Why Traders Should Consider Making the Section 475 Election Before the Tax Deadline

2 min read

The deadline has passed to elect Section 475 MTM for tax year 2020, but it’s still possible to do so for 2021. In this article, we’ll cover the basics about when and how to make the election.

Section 475 Basics

Eligible traders have the option to make a Section 475 election, which allows mark-to-market (MTM) accounting and treatment of trading gains and losses on commodities and securities as ordinary income. Without the election, traders use the cash method of accounting and are taxed on capital gains and losses when they are realized, with losses subject to the $3,000 limitation.

MTM accounting allows traders to offset losses against every type of income, including wages; in years where they have heavy losses, they are not subject to the loss limitations. MTM accounting also works the other way, so if you have large unrealized gains in your positions, then you’ll have to recognize those even though you haven’t liquidated those positions. Another benefit is that it exempts securities trades from wash sale loss adjustments.

Making the election is generally a good idea at the outset of operations or for existing taxpayers who have new losses from trading year-to-date up to the election deadline, giving ordinary loss treatment to these transactions. You can revoke the election in future years subject to certain rules.

Making the Election

Existing individual taxpayers need to file a Section 475 election statement with their return or extension by April 15, 2021. Then a Form 3115 needs to be filed with the 2021 tax return.

Conclusion

The Section 475 election can be a great benefit for active traders; however, the rules are complex so it’s best to consult with your CPA if are considering the election.

Why Traders Should Consider Making the Section 475 Election Before the Tax Deadline

April 1, 2021 · Blog, Guest Article of the Month

2 min read

Section 475 Election The deadline has passed to elect Section 475 MTM for tax year 2020, but it’s still possible to do so for 2021. In this article, we’ll cover the basics about when and how to make the election.

Section 475 Basics

Making the Election

Existing individual taxpayers need to file a Section 475 election statement with their return or extension by April 15, 2021. Then a Form 3115 needs to be filed with the 2021 tax return.

Conclusion

The Section 475 election can be a great benefit for active traders; however, the rules are complex so it’s best to consult with your CPA if are considering the election.

Disclaimer

Tax-Free Student Loan Forgiveness is Part of the Latest Covid-19 Relief Bill

3 min read

The recently passed American Rescue Plan (ARP) Act of 2021 includes a provision making nearly all student loan forgiveness tax-free, at least temporarily. Before the ARP, student loan forgiveness was tax-free only under special programs. Before we look at the changes to come under the ARP, let’s look back at what the previous law provided.

The Old Rules

Under the earlier measure, student loan forgiveness was tax-free under certain circumstances. These special programs included working in certain public sectors, some types of teachers as well as some programs for nurses, doctors, veterinarians, etc. Essentially, you had to work in a specific field under certain conditions for a minimum length of time and some or all your student loans would be forgiven or discharged. There are also other technical qualifications, such as death and disability, closed school, or false certification discharges, but these aren’t widely applicable.

Because student loans are not dischargeable in bankruptcy, income-driven repayment plans were the other main type of program that could result in forgiveness or discharge. Typically, borrowers repaid an amount indexed to their income over a 20-to 25-year period; whatever was leftover at the end was discharged. The forgiven loan amounts under income-driven repayment programs were considered a discharge of indebtedness and tax as ordinary income (although there are exclusions for insolvent taxpayers).

The New Rules

Under the new law in the ARP, the forgiveness of all federal student and parent loans are tax-free. This includes Direct Loans, Family Federal Education Loans (FFEL), Perkins Loans, and federal consolidation loans. Additionally, non-federal loans such as state education loans, institutional loans direct from colleges and universities, and even private student loans also qualify.

The essential criteria for the loan discharge to qualify for tax-free treatment is that it must have been made expressly for post-secondary educational expenses and be insured or guaranteed by the federal government (this includes federal agencies).

This all means that the debt discharged under income-driven forgiveness programs will now be tax-free as well, but there’s a catch. The discharge of student loan debt needs to happen within the next five years because the provision expires at the end of 2025. There could be an extension, but that’s uncertain now.

Why this Change May Really Matter

The change in rules making income-driven student loan forgiveness tax-free isn’t a huge deal for most people. The new law really matters because it sets the stage for broader student loan forgiveness. The program currently being floated by President Biden to forgive $10,000 in student loan debt or the even larger $50,000 proposal by some Senate Democrats will qualify for tax-free treatment.

