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@example.com. We are focused on staying up to date on the tax, accounting and finance updates to assist everyone with these challenges. Things are changing hourly, and discussions on the news don’t completely explain the law as written. So, we are explaining in as much detail as we can for the moment. Our focus on this memo are certain provisions we feel are important to our clients.
I read on the Wall Street Journal app this morning at 8:00 a.m. PST today, March 26, 2020, that the Senate passed Senate bill S.3548, the CARES Act. However, when I looked for the formal acknowledgement on www.congress.gov at 3:30 p.m. PST on March 26, 2020, the status doesn’t say it was passed. So, my discussions are based on the actual bill text that is assumed to be passed by the Senate.
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 is expected to pass the senate, the house and be signed by the president have financial and accounting information requirements necessary for the financial assistance. Accordingly, we are available to assist any client in the SBA application process for financial assistance.
The tax and financial laws are changing daily, therefore I marked this memo with “V2” (version 2) 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 introduced bill at https://www.congress.gov/bill/116th-congress/senate-bill/3548
Businesses & Other Employers:
Retention 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.
Deferral of employer portion of payments for certain payroll taxes.
Modification of net operating loss (NOL) and limitation rules. Will allow some NOL’s incurred in 2018, 2019, and 20120 to carry them back for refunds to 5 years. This carry back law was exempt for tax years beginning 2018 under the new tax laws that Trump and Congress enacted. Due to this financial crisis they are not allowing NOL carry backs for these periods to be carried back.
Modification of the deduction limitation on business interest rules of IRC section 163(j).
Qualified improvement property technical correction, allowing qualifying interior improvements of buildings to be immediately expenses rather than depreciated over 15 years.
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.
Expansion of the ways the SBA can help small business.
Loans for small employers with 500 employers or less, including non-profits would be eligible to apply for loans. The size of the loan would be tied to the applicant’s average monthly payroll, mortgage, rent, utilities payment and other debt obligations over the previous year.
The portion of the loan used to cover payroll and payments on pre-existing debt would be forgiven.
Loans are supposed to be streamlined with SBA, and SBA approved banks.
If a business doesn’t have payroll, or not a large amount of payroll, SBA will expand loans for:
Payroll, supply chain disruption, mortgage payments, and other debt obligations.
SBA express loans would be increased from $350k to $1MM.
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.
Expansion of unemployment benefits, including self-employed, and gig-economy workers.
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.
Additional Information regarding 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 introduced bill at https://www.congress.gov/bill/116th-congress/senate-bill/3548 . These additional steps can cause other changes. However, based on the proposed S 3548 bill, I’m providing some additional details listed below:
Division A – Small Business Interruption Loans
SBA 7(a) Loan Program
This is the most popular loan program with the SBA for small business.
Covered period beginning on March 1, 2020 and ending on December 31, 2020.
Listening to Secretary of the Treasury Steve Mnuchin on March 25, 2020, he stated he expects the loans to be processed by all FDIC banks in a simple format and expect loans to be processed in a day. That would be wonderful.
He did state that they expect to have the money and process ready to provide the funds by 3 weeks which would be around April 15, 2020, but it depends on Congress, and a lot of moving parts.
Secretary of the Treasury also stated the following:
The loans are supposed to be for 8 weeks of payroll, and overhead.
VA Comment:We need to get details on what is included in payroll and overhead, but the Secretary’s discussion seems prudent. However, the proposed S.3548 bill states to take the average monthly payroll for the prior year, plus included overhead and multiple by 4. Can’t exceed $10MM. So, I don’t read the 8 weeks of payroll. Perhaps that was his quick explanation.
This part of the law is for companies with no more than 500 employees.
The maximum loan amount would be the lesser of:
The average total monthly payments for payroll, mortgage payments, rents payments and payments on any other debt obligations incurred during the 1 year period before the date on which the loan is made, except if the employer is seasonal, then they would use the average monthly payments between March 1, 2019 and ending June 20, 2019
Then multiple by 4.
