Burcu Bree Manay

The average American homeowner spends more than $1,200 a year on homeowners insurance.

That’s about $100 a month, year after year, for a product most of us will never use. It makes sense to find the lowest rates possible.

But get this: The average homeowners insurance claim pays about $16,000 to fix damage caused by wind, fire, hail, lightning, and other perils.

If you needed to use your policy, you’d want a company that would come through for you. The $50 or $100 you’d saved on premiums this year wouldn’t matter anymore if the policy wouldn’t pay your large claim.

We’ll explore ways to build the best homeowners coverage below. But here are four things to consider when shopping for a new policy:

When to Shop for Homeowners Insurance:

Many people buy home insurance when they buy a house and never shop for it again. But many factors can influence the cost of your homeowners insurance policy. If you have installed a home security system, changed marital status, performed a remodel or (in some states) done something as simple as buying or selling a car or paying down your credit card — it might be the right time to shop for home insurance again.

What Type of Home Insurance Coverage to Buy:

As you shop, consider choosing “replacement cost coverage” instead of “market value coverage” for your policy.

What’s the difference?

• Replacement cost coverage can restore your home to its original condition, even if the repairs exceed the market value of your home.
• Market value coverage (also called actual cash value) factors in changes in property values and construction costs which could lower your claim’s payout. Your policy would protect the dollar value of your investment but not necessarily the integrity of your home.

What Type of Home Insurance Deductible to Choose:

A higher deductible can lower your premium, but you’d have to pay more out of pocket to unlock your policy’s coverage. Since claims will likely impact the cost of your future coverage, lower deductibles may not save you money in the long run. So many insurance shoppers choose higher deductibles and plan to handle smaller issues that may come up “out of pocket.”

Bundle Your Home and Auto Insurance to Save Money:

Consider buying extra coverage for catastrophes not typically covered by standard home insurance policies.

Standard policies won’t cover damage from earthquakes and floods, for example. If you live in an area prone to these perils, consider paying more for this coverage.

Many insurance carriers will also offer lower rates if you bundle your home insurance policy with your auto insurance.

Why Homeowners Insurance Is So Important

“Insurance, generally and as a rule, is a trade-off,” said attorney Etienne Font of Merlin Law Group. Font has three decades of experience handling claim litigation for homeowners insurance.

“You have to determine if the amount of the premium is worth handing the risk over to the other side or if it’s better to keep it.”

Font also points out it’s up to you, the consumer, to find an insurer you can trust to accept your risk.

And risk is out there: With natural disasters on the rise — from wildfires in California to hurricanes and flooding in the Southeast — choosing the right home insurance company to protect your investment has become even more important.

How to Choose the Best Home Insurance Company

As you already know, there’s more to finding the best homeowners insurance than finding the cheapest premiums.

You might save $100 a year on premiums but then lose tens of thousands of dollars if your coverage excluded the very peril that just damaged your home.

“There are certain policies that just have very strange exclusions,” said Font, the insurance attorney we interviewed. “It’s important to ask for an itemized policy statement so you know how that exclusion may affect you and if you should invest in additional coverage.”

It’s also essential to comparison shop. Insurance companies price risk differently and don’t necessarily offer the same discounts across the board — you could get a better rate by switching carriers.

According to the latest research from Statista, 53 % of homeowners don’t shop around for insurance. Even more alarming: About 60 percent of homeowners have underinsured homes.

Yes, comparing insurers and policy options can be time-consuming, but it can pay off big in the long run, especially after you’ve suffered extensive property damage.

While there’s more to the decision, you can start comparison shopping by understanding the different types of homeowners insurance options and what they cover.

Hundreds of companies offer home insurance so we’ve compiled a list of factors to consider as you shop: consumer satisfaction, financial strength ratings, claims processing, and coverage options. These are among the factors we considered when creating our seven best list.

Regardless of which company you choose, read through your homeowners insurance policy carefully to understand your coverage and exclusions.

While this might sound like a simple and unnecessary step, many homeowners have had claims denied after a disaster. Save yourself this trouble and understand your policy before you need to use it.

