stalled last year.

In 2020, ADW handle in Kentucky was $282 million, of which $1.4 million went to taxes and only $212,093 went to the state's General Fund. HHR handle was $2.2 billion, of which $33.8 million went to taxes and the General Fund received $15.1 million.

Read more at the Lexington Herald-Leader

The post Kentucky Legislator Files Bill To Raise Taxes On HHR, ADW, Claims Racing Gets ‘A Sweetheart Deal’ appeared first on Horse Racing News | Paulick Report.

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Proven Strategies: End-of-Year Tax-Saving Tips

In horse racing, the contest is not over until the horse crosses the finish line.

The same is true with maximizing your tax deductions and minimizing your taxes.

For those who think it is too late to save on your 2020 taxes, we are here to tell you, it is not!

With over 40 years’ experience saving our clients taxes along with our knowledge of the new tax laws, we are confident the following information will help you as you approach the 2020 home stretch and allow you to hit the wire a winner.

Current Tax Act and What it Means to The Horse Industry

The Current Tax Act contains favorable developments for depreciating and expensing yearlings, breeding stock, farm equipment and other property.

Bonus Depreciation: An increase in bonus depreciation allows a write-off to increase from 50% to 100%. Accordingly, you are now permitted to fully expense purchases in the first year for yearlings, breeding stock and farm equipment. Used property can now qualify also. A few weeks still remain for 2020 asset additions with the potential benefit of a full tax write-off.

IRC&179 Deduction: The maximum amount that may be expensed has been increased from $500,000 to $1 million. The phase-out threshold has been increased from $2 million to $2.5 million.

Farm Equipment: The useful life has been reduced from seven years to five years and the 200% declining balance method can now be used.

Racehorses: Certain Thoroughbreds can still be depreciated as three-year property.

Even if business equipment (or horses) is purchased before year-end, they still qualify for these tax benefits.

2020 Year-End Tax Planning Strategies

Due to the transition of administration in our nation’s capital and the uncertainty of whether or not proposed tax law changes will be forthcoming, year-end tax planning for 2020 is more important than ever.

Steps Available for Individual Taxpayers

  1. Capital Gains: President-elect Biden is proposing an increase from 20% to 39.6% on capital gains for taxpayers with income above $1 million. Accordingly, if you are contemplating a sale of horses or real estate, you should consider accelerating the transaction into 2020 rather than waiting until 2021.

Even for taxpayers with income below the $1-million threshold, if you have realized capital gains in 2020, along with unrealized losses, you might want to trigger those losses before year-end to offset your gains, thereby reducing your tax liability.

On the flip side, if you have realized losses, consider taking some gains, as the deduction for capital losses is limited to $3,000 in any given year.

  1. Retirement Plan Alerts: Several relief measures are included in recent tax legislation to help individuals who are approaching retirement or facing financial concerns.

First, required minimum distributions are suspended for Year 2020. As a result, if you do not have a financial need to take a distribution in 2020, you do not need to do so. Leave the money in the Pension Plan and continue to have it accumulate value, tax free.

Second, plan participants who turn 70 1/2 in 2020 or later do not need to take required distributions until the year in which they turn 72.

Third, you are now permitted to contribute to a traditional IRA after age 70 1/2 as long as you have earned income.

Fourth, the 10% early withdrawal penalty for distributions of up to $100,000 from workplace retirement plans will be waived for individuals who either become ill or lose their employment. These distributions can be spread over three years, and individuals can recontribute all, or a portion, to avoid a penalty.

Fifth, contributions to a Keogh plan or a one-person 401(k) plan can be significant and save you substantial 2020 tax dollars if set up before Dec. 31, 2020.

A SEP-IRA is another flexible alternative. A SEP can be set up before the filling date of your 2020 tax return, yet still provide you with a 2020 deduction.

  1. Avoid the Underpayment of Estimated Tax Penalty: If you have not prepared a 2020 income tax projection, you should have your advisor do so. If your 2020 projection shows a balance due, request that a disproportionate amount of withholding be taken from your December paychecks, year-end bonus, or retirement plan distribution, rather than paying a comparable significant amount with a fourth-quarter estimated tax voucher.

This withholding approach is more favorable than writing a check because taxes that are withheld in December are deemed to be “thrown back” and treated as evenly spread through the calendar year. This enables you to catch up on any shortfall and still avoid a penalty for the first three quarters.

