The purpose of this memo is to discuss California Proposition 19, which is also referred to as The Home Protection for Seniors, Severely Disabled, Families, and Victims of Wildfire or Natural Disasters Act. This measure was approved by California voters in November 2020. This memo will provide an explanation of the new Proposition and compare it to the existing law. Additionally, the memo contains a list of topics to consider as a result of the passage of this new law.
Analysis – Existing Law (ARTICLE XIII A of the California Constitution)
The existing law is under Proposition 13 which was passed in 1978. Under this law, the following was true:
Property tax is limited to 1% of a home’s taxable value, based on when the home was purchased, and thereafter, the appraised value of the property when purchased, newly constructed, or a change in ownership occurs, subject to an annual inflation adjustment not to exceed 2%.
For taxpayers 55 years or older or any severely and permanently disabled person residing in the property eligible for the homeowner’s exemption, they can transfer the base year value of that property to a replacement dwelling of equal or lesser value located in the same county, or another county that has adopted an ordinance allowing base years value transfers from other counties, as provided. Eligible taxpayers were able to utilize this one time.
The purchase or transfer of the principal residence, and the first $1,000,000 of other real property, of a transferor in the case of a transfer between parents and their children, or between grandparents and their grandchildren if all the parents of those grandchildren are deceased, is not a “purchase” or “change in ownership” for purposes of determining the “full cash value” of the property for taxation. Additionally, there is a restriction on how much that taxable value can go up each year, even if a home’s market value increases much more.
Analysis – New Tax Law (Assembly Constitutional Amendment No. 11)
Proposition 19 changes the existing law in the following ways:
Homeowners who are 55 or older or who have lost a home in a natural disaster can now transfer their tax assessment from their previous home to a new more expensive home. This can be done up to three times, instead of the previous one-time allowance.
The measure eliminates the exclusion for reassessment when a house transfers to a child or a grandchild. The child or grandchild must actually use the residence as their primary residence to avoid reassessment. Previously, there was no requirement for the inheritor to utilize the house as their primary residence.
Topics to Consider
Who does this help and how?
CA proposition 19 benefits homeowners who are 55 years old or older. When they move to a new and more expensive residence, they can blend the taxable value of their old house with the purchase price of a new, more expensive home, reducing the property tax payment they would otherwise face. This benefit would also extend to disabled taxpayers and taxpayers who have lost their homes in wildfires or other natural disasters.
“For example, a qualifying homeowner who owns a home with a taxable value of $200,000 that is worth $600,000 on the market would pay roughly $2,200 in property taxes now. If the homeowner moves to a $700,000 house, the homeowner will pay $3,300 a year in property taxes under Proposition 19. Without the initiative, the same homeowner would pay $7,700 annually at the new home.” (LA Times)
Based on the example provided by the LA Times, a qualifying homeowner who owns a home with a taxable value of $200,000 that is worth $600,000 on the market would pay roughly $2,200 in property taxes now. If they move to a $400,000 house, it would be expected that if the new home is less than the $600,000 market value of the old home, then the property taxes would be unchanged.
Who does this hurt?
The group of people who would be hurt by proposition 19 are the children who will inherit the properties from their families and intend to rent it out or keep it as a second home. If the child or grandchild that inherited the property does not utilize the property as their primary residence, the property tax will be reassessed based on the market value and thus the children or grandchildren would lose the ability to retain the tax basis that was based on the original purchase price.
Are there any exceptions?
As we discussed above, for the children who will inherit the properties from their families and intend to rent it out or keep it as a second home, the properties will be reassessed, and the tax base would go up based on the market value consequently. However, Prop 19 does not change any of the ownership rules for properties owned by legal entities, which generally provide that legal entity interests can be transferred from current owners to new owners without triggering a reassessment, subject only to the change in control rule and cumulative ownership rules. This legal entity rule is sometimes referred to as “The Dell Maneuver” because Michael Dell purchased the Fairmont Miramar Hotel in Santa Monica without triggering a reassessment. It should be noted that there are regular attempts to close off the Dell Maneuver legislatively, but none have succeeded to date. Accordingly, individual owners would therefore have an incentive to transfer their property to a legal entity to avoid future reassessment.
Important Date
The deadline to transfer real properties without triggering the new reassessment rules under Prop 19 is February 15, 2021.
Generally, your estate attorney or attorney will be able to advise you in these matters. We recommend you speak with your legal counsel if you desire to implement any changes related to Prop 19.
On December 15, 2020, two bipartisan COVID-19 relief bills, the Bipartisan COVID-19 Emergency Relief Act of 2020 and the Bipartisan State and Local Support and Small Business Protection Act of 2020, were introduced that contain payroll-related provisions.
Background. Earlier in 2020, the federal government enacted legislation with COVID-19 relief provisions aimed at helping employers and workers. This included the Families First Coronavirus Relief Act (FFCRA) and the Coronavirus Aid, Relief and Economic Security (CARES) Act. Certain provisions in each bill provided aid for employers and workers such as the Paycheck Protection Program (PPP) and Pandemic Unemployment Assistance (PUA).
Negotiations for further COVID-19 relief legislation between the White House, Senate and Congress have stalled several times.
A new hope? However, the two bipartisan bills introduced in the Senate on December 15 may make it to the finish line before the end of the year based on the statements made by Senators who introduced the bills. According to Senator Joe Manchin (D-WV), who introduced “The Bipartisan COVID-19 Emergency Relief Act of 2020,” with other Senators: “We’re not going home for Christmas until this gets done.”
Senator Mitt Romney (R-UT) who, with other Senators, introduced “The Bipartisan State and Local Support and Small Business Protection Act of 2020,” noted: “This compromise represents the best path forward for Congress and the Administration to provide much-needed relief for the American people before the end of the year.” Senator Rob Portman (R-OH) added: “The Senate should not adjourn until we have passed a new COVID-19 package to provide the relief Americans need.” The Bipartisan COVID-19 Emergency Relief Act of 2020. A summary of The Bipartisan COVID-19 Emergency Relief Act of 2020 says it contains the following payroll-related provisions:
PPP and small business support.This bill would provide $300 million to the Small Business Administration (SBA) to allow the hardest hit small businesses to receive a second forgivable PPP loan. Eligibility for these loans would be limited to businesses with 300 or fewer employees that have sustained a 30% revenue loss in any quarter in 2020.
Forgivable expenses would be expanded to include supplier costs and investments in facility modifications and personal protective equipment needed to operate safely. Also, business expenses paid for with the proceeds of PPP loans are specifically tax deductible, “consistent with Congressional intent in the CARES Act,” according to the summary.
In addition, the loan forgiveness process would be simplified for borrowers with PPP loans of $150,000 or less.
