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Tax Strategies to Repay Debt and/or Build Up Cash

Many businesses have struggled financially during the COVID-19 pandemic. Some businesses have benefited from the PPP and SBA EIDL programs. We expect most businesses to receive loan forgiveness for their PPP loan, but if you received an EIDL loan, you might be concerned on how you are going to pay it back. Generally, if a business had to receive a loan during 2020, it means they incurred more expenses than revenue, and thus needed a loan. This should mean the company or business will have a loss for the 2020 tax year. If you expect your business to have a loss, then there may be an opportunity to take that business loss and turn it into cash. The CARES Act changed the tax laws related to net operating loss (NOLs) options, in which the CARES Act allows NOLs to be carried back up to five (5) years if the loss was incurred in tax years 2018, 2019 and/or 2020. If you incurred a NOL then you might be able to carry it back up to 5 years and receive a cash refund based on taxes paid in those years. If you incurred a loss, and generated a NOL, speak with your tax advisor before the end of the year to determine if you can benefit from the NOL carry back. Contact Vertical Advisors, LLP if we can be of assistance.

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What does the executive action deferring payroll taxes mean for employers and employees?

On August 8, 2020, President Trump signed an executive memorandum that defers an employee’s portion of Social Security and Medicare taxes from September 1 through December 31, 2020. At this point, the taxes are just deferred, meaning they’ll still have to be paid at a later date. However, the action directs U.S. Treasury Secretary Steven Mnuchin to “explore avenues, including legislation, to eliminate the obligation to pay the taxes.” The exact impact on employers and employees isn’t yet known. There are many open questions, including President Trump’s legal ability to implement the deferral. Some experts believe there may be legal challenges to this executive action. Deferral details The payroll tax deferral will be available for “any employee the amount of whose wages or compensation, as applicable, payable during any bi-weekly pay period generally is less than $4,000.” The deferral will be calculated on a pretax basis or the equivalent amount with respect to other pay periods. Plus, the amounts will be deferred without any penalties, interest, additional amount or addition to the tax. Stay tuned for additional guidance No doubt there is much to flesh out about this payroll tax deferral. Secretary Mnuchin has been instructed to provide additional guidance and employers can’t act on the deferral until that happens. It’s also possible Congress could take action. We’ll be monitoring developments and their implications, so turn to us for the latest information. © 2020

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Urgent Tax Update Regarding Possible NIIT Claim for Refund – 2016 Tax Year

To our clients and friends. There have been some last-minute discussions in the income tax community that the Supreme Court of the United Stated  (SCOTUS) may rule that the Net Investment Income Tax (NIIT) which was established as part of Obamacare is unconstitutional.  If the SCOTUS makes that ruling, then taxpayers that have paid NIIT have up to three years from the date their tax returns were filed, or 2 years from when the tax was paid, to file an amended tax return to request a refund of the NIIT. However, since the SCOTUS hasn’t made that ruling, and may not, taxpayers have the option to file a protective claim for refund for tax year 2016, to meet the filing timeline.  The 2016 tax returns may need to be filed as soon as July 15, 2020 or at a late date during 2020 depending on the date your 2016 return was filed. Currently Vertical Advisors is pulling data for the tax returns we prepared for 2016, and we will inform you if the data suggests you paid in NIIT for tax year 2016.  If you didn’t have our firm prepare your 2016 return, and you would like us to review your 2016 returns, please let us know immediately as there is a 3 year statute of limitation for the date you filed.  With the postponement of the April 15, 2020 deadline, tax returns with an April 15, 2017 signature date which would normally require an amended return to be filed by April 15, 2020 have been given extra time till July 15, 2020. For tax returns we have prepared, we will also review 2017 activity and future years also. If we did find that you paid NIIT during 2016 tax year we will be contacting you shortly to discuss your options.  To make a request for this protective claim, please contact us at advisors@verticaladvisors.com or at 949-756-8080. Warmest Regards, Peter DeGregori, CPA MST