Coverage Options

Homeowners insurance exists to protect your home investment from losses caused by natural disasters, accidents, fire, and theft.

Most standard policies include four essential types of coverage:

• Dwelling: This central component of your policy covers your home — the wood, stone, concrete, brick structure itself — and anything that’s attached or integrated such as pipes, electrical wires, and major systems.
• Personal Belongings: This part of your coverage protects items unattached to your home including furniture, small appliances, electronics, and books.
• Additional Living Expenses (ALE): You’d use this part of your policy to pay for a hotel or apartment — and possibly meals — while contractors repaired your damaged dwelling.
• Liability Protection: If a visitor to your home got injured and successfully sued you for damages, this protection could prevent losing your property to a court order.

Some policies allow you to protect tenants if you rent out part of your home. Others let you ramp up your personal belongings coverage to include jewelry or other high value items.

For our list, we considered companies with a wide variety of coverage options and protections for total losses and losses exceeding coverage limits. We also looked at add-on coverage options for events such as flooding and discounts for bundling policies.

Claims Processing

An ideal homeowners policy should insulate you from any out-0f-pocket expenses to cover damages or loss.

For this reason, we prioritized insurance companies with a solid overall track record of getting back to their clients quickly as well as companies with hassle-free, 24-hour claims processing.

Solid Financial Standing

With climate catastrophes becoming more common, it’s especially important to seek insurance companies that can weather the storm.

A company with a strong financial outlook should let you avoid headaches like delayed claim payouts down the road.

That’s also why we prioritized insurance marketplaces that work only with financially sound companies — those with high A.M. Best ratings and solid reputations with the National Association of Insurance Commissioners (NAIC).

Consumer Satisfaction

You should feel at home with your insurance company. That includes being informed, getting updated during the claims process, and being treated fairly during a claim settlement.

We checked different consumer review websites such as the National Association of Insurance Commissioners (NAIC) to find out how well companies serve existing customers.

It’s a good sign when organizations answer customer reviews online; it shows they value their clients’ feedback and overall satisfaction.

You can’t always take individual complaints at face value, but customer reviews can help you identify complaint patterns before you decide to commit to a policy or company.

Types of Home Insurance Policies

You’ll see terms like “HO-2” or “HO-3” thrown around when shopping for home insurance.

These terms refer to the different forms of home insurance policies available today. These brief descriptions can help you know which kind of coverage to buy:

Spoiler-alert: Most homeowners will get HO-3 coverage.

HO-1 Insurance

This most basic insurance protects your property against named perils. If the peril isn’t named in your policy, your policy won’t cover it.

Typically, these plans protect you against damage caused by:

• fire or smoke
• lightning
• hail
• wind
• theft
• vandalism
• explosions
• vehicles colliding with your home
• aircraft crashing onto your property
• riots
• volcanoes

HO-2 Insurance

HO-2 coverage is still a named-peril policy, but it names more perils, protecting your property from a broader array of problems.

In addition to the HO-1 named perils, HO-2 typically adds damage from:

• the weight of wintry precipitation
• falling objects
• electrical surges
• water damage from an accidental overflow
• some kinds of spontaneous accidental materials destruction

HO-3 Insurance

Most homeowners have HO-3 coverage which offers an open-peril plan. This means your coverage would protect you against all perils unless your policy’s language specifically excludes the peril.

Earthquakes and floods will commonly be exclusions. Before signing policy documents, make sure you’ve read and understood your policy’s exclusions.

HO-4 Insurance

This is insurance-speak for a renter’s insurance policy. Renter’s policies protect personal belongings and may add in some coverage for additional living expenses and liability. They do not cover the property itself.

HO-5 Insurance

An HO-5 form policy offers an open-peril approach like an HO-3 form. But an HO-5 tends to be even more comprehensive and also more expensive.

HO-6 Insurance

This coverage, designed specifically for condos, stresses personal belongings and liability but limits dwelling coverage since condo owners normally don’t hold full responsibility for maintaining their structures.

HO-7 Insurance

This coverage behaves like an HO-3 form but has specific adjustments for mobile home owners.

HO-8 Insurance

Historic homes whose value lies partly in their unique and hard-to-replicate charm can benefit from this form which resembles an HO-3 but with adjustments to better serve owners of older homes.

