Stephen Merritt, CPA, PC | Certified Public Accountants | (757) 420-5778
233 Business Park Drive, Suite 104, Virginia Beach, VA 23462
Your monthly news & updates
- SECURE Act and Required Minimum Distributions Proposed by IRS Regulations
- Understanding Equity on the Partnership Balance Sheet
- November Day
- Check Out Our Winner!
- Office Hours
SECURE Act and Required Minimum Distributions Proposed by IRS Regulations
When the SECURE Act went into effect on January 1, 2020, there were many open questions from tax professionals and taxpayers about Required Minimum Distributions (RMDs) and how certain provisions of the new legislation should be treated. Some of the language in a number of the provisions was not defined well or was left open to substantial interpretation. However, earlier this year, the U.S. Department of Treasury released proposed regulations under the SECURE Act, which help to provide a window into the IRS interpretation of this law.
The proposed regulations provided much-needed clarification on a number of SECURE Act provisions. Some of the most notable items include:
- “Eligible Designated Beneficiary” (EDB) Clarifications. One of the most significant changes made by the SECURE Act was the implementation of the 10-Year Rule, which requires most non-spouse beneficiaries to distribute the entirety of their inherited retirement accounts by the end of the tenth year after the decedent’s death. However, some individuals who are EDBs are allowed to “stretch out” post-death RMDs and not conform to the new 10-year payment rules. The regulations further clarify elements of the EDB qualifications, including:
- At what point does a minor child of the IRA owner/retirement plan account holder reach the age of majority? Under previous guidance it was thought that a minor child would reach age of majority based on state law, which could be as late as 26 if the child is still in school. However, these regulations clarify that such minors reach the age of majority on their 21st birthday, so the 10-Year-Rule kicks in at that time.
- What constitutes a disabled beneficiary under the EDB rules? The regulations confirm that the definition of “disability” under IRC Section 72(m)(7) should be used to determine if a beneficiary is an EDB. The individual must be unable to perform any job because of a physical or mental impairment that can be expected to result in death or last indefinitely (or, in the case of a disabled child, the regulations clarify that the beneficiary must have a physical or mental impairment that results in marked or severe functional limitations that are expected to result in death or last indefinitely). Furthermore, the regulations add a “safe harbor” that a beneficiary is considered disabled if they’ve been deemed so by the Social Security Administration.
- Timing of 10-Year-Rule Deadline. For designated non-EDBs, the entire inherited retirement account must be withdrawn in its entirety within 10 years after the death of the IRA owner/retirement plan participant’s death. The regulations make it clear that the deadline is December 31st of the 10th year, not the 10-year anniversary of the date of death.
- Certain Non-EDBs are Subject to Both the 10-Year-Rule and Annual RMDs in Years One Through Nine. To the surprise of some taxpayers and tax practitioners, certain non-EDBs are subject to the annual RMD rule in the years leading up to the 10-year payment deadline. A non-EDB is subject to the annual RMD requirement if the IRA owner/retirement plan participant died after his or her required beginning date (RBD), which is the date by which the first RMD would have been due. The RBD for a traditional IRA owner born before 7/1/1949 is April 1st of the year following the year the owner turns 70.5; if born after 6/30/49, it is April 1st of the year following the year the owner becomes age 72. For a retirement plan participant, the RBD is the later of April 1st of the year the participant turns age 72 or retires from the company offering the plan. If the owner or retirement plan participant died before his or her RBD, there is no annual RMD requirement for the non-EDB – only the 10-year payment rule must be satisfied.
- Trust as Designated Beneficiary/Eligibility for 10-Year Distribution Rule. The regulations clarify that the following requirements must be met in order for a trust to be treated as a designated beneficiary (certain “see-through” trusts):
- The trust is valid under state law
- The trust is irrevocable or will become irrevocable upon the death of the individual who established the trustThe trust beneficiaries are identifiable from the trust document
- A copy of the trust instrument is provided to the IRA trustee or retirement plan administrator
- If the trust meets these four criteria by 9/30 of the year following the year of death of the IRA owner/retirement plan participant, then the trust beneficiaries are considered beneficiaries for computing the post-death RMDs, and the 10-Year Rule applies. However, for trusts that don’t meet these rules, the trust beneficiaries cannot be considered designated beneficiaries, and the existing five-year rule applies instead.
There are many other clarifying details in the Treasury’s proposed regulations, so be sure to review the language to gain additional insight into the various topics covered. While the regulations are still proposed and subject to change, taxpayers are required to take into account a good-faith interpretation of the SECURE Act, so complying with these proposed regulations is an appropriate step in satisfying that requirement.