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IRS Won’t Postpone July 15 Filing and Payment Deadline

IRS Won’t Postpone July 15 Filing and Payment Deadline: The IRS has announced that the tax filing and payment deadline of 7/15/20 won’t be postponed. Individual taxpayers unable to meet the deadline should file Form 4868 by 7/15/20 to obtain an automatic extension to 10/15/20. The IRS reminds taxpayers that an extension provides additional time to file a tax return, but not to pay any taxes due. Taxpayers facing hardships, including those affected by COVID-19, have several options available, including an online payment agreement, installment agreement, offer in compromise, and a temporary collection delay. The IRS recommends that taxpayers who are unable to pay their taxes in full should act as quickly as possible. News Release IR 2020-134. Copyright © 2020 Thomson Reuters/PPC. All rights reserved.

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IRS CARES Act Update

Guidance Released for Plan Distributions and Loans for COVID-19 Victims: The IRS has provided guidance relating to section 2202 of the CARES Act, which allows qualified individuals to receive favorable tax treatment with respect to distributions from eligible retirement plans that are coronavirus-related distributions. A coronavirus-related distribution of up to $100,000 is not subject to the 10% additional tax under IRC Sec. 72(t) and generally is includible in income over a three-year period. However, qualified individuals have three years to repay a coronavirus-related distribution to a plan or IRA and undo the tax consequences of the distribution. The CARES Act also increases the allowable plan loan amount under IRC Sec. 72(p) and permits a suspension of loan repayments due from 3/27/20 through 12/31/20 that are made to qualified individuals. The guidance expands the definition of who is a qualified individual and is intended to assist employers, plan administrators, trustees, and custodians by providing guidance on how plans may report coronavirus-related distributions and how taxpayers may report these distributions on their individual federal income tax returns. Notice 2020-50 and News Release IR 2020-124. Please contact us at 949-756-8080 if we can be of assistance.

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Coronavirus – Related Tax Relief for Qualified Opportunity Funds and Investors

The IRS has provided tax relief to Qualified Opportunity Funds (QOFs) and their investors in response to the ongoing COVID-19 pandemic. Specifically, if a taxpayer’s 180th day to invest in a QOF would have fallen on or after 4/1/20 and before 12/31/20, the taxpayer now has until 12/31/20 to invest eligible gain in a QOF. Also, the period between 4/1/20 and 12/31/20 is suspended for purposes of the 30-month period during which property may be substantially improved. The IRS also has announced that, due to COVID-19, a QOF’s failure to hold less than 90% of its assets in Qualified Opportunity Zone Property on any semiannual testing date from 4/1/20 through 12/31/20 is due to reasonable cause under IRC Sec. 1400Z-2(f)(3) and such failure does not prevent qualification of an entity as a QOF or an investment in a QOF from being a qualifying investment. Notice 2020-39 and News Release IR 2020-114.

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PPP borrowers get concessions, additional guidance on forgiveness