How Companies Can Become More Nimble During the Product Lifecycle

4 min read

The majority of U.S. industrial product company CFOs have shared concerns that COVID-19 would impact their businesses negatively. For companies that develop and manufacture products, understanding the product lifecycle and how to work around crises like the COVID-19 pandemic can be effective to help improve the longevity and success of companies.

Market Development Stage

According to the Harvard Business Review (HBR), the first stage of the product lifecycle is market development. This normally happens when a company introduces a new product for sale. There is usually little demand at this point; instead, demand has to be cultivated among consumers.

Factors that impact the rate of introduction include the product’s novelty; how practical it is for consumers’ existing problems; and how the new product impacts the demand of existing products. For example, if there’s a proven cure for a chronic medical condition, the product would have a more effective ability to penetrate the market versus an unproven product – be it a medical device, cell phone, etc.

Market Growth Stage

HBR calls the second stage the market growth stage or takeoff stage. When a product is successful, it enters this stage because demand begins to grow exponentially due to consumers expressing interest in the new product.

From there, competitors looking to leverage the “used apple policy” will produce either knock-offs or improved versions of the new product. Businesses competing in this product category begin standing apart – via their product and/or brand. Ongoing adaptation is fluid and contingent based on what competitors are doing, normally through balancing pricing or optimizing distribution channels.

Market Maturity Stage

This stage sees equilibrium in consumer demand. The best way to understand when this is achieved is when the target demographics are consuming the intended products. Competing companies will focus on standing out in the market by providing niche solutions through customer service, comprehensive warranties, etc. Producers are maintaining relationships with distribution outlets for in-store product promotion and shelf space; also, more favorable distribution agreements normally occur during this stage.

Market Decline Stage

This stage is evident when consumers fall out of love with an item and stop buying it. As too much capacity for the product floods the market and fewer and fewer producers survive, businesses might propose mergers for survival.

Ways to Extend the Product Lifecycle

While the Covid-19 pandemic has taught everyone how to live and work as safely as possible, it’s also shown that businesses need to be constantly reviewing how they can make their product lifecycles more agile.

One way to extend the product lifecycle for a new product is by creating a positive, memorable first impression. An unfavorable first experience might create negative repercussions beyond what would be normal.

For example, how the product was delivered to the customer can make an impact on the customer’s experience. HBR gives the example of companies that produce home appliances. If a small, independent network of family-run appliance stores can deliver white glove service for customers (going above and beyond to make a lasting, positive first impression, including implementing COVID-19 safe practices), they can make a positive first impression. This will increase the likelihood of customers wanting to share their good experience with others.

However, when it comes to merchandising the product, using a more segmented distribution channel via independent appliance stores will take a lot more effort compared to larger, corporate resellers with turnkey distribution capabilities.

Another way, especially to be mindful of COVID-19 safety precautions, is to remove the chance for miscommunication. When working remotely and using chat and/or video conferencing tools, it is important to document all processes, including sample layouts and designs, to ensure different departments are on the same page.

Staying in communication with existing and potential clients is crucial for product launches – either new or enhanced versions. Looking at the next 90 days ahead, evaluate how each customer’s business is doing – are they fighting for survival or is it nearly business as usual? If a customer is all-hands-on-deck to get cashflow to stay in business, it might not be the right time for deployment. But if the new product or enhancement can increase efficiency, it might be right to contact them ASAP.

While every product lifecycle is unique, taking steps to become more nimble can potentially make the difference between a company surviving or thriving during a crisis.

Sources

https://www.pwc.com/us/en/library/covid-19/manufacturing-operations-strategy-coronavirus.html

https://www.pwc.com/us/en/library/covid-19/pwc-covid-19-cfo-pulse-survey.html

https://hbr.org/1965/11/exploit-the-product-life-cycle

Roth Conversion in 2021?

4 min read

In 2020, a year when all income brackets benefited from lower tax rates, the stock market took a nosedive at the beginning of the pandemic. For investors sharp enough to see the opportunity, this was an ideal time to convert a traditional IRA into a Roth IRA.

When you conduct a Roth conversion, the assets are taxed at ordinary income tax rates in the year of the conversion. So, the best time to do this is when your current income tax rate is low and when your IRA account balance loses money due to declining market performance. Once you convert the account to a Roth, those assets continue to grow tax free and are no longer subject to taxes when withdrawn later.