Understanding Equity on the Partnership Balance Sheet
The equity section of a business’s balance sheet is the most difficult part to understand. The accounts that make up that section vary depending on the type of entity in which the business is structured. In this article, let’s take a look at what the equity section looks like for companies that are organized as partnerships.
The Equity Section
As a reminder, the balance sheet has three major sections: assets, liabilities, and equity. The equity section focuses on the investments that the owners have in the business. For partners, it consists of their capital accounts. The section could look like this:
Partner A Capital $25,000
Partner B Capital $25,000
Partner C Capital $50,000
Each partner has their own Capital account within the equity section of the balance sheet. A partnership with 100 partners will have 100 capital accounts in the equity section. Computing the balance for each partner is where the work comes in.
A partner’s capital account balance is affected by numerous transactions throughout the year as well as current earnings, which are distributed to the partners based on their ownership percentages. Ownership rules and percentages are spelled out in the partnership agreement.
Items Affecting Partners’ Capital
To compute a partner’s capital account balance, here is the basic formula:
Balance at beginning of period
+/- Partner’s share of net income/loss
= Balance at end of period
Contributions to capital includes money that the partner has given the partnership out of their personal assets. Withdrawals are the opposite: this is money that the partner has taken out of the partnership and used for their personal use.
Net income is a bit more involved, with two more steps. First, the sum of the entire partnership’s income and expense accounts must be calculated. This number should be the same number as net profit or loss on the partnership’s income statement, from the beginning of the year to your balance sheet date. Second, the net income must be divided up to calculate each partner’s share based on their ownership percentages. These amounts are then rolled into each partner’s capital accounts.
To make sure the partnership equity section is accurate, good recordkeeping is a must for the partnership as well as each of the individual partners. If we can help you understand more about your partnership, please reach out any time.
Check Out Our Winner!
Congratulations again to Mary!
She guessed the exact amount of Hi-Chew Candy Wrappers in Barb’s Jar!
Everyone here at the office had a great time seeing everyone’s guesses
Here are some Days to Remember in November!
November 1st & 2nd – Día de los Muertos (Day of the Dead)
Día de Muertos is a two day holiday that reunites the living and the dead. Families create Ofrendas (Offerings) to honor their family/friends that have passed. They’re decorated with marigold flowers, photos of the departed and their favorite foods/drinks. Its not a somber day, but celebratory and traditions are different by Country!
November 5th – National Redhead Day
Also known as “Love Your Red Hair Day”, National Redhead Day celebrates redheads! Here are some famous people who had red hair:
Vincent van Gogh, Queen Elizabeth I, Mark Twain, Lucille Ball
The Office has two redheads! Barbara and Vikkie!
November 6th – Daylight Savings Time Ends
Daylight Savings Time ends November 6th at 2 AM! So remember to set your clocks back one hour!
November 10th – U.S. Marine Corps Birthday
November 10th marks the U.S. Marine Corps 247th Birthday in 2022!
Happy Birthday Marines!
November 11th – Veterans Day
Veterans Day honors the military veterans who served in the U.S. Armed Forces. On this Veterans Day, the Stephen Merritt, CPA Office wants to thank and express out gratitude to the men and women who have served our country.
Thank you for your service!
November 24th – Thanksgiving Day
Thanksgiving is observed each year in the U.S. on the fourth Thursday in November. Enjoy your Thanksgiving celebration by sharing a bountiful meal with family and friends!
November 25th – National Native American Heritage Day
On this day, celebrate the rich cultures, accomplishments, contributions and heritage of the different Native American cultures and tribes. Maybe even enjoy some traditional recipes, like:
Three Sisters Soup, Frybread, Buffalo Stew, or Pemmican.
Office Hours: May 2, 2022 – December 2, 2022
Monday – Thursday 8 AM to 5 PM
Coronavirus Disease (COVID-19)
Stephen Merritt, CPA, P.C. understands the challenge the impact COVID-19 has on our community.
Fully-Vaccinated individuals are not required to wear a mask while in our office.
Unvaccinated or not Fully-Vaccinated individuals must wear masks and follow COVID-19 protocol, such as social distancing, while in our office to stop the spread of COVID-19.
Tax documents may be mailed, FAXed, emailed, uploaded to client portal, or dropped off.
Final Returns can be picked up or mailed out.
As always, please call, we are happy to assist.
Stay safe and healthy!