  The U.S. Senate has passed the bipartisan Paycheck Protection Program Flexibility Act of 2020, which loosens several of the Paycheck Protection Program’s (PPP’s) more onerous restrictions regarding loan forgiveness. President Trump has signed the bill into law. The new law follows the May 22, 2020, release of an interim final rule from the U.S. Department of Treasury and the Small Business Administration (SBA) on PPP loan forgiveness requirements. Among other areas, that guidance addresses the calculation of full-time employees and total salary or wages for purposes of loan forgiveness reductions.     The PPP in a nutshell The Coronavirus Aid, Relief and Economic Security Act (CARES Act) established the PPP to help employers cover payroll during the ongoing COVID-19 pandemic. The program is open to U.S. businesses with fewer than 500 employees — including sole proprietors, self-employed individuals, independent contractors and nonprofits — affected by COVID-19. The loans may be used to cover payroll, certain employee health care benefits, mortgage interest, rent, utilities and interest on any other existing debt for the “covered period.” Under the CARES Act and subsequent guidance, the covered period ran for eight weeks after loan origination. The PPP Flexibility Act extends that period to the earlier of 24 weeks after the origination date or December 31, 2020. PPP loan proceeds applied to cover payroll, mortgage interest, rent and utilities are subject to 100% forgiveness if certain criteria are met. Earlier Treasury Department regulations indicated that eligible nonpayroll costs couldn’t exceed 25% of the total forgiveness amount, but the PPP Flexibility Act raises the threshold to 40%. At least 60% of the loan must be spent on payroll costs to qualify for any forgiveness. For unforgiven costs, the new law extends the repayment period from two years to five years. However, employers are still required to maintain their staff headcount and payroll to qualify for full forgiveness. Loan forgiveness may be reduced if: The average weekly number of full-time equivalent (FTE) employees is reduced, or Salaries and wages are cut by more than 25% for any employee who made less than $100,000 annualized in 2019. Borrowers originally had until June 30, 2020, to restore full-time employment and salary levels from reductions made between February 15, 2020, and April 26, 2020, and avoid reductions in the forgiveness amount. The PPP Flexibility Act extends that deadline to December 31, 2020. The covered period Although the CARES Act provides that the covered period runs for eight weeks from the date of origination, the May 22 guidance lays out an alternative covered period. Borrowers with a biweekly, or more frequent, payroll schedule can elect to base their calculations on the eight-week period beginning on the first day of their first pay period following the disbursement date. Note that the alternative covered period is available only for calculating payroll costs; it doesn’t apply to calculating mortgage interest, rent or utilities. And, if a borrower does use the alternative period to compute payroll costs, it also must use that alternative period […]

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Tax Updates related for revisions to the Paycheck Protection Plan (PPP) H.R. 7010

Hello Vertical Advisors (VA) Clients & Friends: This morning listening to the news, I heard that the jobs report showed 3MM job added.  That is great!  In listening to the news but more importantly speaking with our clients, everyone seems ready to open and or get their business back to normal or bigger.  President Trump has stated he expects the US economy to bounce back strong.  A lot of our clients want to believe President Trumps statements about the economy getting back to normal, but we need to see the results to convince us.  The fact that the job report showed 3MM jobs added seems to be the beginning of support for the Presidents statements and supports what I’m hearing from our clients and business owners.  Please read this memo in conjunction with our memo dated April 2, 2020 that discusses the CARES Act. Today, President Trump signed H.R. 7010 which revised the PPP Act.  The revisions were small but should be helpful.  The revisions are focused on the loan forgiveness section and are as follows: Section 1106 of the CARES Act discusses PPP Loan Forgiveness: Change in Covered Period.  The covered period is the time one needs to spend the PPP funds: The original CARES act stated the covered period to use the PPP funds was 8 weeks. H.R. 7010 changes the covered period to the earlier of 24 weeks or December 31, 2020. Change in the requirements of the PPP funds spent on payroll costs: The CARES Act didn’t define a specific percentage needed to be spent on payroll and no payroll.  The SBA provided regulations which stated at least 75% needed to be spent on payroll costs.    H.R. 7010 states that 60% must be spent on qualified payroll and 40% on the non-payroll items. Reminders: Payroll costs include employees’ wages during the covered period which can’t exceed $100k / annual. Includes health insurance premiums Doesn’t include employer payroll taxes Other costs for the 40% (rent, interest on mortgage, utilities) Updates on rehiring: There are reductions in the loan forgiveness if head counts is reduce 25% or more.  If an employee quit or was fired, then the business had the option to replace that position with a new employee.  However, there were discussions regarding the company asking the employee to come back to work and the employee not accepting.  The updates allow additional flexibility regarding employee counts and availability.  A company head count will not be hurt if the company can show support and documentation that they were unable to rehire an employee AND unable to hire a similar qualified employee for an unfilled position on or before December 31, 2020. COVID-19 Safety Standards: Requires the business to follow requirements established or guidance issued by the Secretary of Health and Human Services for the period March 1, 2020 and ending on December 31, 2020 to maintain standards of sanitation, social distancing and other related safety requirements related to COVID-19.  Our firm has used the OSHA guidelines at https://www.osha.gov/Publications/OSHA3990.pdf, […]

