Month: June 2020

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What qualifies as a “coronavirus-related distribution” from a retirement plan?

As potentially heard, the Coronavirus Aid, Relief and Economic Security (CARES) Act allows for “qualified” people to obtain certain “coronavirus-related distributions” from their retirement plans without the necessity of paying tax.

So how does someone qualify? Rather, what’s a coronavirus-related distribution?

Early distribution basics

Generally, withdrawing money from an IRA or eligible retirement plan before you reach age 59½, necessitates a 10% early withdrawal tax in addition to any tax you may owe on the income from the withdrawal. This rule, however, exists with several exceptions. For example, if you become totally and permanently disabled or if you use the money to pay qualified higher education costs or medical expenses, you don’t owe the additional 10% tax.

New exception

In virtue of the CARES Act, you are able to take up to $100,000 in coronavirus-related distributions made from an eligible retirement plan between January 1 and December 30, 2020. These coronavirus-related distributions are not subject to the 10% additional tax that otherwise would generally apply to distributions made before you reach age 59½.

More so, a coronavirus-related distribution can be included in income in installments over a period of three years, and you have an additional three years to repay it to an IRA or plan. If you recontribute the distribution back into your IRA or plan within three years of the withdrawal date, you are able to treat the withdrawal and later recontribution as a totally tax-free rollover.

In new guidance (Notice 2020-50) the IRS spells out who qualifies to take a coronavirus-related distribution. A qualified individual is someone who:

  • Is diagnosed (or whose spouse or dependent is diagnosed) with COVID-19 after taking a test approved for administration by the Centers for Disease Control and Prevention (including a test authorized under the Federal Food, Drug, and Cosmetic Act); or
  • Experiences adverse financial consequences or ramifications as a result of certain events. To qualify under this test, the individual (or his or her spouse or member of his or her household sharing his or her principal residence) must:
    • Be quarantined, be furloughed or laid off, or have work hours reduced due to COVID-19;
    • Be rendered unable to work due to a lack of childcare due to COVID-19;
    • Experience a business that he or she owns or operates due to COVID-19 shut down or have reduced hours;
    • Have pay or self-employment income reduced because of COVID-19; or
    • Have a job offer rescinded or start date for a job delayed due to COVID-19.

Favorable rules

As you can see, the rules allow many people — though not everybody — to take retirement plan distributions under the new exception. If you decide to take advantage of it, be sure to keep good records to show that you qualify. Be careful: You’ll be taxed on the coronavirus-related distribution amount that you don’t recontribute within the three-year window; however, you won’t have to worry about owing the 10% early withdrawal penalty if you’re under 59½. Other rules and restrictions may potentially apply. Contact us if you have questions or need assistance.

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If you’re selling your home, don’t forget about taxes


Conventionally, spring and summer are popular times for selling a home. Unfortunately, the COVID-19 crisis has resulted in a slowdown in sales. The National Association of Realtors (NAR) reports that existing home sales in April decreased year-over-year, 17.2% from a year ago. One bit of good news is that home prices are up. The median existing-home price in April was $286,800, up 7.4% from April 2019, by word of the NAR.

If you’re planning to sell your home this year, it’s a good time to review the tax considerations.

Some gain is excluded

If you’re selling your principal residence, and you meet certain requirements, you are able to exclude up to $250,000 ($500,000 for joint filers) of gain. Gain that is sufficient for the exclusion is also excluded from the 3.8% net investment income tax.

To be eligible for the exclusion, you must meet these tests:

  • The ownership test. You must have owned the property for at least two years during the five-year period ending on the sale date; or
  • The use test. You must have used the property as a principal residence for at least two years during the same five-year period. (Periods of ownership and use don’t need to overlap.)

In addition, you can’t use the exclusion more than once every two years.

Larger gains

What if you have more than $250,000/$500,000 of profit when selling your home? Any gain that isn’t sufficient for the exclusion generally will be taxed at your long-term capital gains rate, provided you have owned the home for at least a year. If you didn’t, the gain will be considered short term and subject to your ordinary-income rate, which could be more than double your long-term rate.

Here are two other tax considerations when selling a home:

  1. Keep track of your basis. To support an accurate and precise tax basis, be sure to maintain complete records, including information on your original cost and later on improvements, reduced by any casualty losses and depreciation claimed based on business use.
  2. Be aware that you can’t deduct a loss. If you sell your principal residence at a loss, it isn’t generally deductible. But if a portion of your home is rented out or used exclusively for your business, the loss that can be traced back to that part may be deductible.

If you’re selling a second home (for example, a beach house), it won’t be appropriate for the gain exclusion. However, if it qualifies as a rental property, it can be considered a business asset, and you may be able to defer tax on any gains through an installment sale or a Section 1031 like-kind exchange. In addition, you may be able to deduct a loss.

For many people, their homes are their most valuable asset. So before selling yours, make sure you are fully aware of the tax implications. We can help you plan ahead to lessen taxes and answer any questions you have about your home sale.

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How to treat business start-up expenses on your tax return?

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While the COVID-19 crisis has devastated many existing businesses, the pandemic has also created opportunities for entrepreneurs to launch new businesses. For example, some businesses are being launched online to provide products and services to people staying at home.

Entrepreneurs often don’t know that many expenses incurred by start-ups can’t be currently deducted. You should be aware that the way you handle some of your initial expenses can make a large difference in your tax bill.

How expenses must be handled

If you’re starting or planning a new enterprise, keep these key points in mind:

  • Start-up costs include those incurred or paid while creating an active trade or business — or investigating the creation or acquisition of one.
  • Under the Internal Revenue Code, taxpayers can elect to deduct up to $5,000 of business start-up and $5,000 of organizational costs in the year the business begins. As you know, $5,000 doesn’t get you very far today! And the $5,000 deduction is reduced dollar-for-dollar by the amount by which your total start-up or organizational costs exceed $50,000. Any remaining costs must be amortized over 180 months on a straight-line basis.
  • No deductions or amortization deductions are allowed until the year when “active conduct” of your new business begins. Generally, that means the year when the business has all the pieces in place to begin earning revenue. To determine if a taxpayer meets this test, the IRS and courts generally ask questions such as: Did the taxpayer undertake the activity intending to earn a profit? Was the taxpayer regularly and actively involved? Did the activity actually begin?

Expenses that qualify

In general, start-up expenses include all amounts you spend to:

  • Investigate the creation or acquisition of a business,
  • Create a business, or
  • Engage in a for-profit activity in anticipation of that activity becoming an active business.

To be eligible for the election, an expense also must be one that would be deductible if it were incurred after a business began. One example is money you spend analyzing potential markets for a new product or service.

To qualify as an “organization expense,” the expenditure must be related to creating a corporation or partnership. Some examples of organization expenses are legal and accounting fees for services related to organizing a new business and filing fees paid to the state of incorporation.

Thinking ahead 

If you have start-up expenses that you’d like to deduct this year, you need to decide whether to take the elections described above. Recordkeeping is critical. Contact us about your start-up plans. We can help with the tax and other aspects of your new business.