Unemployment assistance. The bill would also provide for a 16 week extension of all pandemic unemployment insurance programs, including PUA and pandemic emergency unemployment compensation (PEUC). The 16 weeks would run from the end of December 2020. It would also ensure beneficiaries of Railroad Retirement Board received the same benefits as other workers.
In addition, federal supplemental unemployment insurance benefits would be expanded by $300 per week for 16 weeks, from the end of December into April 2021.
Payroll support program extension. The bill would extend the Payroll Support Program (PSP) through March 31, 2021. As in the CARES Act, funds will go directly to frontline aviation workers’ wages, salaries, and benefits. The Bipartisan State and Local Support and Small Business Protection Act of 2020. A summary of The Bipartisan State and Local Support and Small Business Protection Act of 2020 says it contains the following payroll-related provisions:
State, local and tribal government relief. This bill would provide for $160 billion for state, local and tribal assistance. And, would extend the deadline for spending CARES Act Coronavirus Relief Fund (CRF) aid on COVID-related expenses through December 31, 2021.
Liability protection. This bill would also provide “liability protection” for employers. Employers would not be subject to liability under federal employment law in COVID-19 exposure cases or for changes in working conditions related to COVID-19 if the employer was trying to conform to public health standards and guidance.
The bill would also ensure that an employer’s personal protective equipment (PPE) requirements, COVID-19 policies, procedures, or training, workplace testing, or financial assistance to an independent contractor does not create evidence of an employer-employee relationship.
The Tax Cuts and Jobs Acts (TCJA) limited the individual tax deduction of state and local taxes (SALT) to $10,000 for married filing joint and $5,000 for married fling separate, or single. We feel this limitation was done to offset tax reductions done to spur the US economy. This limitation hurt and increased income taxes for taxpayers that are residents in states with high taxes. Taxpayers and states have been looking for a method of getting around this tax deduction limitation. Various ideas have failed, but the IRS recently issued IRS Notice 2020-75 which provides some hope. In the notice the IRS is explaining that if a state makes a flow through entity (an S Corporation or Partnership) liable for the income tax, rather than the shareholders or partners, and the entity pays it, then that state tax is not limited. Many states have been looking for a way to help their residence, and the IRS has explained a way, but why hasn’t more states implemented this change if they really want to help their residence? Currently only seven (7) states have made this change.
Scope
The purpose of this memo is to discuss Notice 2020-75 issued by Internal Revenue Service (IRS) on November 9, 2020, which allows state and local income taxes imposed on and paid by partnerships or S Corporations in computing its non-separately stated taxable income or loss for the taxable year of payment and are not subject to SALT limitation.
Background
Tax Cuts and Job Acts (TCJA) limits the individual deduction of SALT to $10,000 (or $5,000 for married filing separately) for tax years 2018-2025. Due to this limitation, the notice cited that certain jurisdictions have enacted or contemplating to enact tax laws that impose either a mandatory or elective entity-level income tax on partnerships and S Corporations that do business in the jurisdiction or have income derived from or connected with sources within the jurisdiction. The notice pointed out that “certain jurisdictions provide a corresponding offsetting, owner-level tax benefit, such as full or partial credit, deduction, or exclusion” for taxes deducted at the Pass-Through Entity (PTE) level and that Treasury and IRS are “aware of the uncertainty as to whether entity level-payments made under these laws to jurisdictions described in §164(b)(2) other than U.S. territories must be taken into account in applying the SALT deduction limitation at the owner level”.
The notice also announced the IRS’s intention to issue a proposed regulation to provide clarity to individual owners of partnerships and S Corporations in calculating their SALT deduction limitations and clarify the Specified Income Tax Payments which are deductible by partnerships and S Corporations in computing their non-separately stated income or loss.
Discussion/Analysis
Reporting of Deduction in the Partnership or S Corporation Tax Return
Based on the notice, SALT does not need to be separately stated. Thus, it would be expected that the deduction will be reported under “Taxes and Licenses” on Form 1065 or 1120S and will flow-through to partners/shareholders as part of Box 1 “ordinary income or loss” on Schedule K-1.
Deductibility of the SALT
As mentioned in the notice, there are “certain jurisdictions” that shifted the individual tax to entity-level tax to “workaround” from the SALT limitation under TCJA and below are the states that imposes entity-level income tax which is referred to as a “Specified Income Tax Payment”:
Connecticut – effective January 1, 2018
Louisiana – election to be made
Maryland – imposed to the distributive shares or pro rata shares of resident members of the PTE
New Jersey – effective January 1, 2020, election to be made
Oklahoma – effective January 1, 2019, needs annual election
Rhode Island – effective January 1, 2019, election to be made
Wisconsin – effective January 1, 2019 for person or persons holding more than 50% of capital and profits of a partnership
According to the notice, if a partnership or an S Corporation makes a Specified Income Tax Payment during the taxable year, the partnership or S Corporation is allowed a deduction for the Specified Income Tax Payment in computing its taxable income for the taxable year in which the payment is made.
The impending proposed regulations defined “Specified Income Tax Payments” as any amount paid by a partnership or an S Corporation to a State, a political subdivision of a State or the District of Columbia (Domestic Jurisdiction) to satisfy its liability for income taxes imposed by the Domestic Jurisdiction on the partnership or S Corporation, meaning, it will solely include the state and local taxes paid under Sec. 164(b)(2) but excluding taxes paid or accrued to foreign countries and U.S. territories under Sec. 703(a)(2)(B) and Sec. 1363(b)(2).
Effectivity Date of the Deduction
Based on the notice, the forthcoming Proposed Regulations will apply to payments on or after November 9, 2020, but taxpayers are also permitted to apply the rules to payments made in a partnership or S Corporation tax year ending after December 31, 2017 and before November 9, 2020.
Notes/Comments
This is a taxpayer friendly decision made by IRS. It is expected that other states, particularly those that impose high personal income tax rates on residents that are disproportionately affected by the $10,000 SALT deduction cap may enact similar laws in response to IRS guidance.
Currently, California and many other high tax states have not made this beneficial change. If you live in a state with high income taxes, I suggest you contact them.
Individual states and every individual have unique tax calculations and applications of tax laws, so please contact us if you have questions.
The Security Summit, a coalition of the IRS, state tax agencies, and the private sector tax industry, is warning taxpayers about a new text scam that tricks people into disclosing bank account information under the guise of receiving the $1,200 Economic Impact Payment (EIP).
The text message states: “You have received a direct deposit of $1,200 from COVID-19 TREAS FUND. Further action is required to accept this payment into your account. Continue here to accept this payment” This is followed by a link to a fake phishing web address. The IRS reminds taxpayers that it will never send texts asking for bank account information. Those targeted by the scam should take a screen shot of the text message and email it to [email protected] with the (1) date, time, and time zone that they received the message; (2) the number that appeared on their caller ID; and (3) the number that received the text message.
