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December Newsletter

 Be Prepared for a Ransomware Attack

Adopt measures to combat infiltration


Cybersecurity remains a prominent concern in the business community. Add this to the growing list: Ransomware. According to recent statistics, ransomware attacks increased 41% in 2019 and caused more than 200,000 businesses to lose access to their files. It is estimated that a business is victimized by a ransomware attack every 14 seconds—or sooner.


Background: Essentially, ransomware is malware designed to prevent you from accessing your computer files until you agree to meet the attacker’s demands, In other words, your computer system is held for ransom. Initially, ransomware perpetrators targeted mostly individuals, but the main focus has lately shifted to attacks against the business sector.


Currently, criminals often request payment in cryptotocurrency, such as Bitcoin. No matter what size or industry, no business is immune.


How does ransomware infect your computer? Typically, someone in your office, or a remote worker who has access to your system, receives an email designed to look like it comes from a reputable business source or a well-known friend or family member. The email seems harmless enough on its face, but it may be booby-trapped with an attachment—like a Word file or a pdf—or a link. 


Once you open the attachment or click on the link, the ransomware does the dirty work.  Then you are at the mercy of the cyber crooks. To add to the threat, the criminals often pose as law enforcement officials or representatives of the IRS, FBI or other agencies to coerce you into paying up.


A similar strain of ransomware involves “malvertising.” As the name implies, this is malicious advertising that can infiltrate your system without any action on your part. For instance, if you are browsing the web and come across a malicious ad, it may infect your computer, even if you do nothing further.


The best defense is a good offense. Consider the following steps for protecting your business interests.


·         Do not automatically click on links or open attachments, Try to verify the authenticity of the source first.


·         If you are uncertain, carefully check the veracity of the source through a contact that has been legitimate in the past (e.g., an email address in your history).


·         Keep up with updates. Install legitimate patches that are sent your way. Ensure that your operating systems and applications reflect the latest changes.


·         Rely on cybersecurity measures. These include firewalls, antivirus software and email filters. Again, install updates you are notified about.


·         Train employees to identify ransomware. One good training method simulates ransomware schemes.


·         Back up your files. Follow procedures for your system. In the event of a ransomware invasion, you may be able to use the back-ups to restore the system without paying the criminals. To be even safer, store back-ups in a secure location outside the office.


Final thoughts: If ransomware infects your computer system, immediately contact an IT expert to take steps to remove the malware and restore your system. But be aware that files will remain decrypted. This serves as a reminder to be proactive about cybersecurity measures.



Last Call for CARES Act Provisions

Seven key tax breaks set to expire


The Coronavirus Aid, Relief, and Economic Security (CARES) Act provides a wide range of tax breaks to both individuals and small businesses. However, unless Congress takes prompt action, most of these tax benefits are scheduled to end after 2020. Following is a roundup of seven tax-related provisions that may go away in 2021.


1. Required minimum distributions: Currently, participants in qualified retirement plans and IRAs are generally required to begin taking required minimum distributions (RMDs) each year after turning age 72 (increased from age 70½, beginning in 2020). This also applies to certain taxpayers who have inherited accounts. Saving grace: The CARES Act suspends the RMD rules—but only for 2020. 


2. Charitable donations: Prior to the CARES Act, you could deduct monetary donations up to a threshold of 60% of your adjusted gross income (AGI). But the CARES Act boosted this limit to 100% of AGI for 2020. Furthermore, the new law creates a $300 deduction in 2020 for charitable donations made by a taxpayer who does not itemize.


3. COVID-19-related distributions: The CARES Act carves out several tax breaks for distributions of up to $100,000 from qualified plans and IRAs made in 2020 due to the COVID-19 outbreak. Consider:  


·         The distributions are exempt from the 10% tax penalty on pre-age 59½ payouts. 


·                 The usual 20% tax withholding on distributions from qualified plans is suspended.


·                 The regular tax liability on distributions may be spread out evenly over three years.


·                 No tax liability results if the entire amount is redeposited in a qualified plan or IRA within three years.