Get a Replacement Cost Estimate for Your Home

Do you want Actual Cash Value (ACV) or Replacement Cost Value (RCV) coverage?

The answer could make a huge difference if you had to file a claim.

• Actual Cash Value: Your insurance provider will pay your claims after subtracting an amount based on the age and condition of your home or personal property (depreciation). Your payout will not exceed the market value of your home.
• Replacement Cost: Your insurer will pay the repair or replacement cost of your home or property — without subtracting depreciation costs — using the same kind and quality of materials. Even if repairs exceed the worth of your home, you can claim enough cash to complete them.

You can save on premiums with actual cash value coverage but the payouts on claims may not replace all your lost items or repair all damages sustained.

Replacement cost coverage costs more up front but the payouts will be higher as well, allowing you to cover most if not all expenses for lost or damaged items.

With either style of coverage, knowing the replacement cost of your home and its contents can help you decide how much coverage to buy.

To estimate your replacement costs, do the math yourself, use an online calculator, or hire a professional appraiser.

Take Inventory of Your Belongings

Guessing how much insurance you need can be risky. Instead, take an inventory of your belongings and have a ballpark figure of how much insurance you need as you compare policies.

A home inventory doesn’t have to take all week. Apps like MyStuff or BluePlum Home Inventory can quickly create an itemized list of your possessions.

The Allstate app’s Digital Locker feature allows you to take a quick inventory of your household items. From there, you can estimate each item’s value, so you know how much coverage to buy.

Filing a claim will be much easier when you have an inventory.

Decide How Much Insurance You Need

A quote for standard home insurance is just that: the price you’d pay for a standard policy.

There’s a good chance you’ll need to boost your coverage depending on your home’s individual needs. You can purchase optional add-on insurance, also known as endorsements or riders, to help cover needs specific to your situation.

For example, if you keep expensive items like jewelry, artwork, photography equipment, or antiques in your home, you might need coverage beyond a standard policy’s maximum.

Other common endorsements include coverage against sewer backups, home-based business coverage, and inflation riders that gradually boost the coverage limit over time.

If you’re having trouble estimating your insurance needs an agent could help you find the right level of coverage and the best add-ons.

Consider Additional Coverage for Weather-Related Catastrophes

Your local area can tell you a lot about your insurance needs. Most standard policies cover losses from hail damage and wildfires — but fixing damage from flooding and earthquakes will need extra coverage.

If you live in an earthquake- or flood-prone area, extra coverage for these disasters could be a game-changer for you.

“Anything could go wrong when you least expect it,” said José Gandia, a Puerto Rico-based independent insurance broker with over 20 years of experience.

“It doesn’t matter if you own your house or if you’re still financing it. It’s always a good idea to consider additional insurance to cover a natural disaster or events out of human control [commonly known in the insurance industry as ‘acts of god’].

“In Puerto Rico, many homeowners had paid off their properties and thought that since they sustained a category 5 hurricane, they were in the clear. They didn’t, however, anticipate the devastating damage an earthquake could have.”

Flood insurance is also good to consider, even if you don’t live in a flood plain. According to the Federal Emergency Management Agency (FEMA), over 20 percent of flood claims come from areas not deemed high risk.

Flood insurance works differently from most other home insurance policies: It’s purchased separately through the government’s National Flood Insurance Program. You could still buy it through a broker.

Identify Potential Risks and Take Steps to Reduce Them

Most insurance companies offer discounts to homeowners who take steps to reduce the risk of property damage or loss. Something as simple as installing a home security system or smoke detectors can qualify you for a discount. Evaluate potential risks in your home and neighborhood and take steps to reduce them.

And let your insurance company know about upgrades such as a new roof or new electrical wires. You’ll likely qualify for a discount when you do.

Shop for Quotes

When you know what kind and how much coverage you need, you can shop around for quotes confidently and know you’re making apples-to-apples comparisons.

There are several ways you could go about this.