VA Comment:If you are considering requesting financial relief, then I recommend you get your numbers and support ready for the application process. Plus, you will need to make sure you have enough cash to get you to the date of receiving the financial assistance which is expected to be around April 15, 2020. I would expect that we should have payroll reports that support the numbers on a worksheet that calculates the average, plus your average other included overhead expenses. Being prepared should allow you to get the financial assistance quicker.
Allowable Uses of Program Loans:
Payroll support, including paid sick, medical, family leave and costs related to the continuation of group health care benefits during the periods of leave.
Employee salaries (calculating based on the average number of employees for each pay period)
Rent (including rent under a lease agreement)
Other debt obligations that were incurred before the covered period.
Loan Considerations: The proposed bill is requiring that the lending institution only consider the following:
Was the borrower in operations on March 1, 2020; and
Had employee for whom the borrower paid salaries and payroll taxes.
Fees will be waived for these loans.
The Federal government will guarantee 100% of the loan.
Eligible Borrower means:
Small business concern; or
An organization made eligible by section (b) which discuses private or public nonprofit organizations with 500 or less employees.
VA Comment: Prior to this bill, the SBA typically didn’t allow loans to non-profits.
Deferment of 7(a) Loan. The proposed bill requires the lender to provide complete deferment relief for impacted borrowers with 7(a) loans.
VA Comments: This provision seems to state that payments for the covered loans would be deferred for a period of not more than 1year.
Express Loans will be increased from $350,000 to $1,000,000.
Substantially affected by COVID-19 means:
Supply chain disruptions
A decrease in sales or customers; or
VA Comment: If you have a business that doesn’t have any payroll, or not much payroll, then perhaps an SBA 7(a) loan for lost revenue would be the best option. An impacted industry might be owners of rental properties. They might not have much payroll, so a loan might be necessary to offset the loss or deferral of rents. I believe the spirt of this financial package is to get money into the hands of businesses and individuals so they can pay rent.
No Prepayment Penalty for loans made on or before December 31, 2020.
A 7(a) loan for the covered period which is beginning on March 1, 2020 to June 30, 2020.
An eligible recipient shall be eligible for forgiveness of indebtedness on a covered 7(a) loan in an amount equal to the cost of maintaining payroll continuing during the covered period.
Payroll costs have limits.
Compensation to an individual employee can’t exceed $33,333 during the covered period.
Qualified sick leave wages for which a credit is allowed under section 7001 of the Families First Coronavirus Response Act; or
Qualified family leave wages for which a credit is allowed under section 7003 of the Families First Coronavirus Response Act.
VA Comments: It seems that the loan forgiveness is not meant to forgive loans used for compensation, sick or family leave in which the employer would receive a credit also. Seems like they don’t want a double dip. If a company utilizes the credit method, there will need to be an adjustment.
VA Comments: The borrower will probably have to provide financial statements, and federal, state employee records, and unemployment insurance filings, and a certification. If there is NO documentation, then there will be no forgiveness. This should be done prior to apply for the forgiveness.
Upon application for the loan forgiveness, the lender will require documentation to support the loan forgiveness within 15 days, so be prepared when you start the process. The lender will provide a forgiveness decision within 15 days.
Treatment of Amounts Forgiven: Amounts which have been forgiven under the law shall be considered canceled indebtedness by lenders, BUT Not Taxable.
VA Comment: The bill states the forgiveness of debt will be treated as cancelation of indebtedness. However, a section in the proposed bill under “Taxability” states, Cancelation of indebtedness under this section shall be excluded from gross income for purpose of the Internal Revenue Code of 1986.
If there is a reduction of employees, then there can be a reduction of the loan forgiveness.
VA Comment: I read or heard that the forgiveness of any part of the debt wouldn’t negatively affect the credit score of the borrower, but I didn’t read that provision in this bill. This might be an issue that needs to be corrected.
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.
Individual ES Payments: Different from the prior communication from Treasury, this bill states that individual estimated tax payments are not due before October 15, 2020.
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.
