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If you have a life insurance policy, you may want to ensure that the benefits your family will receive after your death won’t be included in your estate. That way, the benefits won’t be subject to federal estate tax.

Current exemption amounts

For 2021, the federal estate and gift tax exemption is $11.7 million ($23.4 million for married couples). That’s generous by historical standards but in 2026, the exemption is set to fall to about $6 million ($12 million for married couples) after inflation adjustments — unless Congress changes the law.

In or out of your estate

Under the estate tax rules, insurance on your life will be included in your taxable estate if:

Your estate is the beneficiary of the insurance proceeds, or
You possessed certain economic ownership rights (called “incidents of ownership”) in the policy at your death (or within three years of your death).

It’s easy to avoid the first situation by making sure your estate isn’t designated as the policy beneficiary.

The second rule is more complicated. Just having someone else possess legal title to the policy won’t prevent the proceeds from being included in your estate if you keep “incidents of ownership.” Rights that, if held by you, will cause the proceeds to be taxed in your estate include:

The right to change beneficiaries,
The right to assign the policy (or revoke an assignment),
The right to pledge the policy as security for a loan,
The right to borrow against the policy’s cash surrender value, and
The right to surrender or cancel the policy.

Be aware that merely having any of the above powers will cause the proceeds to be taxed in your estate even if you never exercise them.

Buy-sell agreements and trusts

Life insurance obtained to fund a buy-sell agreement for a business interest under a “cross-purchase” arrangement won’t be taxed in your estate (unless the estate is the beneficiary).

An irrevocable life insurance trust (ILIT) is another effective vehicle that can be set up to keep life insurance proceeds from being taxed in the insured’s estate. Typically, the policy is transferred to the trust along with assets that can be used to pay future premiums. Alternatively, the trust buys the insurance with funds contributed by the insured. As long as the trust agreement doesn’t give the insured the ownership rights described above, the proceeds won’t be included in the insured’s estate.

The three-year rule

If you’re considering setting up a life insurance trust with a policy you own currently or simply assigning away your ownership rights in such a policy, consult with us to ensure you achieve your goals. Unless you live for at least three years after these steps are taken, the proceeds will be taxed in your estate. (For policies in which you never held incidents of ownership, the three-year rule doesn’t apply.)

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The new American Rescue Plan Act (ARPA) provides eligible families with an enhanced child and dependent care credit for 2021. This is the credit available for expenses a taxpayer pays for the care of qualifying children under the age of 13 so that the taxpayer can be gainfully employed.

Note that a credit reduces your tax bill dollar for dollar.

Who qualifies?

For care to qualify for the credit, the expenses must be “employment-related.” In other words, they must enable you and your spouse to work. In addition, they must be for the care of your child, stepchild, foster child, brother, sister or step-sibling (or a descendant of any of these), who’s under 13, lives in your home for over half the year, and doesn’t provide over half of his or her own support for the year. The expenses can also be for the care of your spouse or dependent who’s handicapped and lives with you for over half the year.

The typical expenses that qualify for the credit are payments to a day care center, nanny or nursery school. Sleep-away camp doesn’t qualify. The cost of kindergarten or higher grades doesn’t qualify because it’s an education expense. However, the cost of before and after school programs may qualify.

To claim the credit, married couples must file a joint return. You must also provide the caregiver’s name, address and Social Security number (or tax ID number for a day care center or nursery school). You also must include on the return the Social Security number(s) of the children receiving the care.

The 2021 credit is refundable as long as either you or your spouse has a principal residence in the U.S. for more than half of the tax year.

What are the limits?

When calculating the credit, several limits apply. First, qualifying expenses are limited to the income you or your spouse earn from work, self-employment, or certain disability and retirement benefits — using the figure for whichever of you earns less. Under this limitation, if one of you has no earned income, you aren’t entitled to any credit. However, in some cases, if one spouse has no actual earned income and that spouse is a full-time student or disabled, the spouse is considered to have monthly income of $250 (for one qualifying individual) or $500 (for two or more qualifying individuals).

For 2021, the first $8,000 of care expenses generally qualifies for the credit if you have one qualifying individual, or $16,000 if you have two or more. (These amounts have increased significantly from $3,000 and $6,000, respectively.) However, if your employer has a dependent care assistance program under which you receive benefits excluded from gross income, the qualifying expense limits ($8,000 or $16,000) are reduced by the excludable amounts you receive.

How much is the credit worth?

If your AGI is $125,000 or less, the maximum credit amount is $4,000 for taxpayers with one qualifying individual and $8,000 for taxpayers with two or more qualifying individuals. The credit phases out under a complicated formula. For taxpayers with an AGI greater than $440,000, it’s phased out completely.

These are the essential elements of the enhanced child and dependent care credit in 2021 under the new law. Contact us if you have questions.