• The Direct Approach: You can check with each company directly. Though time consuming, this is useful because you might be better able to customize your quote.
• Quicker Comparing: You can also use an insurance marketplace to easily compare multiple policies at once. But the marketplace will show quotes for standard home insurance policies without the additional options you may need for full protection.
• Calling in Help: Another option is to make an appointment with an insurance broker. This might seem more expensive because of the broker’s commission, but the broker may find you better rates. Brokers can also help you figure out exactly how much insurance you need so you can buy just the right amount — which is an often-overlooked avenue for savings.

Choose a Home Insurance Policy Provider

Now it’s time to make the decision. You’ve already compared quotes for your specific needs and filtered out companies with inadequate coverage.

So now you have earned the freedom to choose the cheapest option if you want. However, if other aspects are important to you, make sure to take these into account.

For example, if you’d rather work with a local company or if you value customer service above all else, you may be willing to pay a little more for these features.

Font also says not to rely solely on the information provided by insurance agents as their recommendations could be self-serving.

“They will only tell you what they think will sell you,” said Font. “You should ask for the policy or copy of a standard policy they would issue for your property. They should be able to provide that, and if they don’t – then what are they hiding, right?”

Choose Your Deductible

One of the last decisions you’ll make can have the biggest effect on your premiums and your ability to file a claim: Where should you set your deductible?

Before your insurance company would kick in to repair the damage or replace something, you’d have to pay your part — your deductible.

For example, if a fallen tree does $10,000 worth of damage to your house and your deductible is $500, you’ll need to pay that $500 before your insurance pays the remaining $9,500.

Higher deductibles lower premiums. We advise choosing the highest deductible you could afford. This will save you money on your premium and keep you from being stuck in a difficult financial situation if you needed to file a claim.

And try to keep that deductible tucked away in a savings account you don’t use for everyday expenses. That way, you’ll be less tempted to spend it, it’ll earn interest, and you’ll have the money if you need it.

Review Your Home Insurance Policy Annually

We also recommend looking at your home insurance policy at least once a year to make sure you’re still fully covered. Your insurance needs might change over time as your circumstances change and evolve.

For example, if you’ve made substantial changes such as remodeling the kitchen or a bathroom, check with your insurer to make sure your coverage still fits your home.

Similarly, if you’ve recently taken up an expensive new hobby such as woodworking or photography, make sure your policy covers the new equipment in your home.

Shopping for home insurance doesn’t have to be daunting. A little homework ahead of time — along with learning how to reduce risks and having a clear idea of the amount of coverage you’ll need — will help you choose the insurance company and policy that best fits your needs. Also, if you’re looking for more ways to save on your premium, a home security system is worth adding. Most home insurance companies tend to give discounts if you have a security system in place.

(Source: Money.com)

The SBA has reopened the Economic Injury Disaster Loan (EIDL) and EIDL Advance program portal to all eligible applicants experiencing economic impacts due to COVID-19.

SBA’s EIDL program offers long-term, low interest assistance for a small business or non-profit. These loans can provide vital economic support to help alleviate temporary loss of revenue. EIDL assistance can be used to cover payroll and inventory, pay short-term debt or fund other expenses. The interest rate is 3.75% for small businesses.  The interest rate for non-profits is 2.75%. SBA offers loans with long repayment terms, up to a maximum of 30 years. Plus, the first payment is deferred for one year.

Additionally, the EIDL Advance will provide up to $10,000 ($1,000 per employee) of emergency economic relief to businesses that are currently experiencing temporary difficulties, and these emergency grants do not have to be repaid.

The SBA is also assisting small businesses and non-profits with access to the federal forgivable loan program, the Paycheck Protection Program, which is currently accepting applications until June 30, 2020.

If you need help and guidance with your EIDL or PPP loan applications, Manay CPA, Inc. is here in Atlanta to help and serve you in all 50 states.

If you need our assistance with either the EIDL or PPP loan applications, please contact Manay CPA for a virtual appointment.

Good thoughts for you and your loved ones.

Burcu Bree Manay, CPA, MPAc, CTC
President & Managing Partner

The Paycheck Protection Program Flexibility Act (PPPFA), was signed into law on June 5, 2020. PPPFA extends the time period allowed for businesses to spend Paycheck Protection Program (PPP) loan proceeds and allows loan forgiveness recipients to continue deferring payment of the employer share of the Social Security tax.