4. Business interest: Previously, business interest was fully deductible, but legislation in 2017 limited the deduction to 30% of adjusted taxable income (ATI) for 2018 through 2025. The CARES Act raised this threshold to 50% of ATI, but only for 2019 and 2020. Key exception: There is no limit for a business with average gross receipts of $25 million ($26 million in 2020) or less for the last three years.


5. Payroll tax deferral: Another CARES Act provision allows an employer to defer the 6.2% Social Security tax normally due for the period of March 27, 2020 through December 31, 2020. But this is a temporary reprieve: The employer must pay 50% of the required amount by the end of 2021 and the other 50% by the end of 2022. 


6. Employee retention credits: Under the CARES Act, an employer can claim an “employee retention credit” (ERC) against the Social Security component of payroll tax for the first $10,000 of wages paid to an employee from March 13, 2020 through December 31, 2020. This credit is available if your business was forced to shut down or suspend operations because of the COVID-19 outbreak. Similarly, a business with reduced gross receipts below 50% of a comparable quarter in 2019 qualifies for the ERC.


7. Retirement plan loans: If you borrowed funds from a qualified plan in 2020, the CARES Act suspends the loan repayment requirements. Currently, loan repayments must resume in 2021. Borrowers have been granted an extra year to repay loans without violating the usual five-year maximum for repayments. Note: Certain other benefits are available for loans made from March 27, 2020 through September 22, 2020.


These are just seven tax breaks scheduled to go off the books after 2020. You may be affected by others. In any event, we will keep a close watch on proceedings in our nation’s capital.



Key Points on Key-Person Insurance

Addressing the needs of your business


Virtually every small business owner will tell you it takes more than one person to build and maintain a profitable operation. In fact, it is likely that several “key employees” have contributed to the success of any given entity. However, while a business owner may be careful to make sure that he or she is adequately insured, the need to protect the business against the loss of key employees is often ignored or disregarded. Mistake!


This is especially troublesome during the national health crisis that has affected small businesses on so many levels. The stakes are even higher than usual. 


Fortunately, there is a relatively painless way to help safeguard your business interests. Appropriately enough, it is commonly referred to as “key‑person” insurance.


Typical situation: A company takes out a life insurance policy on someone whose presence is considered crucial to the business operation. In some cases, the proper insurance protection can mean the difference between solvency and bankruptcy for the business. The life insurance proceeds from the policy could be used for any or all of the following purposes:


·         Finding, hiring, and training someone to take the place of a deceased worker;


·         Paying bills to maintain the company's good credit rating;


·         Paying off business loans, which lenders may call for after the death of an owner/officer; 


·         Making up for the loss of revenue caused by the subsequent disruption to the business; or


·         Paying severance to employees and expenses of closing down a business.


Who should be covered by a key‑person policy? Start with the owner and president of the company (who might also be the founder). The rest of the group depends on the type and size of the business. For example, it may be worthwhile to insure a top salesperson, a creative talent or an indispensable manager.


Are the life insurance premiums tax-deductible? No. However, when the key person dies, the business receives the proceeds of the policy tax‑free. In addition, the life insurance proceeds generally are not part of the key person's estate. But if he or she is the sole or controlling shareholder, the proceeds may be taken into account for determining the value of the stock for estate tax purposes.


Finally, as long as there is a legitimate business reason for the insurance, the business should be able to avoid any accumulated earnings tax problem.


What happens if the key person leaves the firm? Generally, there are three options. The company may (1) sell the ex-employee the policy as a fringe benefit, (2) transfer the policy to another key person or (3) surrender the policy for its cash value.


In summary: With astute planning, you should be able to cover all the insurance needs of the business, including any appropriate life insurance policies. Consider this to be an important aspect of the business planning process.




Can You Salvage a Home Sale Exclusion?

When partial tax exclusion is available


One of the “biggest and best” tax breaks in the tax code is the home sale exclusion. If you qualify, you can exclude tax on the first $250,000 of gain from your principal residence or $500,000 if you file a joint return. But the exclusion is not available if you do not meet certain requirements.


Saving grace: Even if you fall short, you may be eligible for partial tax exclusion permitted for a handful of exceptions. It is important to adhere to these rules.


