Are scholarships tax-free or taxable?
COVID-19 is changing the landscape for many schools this fall. But many children and young adults are going back, even if it’s just for online learning, and some parents will be facing tuition bills. If your child has been awarded a scholarship, that’s cause for celebration! But be aware that there may be tax implications.
Scholarships (and fellowships) are generally tax-free for students at elementary, middle and high schools, as well as those attending college, graduate school or accredited vocational schools. It doesn’t matter if the scholarship makes a direct payment to the individual or reduces tuition.
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Avoid “bad blood” among family members: Protect your will from legal challenges
You’ve probably seen it in the movies or on TV: A close-knit family gathers to find out what’s contained in the will of a wealthy patriarch or matriarch. When the terms are revealed, a niece, for example, benefits at the expense her uncle, causing a ruckus. This “bad blood” continues to boil between estranged family members, who won’t even speak to one another.
Unfortunately, a comparable scenario can play out in real life if you don’t make proper provisions. With some planning, you can avoid family disputes or at least minimize the chances of your will being contested by your loved ones.
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IRS relief available for midyear contribution changes to safe harbor 401(k)s
In response to the COVID-19 crisis, the IRS recently issued Notice 2020-52. It offers sponsors of safe harbor 401(k) plans with temporary relief from certain requirements applicable to midyear reductions or suspensions of contributions. The guidance also clarifies the requirements for midyear contribution reductions (during or after the pandemic) that affect only highly compensated employees (HCEs) participating in such plans.
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Drive success with dashboard reports
Timely, relevant financial data is critical to managing a business in today’s unprecedented conditions. Similar to the control panel in a vehicle or machine, dashboard reports provide a real-time snapshot of how your business is performing.
Why you need a dashboard report
Everything in a dashboard report can typically be found elsewhere in the company’s financial reporting systems, just in a less user-friendly format. Rather than report new information, a dashboard report captures the most critical data, based on the nature of the business. It can provide an early warning system for potential problems, allowing you to pivot as needed to minimize losses and jump on emerging opportunities in the marketplace.
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Take advantage of a “stepped-up basis” when you inherit property
If you’re planning your estate, or you’ve recently inherited assets, you may be unsure of the “cost” (or “basis”) for tax purposes.
Fair market value rules
Under the fair market value basis rules (also known as the “step-up and step-down” rules), an heir receives a basis in inherited property equal to its date-of-death value. So, for example, if your grandfather bought ABC Corp. stock in 1935 for $500 and it’s worth $5 million at his death, the basis is stepped up to $5 million in the hands of your grandfather’s heirs — and all of that gain escapes federal income tax forever.
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Fortify your assets against creditors with a trust
You may think of trusts as estate planning tools — vehicles for reducing taxes after your death. While trusts can certainly fill that role, they’re also useful for protecting assets, both now and later. After all, the better protected your assets are, the more you’ll have to pass on to loved ones.
Creditors, former business partners, ex-spouses, “spendthrift” children and tax agencies can all pose risks. Here’s how trusts defend against asset protection challenges.
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External audits offer many benefits to nonprofits
Your nonprofit organization may be required to hire an independent outside CPA to audit its books, depending on its annual gross receipts and other factors. Even when external audits aren’t mandated, however, they’re often recommended. These audits can provide assurance to donors and other stakeholders that your organization is operating with integrity and within acceptable accounting guidelines.
Internal audits
Most nonprofits conduct internal audits on a regular basis, perhaps quarterly or annually. These audits are typically performed by a board member or a member of the organization’s staff. The objective is to review the organization’s financial statements, accounting policies and spending habits.
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Form W-2 reporting of COVID-19-related sick leave and family leave
In Notice 2020-54, the IRS recently provided guidance to employers on Form W-2 reporting of qualified sick leave wages and qualified family leave wages. These are the wages paid to employees under the Families First Coronavirus Response Act.
The guidance requires employers to report the amount of qualified sick leave wages and qualified family leave wages paid to those employees. Doing so enables self-employed individuals who also receive wages or compensation as employees with the information they need to properly claim any qualified sick leave equivalent or qualified family leave equivalent credits for which they’re eligible.