When you are self-employed with no employees, the payroll protection program (PPP) program is a COVID-19 gift designed to help you get through this pandemic.

If you now have your PPP funds, we identified nine insights for you.

1. Do I Have to Spend the Paycheck Protection Program (PPP) Loan Proceeds?

Yes, it appears so. The instructions for line 9 of Schedule A for the U.S. Small Business Administration’s (SBA) Form 3508 PPP forgiveness application state:

Line 9: Enter any amounts paid to owners (owner-employees, a self-employed individual, or general partners). This amount is capped at $15,385 (the eight-week equivalent of $100,000 per year) for each individual or the eight-week equivalent of their applicable compensation in 2019, whichever is lower.

Note the word “paid.”

Example: Sam shows 2019 Schedule C net profits of $100,000 and obtains a PPP loan of $20,833. By the SBA interim final rule, his payroll forgiveness amount is $15,385 based solely on his 2019 Schedule C.

Sam maintains both business and personal bank accounts. Sam deposits the $20,833 into his business account. During Sam’s eight-week covered period, he takes $15,385 out of his business account and puts it in his personal account. He has satisfied the “paid” requirement that you see on line 9 of the loan forgiveness application.

2. Should I Put the Loan Proceeds in a Separate Bank Account?

You do not have to. But with a separate bank account from which you use the PPP loan proceeds, you can create a pretty perfect paper trail as to the use of the proceeds.

From a practical standpoint, you should be able to use your existing accounting methods to prove the use of the PPP loan proceeds. But the idea of a separate PPP account and the creation of a “pretty perfect paper trail” has much to say for itself.

3. When Do My Eight Weeks Begin?

According to the latest interim guidance and consistent with SBA Form 3508, with no employees, your eight weeks begin on the date the lender disburses the funds to you.

You would have an alternate date possibility if you had employees on a W-2 payroll.

4. Can I Claim Forgiveness for the Business Interest and Utilities Percentage I Pay for My Home Office?

Yes. When you claim the home-office deduction on your Schedule C, it reduces the net profits from your business. In other words, the home-office deduction is a business deduction.

Under the current loan forgiveness rules, your non-payroll PPP loan forgiveness amount (limited to a maximum of 25 percent of total forgiveness) may include the following during your eight-week covered period:

• interest payments on any business mortgage obligation on real or personal property where such obligation was in place before February 15, 2020 (but not any prepayment or payment of principal);
• payments on business rent obligations on real or personal property under lease agreements in force before February 15, 2020; and
• business utility payments for the distribution of electricity, gas, water, transportation, telephone, or internet access for which service began before February 15, 2020.

To put this in perspective, you need both the home (rented or owned) and the home office in place before February 15, 2020.

5. What Is a Transportation Utility?

We have not seen from the SBA or the Department of the Treasury an official definition of a “transportation utility” with respect to the PPP loan process.

The Federal Highway Administration’s Center for Innovative Finance Support says:

Transportation utility fees are a financing mechanism that treats the transportation system like a utility in which residents and businesses pay fees based on their use of the transportation system rather than taxes based on the value of property they occupy.

The definition above is what we think the SBA and the Department of the Treasury are thinking of.

6. How Does the 75 Percent Work?

When you file Schedule C and have no employees, your minimum loan forgiveness amount under the 75 percent rule is straightforward. Take your Payroll amount and divide by 0.75.

Example 4. Your PPP loan is $20,833. Your deemed Schedule C payroll to yourself is $15,385.

• Your maximum loan forgiveness amount is $15,385 divided by 0.75, or $20,513.
• Your minimum loan forgiveness amount is the 2019 Schedule C payroll component of $15,385, assuming you meet the paid rule as explained above.

Say you meet the paid rule and spend $4,000 on interest and utilities; your loan forgiveness amount is $19,385 ($15,385 + $4,000). You can let the unforgiven $1,448 ($20,833 – $19,385) continue as a 1 percent interest loan for two years from the date of the loan or you can pay it off during this time frame with no prepayment penalties.