To qualify for the home sale exclusion, you must have owned and used the home as your principal residence for at least two out of the previous five years. Generally, you cannot claim any exclusion if you do not meet the ownership and use tests or if you claimed the exclusion within the last two years.


However, if you sell the home without meeting the two-year requirement or if you have claimed the exclusion within the last two years, you still may be eligible for a partial exclusion. This tax break is only allowed if you sell the home due to a change in employment, a need for medical care or other unforeseen circumstances.


The IRS has issued regulations defining “unforeseen circumstances” for this purpose. The list includes the following occurrences:


·         Death;

·         Divorce;

·         Loss of employment;

·         A job change that reduces your ability to pay for the home;

·         Multiple births from the same pregnancy;

·         Damage from a disaster; and

·         Taking of property.


If none of these exceptions apply, the IRS will examine the facts and circumstances of the case. The most important factors are whether the home has become less suitable as a principal residence, if your ability to pay for the home has materially decreased and if the reason for the sale could have been reasonably anticipated when you acquired the home.


Note: The IRS has not formally created a special allowance for sales resulting from the COVID-19 outbreak. However, based on past history, it is likely that these sellers would be eligible for the tax break.


How much is the partial exclusion? It is equal to the available exclusion amount (a maximum of $250,000 or $500,000, depending on your filing status) multiplied by the percentage of time for which you qualified.


Example: Say you are a joint filer and you and your spouse have owned and used a home as your principal residence for nine months. Due to unforeseen circumstances, you are forced to move, so you sell the home at a $200,000 gain. Unfortunately, you do not qualify for a $200,000 home sale exclusion because you have not met the two-year requirement.


Nevertheless, you can still salvage a partial exclusion. The appropriate percentage is 37.5% (nine months divided by 24 months). When you multiply $500,000 by 37.5%, the result is $187,500. Thus, you can exclude $187,500 of gain from tax and the remaining $12,500 is taxable as a capital gain.


Reminder: Under current capital gain rules, a capital asset held for a year or less is taxed at ordinary income rates. Any long-term gain is taxed at a maximum 15% rate or 20% for certain high-income taxpayers.



Capital Gains: Timing Is Everything


Are you planning to sell securities at the end of the year to “harvest” a long-term capital gain? Generally, the maximum tax rate on long-term capital gains is 15% (20% for certain upper-income taxpayers).


To qualify as long-term gain, you must have owned the securities for more than one year. For these purposes, the controlling date is generally the trade date, not the settlement date. Therefore, if you acquired securities on December 30, 2019, and sell them at a gain on December 31, 2020, the transaction qualifies as a long-tem gain on your 2020 return.


But there are a few twists to the rules for capital gains and losses. Check with professional advisors to ensure that you will realize the intended tax results.



Facts and Figures

Timely points of particular interest


Scam Alert—Watch out for a new scam identified by the “Security Summit” comprised of the IRS, other agencies and tax community stakeholders. According to recent reports, criminals are trying to trick individuals into revealing their banking information by promising to send them $1,200 economic impact payments (EIPs). The Security Summit cautions taxpayers that legitimate representatives would never ask them to text their banking information to receive EIPs.


Retirement Plan Limits—The IRS recently released new retirement plan limits for 2021 based on cost of living adjustments (COLAs). Generally, the figures are the same as they were for 2020. For instance, the limit on deferrals to a 401(k) plan for 2021 remains $19,500 or $26,000 if you are age 50 older. Similarly, the IRA contribution limit is still $6,000 or $7,000 if you are age 50 or older. Other COLAs for retirement plan provisions resulted in modest changes.  


PPP Loan Forgiveness—Under the Paycheck Protection Program (PPP), loans may be forgiven if certain requirements are met. As opposed to most loans, the forgiveness does not result in taxable income. Accordingly, the IRS recently said that expenses relating to PPP loans are not deductible. Now, under new guidance, if a PPP loan was expected to be forgiven but it is not, a safe-harbor rule provides that the business will be able to deduct those expenses. Additional guidance is expected.


Happy Holidays—A trying year is coming to an end. Looking ahead, our firm would like to wish you and your family a happy holiday season and a healthy and prosperous New Year.