News Release IR 2020-249.
If you receive any notice like this, please contact us to discuss if we can be of assistance.
In a recent Chief Counsel Advice (CCA), the IRS concluded that the entry fee to participate in a Daily Fantasy Sports (DFS) contest constitutes an amount paid for a wagering transaction under IRC Sec. 165(d). The IRS noted that DFS transactions meet the definition of wager , as interpreted by the Tax Court and state courts, because (1) there is an uncertain event (such as the live performance of individual players), (2) winnings if the event resolves in the participant’s favor, and (3) consideration is lost if the event does not resolve in the participant’s favor. According to the IRS, DFS transactions are similar to poker and other wagers in which a player’s skill is a component of the game, but does not dictate the outcome. CCA 202042015.
The California Democrats have proposed a significant tax hike on taxable income of $1 million and higher. Legislators say the tax hike would raise more than $6 billion a year to help K-12 schools and government services hurt by the coronavirus pandemic. I don’t know about your, but I have heard many times in the past that additional taxes and fees were going to the schools, for example the Lottery proceeds were supposed to go to the school, but what they didn’t’ communicate was they were taking away existing funding, and replacing it with Lottery. In California we pay one of the highest state income taxes, sales tax, and gas tax. I personally feel as a CPA and business owner, we the people need to tell our representatives, NO MORE TAXES and they need to become fiscally responsible.
Anyway, here are the tax rates that AB 1253 is proposing:
A 1% tax on income above $1 million, but not over $2 million
A 3% tax on income over $2 million, but not over $5 million
A 3.5% tax on income over $5 million
The bill would apply retroactively to tax years beginning on or after January 1, 2020, and would be permanent.
Under existing law, the highest tax rate for individuals is 12.3%, but when your income is over $1,000,000 there is an additional 1% for income over $1 million often called a “mental health tax”. With all the mental health tax collected, California shouldn’t have a mental health problem. However, look at our homeless challenges. Again, from a business perspective, the State seems to just be out of control in spending and just wants to tax the residents more and more and have no accountability.
If AB 1253 were enacted, the 13.3% rate would rise to 14.3% for incomes above $1 million and the state’s highest rate would be raised to 16.8% for incomes above $5 million.
The proposal would result in a top tax rate of nearly 54% for federal and state taxes for the highest earners. If Biden is elected, he has already stated he would roll back the Trump tax cuts, so the combined tax rate would increase even more.
California already has the highest state tax rate at 13.3%, Hawaii is the second highest at 11%. Most other states have a state tax of about 6%, and Alaska, Florida, Nevada, South Dakota, Texas, Washington, and Wyoming do not have an income tax.
The continued tax increases are going to continue to move wealthy individuals out of the state. However, a change of residency needs to be done right, so if you are considering to change your residency, please contact us. Most of the clients we have helped with changing residency, have done so properly and maintain a second home in California.
At this point, we highly recommend that you contact your State representative, and voice your opinion on the proposed tax increase and perhaps a discussion about fiscal responsibility. Please contact us at 949-756-8080 if we can be of assistance.
Taxpayers should be alert to potential fake emails or websites looking to steal personal information. The IRS will never initiate contact with taxpayers via email about a tax bill, refund or Economic Impact Payments. Don’t click on links claiming to be from the IRS. Be wary of emails and websites − they may be nothing more than scams to steal personal information. VA Comment:We have been informed by a handful of our clients that they have received IRS emails. Please note that this is one of the top IRS scams. Make sure everyone in your accounting department knows this so you can reduce your risk of a financial crime.
IRS Criminal Investigation has seen a tremendous increase in phishing schemes utilizing emails, letters, texts and links. These phishing schemes are using keywords such as “coronavirus,” “COVID-19” and “Stimulus” in various ways.
These schemes are blasted to large numbers of people in an effort to get personal identifying information or financial account information, including account numbers and passwords. Most of these new schemes are actively playing on the fear and unknown of the virus and the stimulus payments. (For more see IR-2020-115, IRS warns against COVID-19 fraud; other financial schemes.)
Fake Charities:
Criminals frequently exploit natural disasters and other situations such as the current COVID-19 pandemic by setting up fake charities to steal from well-intentioned people trying to help in times of need. Fake charity scams generally rise during times like these.
Fraudulent schemes normally start with unsolicited contact by telephone, text, social media, e-mail or in-person using a variety of tactics. Bogus websites use names similar to legitimate charities to trick people to send money or provide personal financial information. They may even claim to be working for or on behalf of the IRS to help victims file casualty loss claims and get tax refunds.
Taxpayers should be particularly wary of charities with names like nationally known organizations. Legitimate charities will provide their Employer Identification Number (EIN), if requested, which can be used to verify their legitimacy. Taxpayers can find legitimate and qualified charities with the search tool on IRS.gov.
Threatening Impersonator Phone Calls:
IRS impersonation scams come in many forms. A common one remains bogus threatening phone calls from a criminal claiming to be with the IRS. The scammer attempts to instill fear and urgency in the potential victim. In fact, the IRS will never threaten a taxpayer or surprise him or her with a demand for immediate payment. VA Comments:If you receive a call from the IRS or any government authority, and you are not sure, please get their contact information and contact Vertical Advisors so we can assist quickly.
Phone scams or “vishing” (voice phishing) pose a major threat. Scam phone calls, including those threatening arrest, deportation or license revocation if the victim doesn’t pay a bogus tax bill, are reported year-round. These calls often take the form of a “robocall” (a text-to-speech recorded message with instructions for returning the call).
The IRS will never demand immediate payment, threaten, ask for financial information over the phone, or call about an unexpected refund or Economic Impact Payment. Taxpayers should contact the real IRS if they worry about having a tax problem.
Social Media Scams:
Taxpayers need to protect themselves against social media scams, which frequently use events like COVID-19 to try tricking people. Social media enables anyone to share information with anyone else on the Internet. Scammers use that information as ammunition for a wide variety of scams. These include emails where scammers impersonate someone’s family, friends or co-workers.
Social media scams have also led to tax-related identity theft. The basic element of social media scams is convincing a potential victim that he or she is dealing with a person close to them that they trust via email, text or social media messaging.
Using personal information, a scammer may email a potential victim and include a link to something of interest to the recipient which contains malware intended to commit more crimes. Scammers also infiltrate their victim’s emails and cell phones to go after their friends and family with fake emails that appear to be real and text messages soliciting, for example, small donations to fake charities that are appealing to the victims.
EIP or Refund Theft:
The IRS has made great strides against refund fraud and theft in recent years, but they remain an ongoing threat. Criminals this year also turned their attention to stealing Economic Impact Payments as provided by the Coronavirus Aid, Relief, and Economic Security (CARES) Act.