  1. Net Operating Losses (NOLs): Recent tax legislation temporarily reverses the rules enacted in 2017 which preclude the carryback of NOLs. Individuals with NOLs arising in 2018, 2019 and 2020 can now carry back their NOLs five years.

Of great importance, business losses, which had been capped at $250,000 for single taxpayers and $500,00 for joint returns, can be deducted without limitation through 2020!

  1. Maximize the Pass-Through Business Income Deduction: This tax-saving deduction allows certain taxpayers to deduct 20% of their qualified business income. To maximize the deduction, you should take action steps to qualify your taxable income so it is below this new provision’s phase-out thresholds.

Steps Available for Business Taxpayers

  1. Tax Treatment of Losses: Corporations can once again carry back NOLs, at least for losses arising in 2018 through 2020. Tax rule changes in December of 2017 had put a stop to this practice. Recent tax legislation reinstates this benefit and the carryback period is five years. Another temporary change is that corporations can now use NOLs to offset their entire taxable income through the 2020 tax year. The 2017 Tax Act’s 80% limitation has been temporarily removed.
  2. Maximize Available Depreciation: Businesses should consider making expenditures that qualify for 100% first-year bonus depreciation. Generally, both new and used depreciable assets are eligible. The full first-year write-off is allowed even if the asset is purchased late in the year and even if the deduction gives rise to a taxable loss.

Also, make sure you are taking bonus depreciation on all assets that are eligible. Many times assets are missed as to leasehold improvements on horses purchased in overseas sales or horses put into training but not yet raced.

An alternative is Section 179 depreciation, where for 2020 the expense limit has been raised to $1,040,000 if the investment purchases do not exceed $2,590,000. Keep in mind that Section 179 expensing cannot give rise to a loss.

  1. Qualified Business Income (QBI) Deduction: Certain business owners may be entitled to a deduction of up to 20% of their qualified business income. You should take whatever steps are possible to keep your taxable income below the phase-out thresholds. The rules are complex, so contact your tax advisor so they can help you maximize the use of the QBI deduction.

Possible Tax Law Changes Proposed by the Biden Administration

The best way to sum up President-elect Joe Biden’s tax plan would be to say he wants to raise taxes on high-income households and corporations.

  • Increase the corporate tax rate: The existing tax plan lowered the corporate rate from 35% to 21%. While Biden’s camp generally agrees 35% was too high, their proposal is to raise it to 28%.
  • Increase taxes on high earners: Biden would restore the 39.6% top marginal tax rate that was in effect prior to the 2018 tax year.
  • Phase out the pass-through deduction: Biden would phase out the 20% Qualified Business Income (QBI) deduction for taxpayers earning $400,000 or more.
  • Increase capital gains tax on high earners: Currently capital gains enjoy lower tax rates than ordinary income, but Biden’s proposal would change this for taxpayers earning more than $1 million.
  • Increase Social Security taxes: Biden would increase revenue to Social Security by imposing the 12.4% payroll tax (half of which is paid by the taxpayer) on all income above $400,000 in addition to the current structure of the tax.
  • Changes in estate planning: This portion of the proposed plan is less straightforward. On the one hand, you have the estate tax exemption of $11.58 million being reduced by 50%. On the other hand, there is less clarity regarding important items such as step-up in basis, business asset exemptions, capital gains, etc.

Clearly there will be changes, adjustments and alterations during the negotiation period prior to any changes being implemented. Also note that it is highly unlikely that any new laws will be made retroactively to 2020. Our best advice is to keep an open line of communication with your tax and financial advisors prior to making any updates to your estate planning.

The Green Group welcomes the opportunity to discuss your 2020 year-end tax-saving strategies with you by phone at 732.634.5100. In the meantime, stay well.

The post Proven Strategies: End-of-Year Tax-Saving Tips appeared first on TDN | Thoroughbred Daily News | Horse Racing News, Results and Video | Thoroughbred Breeding and Auctions.

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Proven Strategies: If You are an Independent Contractor, What Tax Deductions Are You Entitled to?

COVID-19 has changed the way we go about our daily lives. It has also increased the number of individuals who are self-employed and have no other employees, also known as independent contractors.