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 October 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.
During your working days, you pay Social Security tax in the form of withholding from your salary or self-employment tax. And when you start receiving Social Security benefits, you may be surprised to learn that some of the payments may be taxed.
If you’re getting close to retirement age, you may be wondering if your benefits are going to be taxed. And if so, how much will you have to pay? The answer depends on your other income. If you are taxed, between 50% and 85% of your payments will be hit with federal income tax. (There could also be state tax.)
Important: This doesn’t mean you pay 50% to 85% of your benefits back to the government in taxes. It means that you have to include 50% to 85% of them in your income subject to your regular tax rates.
Calculate provisional income
To determine how much of your benefits are taxed, you must calculate your provisional income. It starts with your adjusted gross income on your tax return. Then, you add certain amounts (for example, tax-exempt interest from municipal bonds). Add to that the income of your spouse, if you file jointly. To this, add half of the Social Security benefits you and your spouse received during the year. The figure you come up with is your provisional income. Now apply the following rules:
If you file a joint tax return and your provisional income, plus half your benefits, isn’t above $32,000 ($25,000 for single taxpayers), none of your Social Security benefits are taxed.
If your provisional income is between $32,001 and $44,000, and you file jointly with your spouse, you must report up to 50% of your Social Security benefits as income. For single taxpayers, if your provisional income is between $25,001 and $34,000, you must report up to 50% of your Social Security benefits as income.
If your provisional income is more than $44,000, and you file jointly, you must report up to 85% of your Social Security benefits as income on Form 1040. For single taxpayers, if your provisional income is more than $34,000, the general rule is that you must report up to 85% of your Social Security benefits as income.
Caution: If you aren’t paying tax on your Social Security benefits now because your income is below the floor, or you’re paying tax on only 50% of those benefits, an unplanned increase in your income can have a significant tax cost. You’ll have to pay tax on the additional income, you’ll also have to pay tax on (or on more of) your Social Security benefits, and you may get pushed into a higher tax bracket.
For example, this might happen if you receive a large retirement plan distribution during the year or you receive large capital gains. With careful planning, you might be able to avoid this tax result.
Avoid a large tax bill
If you know your Social Security benefits will be taxed, you may want to voluntarily arrange to have tax withheld from the payments by filing a Form W-4V with the IRS. Otherwise, you may have to make estimated tax payments.
Contact us to help you with the exact calculations on whether your Social Security will be taxed. We can also help you with tax planning to keep your taxes as low as possible during retirement.
On March 25, 2014, the Internal Revenue Service (IRS) released Notice 2014-21 stating that virtual currency is treated as property. In English, this means that virtual currency like Bitcoin will be subject to income tax just like it is treated as cash or property. The taxability will depend on the type of transaction and how it is received. The type of tax treatment will be similar based on current transactions dealing with cash and existing tax laws. Let’s look at three common examples:
Employment & Independent Contractor Relationship: We all know, that if you work for someone as either a employee or independent contractor and you are paid in cash, that the cash amount is taxable as compensation or income. Thus if you work for someone and they pay you in Bitcoin or another virtual currency, the IRS is now stating that transaction is taxable based on the fair market value (FMV) on the day of receipt (assuming the taxpayer is using the cash basis of accounting). If a taxpayer is using the accrual method of accounting, income would be triggered differently. Thus the employee or contractor would be taxed just like they received cash. Some items to consider are: (1) Will you receive a W-2 or 1099-k?, (2) The income most likely would be subject to self-employment tax, or Federal and state withholding, payroll tax and don’t forget additional Medicare tax (AKA Obamacare), (3) Tracking the income at the date of receipt will provide a tax basis / cost, (4) Tracking a gain or loss on the date of conversion from Bitcoin to cash or property. Thus, there are many things to consider. The fact that virtual currency will eventually be converted into cash or property creates an additional step not generally created if paid in cash.