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Data security is a critical part of the audit risk assessment. If your financial statements are audited, your audit team will tailor their procedures to answer critical questions about cyber risks and the effectiveness of your internal controls. While conducting fieldwork, they’ll assess how your practices measure up and whether your company has weaknesses that may require additional inquiry, testing and disclosure.

Is cybersecurity a priority?

Most companies today view cybersecurity as a business problem, not just as an information technology (IT) issue. During the audit process, it’s important to identify the “crown jewels” of your company’s data assets, and then consider how your management team evaluates, manages and responds to cyber risks and cybersecurity incidents.

People are often the weakest link in cybersecurity. So, auditors will evaluate your company’s training, awareness and accountability policies to ensure that sensitive data is kept safe. Those policies may need to be regularly updated as 1) hackers get more sophisticated and find new ways of breaking into systems, and 2) your business environment changes.

For example, remote working arrangements during the COVID-19 pandemic have resulted in new risks as employees access data from less-secure home networks. So companies may need to modify their practices to maintain effective data security.

Auditors also consider the tone at the top of your organization. Cybersecurity should be integrated into an organization’s values and goals. Responsibility shouldn’t fall solely in the hands of your company’s IT department. After all, if your company can’t keep its intellectual property and customers safe, its ability to operate will ultimately be diminished over the long run.

What’s important to investors and lenders?

To date, the Public Company Accounting Oversight Board (PCAOB) hasn’t found any material misstatements on a public company’s financial statements as a result of a cybersecurity breach. So, stakeholders generally have confidence in the ability of auditors to evaluate and identify cyber risks.

However, audit committees and other external stakeholders recognize that there’s a risk that future cyberattacks may affect financial reporting. And they expect auditors to actively communicate about cybersecurity measures and the costs associated with breaches. The full cost of a data breach — including response and reputational damage — may not always be apparent. Financial statement disclosures should be as accurate, timely and comprehensive as possible.

An agile approach

Many traditional audit risks — such as supply chain and related party risks — tend to be fairly constant and predictable over time. But cyber risks are constantly evolving. We have experience evaluating and disclosing data security practices. Each accounting period, our audit team will take a fresh look your company’s cyber risks in today’s marketplace and modify our audit procedures as necessary. We can also help get your policies and procedures back on track, if they haven’t kept up with the times.

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Now that the vaccines are rolling out to more people and government health restrictions are beginning to ease, every business leader should be asking themself what their company is going to do when the pandemic is over. Certain industries such as grocery stores and cleaning product suppliers have experienced a boost in sales, but will that growth be sustainable? Hotels and movie theaters have experienced an unprecedented drop in demand, but will their customers come back?

The U.S. economy is driven by consumer purchases, and those purchases have not gone away. Even though the pandemic is temporary, it has lasted long enough to turn temporary behaviors into structural shifts. At the end of the crisis, some things will return to the way they were, some things will look different, and some things will simply not come back at all. The real question is, which trends are temporary and which trends are here to stay? Unfortunately, predicting the future habits of consumers can be challenging during normal times. Predicting habits during and after a global pandemic requires even greater planning and evaluation.

As you begin developing a business plan for the post-covid world, it is important to consider how your customers’ habits and behaviors are going to change. This is a difficult question for businesses to consider and the answers will be different for every sector and industry. In a recent Harvard Business Review article, Dev Patnaik, Michelle Loret de Mola and Brady Bates identified key factors to help business leaders evaluate how the behaviors of stakeholders might change.

Habits

How has the pandemic affected people’s habits? When a behavior becomes part of a routine, the likelihood of that behavior continuing, increases. Importantly, studies of habit formation suggest that the number of times you perform a behavior determines the likelihood that the behavior will stick. Food delivery businesses such as DoorDash and Uber Eats have thrived during the pandemic. After looking at their data, they discovered that it took four deliveries to a single customer to turn that customer into a ‘lifelong customer.’ Three orders wasn’t enough, and five orders provided no additional gain. The belief is that these companies will fare well in the post-covid landscape, since customers have developed a habit of using apps to place food orders.

Motivators

Does continuing the behavior provide significant psychological or financial benefit? The tourism industry has been understandably hit hard by the pandemic. While the industry has struggled, it is very unlikely the current trends will continue post-pandemic. The psychological benefits of vacations and travel have long been documented and the tourism industry will likely rebound strongly. While many museums and tourist destinations have tried to develop virtual tours and online experiences, most travelers do not believe these are substitutes for real-life activities.

Better Alternatives

People will change their behavior if they discover a better way to do something, but shifting to a new behavior needs to be relatively easy and the alternative must already exist. Zoom wasn’t invented during the pandemic, but the pandemic created the perfect environment for it to thrive. The question is, has Zoom transformed people’s behavior or will they revert back to their old behavior? Going forward, we are likely to see a mix of both. Unfortunately for kids and teachers, snow days may become a thing of the past as schools can simply have their students participate in virtual learning instead of canceling school.