Much of this stems from identity theft whereby criminals file false tax returns or supply other bogus information to the IRS to divert refunds to wrong addresses or bank accounts.
The IRS recently warned nursing homes and other care facilities that Economic Impact Payments generally belong to the recipients, not the organizations providing the care. This came following concerns that people and businesses may be taking advantage of vulnerable populations who received the payments. These payments do not count as a resource for determining eligibility for Medicaid and other federal programs They also do not count as income in determining eligibility for these programs. See IR-2020-121, IRS alert: Economic Impact Payments belong to recipient, not nursing homes or care facilities for more.
Taxpayers can consult the Coronavirus Tax Relief page of IRS.gov for assistance in getting their EIPs. Anyone who believes they may be a victim of identity theft should consult the Taxpayer Guide to Identity Theft on IRS.gov.
Senior Fraud:
Senior citizens and those who care about them need to be on alert for tax scams targeting older Americans. The IRS recognizes the pervasiveness of fraud targeting older Americans along with the Department of Justice and FBI, the Federal Trade Commission, the Consumer Financial Protection Bureau (CFPB), among others.
Seniors are more likely to be targeted and victimized by scammers than other segments of society. Financial abuse of seniors is a problem among personal and professional relationships. Anecdotal evidence across professional services indicates that elder fraud goes down substantially when the service provider knows a trusted friend or family member is taking an interest in the senior’s affairs.
Older Americans are becoming more comfortable with evolving technologies, such as social media. Unfortunately, that gives scammers another means of taking advantage. Phishing scams linked to Covid-19 have been a major threat this filing season. Seniors need to be alert for a continuing surge of fake emails, text messages, websites and social media attempts to steal personal information.
Scams targeting non-English speakers:
IRS impersonators and other scammers also target groups with limited English proficiency. These scams are often threatening in nature. Some scams also target those potentially receiving an Economic Impact Payment and request personal or financial information from the taxpayer.
Phone scams pose a major threat to people with limited access to information, including individuals not entirely comfortable with the English language. These calls frequently take the form of a “robocall” (a text-to-speech recorded message with instructions for returning the call), but in some cases may be made by a real person. These con artists may have some of the taxpayer’s information, including their address, the last four digits of their Social Security number or other personal details – making the phone calls seem more legitimate.
A common one remains the IRS impersonation scam where a taxpayer receives a telephone call threatening jail time, deportation or revocation of a driver’s license from someone claiming to be with the IRS. Taxpayers who are recent immigrants often are the most vulnerable and should ignore these threats and not engage the scammers.
Unscrupulous Return Preparers:
Selecting the right return preparer is important. They are entrusted with a taxpayer’s sensitive personal data. Most tax professionals provide honest, high-quality service, but dishonest preparers pop up every filing season committing fraud, harming innocent taxpayers or talking taxpayers into doing illegal things they regret later.
Taxpayers should avoid so-called “ghost” preparers who expose their clients to potentially serious filing mistakes as well as possible tax fraud and risk of losing their refunds. With many tax professionals impacted by COVID-19 and their offices potentially closed, taxpayers should take particular care in selecting a credible tax preparer.
Ghost preparers don’t sign the tax returns they prepare. They may print the tax return and tell the taxpayer to sign and mail it to the IRS. For e-filed returns, the ghost preparer will prepare but not digitally sign as the paid preparer. By law, anyone who is paid to prepare or assists in preparing federal tax returns must have a Preparer Tax Identification Number (PTIN). Paid preparers must sign and include their PTIN on returns.
Unscrupulous preparers may also target those without a filing requirement and may or may not be due a refund. They promise inflated refunds by claiming fake tax credits, including education credits, the Earned Income Tax Credit (EITC) and others. Taxpayers should avoid preparers who ask them to sign a blank return, promise a big refund before looking at the taxpayer’s records or charge fees based on a percentage of the refund.
Taxpayers are ultimately responsible for the accuracy of their tax return, regardless of who prepares it. Taxpayers can go to a special page on IRS.gov for tips on choosing a preparer.
Offer in Compromise Mills:
Taxpayers need to wary of misleading tax debt resolution companies that can exaggerate chances to settle tax debts for “pennies on the dollar” through an Offer in Compromise (OIC). These offers are available for taxpayers who meet very specific criteria under law to qualify for reducing their tax bill. But unscrupulous companies oversell the program to unqualified candidates so they can collect a hefty fee from taxpayers already struggling with debt. VA Comment: We hear these ads often. We have had individuals contact us after companies that advertise to settle IRS debt for “pennies on the dollar” didn’t work. The IRS does have OIC program, but it can be very changelings to settle debt for “pennies on the dollar.”. We have never seen a settlement for “pennies on the dollar”.
These scams are commonly called OIC “mills,” which cast a wide net for taxpayers, charge them pricey fees and churn out applications for a program they’re unlikely to qualify for. Although the OIC program helps thousands of taxpayers each year reduce their tax debt, not everyone qualifies for an OIC. In Fiscal Year 2019, there were 54,000 OICs submitted to the IRS. The agency accepted 18,000 of them.
Individual taxpayers can use the free online Offer in Compromise Pre-Qualifier tool to see if they qualify. The simple tool allows taxpayers to confirm eligibility and provides an estimated offer amount. Taxpayers can apply for an OIC without third-party representation; but the IRS reminds taxpayers that if they need help, they should be cautious about whom they hire.
Fake Payments with Repayment Demands:
Criminals are always finding new ways to trick taxpayers into believing their scam including putting a bogus refund into the taxpayer’s actual bank account. Here’s how the scam works:
A con artist steals or obtains a taxpayer’s personal data including Social Security number or Individual Taxpayer Identification Number (ITIN) and bank account information. The scammer files a bogus tax return and has the refund deposited into the taxpayer’s checking or savings account. Once the direct deposit hits the taxpayer’s bank account, the fraudster places a call to them, posing as an IRS employee. The taxpayer is told that there’s been an error and that the IRS needs the money returned immediately or penalties and interest will result. The taxpayer is told to buy specific gift cards for the amount of the refund.
The IRS will never demand payment by a specific method. There are many payment options available to taxpayers and there’s also a process through which taxpayers have the right to question the amount of tax we say they owe. Anytime a taxpayer receives an unexpected refund and a call from us out of the blue demanding a refund repayment, they should reach out to their banking institution and to the IRS.
Payroll and HR Scams:
Tax professionals, employers and taxpayers need to be on guard against phishing designed to steal Form W-2s and other tax information. These are Business Email Compromise (BEC) or Business Email Spoofing (BES). This is particularly true with many businesses closed and their employees working from home due to COVID-19. Currently, two of the most common types of these scams are the gift card scam and the direct deposit scam.