If you believe those stocks will rebound, you can direct the traditional and new Roth IRA custodians to move the shares as they are, rather than selling them for cash. Or, if you are converting the entire account and choose to remain with the same brokerage, you can simply instruct the custodian to change the account type. This way you can keep the same investments, pay applicable taxes on the account balance at the time of the conversion, and then never have to pay taxes on future gains.

While the stock market did recover in 2020, many market analysts believe equities are currently overpriced and could experience another correction this year. On top of that, with Democrats now in control of the White House and both houses of Congress, many expect legislation that will increase income taxes, at least among wealthier households.

Therefore, in order to avoid higher taxes on a long-accumulated traditional IRA, 2021 might be a good year to conduct a Roth conversion. The key is to try to time that conversion with a market loss. By conducting a conversion before income taxes increase, you’ll pay a lower rate, and all future earnings can grow tax-free and be distributed tax-free. Bear in mind, too, that a Roth does not mandate required minimum distributions at any age. The full account balance of a Roth has the opportunity to continue growing for the rest of the owner’s life.

A Roth conversion is not the best strategy for everyone. Consider the following scenarios that are not ideal for conversion.

An investor under age 59½ will be assessed a penalty on newly converted Roth funds withdrawn in less than five years, so this might not work for an early retiree who needs immediate income.
If you expect to be in a lower tax bracket during retirement, you should wait until then to pay taxes on distributions of your traditional IRA. Also, if you think you might relocate to a state with lower or no state income tax during retirement, not converting eliminates state taxes on that money entirely.
Watch out for a bump in income taxes on a Roth conversion. You might not want to convert if those assets put you in a higher tax bracket during the year of conversion.
Also note that if you convert after age 65, higher income reported that year could increase premiums for Medicare Part B benefits, as well as taxes on Social Security benefits.
If the non-spousal IRA beneficiary is likely to remain in a lower tax bracket than the owner, he might as well leave the assets in the traditional IRA. Otherwise, the owner will waste more of his estate’s assets to pay taxes on the conversion.
If you don’t have available cash outside the traditional IRA to pay the taxes on the conversion, the money will come out of the account and substantially drop the value. Consider whether or not your investment timeline is long enough to make up for that loss.
If your goal is to leave that IRA money to a charity, don’t bother to convert. Qualified charities are exempt from taxes on donations.

If you’re planning to leave a Roth IRA to your heirs, they also enjoy tax-free distributions as long as that Roth was opened and funded for at least five years before you pass away. This is another reason why it might be better to convert to a Roth IRA sooner rather than later.

3 Best Ways to Save for College

4 min read

What if you could save enough for your child to go to college debt-free? It might sound impossible, but with dedication, hard work, and careful planning, you can do just that. According to Dave Ramsey, American personal finance advisor, here are the top three tax-favored plans to get started.

The Education Savings Account (ESA)

Otherwise known as the Education IRA, this plan allows you to save $2,000 (after tax) per year, per child. Let’s do that math. If you begin saving when your child is born and put away $2,000 a year until they’re 18, you’ll be investing $36,000. Not too shabby. And the good news is that qualified distributions are tax-free, which means you won’t have to pay anything when you withdraw the funds to pay for college. The other upside is, depending on the rate of growth, you’ll earn more than you would in a regular savings account. However, there are some caveats. You can’t contribute if you make more than $110,000 (single) or $220,000 (married filing jointly); the contribution cap is $2,000 a year; and the money must be used by the time your child is 30.

The 529 Plan

If you want to save more for your child’s education or you don’t qualify for the income limits of the ESA, then this might be a better fit because you can contribute up to $300,000, depending on what state you live in. Ramsey recommends you look for a 529 Plan that allows you to choose your investment funds. Also, he says most of the time there aren’t any income restrictions based on your child’s age; however, there are some limits, so choose wisely. This plan also grows tax-free. One thing to note: restrictions may apply if you want to transfer your funds to another child.

The UTMA or UGMA (Uniform Transfer/Gift to Minors Act)

One of the best things about these plans is they’re not just designed to save for education. For example, if your kiddo wants to take a gap year, this can cover living expenses. The account is set up in your child’s name but it’s controlled by a custodian (usually a parent or grandparent). The custodian manages the account until the child is 21 (18 for the UGMA). One of the pluses of this plan is that since the account is owned by the child, the earnings are usually taxed at the child’s rate, which is generally lower than that of the parents. For some people, the savings can be significant. However, there are two important things to know: (1) once your child is of legal age, she can use the funds however she likes (a trip to Europe, a sports car…or college?) and, (2) the beneficiary can’t be changed after selected.