As we try and look over the horizon at a post-covid world, businesses will need to examine which trends are here to stay, which are not, and which will be reshaped. We’ve discovered over the past year that predicting the future is extremely difficult. It is important that business leaders focus on their customers’ needs, both in the present and in the future. Predicting expected trends is not easy, but these tools may help.

Looking forward to being a part of your business’s success.

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On Thursday, March 11th, the newest stimulus effort, called the American Rescue Plan Act of 2021 (APRA), was signed by President Joe Biden. The Act is chock-full of provisions that will make a difference to both businesses and individual taxpayers. Here are some of its highlights:

Unemployment Benefits

Under APRA, for the tax year beginning in 2020, the first $10,200 in unemployment benefits per worker, in households that make less than $150,000 in adjusted gross income (AGI), will not be taxable and will not count towards their AGI.

For those that are rushing to prepare their 2020 returns in order to qualify for the new stimulus payment, please be aware that it might take some time for the IRS (and tax software companies) to update their forms and instructions to exclude the first $10,200 of unemployment benefits in its income calculations. If a tax return has already been filed, it may need to be amended.

Stimulus Checks

The new act creates another round of economic impact payments, or ‘stimulus checks’, to be sent to qualifying individuals.

It provides for a $1,400 stimulus check per qualifying individual, $2,800 for married taxpayers filing jointly and an additional $1,400 for each dependent. In addition, the new provision now includes college students and qualifying relatives who are claimed as dependents.
Eligibility for single taxpayers will begin to phase out with an adjusted gross income of $75,000, and completely phase out with an AGI over $80,000.
Phase-out for married taxpayers who file jointly begins with an AGI of $150,000 and ends with an AGI of $160,000. This means that if a married couple has above $160,000 in adjusted gross income, they will be ineligible for any stimulus payment, even if they have many children.
For heads of household, the phase-out will begin with an AGI of $112,500 and end with an AGI of $120,000.
The act uses 2019 AGI to determine eligibility unless the taxpayer has already filed a 2020 return. If a taxpayer’s income drops on his 2020 tax return, or if an additional dependent is added, the additional stimulus funds can still be claimed on the 2021 filing. We are not yet sure how quickly the IRS will process the stimulus checks based on a 2020 return that is filed now.

Tax Credits

The Employee Retention Tax Credit, originally enacted in the Coronavirus Aid, Relief, and Economic Security Act, has been extended through December 31, 2021. This provision allows eligible employers to claim a credit for paying qualified wages to employees. This can potentially provide a credit of up to $28,000 per employee.

The Dependent Care Refundable Credit has increased to up to 50% of eligible expenses. This makes the credit worth up to $4,000 for one qualifying individual and up to $8,000 for two or more. The credit will be fully refundable. The percentage will be gradually reduced for households with income over $125,000 until the minimum of 20%.

Child Tax Credits will be expanded to $3,600 for each child under the age of 6 and $3,000 for each child ages 6 to 17. The credits will be refundable (i.e. will be available even if no tax is due). However, this increase will be phased out for single filers making more than $75,000 and married filers making more than $150,000. In addition, the IRS will prepay 50% of the credit in monthly payments running from July through December 2021. The remaining 50% can be claimed as a credit with your 2021 tax return.

Family and Sick Leave Credits will be extended to September 30, 2021. These refundable credits against payroll taxes compensate employers and self-employed individuals for coronavirus-related paid sick leave and family and medical leave. The act increases the limit on the credit for paid family leave to $12,000, and the number of days a self-employed individual can take into account from 50 to 60. Additionally, the credits have been expanded to include 501(c)(1) governmental organizations.

Additional Funding Allocation:

Public schools serving K-12 students will receive $130 billion in funding to help get students back into the classroom. Another $2.5 billion in funding will be allocated to private schools, and $40 billion to colleges.
The Federal Government will be distributing $30 billion in housing assistance to state governments to help low-income households with their rent, mortgage and homelessness issues. The freeze on evictions and foreclosures will also be extended through September 30, 2021.
Funding for vaccines and testing will be increased by another $60 billion, while COVID disaster relief will be allocated another $47 billion.
Funding towards food stamps will be increased by 15%.

Grants and Loans

A 100% subsidy for COBRA premiums for eligible individuals may be available for the period of COBRA coverage including the periods beginning on April 1, 2021, and ending on September 30, 2021.
EIDL grants for small businesses will see $15 billion more in funding for grants up to $5,000.
The Paycheck Protection Program will receive another $7 billion in funding.
Some student loans discharged after December 31, 2020, and before January 1, 2026, will not be included in gross income.

Roth&Co is committed to keeping you apprised of all provisions that may benefit you, your business or your organization. We will provide more information as it becomes available.