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Why do partners sometimes report more income on tax returns than they receive in cash?
If you’re a partner in a business, you may have come across a situation that gave you pause. In a given year, you may be taxed on more partnership income than was distributed to you from the partnership in which you’re a partner.
Why is this? The answer lies in the way partnerships and partners are taxed. Unlike regular corporations, partnerships aren’t subject to income tax. Instead, each partner is taxed on the partnership’s earnings — whether or not they’re distributed. Similarly, if a partnership has a loss, the loss is passed through to the partners. (However, various rules may prevent a partner from currently using his share of a partnership’s loss to offset other income.)
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Even if no money changes hands, bartering is a taxable transaction
During the COVID-19 pandemic, many small businesses are strapped for cash. They may find it beneficial to barter for goods and services instead of paying cash for them. If your business gets involved in bartering, remember that the fair market value of goods that you receive in bartering is taxable income. And if you exchange services with another business, the transaction results in taxable income for both parties.
For example, if a computer consultant agrees to exchange services with an advertising agency, both parties are taxed on the fair market value of the services received. This is the amount they would normally charge for the same services. If the parties agree to the value of the services in advance, that will be considered the fair market value unless there is contrary evidence.
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Businesses: Get ready for the new Form 1099-NEC
There’s a new IRS form for business taxpayers that pay or receive nonemployee compensation.
Beginning with tax year 2020, payers must complete Form 1099-NEC, Nonemployee Compensation, to report any payment of $600 or more to a payee.
Why the new form?
Prior to 2020, Form 1099-MISC was filed to report payments totaling at least $600 in a calendar year for services performed in a trade or business by someone who isn’t treated as an employee. These payments are referred to as nonemployee compensation (NEC) and the payment amount was reported in box 7.
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Communicate carefully about compensation during the pandemic
The COVID-19 pandemic and resulting economic fallout have spurred layoffs and furloughs for many employers. As the months pass, organizations that have retained employees face another dilemma: How should we handle compensation changes?
Pay raises have been out of the question for some organizations. In fact, more than 25% of employers surveyed in June by global advisory firm Willis Towers Watson reported reducing salaries rather than increasing them. However you handle compensation this year, it’s critical to communicate clearly and carefully with employees.
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Reopening concepts: What business owners should consider
A widely circulated article about the COVID-19 pandemic, written by author Tomas Pueyo in March, described efforts to cope with the crisis as “the hammer and the dance.” The hammer was the abrupt shutdown of most businesses and institutions; the dance is the slow reopening of them — figuratively tiptoeing out to see whether day-to-day life can return to some semblance of normality without a dangerous uptick in infections.
Many business owners are now engaged in the dance. “Reopening” a company, even if it was never completely closed, involves grappling with a variety of concepts. This is a new kind of strategic planning that will test your patience and savvy but may also lead to a safer, leaner and better-informed business.
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IRS guidance on “coronavirus-related” retirement plan distributions
In Notice 2020-50, the IRS recently provided guidance on “coronavirus-related distributions” from retirement plans under Section 2202 of the Coronavirus Aid, Relief, and Economic Security (CARES) Act. Here are some pertinent details for employers.
Pension plans
The Notice points out that Sec. 2202 doesn’t change the rules for when plan distributions are permitted to be made from employer retirement plans. Thus, a qualified pension plan isn’t permitted to make a distribution before an otherwise permitted distributable event merely because the distribution, if made, would qualify as coronavirus-related.
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6 key IT questions to ask in the new normal
The sudden shutdown of the economy in March because of the COVID-19 pandemic forced many businesses to rely more heavily on technology. Some companies fared better than others.
Many businesses that had been taking an informal approach to IT strategy discovered their systems weren’t as robust and scalable as they’d hoped. Some may have lost ground competitively as fires were put out and employees got back up to speed in an altered working environment.
To keep your approach to technology relevant, you’ve got to regularly reassess processes and assets. Doing so is even more important in the new normal. Here are six key questions to ask:
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