While setting up a college fund is a smart goal, it’s not the only one. Prior to starting down these paths, Ramsey recommends that you consider paying off your mortgage, credit cards, and your own student loans. He also suggests setting up an emergency fund of three to six months and allocating 15 percent of your salary to retirement through a 401(k) and/or a Roth IRA. For more help, he recommends both parents and children read “Debt-Free Degree.” This book walks you through how to go to college without student loans.

Saving for an education might feel completely overwhelming, but if you start early enough, do your homework and create a solid plan, it’s absolutely possible.

Sources

https://www.daveramsey.com/blog/saving-for-college-is-easier-than-you-think

https://www.troweprice.com/personal-investing/accounts/general-investing/ugma-utma.html#:~:text=Because%20money%20placed%20in%20an,this%20savings%20can%20be%20significant.&text=Up%20to%20%241%2C050%20in%20earnings%20tax%2Dfree.&text=Any%20earnings%20over%20%242%2C100%20are%20taxed%20at%20the%20parent’s%20rate

Non-Fungible Tokens and Their Special Taxation

3 min read

Non-fungible tokens (NFTs) have exploded in use and popularity in recent months. NFTs have some special tax considerations to be aware of that can be different than fungible tokens, but before we get into that, let’s look at exactly what NFTs are.

What are NFTs

Economically speaking, fungible assets are those that can be broken down into units and readily interchanged, like cash. For example, you can take a $100 bill and exchange it for five $20 bills nearly anywhere without an issue. Non-fungible assets cannot be exchanged in such as way because they have unique properties that prevent this. Non-fungible assets are things such as houses, a sculpture like Michelangelo’s David or an Andy Warhol painting. There is only one real original.

NFTs are “one-of-a-kind” digital assets that can be thought of as certificates of ownership for virtual assets. They can be bought or sold like any other piece of property, but do not have a tangible form themselves. Similar to cryptocurrencies, a blockchain ledger keeps track of ownership; these records can’t be forged because the ledger is maintained by thousands of computers around the world. They are most often used to prove ownership of an “original” digital art piece.

NFT Tax Basics

Similar to cryptocurrencies like Ethereum or Bitcoin, NFTs are taxable property. The big difference in taxation depends on if you are the creator or an investor.

Creators are taxed when they sell an NFT. If an artist created NFT art and sold it for 4 Ethereum coins worth $3,000 (they are typically traded in cryptocurrencies), then the artist would claim the $3,000 as ordinary income for tax purposes.

Investors are those who buy and sell NFTs. Similar to other trading activities profits, they are subject to capital gains tax rules.

Investor Example

Let’s look at an example of how taxes work for an NFT investor. Assume Jane bought an NFT valued at $3,500 in February 2021 by exchanging 2 Ethereum coins (ETH) she bought a few years ago when they cost $350. At the time of the acquisition of the NFT, Jane would have a long-term capital gain on the exchange of her ETH of $2,800 ($3,500 value of the NFT less her cost basis in the ETH exchanged of $700). Essentially, the exchange of the cryptocurrency triggers taxation of that asset and a new basis is established in the NFT as it’s not really an exchange but a disposal for tax purposes.

Half a year later in July, Jane sells the NFT for $8,500. Here she realizes a short-term capital gain of $5,000 (sale price of the NFT of $8,500 less her basis of $3,500). As with other short-term capital gains, this would be taxed as ordinary income.

Special Circumstances for High-Income Earners

Certain NFTs can be considered “collectibles,” leading to unfavorable tax treatment for high-income earners and subjecting them to a 28 percent tax rate on collectibles versus a 20 percent tax rate on regular long-term capital gains.

How Cloud Accounting Helps Small Businesses Gain Competitive Edge

4 min read

In a continuously changing business environment, small businesses have a challenge to keep up. It’s especially expensive to keep pace with ever changing technology. Luckily, with affordable cloud accounting solutions, small businesses can maintain a competitive edge.

What is Cloud Accounting

Cloud accounting involves moving your business books online. Unlike desktop accounting systems, cloud accounting permits you to access accounting software from a web browser without the need to install it on your personal computer.