7. What If I Have Employees?

With employees, the calculation of how you qualify for your personal portion of loan forgiveness is unchanged.

But you have to make a number of calculations to figure the forgiveness you receive because of your employees.

8. New, Easier PPP Forgiveness

The Paycheck Protection Program Flexibility Act (PPPFA), was signed into law on June 5, 2020 to make it easier for all PPP borrowers to qualify for PPP loan forgiveness. Here are some highlights from this bill:

• Extends the eight weeks to 24 weeks
• Changes the 75 percent rule to 60 percent
• Changes the two years to five years and retains the 1 percent interest rate
• Changes June 30 to December 31
• Adds exemptions that will increase full-time equivalents and that will increase forgiveness amounts
• Will make it easier to obtain forgiveness when you have reductions in your employee levels

9. PPP Money Still Available; Apply Now

As of 5:00 p.m. Eastern Time on Friday, May 29, the SBA had approved 4.3 million PPP loans totaling $510.2 billion.

The Journal of Accountancy reports that a total of $138 billion remained available in PPP funding as of May 23.

That means that there is money available today. If you have not applied, do it now.

If you need our assistance with either the PPP loan or forgiveness, please contact Manay CPA for a virtual appointment.

Good thoughts for you and your loved ones.

Burcu Bree Manay, CPA, MPAc, CTC
President & Managing Partner

To help small businesses, Congress created a lot of new tax-saving provisions due to the COVID-19 pandemic.

Payroll Tax Deferral

You can defer payment of your S corporation’s employer share of Social Security tax on federal tax deposits you would otherwise have to make during the period beginning on March 27, 2020, and ending December 31, 2020.

Your S corporation’s deferred Social Security taxes are due in two installments. You must pay 50 percent by December 31, 2021, and the other 50 percent by December 31, 2022.

If you are an S corporation owner, the S corporation can defer the employer portion of Social Security tax on your salary just as it can on any other employee.

PPP Exception: If your S corporation receives a Paycheck Protection Program (PPP) loan, and it obtains loan forgiveness, it does not qualify for the payroll tax deferral provision.

PPP exception loophole: The PPP loan forgiveness prohibition doesn’t apply until your S corporation receives a decision from your lender on PPP loan forgiveness. Before that date, you can defer payroll taxes even if you apply for and receive a PPP loan.

Example 1: You operate as an S corporation and have three employees, including yourself. Your S corporation’s April payroll is $10,000, including your W-2 salary or wages.

The employer Social Security tax on this payroll is $620. Your S corporation doesn’t have to pay it with its federal tax deposit. Instead, it will pay $310 by December 31, 2021, and the other $310 by December 31, 2022.

Employee Retention Credit

Your S corporation gets a refundable payroll tax credit against the employer share of employment taxes equal to 50 percent of its wages paid to employees after March 12, 2020, and before January 1, 2021.

But the law also states that “rules similar to the rules of sections 51(i)(1) and 280C(a) . . . shall apply.”

Code Section 280C(a) states you can’t deduct wage expenses equal to the employee retention credit you receive—no double dipping.

Code Section 51(i)(1) affects the S corporation shareholder by denying the employee retention credit for wages paid to the following family members of a 50-percent-or-more shareholder:

• A child or a descendant of a child
• A brother, sister, stepbrother, or stepsister
• The father or mother, or an ancestor of either
• A stepfather or stepmother
• A son or daughter of a brother or sister of the taxpayer
• A brother or sister of the father or mother of the taxpayer
• A son-in-law, daughter-in-law, father-in-law, mother-in-law, brother-in-law, or sister-in-law

The provision does not prevent the S corporation owner from taking the employee retention credit on his or her wages, provided that the S corporation otherwise meets one of the following requirements:

• A government order fully or partially suspended your operations during a calendar quarter due to COVID-19.
• Your calendar-quarter gross receipts are less than 50 percent of gross receipts from the same quarter in the prior year.

PPP Exception: If you receive a PPP loan, then you don’t qualify for the employee retention credit.