In the gift card scam, a compromised email account is often used to send a request to purchase gift cards in various denominations. In the direct deposit scheme, the fraudster may have access to the victim’s email account (also known as an email account compromise or “EAC”). They may also impersonate the potential victim to have the organization change the employee’s direct deposit information to reroute their deposit to an account the fraudster controls.
BEC/BES scams have used a variety of ploys to include requests for wire transfers, payment of fake invoices as well as others. In recent years, the IRS has observed variations of these scams where fake IRS documents are used in to lend legitimacy to the bogus request. For example, a fraudster may attempt a fake invoice scheme and use what appears to be a legitimate IRS document to help convince the victim.
The Direct Deposit and other BEC/BES variations should be forwarded to the Federal Bureau of Investigation Internet Crime Complaint Center (IC3) where a complaint can be filed. The IRS requests that Form W-2 scams be reported to: [email protected] (Subject: W-2 Scam).
Ransomware:
This is a growing cybercrime. Ransomware is malware targeting human and technical weaknesses to infect a potential victim’s computer, network or server. Malware is a form of invasive software that is often frequently inadvertently downloaded by the user. Once downloaded, it tracks keystrokes and other computer activity. Once infected, ransomware looks for and locks critical or sensitive data with its own encryption. In some cases, entire computer networks can be adversely impacted.
Victims generally aren’t aware of the attack until they try to access their data, or they receive a ransom request in the form of a pop-up window. These criminals don’t want to be traced so they frequently use anonymous messaging platforms and demand payment in virtual currency such as Bitcoin.
Cybercriminals might use a phishing email to trick a potential victim into opening a link or attachment containing the ransomware. These may include email solicitations to support a fake COVID-19 charity. Cybercriminals also look for system vulnerabilities where human error is not needed to deliver their malware.
The IRS and its Security Summit partners have advised tax professionals and taxpayers to use the free, multi-factor authentication feature being offered on tax preparation software products. Use of the multi-factor authentication feature is a free and easy way to protect clients and practitioners’ offices from data thefts. Tax software providers also offer free multi-factor authentication protections on their Do-It-Yourself products for taxpayers.
Please call us at 949-756-8080 if we can be of assistance.
If you received a PPP loan, please make sure you read the PPP Loan Forgiveness rules, and contact if you need assistance. We felt the US Chamber of Commerce Guide was well written. You can view it at https://www.uschamber.com/report/guide-ppp-loan-forgiveness
If you have questions, or need assistance with preparing for the loan forgiveness application, please contact us for assistance.
During 2008/2009, the Great Recession, we learned some things. When the economy is hurt, there are some things we can do to be better prepared, and there are some actions we can take to benefit from the financial stress. During those times, the banks took steps to reduce or close lines of credit and end banking relationships. If you feel this might be an issue for you, and you would like to have more cash, then consider drawing down on your line of credit to hold the cash. This will generally give you the opportunity to get more cash in your bank before the bank would reduce your line of credit. Now, I have not heard from anyone that they banks are doing this yet, but we are going through some financially challenging times. Each individual should consider if this strategy is a good strategy for them and weigh the costs of the interest expenses. Perhaps after a couple of months you can repay the line of credit.
Keep your accounting up to date, as the banks might want to check your financial statements to continue your leading relationship.
Consider if you can benefit from any of the tax law updates, which we have written about. Did you have a net operating loss in 2018, and if so, contact us to discuss how you can get a refund. Were you limited in the amount of interest expense you could deduct in 2018? If so, contact us.
One item in the CARES Act that we did not write about, which was brought up by a client of ours, is that for 2020, the charitable deduction limitation is removed. The law previously stated that a taxpayer cannot take a charitable deduction in 2020 if the deduction exceeded 60% of their adjusted gross income (AGI), but with the CARES Act, that limitation has been removed. However, the requirements in general are that the donation must be in cash and typically must go to a 501(c)(3) charity. If you are interested in more information about this, please contact us so we can discuss the whole law and see if this could benefit you.
Some other items to consider:
Due to the stock marketing value dropping, this might be an opportunity to do some estate and gift tax planning with reduced values of securities. Contact us to discuss if you are interested.
If your business revenues have dropped, then most likely the value of your business has probably been reduced. This can provide an option to provide key employees with some equity participation at a reduced value if that will benefit the company. Again, each business is unique, so contact us to discuss.
We are hoping that the economy will be opening back up soon throughout the entire country. We are here to help, so contact us if you need our assistance.
The novel coronavirus (COVID-19) crisis has touched so many lives, with both illnesses and hardships. In response to this crisis, our office is working remotely on all accounting and tax projects. The best method to contact us is to email us at [email protected]. We are focused on staying up to date on the tax, accounting and finance updates to assist everyone with these challenges. The final Coronavirus bill that was signed by President Trump on March 27, 2020 is H.R. 748 called the CARES Act. This passed bill was different than the Senate bill I wrote about on March 25, 2020. Some provisions are the same or similar.
Remember this CARES Act bill was written quickly and all explanations of various scenarios has not been provided yet. Not to mention, various groups, professionals, and industries have asked many questions of the Treasury and SBA for additional guidance. Based on new information reviewed and the discussions with our clients, I’m providing an update.
Section 1102 Paycheck Protection Program Loans (PPP):
This is a section 7(a) SBA loan
VA Comment: Supposed to be a streamline process. When I speak with bankers, they advise that they are still waiting for guidance from SBA. See attached the U.S. Chamber of Commerce Coronavirus Emergency Loan Checklist.
Apparently, small businesses can apply starting April 3, 2020. However, banks need to be prepared. Most banks have sent out emails to their customer to begin compiling information regarding payroll, and health care costs.
Starting April 10, 2020, independent contractors and self-employed individuals can apply.
We are assuming the banks will want to look at and/or have the net self-employed income from your 2019 tax return or financial statements, and they may ask for 1099’s.
VA Update: Based on additional information received from tax discussions, it seems as if a taxpayer can apply for BOTH a PPL and an EIDL, however, if they apply for both, the EIDL can’t be used for payroll, and the PPL is supposed to be used for payroll.
Some businesses may need more money than just the PPL, so the EIDL will be required. Loans under $250,000 seems to require less information and no personal guarantee.
Government guarantees 100% of the loan through December 31, 2020
Guarantee drops to 75% for loans exceeding $150,000 and
85% for loans equal to or less than $150,000.
VA Comments: The Federal loan guarantee reduces at 12/31/2020, as I would expect that large portions of loans will be forgiven for payroll before 12/31/2020.
Eligible businesses are small business (500 or less of employees), nonprofit, veteran’s organization or tribal businesses.
Includes sole-proprietors, independent contractors, and self-employed individuals.