Companies that offer cloud computing provide their services on remote servers and applications. For a fee, you gain remote access to the services that fit your business needs.

Cloud Accounting Benefits for a Small Business

Here are benefits offered by cloud accounting that enable small businesses to gain a competitive edge:

No need to invest in expensive software and hardware
With cloud accounting, you need only subscribe to a company offering cloud accounting services. This removes the need to purchase the actual software and necessary hardware. It also means there are no extra costs for maintenance, allowing a business to focus on core business activities.
Save on upgrade costs
Software keeps changing and needs frequent patches and upgrades. This is expensive for a small business running a traditional accounting software, and most end up using outdated software.
Subscribing to cloud accounting means the service provider takes care of the upgrades, and you have access to new features instantly.
No need to hire an in-house accountant or bookkeeper
If your business is small and running on a tight budget, subscribing to a cloud accounting solution will save you the cost of hiring a person for manual accounting and other bookkeeping processes. By connecting the system with your bank account, the transactions will be updated automatically, thereby saving you time and ensuring accuracy.
Easy to scale
With cloud-based services, you can easily scale your business as it grows by adding to the services you subscribe to. At the same time, if your business is experiencing a slowdown and you need to reduce expenses, you can scale down by reducing the number of subscribed services.
Data accessibility
You can easily access your financial status at any time, unlike when you run a traditional desktop accounting system. This is possible from any device that has an internet connection.
Access to various functions, features and support
Cloud accounting enables a small business to have access to different accounting features and functions, such as project estimates, finance, billing, invoicing, tax summary, and stocks, among others. This is because of the ability to select services depending on the needs of your business and your budget.
Enables remote working and collaboration
Cloud accounting allows for remote working, which is especially important with the ongoing COVID-19 pandemic and recommendations to work from home. This enhances collaboration with your team and financial advisor because you can all work on the same system at the same time, regardless of your location. The accountant also needs not go through the trouble of importing client data.
Financial reports
Cloud accounting allows for access to regular reports that include insights about the financial state of your business. This enables a business owner to have an up-to-date picture of how the business is performing anytime, whether at home, at work or on the go.
Data security
Data on the cloud is more secure than data stored on a hard drive, which can be accessed if it is stolen. In the case of a natural disaster, your business productivity is not greatly affected because you can still access your data. This is because it’s the responsibility of the cloud provider to ensure data security, make regular backups, scan servers for vulnerabilities and use the latest technology.

Final Words

Cloud accounting enables small businesses to enjoy business efficiency and increased productivity while reducing costs. Businesses of all sizes, even small ones, have to keep up with changing technology. Any business that wants to maintain a competitive edge has the option to do away with traditional accounting desktop software.

Latest Stimulus Bill Provides More Relief for Americans and the Economy

3 min read

Nearly one year after the COIVD-19 pandemic-driven shut-downs began the shutter the economy, Democrats pushed through another $1.9 trillion stimulus package by narrow margins, with the President set to sign the bill. The legislation is one of President Biden’s first major achievements and contains numerous provisions that impact millions of Americans. Below we’ll look at what’s inside the legislation.

Stimulus Checks

$1,400 stimulus checks are the hallmark of the legislation, but not everyone is eligible. Similar to previous stimulus packages, single taxpayers making $75,000 or less are eligible for the full amount, but the payout completely phases-out once income reaches $80,000. Married couples earning up to $150,000 will receive $2,800, but phase-out once they reach $160,000. These income-based eligibility phase-outs are much more narrow than previous packages. Taxpayers also receive an additional $1,400 per qualifying dependent, which may include college students, disabled adults, and elderly parents.

Unemployment Benefit Extension

The weekly unemployment supplement of $300 is extended through September 6^th, whereas previously, the benefit was set to expire in March. Initially, House Democrats tried to increase the unemployment supplement to $400 per week, but this change didn’t make it into the final legislation.

Child Tax Credits

Previous stimulus packages increased the child tax credit from $2,000 up to $3,000 per child, including a bonus of $600 for children six years old and younger, and made the credit refundable. Making the credit refundable expanded the benefit to millions of low-income families who previously didn’t earn enough to pay enough taxes to take the full credit.

This bill extended these provisions for an additional year through 2021, with some lawmakers looking to make the changes permanent.