The formal definition of an independent contractor is a person or entity contracted to perform work for, or provide services to another entity as a nonemployee (meaning that the employee is “at will” and not eligible for an employer’s health or retirement benefits). The general rule is that an individual is an independent contractor if the payer has the right to control or direct only the result of the work and not what will be done and how it will be done. The earnings of a person who is working as an independent contractor are subject to self-employment tax.

Self-employed professions such as jockeys, jockey agents, confirmation videographers, bloodstock agents, blacksmiths, veterinarians, exercise riders, equine chiropractors, bid spotters/auctioneers, sales short listers, etc. are all possible examples of horse-related independent contractors.

Prior to the enactment of the new tax act in 2017, if you operated your business as a sole proprietor, you could still take advantage of many of the tax deductions that you incurred. With the adoption of the new Tax Act came a limitation on the deductibility of state income taxes, real estate taxes and the elimination of all personal business-related expenses.

Expenses that Could Become Tax Deductible

There are a number of expenses, if you are in the above categories, that can be tax deductible such as the following:

a. Training–training expense whether for racing, shows or for sales become deductible
b. Professional fees
c. Veterinary fees
d. Vanning and other transportation expenses–if you own racehorses and/or consign horses at sales, you should be sure to include all transportation expenses
e. Work clothing–all of you involved in the training side of the business, including jockeys, should deduct any garments/outfits that are primarily worn while riding, breaking or training horses
f. Barn and stable supplies
g. Feed and shavings; as well as removal expenses
h. Books, magazines, online subscriptions and/or sales analysis reference guides
i. Breeding fees
j. Broodmare leases
k. Meals for employees who were taking care of the horses
l. Equine therapy
m. Depreciation (including bonus depreciation)

In order to ensure that you are maximizing the above deductions, be sure to communicate with your tax provider. Have your accountant confirm your status as an independent contractor and indicate that status on your tax returns. If you want additional legal protection, you may want to either form an LLC which provides you with additional liability protection or a Subchapter S Corporation.

Important Additional Fact

The deductions listed above are, in most cases, equally tax deductible for partners in an LLC or shareholders in Sub Chapter S corporations.

Increasing Your Retirement Contributions

Most independent contractors can make retirement contributions into an IRA. The annual contribution limit for 2020 is $6,000 or $7,000 if you are age 50 or older. If you have a Roth IRA, the 2020 contributions may also be limited based on your filing status and income.

However, there is a plan that will allow you to greatly increase your retirement contributions and simultaneously reduce your taxable income. A Solo 401(k), also known as a Self-Employed 401(k) or Individual 401(k) is a 401(k) qualified retirement plan that was designed specifically for employers with no full-time employees. The Solo 401(k) is unique because it only covers the business owner(s) and their spouse(s), thus, not subjecting the 401(k) plan to the complex ERISA (Employee Retirement Income Security Act of 1974) Rules which sets minimum standards for employer pension plans with non-owner employees. Independent contractors who qualify for the Solo 401(k) can receive the same tax benefits as in a general 401(k) plan but without the employer being subject to the complexities of ERISA.

The contribution limits for the Solo 401(k) are the same as a standard 401(k). They are broken down into a profit-sharing contribution, which comes from the employer and a salary deferral contribution which comes from the employee. However, due to the fact that in a Solo 401(k) the plan holder is acting both as employer and employee, the actual percentages assume a more meaningful role. If the plan holder is filing as a Sole Proprietor or Single Member LLC, which is true in most cases, then the limit is capped at 20% of the self-employed income, plus $19,000 for 2020. IRC Section 401(a)(3) states that the amount of employer contributions is limited to 25% of the entity’s income subject to self-employment tax. Schedule C sole proprietors must do an added calculation starting with earned income to determine their maximum contribution which, in effect, brings the maximum 25% of compensation limit down to 20% of earned income.

In both cases, the IRS has declared an upper limit for total employer and employee contributions to a plan, the IRS Section 415(c) limit which may not be exceeded. As of 2020, this upper limit is $56,000 for those under 50 and $62,000 for those 50 and older.

Other contribution limits may apply so we highly recommend that you discuss your options with your tax professional and/or investment advisor.

There may be alternative retirement plans such as SEP which you may be eligible for.

Bottom Line

The Thoroughbred horse business is like no other business when it comes to its complexity, challenges and strategies.

The same can be said as to how to maximize your tax deductions.

If you have any questions, please contact Len Green lgreen@greenco.com or Jim Benkoil jbenkoil@greenco.com at The Green Group or call us at 732.634.5100.

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