VA Comment: Seems like most every business has been negatively affected from COVID-19 and if a business has payroll, they will apply for the PPL.
How to Calculate the Loan Amount / Maximum Loan Amount:
In Summary, average monthly payroll from 2019 multiplied by 2.5.
Sum of average total monthly payment by the applicant for payroll costs incurred during the 1-year period before the date on which the loan is made.
VA Update: The current PPL application, just asks for “payroll costs” and the form doesn’t provide a definition of “payroll costs”, so we are suggesting looking at the summary of the bill that defines “payroll costs”. However, we have seen the banks asking for supporting information about “payroll costs”. These items are:
2019 Payroll, including the last 12 months
2019 Employees – 1099’s for 2019 employees and independent contractors that would otherwise be an employee of your business (Note: Do NOT include 1099s for services)
Health care costs. All insurance premiums paid by the business owner under a group health plan.
Retirement – your company retirement plan funding paid by the company.
Some banks, like Bank of America, have stated that they are currently only going to provide PPL’s for customers that have deposit and lending relationships.
VA Update: There have been some questions regarding if payments to independent contractors are considered “payroll costs”. In reading the CARES Section by Section explanation, the bill itself, and listening to other tax advisors, we believe the “payroll costs” includes payments to independent contractors (IC) which are really like employees. This could mean an IC that doesn’t work for anyone else. However, in reading bank instructions for the PPP loans, and the SBA guidance recently released, and specifically the loan forgiveness, the IC expenses seems to be excluded from the “Payroll Costs” explanation. So, the PPP loan application based on the lender’s explanation of payroll costs, and SBA’s recently released explanations need to NOT be included in “payroll costs” especially for the loan forgiveness calculation. Perhaps this is an SBA interpretation as they want to minimize any double dipping. The IC can request financial assistance from the PPP, as well. Please be careful to make sure the calculation is done correctly.
Salary, wage, commission, or similar compensation (not to exceed $100,000. So, if an employee earns $150,000 a year, the company can only use $100,000 a year for the calculation.)
Payment of cash tip or equivalent
Payment for vacation, parental family, medical or sick leave
Allowance for dismissal or separation
Payment required for the provision of group health care benefits including insurance premiums.
Payment of any retirement benefits; or
Payment of State or local tax assessed on the compensation of employees and
Payroll can’t exceed more than $100,000 a year.
Self-employed , Sole Proprietor.
The sum of payments of any compensation to or income of a sole proprietor or independent contractor that is wage, commission, income, net earnings from self-employment that isn’t more then $100,000.
VA Comments: If you’re self-employed and you pay yourself with draws, then the banks will probably want to see 2019 1099-MISC and various expenses from your business. If you have employees, then you would calculate as discussed above.
Excluded Payroll Costs:
An annual salary over $100,000 / year.
Payroll taxes
If a seasonal employer, there is an alternative calculation for an average 12-week period from February 15, 2019 and ending June 30, 2019.
Multiplied by 2.5. NOT to Exceed $10MM
VA Example: If average monthly payroll was $100,000, then multiple by 2.5 = $250,000.
If the business was not in business from February 15, 2019 to June 30, 2019, there is another calculation.
VA Comment: This loan calculation isn’t as rich as the senate proposed bill which was multiplied by 4. Also, the loan doesn’t seem to include payroll taxes for the employee or employer, so the loan seems to be just the net payroll. Not sure this will be a large enough loan for some small business.
Waives affiliation rules for businesses in hospitality and restaurant industries franchise.
VA Comment: This means that restaurant chains that have over 500 employees can treat each location has an individual borrow and they don’t need to consolidate.
Defines covered loan period as beginning on February 15, 2020 and ending on June 30, 2020.
Established the maximum 7(a) loan amount to $10MM through December 31, 2020 and provides a formula by which the loan amount is tied to payroll costs incurred by the business to determine the size of the loan.
Allowable use of the loan includes payroll support, such as employee salaries, paid sick or medical leave, insurance premiums, and mortgage, rent, and utility payments.
Provides delegated authority which is the ability for lenders to make determination on borrowers eligibility and creditworthiness without going through all SBA’s channels to all current 7(a) lenders who make these loans to small business and provides the same authority to lenders who join the program and make these loans.
Requires eligible borrowers to make a good faith certification that the loan is necessary due to the uncertainty of current economic conditions caused by COVID -19; they will use the funds to retain workers and maintain payroll. Lease and utility payments; and are not receiving duplicative funds for the same uses from another SBA program.
Waives both borrower and lender fees for participation in the Paycheck Protection Program (PPP).
Waives the credit elsewhere test for funds provided under this program.
Waives collateral and personal guarantee requirements under this program.
Any portion of the loan Not used for forgiveness purposes, the remaining loan balance will have a maturity of not more than 10 years, and the guarantee for that portion of the loan will remain intact.
Maximum interest rate will be 4%.
No prepayment fees.
Allows complete deferment of 7(a) loan payments for at least six months and no more than a year.
Increases SBA Express loan from $350,000 to $1MM through December 31, 2020.
If head count reduces 25% or more, it will hurt the loan forgiveness, or make the loan not forgiven at all.
Section 1106 Loan Forgiveness:
Borrower shall be eligible for loan forgiveness equal to the amount spent by borrower during an 8 week period after the origination date of the loan on payroll costs, interest payment on any mortgage incurred prior to February 15, 2020, payment of rent on any lease in force prior to February 15, 2020, and payment on any utility for which service began before February 15, 2020.
VA Update: Please review your lender’s application and explanation of “payroll costs”. Just recently, SBA issued additional guidance that independent contractor costs, even if they are treated like employees are NOT included in the “Payroll Costs”. This recent SBA guidance is different from our interpretation of the CARES Act bill. If you are considering a PPL to include IC expenses, at this time, we don’t feel it can be included in “payroll costs”.
The loan forgiveness seems to be only for PPL / PPP loans.
Amount forgiven may not exceed the principal amount of the loan.
Eligible payroll costs do not include compensation above $100,000 in wages.
The amount forgiven will be reduced proportionally by any reduction in employees retained compared to the prior year and reduced by the reduction in pay of any employee beyond 25% of their prior year compensation.
Loan forgiveness / cancellation will not be included in borrower’s taxable income.
VA Update: We are reading that Treasury is now stating that 75% or more of the loan forgiveness needs to be for payroll. Thus, no more than 25% of the loan forgiveness can be for non-payroll. This is an example of the SBA generating rules which are NOT part of the legislated CARES Act bill.
Provides an advance of $10,000 to small business and non-profits that apply for SBA EIDL loans within three days of applying for the loan.