Money for State and Local Governments, Schools, Vaccine Distribution, and Others

Money is allocated to help fight the pandemic’s spread and impact, with $7.5 billion earmarked to fund vaccine distribution and $48 billion set aside for contact-tracing and testing efforts. Meanwhile, state and local governments have a fund of $350 billion in aid to help them cover budget shortfalls caused by the pandemic. Schools and universities received a pot of $160 billion for similar operational budget support.

Other economic assistance programs in the legislation include $22 billion for rental assistance, $39 billion for child care, $29 billion for the restaurant industry.

What Didn’t Make it Into the Bill

Initially, Democrats tried to make a $15 per hour minimum wage part of the bill; however, this didn’t make it into the final version. In order to pass the stimulus package, Democrats used a political process call reconciliation, which enabled them to skirt the 60-vote filibuster threshold in the Senate and pass it with a simple majority. However, this maneuver also limited what they could put in the bill.

Multi-employer Pension Plans

Nearly $86 billion is put into a new program, allowing the Pension Benefit Guaranty Corporation to provide assistance to beleaguered multi-employer pension plans. The aim is to ensure retirees continue to receive their pension benefits.

Conclusion and Economic Impact

The bill’s stimulus impact is expected to set the US economy off and running at the fastest growth rate in more than 40 years. The economy is expected to grow 5.95 percent compared to 4.0 percent in the fourth quarter of last year, with increased employment and rising inflation.

The Return of Section 467 Rental Agreements

4 min read

The Tax Reform Act of 1984 enacted a provision that commercial leases need to be tested under Internal Revenue Code section 467. The intent of section 467 is to prevent tax sheltering of income that could arise due to differences between cash and accrual basis income taxpayers by placing both the lessor and lessee on the same revenue and expense recognition terms, thereby eliminating the timing difference between the two accounting methods.

COVID and the Avalanche of Lease Modifications

Section 467 is re-emerging as a hot topic due to the economic fallout of COVID-19. The economic downturn is significantly impacting commercial real estate; especially in the office, retail and industrial sectors as lessors struggle to maintain and attract tenants. Commercial tenants are seeking rent relief and negotiating concessions in an effort to either survive or take advantage of the market conditions. In either case, when these negotiations result in a significant modification of the lease terms, it requires that a new section 467 analysis be performed.

How Section 467 Works

If the changes to the lease arrangement are large enough, section 467 requires the lessee and lessor to use the accrual method, regardless of their regular accounting method. Moreover, if the lease contains significant prepaid rent or deferred rent, the lease could be deemed to constitute a loan agreement forcing the recognition of interest income and expenses.

A contract for the use of tangible property, with increasing or decreasing rents, or deferred or prepaid rents, and total rents exceeding $250,000 is a section 467 rental agreement. The results of a lease modification can vary widely, so let’s dig into an example to see how it works in practice.

Example 1: Lease with Rent Allocations and Payments

Assume we have a five-year lease with rental allocations and payments as follows:

Year 1: Zero rent payment and no rent allocation
Year 2: $150,000 rent allocation, but no rent payments
Year 3: $150,000 rent allocation and $300,000 in payments
Year 4: $150,000 rent allocation and $300,000 in payments
Year 5: $150,000 rent allocation, but no rent payments

Since there is no rent due for year one, the fact that there is no rental payment in year two is not considered deferred rent. Similarly, the rent allocation through the end of year two of $150,000 is less than the rent paid by the end of year three, so there is no deferred rent at this point. Moving into year three, the first payment of $300,000 is not considered pre-paid rent because it is less than the total rental payment allocations through the following year four of $450,000.

On the surface, this lease arrangement appears to skirt the section 467 test; however, that is not the case. Any lease that “specifically allocates” fixed rent can cause a disconnect between the timing of the allocation and actual cash payments, causing section 467 issues. The escalating rent schedule causes this lease to qualify, forcing both the lessor and lessee to use the accrual basis of accounting for the lease, regardless of their respective accounting methods generally applied.

Example 2: Lease with Deferred Rent

As we look at our next example, keep in mind that “deferred rent” under section 467 exists where the cumulative rent allocated at the end of a year is more than the total rent payable at the end of the next year.

Let’s assume a tenant holds an eight-year lease with rental costs of $50,000 per month. Due to COVID-19, they secure a lease modification for a deferral of 24 months’ rent, payable at the end of the lease. In total, $1.2 million in rent has been deferred (24 x $50k) under section 467.

