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September 2020 Client Profile

Allen owns a small construction business and has been self-insuring property and casualty insurance risks using a captive insurance company. Is the IRS planning to crack down on these arrangements?

Businesses are allowed to create their own captive insurance entities to help cover risks that aren’t covered by ordinary business insurance policies. These arrangements are perfectly legal — when structured properly. But some businesses have abused the privilege to avoid paying taxes. The IRS has signaled that it may audit more firms claiming deductions for payments to captive insurance entities.

Remember, the primary purpose of the captive entity must be insurance, not tax avoidance. Premium pricing should be actuarially sound and based on exprected claims. The IRS will look at deductions for premiums paid to captive insurance companies that go years without ever paying a claim. The captive should not invest its float in “loans” to related parties.

Client Profile is based on a hypothetical situation.The solutions we discuss may or may not be appropriate for you.

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2020 Tax Changes

2020 has been a big year for tax law changes. The SECURE Act is the most significant retirement reform law in at least a decade. The CARES Act provided tax breaks designed to help ease the economic burden of the Coronavirus and related shutdowns. These are just a few of the many changes affecting individuals this year:

  • The SECURE Act raised the required minimum distribution requirement (RMD) for traditional IRAs from 70½ to 72 for anyone turning 72 in 2020 or later. Then, the CARES Act suspended RMDs for 2020 without penalty.
  • Traditional IRA owners can now continue to make contributions past the age of 70½.
  • If you were impacted financially by COVID you can take higher than normal distributions from your retirement account this year — up to $100,000 — without penalties. You have three years during which you can pay the income taxes on the distribution or repay the money to the plan. Plan loan repayments are also delayed for one year.
  • Early withdrawal penalties on IRAs and 401(k) distributions of up to $5,000 are also waived for households with a new baby, including adoptions. Income tax is still due.
  • Effective in 2020, non-spousal heirs can no longer stretch IRA distributions over their lifetimes. Instead, funds must be distributed within ten years of the original owners’ death. (Some exceptions apply.)
  • The CARES Act suspended the limit on deductions for cash donations by people who itemize (gifts to donor-advised funds and private nonoperating foundations are excluded). A new “above-the-line” deduction for cash donations of up to $300 is available for nonitemizers.

As we head into the final quarter of 2020, now’s the time to schedule a year-end tax review. Some of these tax opportunities expire at year-end.

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Data Breaches

Industry studies show that data breaches cost small to medium businesses an average of $200,000.* These costs include customer notification, fines, investigation costs, defense attorney fees and the expense of providing affected individuals with a year of identity theft monitoring services after the breach.

Protect Your Business

  • Provide data security training to all employees;
  • Run automatic network virus scans and antivirus software updates;
  • Download the latest operating system and software updates and patches;
  • Purchase data breach insurance and consider cyber liability insurance and technology errors and omissions policies;
  • Purchase umbrella liability coverage as a backstop for data breach insurance and other insurance policies. Umbrella coverage kicks in when the claim is greater than your primary insurance coverage limits and is generally very affordable.

*Hiscox Cyber Readiness Report 2019.

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Is a Roth Conversion Right For You?

Roth IRAs offer many benefits, including federal income tax-free withdrawals, provided you follow the rules. You can convert a traditional IRA to a more flexible Roth IRA, but it will trigger a significant taxable event.

TAXES

Because contributions to a traditional IRA are tax deductible and earnings are tax deferred, you’ll have to pay income taxes on all the funds you transfer in the year you execute the conversion. In a perfect world, you would pay taxes out of pocket, leaving more in your Roth IRA to continue to grow—income tax-free.

SOME DIFFERENCES

Traditional IRAs have required minimum distributions (RMDs) — and paying income taxes on those RMDs — every year after you reach age 72, (age 70½ if you attained age 70½ before 2020).* You have to take RMDs and pay the taxes even if you don’t need the money.

Roth IRAs have no RMD requirement. In general, you can withdraw earnings without penalties or federal taxes as long as you’re 59½ or older and you’ve owned the account for at least five years. (Some exceptions apply.)

WHO SHOULD CONSIDER CONVERTING TO A ROTH IRA?

A Roth IRA may be right for you if:

  • You believe your tax rates will be higher in the future;
  • Your income may be lower than usual this year;
  • Your IRA account value is lower this year, due to the pandemic;
  • You don’t need the money to live on for at least five years;
  • You want to leave the money to your heirs;
  • You are concerned about estate taxes.

WHO SHOULD NOT CONVERT?

A Roth conversion may not be the best strategy if:

  • You will need the money within five years;
  • You’re in a higher tax bracket now than you expect to be in retirement.

Consult your tax and financial professionals before taking action.

*The CARES Act suspended RMDs for 2020.

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September 2020 ClientLine Newsletter

Is a Roth Conversion Right for You? – you can convert a traditional IRA to a more flexible Roth IRA, but it will trigger a significant taxable event.

Data Breaches – industry studies show that data breaches cost small to medium businesses an average of $200k.

2020 Tax Changes – 2020 has been a big year for tax law changes.

September 2020 Client Profile – is the IRS planning to crack down on captive insurance company arrangements?

Open Enrollment Planning – planning ahead can result in savings, a smooth enrollment process and ensures you are offering benefits that help recruit and retain the best talent.

Real Mortgage Costs – well-qualified borrowers may be able to get some very low mortgage rates on both purchases and refinance transactions.

Questions and Answers

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