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Haven’t received your stimulus payment? What can you do…

If you haven’t received your CARES Act taxpayer stimulus payment go to “Get My Payment” website at https://www.irs.gov/coronavirus/get-my-payment and enter your direct deposit information to order to receive an electronic economic impact payment.  This is needed by noon on Wednesday, May 13, 2020. As a reminder, individuals could receive up to $1,200 and married couples could receive up to $2,400.  Parents could also receive $500 for qualifying children.  For more information, you can read IR-2020-92 at https://www.irs.gov/newsroom/act-by-wednesday-for-chance-to-get-quicker-economic-impact-payment-timeline-for-payments-continues-to-accelerate  

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The IRS clarifies the deductibility of PPP-funded expenses

The IRS has issued new guidance addressing a question that has lingered since the launch of the Paycheck Protection Program (PPP) — whether expenses paid for with forgiven, tax-free PPP loan proceeds are deductible business expenses under Section 162 of the Internal Revenue Code (IRC). The guidance in IRS Notice 2020-32 doesn’t provide the answer borrowers hoped for, but that may yet come. The root of the question The Coronavirus Aid, Relief and Economic Security (CARES) Act created the widely publicized PPP to help some employers cover their payrolls during the novel coronavirus (COVID-19) pandemic. PPP loans are subject to 100% forgiveness if certain criteria are met, and the amounts forgiven are excluded from the borrower’s gross income. This is notable because forgiven debt generally is taxed as cancellation of debt income. The program is open to U.S. businesses with fewer than 500 employees — including sole proprietors, self-employed individuals, independent contractors and nonprofits — affected by COVID-19. The loans may be used to cover payroll, certain employee healthcare benefits, mortgage interest, rent, utilities and interest on any other existing debt, for eight weeks after receipt of funds. Forgiveness is available for payments for payroll, mortgage interest, rent and utilities. While the CARES Act explicitly states that forgiven PPP loan amounts aren’t included in the borrower’s gross income, it doesn’t expressly state whether borrowers can claim business expense deductions for the expenditures the forgiven amounts cover. Notice 2020-32 comes in response to requests from the tax community for clarification on this point. The IRS’s position Unfortunately, the guidance states that no deduction is allowed for an expense that’s otherwise deductible if the payment of the expense results in forgiveness of a PPP loan. It explains that, to prevent a double tax benefit, IRC Sec. 265 disallows a deduction for any amount otherwise allowable as a deduction that’s allocable to tax-exempt income (other than interest). The IRS asserts that forgiven PPP funds constitute such tax-exempt income. In other words, the IRS maintains that a business shouldn’t be allowed to avoid taxable cancellation of debt income on forgiven PPP loan amounts and also to deduct the payments made with those loan amounts. The result for borrowers essentially is an offset of the tax benefit — the forgiven amounts are excluded from gross income but the deduction(s) for those amounts are eliminated. The pushback The IRS may not have the last word on the deduction issue, though. Members of Congress are signaling that the expenses paid by forgiven PPP loan proceeds should indeed be tax deductible. For example, both Sen. Charles Grassley (R-IA), the chair of the Senate Finance Committee, and Rep. Richard Neal (D-Mass.), the chair of the House Ways and Means Committee, have indicated that the IRS interpretation runs contrary to the goal of the PPP. They’ve said they would like the discrepancy to be remedied legislatively in the near future. It’s also possible that a borrower will challenge the IRS stance in court. Or the IRS simply could succumb to […]

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