Assume that the landlord recognizes $500,000 in gross rental income under the accrual method. Since the tenant doesn’t need to pay the rent for the first year of deferral, a deemed loan of $600,000 to the tenant is created. The tenant receives a rent expense deduction for $500k (same as the landlord’s take), with the $100,000 in payment deferred treated as imputed interest and recognized over the life of the loan.

Conclusion

The rules around section 467 can be complex, but the important thing to keep in mind is that with the economic impact of COVID-19 causing renegotiations and commercial lease modifications, any substantial changes need to be assessed to see if the new lease terms require any different accounting treatment as a result of section 467.

Securing Jobs for Cabinet and Congress Members, Inspector Generals, and Apprentices – and Honoring Capitol Police Officer Eugene Goodman

3 min read

To provide for an exception to a limitation against appointment of persons as Secretary of Defense within seven years of relief from active duty as a regular commissioned officer of the Armed Forces (HR 35) – Prior to passage of this bill, a former service member could not be appointed as Secretary of Defense until separation from active duty for at least seven years. This legislation allows someone to be appointed after only four years from active duty as a commissioned officer of a regular component of the Armed Forces. The bill was introduced by Rep. Adam Smith (D-WA) on Jan. 15, passed in the House and the Senate on Jan. 22 and signed into law by President Biden on Jan. 22.

Officer Eugene Goodman Congressional Gold Medal Act (S 35) – This act authorizes awarding the Congressional Gold Medal to Capitol Police Officer Eugene Goodman for his actions to protect the Senate chamber during the Capitol security breach on Jan. 6. It passed in the Senate amid a standing ovation. In addition to Officer Goodman’s recent promotion to acting deputy sergeant-at-arms for the Senate, this medal represents the highest honor Congress can bestow. The act was introduced by Sen. Chris Van Hollen (D-MD) on Jan. 22, and passed in the Senate on Feb. 12. The House is also considering plans to honor the officer.

National Apprenticeship Act of 2021 (HR 447) – This bill was introduced by Rep. Robert Scott (D-VA) on Jan. 25. The purpose of the legislation is to amend the 1937 National Apprenticeship Act to include youth apprenticeships, and for other purposes. The legislation authorizes the establishment of criteria for quality standards, apprenticeship agreements and acceptable uses for grant funds awarded under this act. The bill passed in the House on Feb. 5 and is currently in the Senate for consideration.

Inspector General Protection Act (HR 23) – This act requires the president to notify Congress any time an inspector general is placed on nonduty status, and to nominate a new inspector general within 210 days after a vacancy occurs. Otherwise, within 30 days after the end of that period, the president must explain to Congress the reasons why there is not yet a formal nomination, with a target date for making that nomination. The bill was introduced by Rep. Ted Lieu (D-CA) on Jan. 4. It passed in the House on Jan. 5 and is currently under consideration in the Senate.

Regarding consent to assemble outside the seat of government (H.Con.Res. 1) – In light of the disruption of Congressional duties due to the coronavirus, the House passed this concurrent resolution authorizing the Speaker of the House and the Majority Leader of the Senate to assemble the House and the Senate outside the District of Columbia whenever the public interest warrants it. Introduced by Rep. James McGovern (D-MA), this bill was both presented and passed in the House on Jan. 4. It is currently under consideration in the Senate.

Congressional Budget Justification Transparency Act of 2021 (HR 22) – This bill was introduced by Rep. Mike Quigley (D-IL) on Jan. 4 and passed in the House the next day. It would require federal agencies to make budget justification materials accessible to the public on a website managed by the Office of Management and Budget. Available information should include a list of the agencies that submit budget justification materials to Congress and the dates they were submitted, with links to the actual materials. This bill is currently under review in the Senate.

Why Traders Should Consider Making the Section 475 Election Before the Tax Deadline

Tax-Free Student Loan Forgiveness is Part of the Latest Covid-19 Relief Bill

How Companies Can Become More Nimble During the Product Lifecycle

Roth Conversion in 2021?

3 Best Ways to Save for College

Non-Fungible Tokens and Their Special Taxation

How Cloud Accounting Helps Small Businesses Gain Competitive Edge

Latest Stimulus Bill Provides More Relief for Americans and the Economy

The Return of Section 467 Rental Agreements

Securing Jobs for Cabinet and Congress Members, Inspector Generals, and Apprentices – and Honoring Capitol Police Officer Eugene Goodman

Public Accountants

Category: Blog