This material has been prepared for informational purposes only, and is not intended to provide, nor should it be relied upon for legal or tax advice. If you have any specific legal or tax questions regarding this content or related issues, please consult with your professional legal or tax advisor.

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Breakeven analysis can be useful when investing in new equipment, launching a new product or analyzing the effects of a cost reduction plan. During the COVID-19 pandemic, however, many struggling companies are using it to evaluate how much longer they can afford to keep their doors open.

Fixed vs. variable costs

Breakeven can be explained in a few different ways using information from your company’s income statement. It’s the point at which total sales are equal to total expenses. More specifically, it’s where net income is equal to zero and sales are equal to variable costs plus fixed costs.

To calculate your breakeven point, you need to understand a few terms:

Fixed expenses. These are the expenses that remain relatively unchanged with changes in your business volume. Examples include rent, property taxes, salaries and insurance.

Variable/semi-fixed expenses. Your sales volume determines the ebb and flow of these expenses. If you had no sales revenue, you’d have no variable expenses and your semifixed expenses would be lower. Examples are shipping costs, materials, supplies and independent contractor fees.

Breakeven formula

The basic formula for calculating the breakeven point is:

Breakeven = fixed expenses / [1 – (variable expenses / sales)]

Breakeven can be computed on various levels. For example, you can estimate it for your company overall or by product line or division, as long as you have requisite sales and cost data broken down.

To illustrate how this formula works, let’s suppose ABC Company generates $24 million in revenue, has fixed costs of $2 million and variable costs of $21.6 million. Here’s how those numbers fit into the breakeven formula:

Annual breakeven = $2 million / [1 – ($21.6 million / $24 million)] = $20 million

Monthly breakeven = $20 million / 12 = $1,666,667

As long as expenses stay within budget, the breakeven point will be reliable. In the example, variable expenses must remain at 90% of revenue and fixed expenses must stay at $2 million. If either of these variables changes, the breakeven point will change.

Lowering your breakeven

During the COVID-19 pandemic, distressed companies may have taken measures to reduce their breakeven points. One solution is to convert as many fixed costs into variable costs as possible. Another solution involves cost cutting measures, such as carrying less inventory and furloughing workers. You also might consider refinancing debt to take advantage of today’s low interest rates and renegotiating key contracts with lessors, insurance providers and suppliers. Contact us to help you work through the calculations and find a balance between variable and fixed costs that suits your company’s current needs.

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Are you a business owner thinking about hiring? Be aware that a recent law extended a credit for hiring individuals from one or more targeted groups. Employers can qualify for a tax credit known as the Work Opportunity Tax Credit (WOTC) that’s worth as much as $2,400 for each eligible employee ($4,800, $5,600 and $9,600 for certain veterans and $9,000 for “long-term family assistance recipients”). The credit is generally limited to eligible employees who began work for the employer before January 1, 2026.

Generally, an employer is eligible for the credit only for qualified wages paid to members of a targeted group. These groups are:

Qualified members of families receiving assistance under the Temporary Assistance for Needy Families (TANF) program,
Qualified veterans,
Qualified ex-felons,
Designated community residents,
Vocational rehabilitation referrals,
Qualified summer youth employees,
Qualified members of families in the Supplemental Nutritional Assistance Program (SNAP),
Qualified Supplemental Security Income recipients,
Long-term family assistance recipients, and
Long-term unemployed individuals.

You must meet certain requirements

There are a number of requirements to qualify for the credit. For example, for each employee, there’s also a minimum requirement that the employee must have completed at least 120 hours of service for the employer. Also, the credit isn’t available for certain employees who are related to or who previously worked for the employer.

There are different rules and credit amounts for certain employees. The maximum credit available for the first-year wages is $2,400 for each employee, $4,000 for long-term family assistance recipients, and $4,800, $5,600 or $9,600 for certain veterans. Additionally, for long-term family assistance recipients, there’s a 50% credit for up to $10,000 of second-year wages, resulting in a total maximum credit, over two years, of $9,000.

For summer youth employees, the wages must be paid for services performed during any 90-day period between May 1 and September 15. The maximum WOTC credit available for summer youth employees is $1,200 per employee.

A valuable credit

There are additional rules and requirements. In some cases, employers may elect not to claim the WOTC. And in limited circumstances, the rules may prohibit the credit or require an allocation of it. However, for most employers hiring from targeted groups, the credit can be valuable. Contact us with questions or for more information about your situation.

How to Ensure Life Insurance Isn’t Part of Your Taxable Estate

New Law Tax Break May Make Child Care Less Expensive

How Auditors Assess Cyber Risks

Developing Your Post-Covid Business Plan

RECAP: The American Rescue Plan of 2021 – The New Covid Relief Bill

How to Compute Your Company’s Breakeven Point

Work Opportunity Tax Credit extended through 2025