Mining Operation: If you own or are a partner in a mining operation then the mining operation will generate income when a Bitcoin or virtual currency is mined. Depending on the entity structure type (i.e. sole-proprietorship, C Corporation, S -Corporation, Partnership, LLC) the taxability of the income will be treated differently. When a business is in the business to generate a profit, then expenses to run the business can be deductible against the income. Side note, there are exceptions if the business is deemed illegal. Anyway, thus in a virtual mining operation, the hardware, software, utilities and other operating expense can be used to reduce the taxable income. Then depending on the entity structure, the income will be taxed differently. The mining operation taxability is similar to any other for profit business, but again, another step is created due to a virtual currency being used. Since virtual currency mining isn’t like normal manual labor mining, the tax issue of this business being active or passive is more relevant. This again, can change the tax results. For example, will Net Investment Income Tax (NIIT) / (AKA: Obamatax) be due?
When the virtual currency is mined, the FMV of that currency will generate income. That currency value on that date should be tracked as it will generate income and also create a tax basis for the currency. If the virtual currency is exchanged into US dollar, then the transaction has ended and income is generated. However, if the virtual currency is held for a period of time, then the business should keep track of the FMV on the date it was mined and generated income. Later when the virtual currency is exchanged into US currency, that transaction will create another taxable transaction based on currency exchange tax laws. Thus tracking the virtual currency from mined date to exchange date is very important. As with any business it is also important to make sure the business is properly tracking and supporting expenses and chooses the entity structure wisely. For example, an S Corporation structure can generate less tax than a sole proprietorship or partnership / LLC. Entity structures need to be throughly reviewed based on the business operation and consideration of the partners / shareholders.
Let’s discuss an example. A mining operation generates three (3) bitcoins. The value of those bitcoins on the day they are mined is $700 a coin, so income under the new IRS ruling would be $2,100 for that week. If the bitcoin is exchanged into cash on the mining date, then the income step is over. However, if the bitcoin isn’t exchanged into dollars on the mining date then the company needs to track the bitcoin and later when it is exchanged into cash at $800 a coin, there would be $300 of additional income. However, if the exchange rate is $600 a coin, there would trigger a $300 loss. The mining income and exchange income should be tracked separately due to various tax laws.
If you are part of a pool mining operation, then the above still needs to be considered and then other tax items like, passive versus non-passive come up slightly differently. Also, the pooling operating agreement should have an operating agreement, explanation about tax ramifications and who is the tax matters partner. All these items discussed come up with any business.
Investing in Virtual Currency: If an individual invests in virtual currency, then the transaction should be treated just like any other investment. For example, buying a stock. The opportunity to be taxed at the lower long term capital gains rate is possible. The long term capital gains tax rates are generally either 15% or 20%, and then one must not forget the Net Investment Income Tax (NIIT) / (AKA Obamatax). The individual will need to track their cost basis / tax basis, the date of purchase, the date of sale and the sales price. The holding period will determine if the transaction will qualify for the reduced long term capital gains rate or not.
In summary, now that the IRS has taken the position that they will treat virtual currency like property from a tax law perspective, income tax now becomes an issue that virtual currency holders didn’t really have to worry about in the past. It will be interesting to see any debate about the IRS notice and to see how the community will deal with the IRS notice. Will the community provide the IRS with W-2’s, and 1099’s, or not? Will the community report virtual currency holdings or not? It is hard for the IRS to track transactions if they are not reported, but this IRS notice is telling the taxpayer, the law, and the taxpayer would need to comply.
If we look at how aggressive the IRS has been over the last five years regarding offshore bank accounts then one could argue that this taxation on virtual currency is here to stay. The community and network of virtual currency has also provided support that the currency is valuable and easily converted into good and world currencies. So, if you are involved with virtual currencies, now is the time to speak with your tax advisor and create a plan on how to deal with the taxation and create a strategy just like any other successful business.
The IRS notice can be found at http://goo.gl/ONYs4y as of today. However, if the link doesn’t work, go to www.irs.gov and search the website for Notice 2014-21. Please feel free to ask questions and comments. Please contact us if we can be of assistance.
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