Expands eligibility for access to EIDL’s to include tribal business, cooperatives and ESOP’s with fewer than 500 employees or any individual operating as a sole proprietor or independent contractor during the covered period (January 31, 2020 to December 31, 2020. Private non-profits are also eligible for both grants and EIDL’s.
EIDL’s are loans up to $2MM that carry interest rates up to 3.75% for companies and up to 2.75% for nonprofits as well as principal and interest deferment up to 4 years.
The loans may be used for expenses that could have been met had the disaster not occurred, including payroll and other operating expenses.
The EIDL grant does not need to be repaid, even if the grantee is subsequently denied an EIDL.
It may be used to provide paid sick leave to employees, maintain payroll, meet increased production costs due to supply chain disruption or pay business obligations, including debts, rent and mortgage payments.
VA Update: If a business needs more money than they can get from the PPL, then they can apply for an EIDL for items other than payroll which the PPL would be used for.
Eligible grant recipients must have been in operation on January 31, 2020.
The business that received an EIDL between January 31, 2020 and June 30, 2020 as a result of COVID-19 disaster declaration, is eligible to apply for a PPP loan, or the business may refinance their EIDL into a PPP loan.
Typically, the $10,000 grant would be subtracted from the amount forgiven in the payroll protection plan.
Waived personal guarantee on advances and loans not exceeding $200,000.
The approval should be based on solely on the credit score of the applicant and no requirement for tax returns or tax return transcripts.
VA Update: For loans over $250,000, there seems to be more underwriting requirements. May require financial statements, and tax returns. However, we haven’t heard or seen if these rules are being applied.
Most of the financial assistance offered through the first bill called, HR 6201, FAMILIES FIRST CORONRAVIRUS RESPONSE ACT (discussed on our previous memo), and the CARES Act S. 3548 which concluded as HR 748 was included in my discussion below.
The tax and financial laws are changing daily, therefore I marked this memo with “V5” (version 5) on my memo above. There are various other social service updates, but our memos will focus mainly on finance, business and tax updates.
Highlights of the PROPOSED SENATE BILL S 3548, CORONAVIRUS AID, RELIEF AND ECONOMIC SECURITY ACT OR THE CARES ACT. March 19, 2020. This bill has NOT been passed in the Senate at this time, so it can change, and then the bill would need to go to the House and to the President. You can view the at https://www.congress.gov, search for HR 748.
Businesses & Other Employers:
Retention payroll tax credit for eligible employers that continue to pay employee wages while their operations are fully or partially suspended as a result of certain COVID-19 related government orders. A 50% refundable payroll tax credit on wages paid up to $10,000 during the crisis. The credit is available for employees retained by not currently working due to the crises for firms with more than 100 employees and for all employee wages for firms with 100 or fewer employees.
Delayed Employer-side Social Security payroll tax payments may be delayed until January 1, 2021 with 50% owned on December 31, 2021 and the other half due on December 31, 2022. Deferral of employer portion of payments for certain payroll taxes.
Net Operating Losses: Modification of net operating loss (NOL) and limitation rules. Will allow most NOL’s incurred in 2018, 2019, and 2020 to carry them back for refunds to 5 years. This carry back law was exempt for tax years beginning 2018 under the TCJA, but the CARE Act reverses it. Due to this financial crisis they are allowing NOL carry backs for these periods to be carried back. The Act also removed the 80% utilization of NOL’s for a carry forward, meaning an NOL could only reduce taxable income by 80%.
Business Interest Deduction: Modification of the deduction limitation on business interest rules of IRC section 163(j). The law temporarily changes the business interest deduction limit from 30% to 50% for tax years 2019 and 2020.
Qualified improvement property technical correction, allowing qualifying interior improvements of buildings to be immediately expensed (bonus depreciation or Section 179) rather than depreciated over 15 years for 2018 and future.
Payroll tax credit for eligible employers up to 50% refundable payroll tax credit on wages paid up to $10,000 during the crisis. The credit would be available to employers whose business were disrupted and retained employees, but they were not able to work. Employers with more than 100 employees and under 100 employees have slightly different calculations.
Business Loss Limitation Revision: For years after 12/31/2017, the business loss limitation is suspended. Previously, business losses couldn’t be used to offset non-business income (like wages, investment income) over $250,000 for individuals or $500,000 for married filing jointly.
VA Comments: For individuals that have business losses, and perhaps real estate losses from being a real estate professional, this law change may make it desirable to amend the 2018 tax return.
Individuals:
Recovery rebates of up to $1,200 for single and $2,400 for married couples filing jointly, plus $500 per qualifying child. Phaseouts of the rebates are based on adjusted gross income (AGI) starting at $75k for single, and $150k for married couples.
The rebates phase out at $99,999 for single and $199,000.
Expansion of unemployment benefits, including self-employed, and gig-economy workers. Unemployment insurance to include an additional $600 / week for an additional 13 weeks.
Waiver of the 10% penalty for COVID-19 related early distributions from IRAs, 401K and other retirement plans. However, taxability of the distribution will need to be considered.
Exclusion of certain employer payments of student loans up to $5,250 will not be treated as taxable income to the employee.
Temporary Relief Federal Student Loan: Deferral of student loan payments on principal and interest for 6 months through September 30, 2020.
Other Items:
Forbearance of Residential Mortgage Loan Payments (section 4023): Provides up to 90 days of forbearance for multifamily borrowers with a federally backed multifamily mortgage loan who have experienced a financial hardship. Borrowers receiving forbearance may not evict or charge late fees to tenants for the duration of the forbearance period.
Applicable mortgages include loans to real property designed for 5 or more families that are purchased, insured, or assisted by Fannie Mae, Freddie Mac, or HUD.
Additional Information regarding HR 748 CARES ACT ,
Relief for Individuals, Families, and Businesses. Rebates and Other individual Provisions.
Eligible individuals shall be allowed as credit against the tax for the first taxable year beginning in 2020 an amount equal to the lesser of:
Net income tax liability, or
$1,200 ($2,400 in the case of joint returns)
The credit should not be less than $600
$500 per qualifying children
Eligible individuals are based on adjusted gross income (AGI) of
$75,000 and $150,000 in the case of a joint return. Once a taxpayer AGI is either $75k or $150k the credit begins to be reduced and phased out. The phase out is $99k and $198k.
Delay in filing deadlines. In the case for returns for tax year 2019, due dates for April 15, 2020, are delayed to July 15, 2020. This isn’t in the HR 748 bill, but it is noted in IRS Notice 2020-18. An extension is not required. There is an automatic extension till July 15, 2020. However, if the tax return can’t be filed by July 15, 2020, an extension will need to be filed.
This means that IRA, HAS and MSA contributions are extended to July 15, 2020 also.
Individual ES Payments: Different from the Senate bill, 1st quarter estimated tax payments are delayed and due on July 15, 2020. 2nd quarter estimated tax payments are still due on June 15, 2020. This is stated on IRS Notice 2020-18 and Notice 2020-20.