Example 2: ABC Corporation is an S corporation with four equal owners who each own 25 percent. It has eight employees: the four owners and four children of the owners. A government order partially suspended the business operations. Because no shareholder has 50 percent or more ownership, the wages of all eight employees qualify for the employee retention credit.

Example 3: DEF Corporation is an S corporation that is 100 percent owned by a married couple. It has four employees: the two owners and two children of the owners. A government order partially suspended the business operations. Only the wages of the two owners qualify for the employee retention credit.

Tax-Free Disaster Payments

Congress allows your S corporation to make tax-deductible disaster-related payments to its employees, and those payments are tax-free to its employees.

But as you likely know, S corporation owners usually can’t take advantage of tax-free fringe benefits, and usually have to include their value as taxable income on their W-2.

We have good news about disaster-related payments: none of the guidance issued about these payments denies their favorable tax treatment to the S corporation shareholder. In addition, the IRS doesn’t mention such payments in Publication 15-B, Employer’s Tax Guide to Fringe Benefits.

But we have some bad news, too—there is no guidance explicitly allowing the S corporation owner to take advantage of the tax-free disaster-related payments.

If you choose to have your S corporation provide tax-free disaster-related payments to you, we recommend you implement a formal, written plan and keep excellent documentation—even though such steps are not required by the law.

Example 4: Your S corporation sets up a plan to give every employee a $500 payment to cover telework supplies and ongoing expenses during the COVID-19 pandemic. Your business is subject to a shutdown order, and all 12 of your employees, including you, must work remotely from home.

The $6,000 in payments your S corporation provides is tax-deductible to the corporation and tax-free to the employees, including the S corporation shareholder.

Takeaways

S corporation owners get to benefit from most of the big COVID-19 tax benefits, including:

• Payroll tax deferral
• Employee retention credit
• Tax-free disaster-related payments

If you are wondering how get the big COVID-19 tax benefits, please contact Manay CPA for a virtual appointment.

Good thoughts for you and your loved ones.

Burcu Bree Manay, CPA,MPAc, CTC
President & Managing Partner

 

For many, the financial fallout from the COVID-19 crisis creates a once-in-a-lifetime opportunity to do Roth conversions at an affordable tax cost and also gain insurance against future tax rate increases.

Roth IRAs Have Two Big Tax Advantages

Tax-Free Withdrawals

Unlike withdrawals from a traditional IRA, qualified Roth IRA withdrawals are federal-income-tax-free and usually state-income-tax-free, too.

What is a qualified withdrawal? In general, the tax-free qualified withdrawal is one taken after you meet both of the following requirements:

1. You had at least one Roth IRA open for over five years.
2. You reached age 59½, became disabled, or died.

To meet the five-year requirement, start the clock ticking on the first day of the tax year for which you make your initial contribution to any Roth account. That initial contribution can be a regular annual contribution, or it can be a contribution from converting a traditional IRA into a Roth account.

Example: Five-Year Rule. You opened your first Roth IRA by making a regular annual contribution on April 15, 2017, for your 2016 tax year. The five-year clock started ticking on January 1, 2016 (the first day of your 2016 tax year), even though you did not actually make your initial Roth contribution until April 15, 2017. You meet the five-year requirement on January 1, 2021. From that date forward, as long as you are age 59½ or older on the withdrawal date, you can take federal-income-tax-free Roth IRA withdrawals—including withdrawals from a new Roth IRA established with a 2020 conversion of a traditional IRA.

Exemption from RMD Rules

Unlike with the traditional IRA, you as the original owner of the Roth account don’t have to take annual required minimum distributions (RMDs) from the Roth account after reaching age 72. That’s good, because RMDs taken from a traditional IRA are taxable.

Under those rules, if your surviving spouse is the sole account beneficiary of your Roth IRA, he or she can treat the inherited account as his or her own Roth IRA. That means your surviving spouse can leave the account untouched for as long as he or she lives.

If a non-spouse beneficiary inherits your Roth IRA, he or she can leave it untouched for at least 10 years. As long as an inherited Roth account is kept open, it can keep earning tax-free income and gains.

Silver Lining for Roth Conversions

A Roth conversion is treated as a taxable distribution from your traditional IRA, because you’re deemed to receive a payout from the traditional account with the money then going into the new Roth account.

