People who trade cryptocurrency had a surprise in 2019.
Some cryptocurrency companies sent out (incorrectly in my view) 1099-K forms for cryptocurrency transactions. This led to the IRS looking for Schedule C income for taxpayers and assessing taxes for unreported income.
Some have said will start issuing 1099-MISC in 2020 which likewise may be incorrect. A 1099-MISC is not meant for:
At least $10 in royalties or broker payments in lieu of dividends or tax-exempt interest.
At least $600 in:
Rents.
Prizes and awards.
Other income payments.
Medical and health care payments.
Crop insurance proceeds.
Cash payments for fish (or other aquatic life) you purchase from anyone engaged in the trade or business of catching fish.
Generally, the cash paid from a notional principal contract to an individual, partnership, or estate.
Payments to an attorney.
Any fishing boat proceeds.
In addition, use Form 1099-MISC to report that you made direct sales of at least $5,000 of consumer products to a buyer for resale anywhere other than a permanent retail establishment.
If you received a 1099-K in 2019 and didn’t report that income on your return what should you do. Amend your return with a schedule C showing the income and then backing out 100% of the income with a negative number (stating that the 1099 was issued erroneously). If you had trading profits or losses, you (and didn’t report them) you should amend schedule D to reflect those using the 1099-K number as gross proceeds.
If you receive a 1099-MISC in 2020, again, you may have to file a schedule C back out the number and then report the transactions on Schedule D.
In some respects, Cryptocurrency companies are stuck in the middle. Some people accept cryptocurrency in their businesses for payment, others trade the currency and these companies can not differentiate who is who.
The main lesson is don’t ignore the form, and be sure to include that income clearly on your return where the IRS will be looking which will be Schedule C.
Post COVID Surprises
What have we learned during the COVID crisis? People can telework (except me). When people stay home, restaurants that depend on lunch business, die. When restaurants can’t fill all their tables they die. What does this mean in general. All these businesses rent commercial space in commercial buildings. There will be a glut of commercial space starting in 2021. Empty buildings mean foreclosures. Foreclosures mean depressed values on commercial real and personal property. This means tax revenues for localities will be tight. Look for localities to get creative by raising licensing taxes and fees. Planning for these increases is difficult, because fees are random and license taxes are on gross receipts. So, businesses are advised to not book receipts until earned and establish escrow accounts for unearned money that may have to be returned to customers. For example if something has a one year money back guarantee, escrow the money until the year has passed and don’t book it as earned until guarantee period has expired.
Given that some states unemployment insurance funds were stretched to their limits during COVID, and that some states passed higher minimum wage laws (which will lead to layoffs), expect unemployment insurance premiums to rise in the coming months. Be prepared to contest claims for justified firings. Larger employers should consider hiring a UI cost control company to audit your practices. Consider retraining instead of laying off. Its very hard to move employees into a contractor status. So, look at IRS Form W-8 to see what the test looks like. So, that will not be a panacea.
2021 may not be as weird as 2020, but it will still have its shocks.
More Tax Planning Pre-Biden
If you make more than $400,000 (apparently in compensation) then there will be a 12.4% social security tax on top of your income tax which will go up to 39.5% Federal and who knows what will happen in high tax states who are losing payers by the day. So, if in fact the trigger is compensation, it might be time to look at those LLC’s and turn them into S Corporations starting 1/1/2021. That way you can limit compensation to reasonable compensation and the rest would be S Corp dividends. Given this was the method used by none other than Joe Biden to save medicare taxes on his $15 Million of book royalties, I don’t feel as bad about mentioning it. We’ll keep looking at this subject in days going forward.
Tax planning Pre-Biden
If as has been alleged, Biden wins this election and the Democrats somehow get control of both houses of congress, Estate and Gift taxes will go up. Two areas where they have mentioned increases (1) lowering the Unified Credit Exemption from $11 Million to $5 Million. This would mean that individuals worth more than $5 Million or couples worth more the $10 Million will lose some benefits they currently have under the tax code. (2) Raising the Estate and Gift Tax rates to higher levels. What are some strategies to consider before the end of the year?
A. Dynasty Trusts. Make gifts now before the exemption is reduced. If you create a trust for your children and your grandchildren now (not you), you can create you can give up to $11 Million ($22 Million for couples) tax free to be used by your children and grandchildren. If you wait, you can only give $5 Million ($10 Million per couple). So, if you’re really rich, now is the time to make generation skipping gifts.
Another target is preferred capital gains rates. I do believe that will be watered down to a degree, but assume the rate goes from 20% to 30%, then what do you do. (1) You can harvest capital gains now, wait 30 days and reinvest. (2) Utilize a charitable remainder trust over multiple generations. It gives you a small charitable deduction, but allows capital gains to not be taxed unless taken out. So, again, this allows you some ability to make gifts to your children now and keep benefits for yourself, and allows for deferral of capital gains until they are distributed.
What if your home was vandalized by a group of peaceful protestors
Under the 2017 Tax Act, no deduction for you. Hope you’re insured because until 2023 such a loss is not deductible. I suspect those living in some of these riot zones are going to have a big surprise.
What if you car was destroyed, same result. Personal property is also not subject to a casualty loss for vandalism.
The only casualty losses allowed are for casualty losses from a natural disaster in a federally declared natural disaster. Luckily the Administration has been quite generous in declaring FEMA natural disasters.