Retirement Accounts: Early withdrawal penalties under IRC section 72(t) which is typically 10% for Federal and then some states add a lower penalty are waived if the early distributions are $100,000 or under.
Amounts distributed may be paid back. There is also a provision that allows taxpayers that took early distributions to make one or more contributions over a three-year period to contribute up to the amount of distributions they took.
Income inclusion of premature distribution. A taxpayer can spread the taxability of the premature distribution over 3 years.
Loans from retirement plans: The bill allows for an increase in loans and not to be treated as distributions. The loan amount is increased from $50,000 to $100,000.
Loan repayments will be delayed by 1 year.
Charitable Contributions: The allowance to deduct more charitable donations have been increased for both individuals and Corporations.
VA Comments: Seems as if the individual 30% / 50% AGI limitation is temporary suspended. The 10% limitation for C Corporations seem to be increased to 25%.
Student Loan Temporary Relief: The bill states the Secretary shall suspend all payments due for loans under part D of title IV for Higher Education Act of 1965 for 3 months.
Business Provisions:
C Corporation estimated tax payments. Delay of estimated tax payments for Corporations. Like individuals, the required estimated tax payments for C Corporation is delayed till July 15, 2020.
Delay in Payment of Employer Payroll Taxes. The bill states that employers can delay payment of the employer portion of payroll taxes till December 31, 2021 for 50% of the deferral and the balance due on December 31, 2022. This also applies to the estimated payroll deposits.
VA Comment: If a small business is going to request and receive a loan for payroll and overhead, this deferral might not be necessary. If a defer is desired, a liability should be posted on the companies’ financial statements.
Net Operating Loss (NOL) Carrybacks: The NOL carry back was removed for tax years after 12/31/2017. This bill will allow NOL’s generated from year 2018, 2019, and 2020 to carry back and request a refund for up to a 5 year carry back period. The 80% limitation is removed also.
VA Comment: If you incurred a loss in 2018 or 2019, or expect a loss in 2020, please get us the information and quickly as possible so we can begin preparation of a NOL carryback. If your tax return had qualified improvement property and the return couldn’t take the deduction, this new bill corrects that prior error and that deduction might generate a taxable loss for a NOL carryback.
A taxpayer may elect out of the 5-year NOL carry back. If elected, it can’t be changed. It is irrevocable.
VA Comment: For tax returns with NOL’s for 2018 or 2019 that have been filed, the return needs to be amended within 120 days from the enactment of this bill regarding the NOL carryback provision.
Loss limitation for taxpayers other than Corporations: IRC section 461(l)(2) was added by the Tax Cuts and Jobs Act of 2017 and was effective for tax years 2018 to 2025 which disallowed any excess business loss for a non-corporate taxpayer. Generally, the law prohibited business losses to only be deducted against no more than $250,000 / $500,000 of non-business income. Any non-deductible business loss was carried forward. The bill removes those limits from being implemented till December 31, 2020 (previously applied on December 31, 2017).
VA Comment: We know this loss limitation occurred with some of our clients, and we will have to review affected taxpayers to ask them if they want us to amend their tax returns. The IRS will need to provide guidance on the amendment process.
Interest Deduction Limitation: The Tax Cuts and Jobs Act of 2017 enacted an interest deduction limitation. For taxpayers where it was applicable, taxpayers with gross sales over $25MM, the interest deduction was limited to 30% of the adjusted taxable income. The bill now increases the limitation amount for 30% to 50% for tax years 2019 and 2020.
VA Comment: This means a taxpayer that this limitation would apply to will be allowed more of an interest deduction.
Technical correction for qualified Improvement Property: This bill corrected a prior law error.
The Tax Cuts & Job Act (TCJA) removed investment barriers by allowing businesses to immediately deduct the cost of certain investments under a provision called 100% bonus depreciation.
Due to legislative oversight, the law accidentally excluded improvements property to be eligible from 100% bonus depreciation.
This bill corrects this error and thus the improvements would be eligible for bonus depreciation and should make this asset a 15-year recovery period.
Foreign controlled corporation/shareholder:
The bill is changing the US owned foreign corporation from 10% to 50%.
Limitation of Paid Leave: Section 110(b)(2)(B) of the Family and Medical Leave Act of 1993 is providing limitation. An employer shall not be required to pay more than $200 per day and a $10,000 in aggregate for each employee for paid leave under this section.
Other Considerations:
Lost Income/ Business Interruption insurance coverage: Our firm and clients have reviewed our insurance policies, and considered filing a claim for lost income or additional expense base on “Civil Authority”, in which the argument is that since the state government demanded the residents to stay at home, there has been some business interruption. In conversations with insurance brokers that the coverage is excluded for a “virus”. However, the argument is that the company didn’t close their business for a virus, as they probably didn’t close during influenza season, they closed because of the state government made a demand. As one can guess, lawsuits are already starting, so we are receiving information that if a business has lost of income or business interruption coverage, review your policy and consider filing a claim.
Please read our memo dated March 17, 2020 and March 35, 2020 which were Versions 1 and 2. If you can’t find it, please contact us at [email protected] to request a copy or you can read it on our website at www.verticaladvisors.com under blogs.
Keep sending us your tax information, as we still need to prepare all the returns before the 9/15/2020 and 10/15/2020 due dates.
April 15, 2020 due dates have been delayed to July 15, 2020. If you need more time after that, and extension will need to be filed.
2019 taxes are due July 15, 2020, and 1st quarter estimated tax payments are due July 15, 2020. 2nd quarter ES payments are still due June 15, 2020.
Consider amending 2018 and/or 2019 tax returns for the following:
NOL’s: Now NOL’s from 2018 – 2020 can be carried back up to 5 years.
VA Comment: The election to file a NOL for a 2018 and / or a tax return already filed much be by the extended due date of the 2019 tax return. So, if a 2018 tax return needs to be filed to benefit from the 2018 NOL, that return needs to be prepared and filed before the 2019 tax return if filed.
VA Update: Currently, the CARES Act is stating that tax returns already filed, need to be amended within 120 days from the date of the CARES Act on March 27, 2020.
For example, if your 2018 tax return had an NOL and it was carried forward, those tax returns need to be amended within 120 days from March 27, 2020.
If a tax return has an NOL in 2018 through 2020, and they DON’T to carry back the NOL, the return needs to elect out on a timely return.
Interest deduction limitations
Business loss limitations
Keep up to date with additional guidance on the CARES Act, as there are many areas that need continued guidance. The CARES Act does provide SBA the ability to regulate and within reason, create guidance on the Act.
Lastly, and as always, please contact us if you need assistance or have any questions. Contact us at [email protected]