So, doing a conversion will trigger a bigger federal income tax bill for the conversion year, and maybe a bigger state income tax bill, too. That said, right now might be the best time ever to convert a traditional IRA into a Roth IRA. Here are three reasons why.

1. Current tax rates are low thanks to the TCJA.

Today’s federal income tax rates might be the lowest you’ll see for the rest of your life.

Thanks to the Tax Cuts and Jobs Act (TCJA), rates for 2018-2025 were reduced. The top rate was reduced from 39.6 percent in 2017 to 37 percent for 2018-2025.

But the rates that were in effect before the TCJA are scheduled to come back into play for 2026 and beyond.

2. Your tax rate this year might be lower due to your COVID-19 fallout.

You won’t be alone if your 2020 income takes a hit from the COVID-19 crisis.

If that happens, your marginal federal income tax rate for this year might be lower than what you expected just a short time ago—maybe way lower. A lower marginal rate translates into a lower tax bill if you convert your traditional IRA into a Roth account this year.

But watch out if you convert a traditional IRA with a large balance—say, several hundred thousand dollars or more. Such a conversion would trigger lots of extra taxable income, and you could wind up paying federal income tax at rates of 32, 35, and 37 percent on a big chunk of that extra income.

3. A lower IRA balance due to the stock market decline means a lower conversion tax bill.

Just a short time ago, the U.S. stock market averages were at all-time highs.

Then the COVID-19 crisis happened, and the averages dropped big-time.

Depending on how the money in your traditional IRA was invested, your account might have taken a substantial hit. Nobody likes seeing their IRA balance go south, but a lower balance means a lower tax bill when (if) you convert your traditional IRA into a Roth account.

When the investments in your Roth account recover, you can eventually withdraw the increased account value in the form of federal-income-tax-free qualified Roth IRA withdrawals. If you leave your Roth IRA to your heirs, they can do the same thing.

In contrast, if you keep your account in traditional IRA status, any account value recovery and increase will be treated as high-taxed ordinary income when it is eventually withdrawn.

The Bottom Line

If you do a Roth conversion this year, you will be taxed at today’s “low” rates on the extra income triggered by the conversion.

On the (far bigger) upside, you avoid the potential for higher future tax rates (maybe much higher) on all the post-conversion recovery and future income and gains that will accumulate in your new Roth account.

That’s because qualified Roth withdrawals taken after age 59½ are totally federal-income-tax-free, as long as you’ve had at least one Roth account open for more than five years when withdrawals are taken.

If you leave your Roth IRA to an heir, he or she can take tax-free qualified withdrawals from the inherited account—as long as at least one of your Roth IRAs has been open for more than five years when withdrawals are taken.

If you are wondering how the Roth conversion may benefit you, please contact Manay CPA for a virtual appointment.

Good thoughts for you and your loved ones.

Burcu Bree Manay, CPA,MPAc, CTC
President & Managing Partner

 

It doesn’t matter the industry or the occupation, a furlough can happen to just about anyone.

That’s why it’s important for those dealing with the financial difficulties of a recent coronavirus-driven furlough to know there are a number of ways to try and stay afloat when you’re not receiving your normal pay.

Even if you’re lucky enough to still have your job today, it may be in your best interest to take some proactive steps to plan ahead in the event a furlough, or lay off, impacts you in the near future. Facing the economic uncertainties of a pandemic, it’s entirely possible that you could potentially be the victim of an employment interruption at some point.

Here are seven tips for surviving a furlough in these tough times.

1. See if you’re eligible for unemployment insurance

Take advantage of benefits available through the CARES Act or unemployment insurance benefits. The U.S. Department of Labor has answers to some of your eligibility questions.

Pandemic Unemployment Assistance (PUA) may be an option for those who wouldn’t normally qualify for regular unemployment compensation.

“The Federal supplement to the state unemployment benefits now makes a big difference,” says Mark Meredith, certified financial planner at Meredith Wealth Planning in Maryville, Illinois.

States give an additional $600 weekly payment to eligible individuals receiving other benefits under Federal Pandemic Unemployment Compensation (FPUC).