Tag Archives: tax deduction

Tax Cuts and Jobs Act – State and Local Taxes Update

December 16, 2020Uncategorizedbusiness, corporation, cut, finance, IRS, memo, Money, partnership, s corp, salt, tax, tax cut, tax cut job act, tax deduction, taxpayer, TCJA[email protected]

Summary

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
1. 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
1. 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”:
2. Connecticut – effective January 1, 2018
3. Louisiana – election to be made
4. Maryland – imposed to the distributive shares or pro rata shares of resident members of the PTE
5. New Jersey – effective January 1, 2020, election to be made
6. Oklahoma – effective January 1, 2019, needs annual election
7. Rhode Island – effective January 1, 2019, election to be made
8. 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.

Update 3: Tax and Financial Update Due to Coronavirus

March 31, 2020Uncategorized401k, accounting, business, carryback, contributions, coronavirus, covid-19, deduction, financial, grant, investment, IRS, IRS Update, loan, loss, new tax law, NOL, retirement, small business, student loan, tax, tax bill, tax credit, tax deduction, taxes, update, virus[email protected]

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 provision is the same or similar.

The Senate bill S. 3548 turned into H.R. 748, and this bill was passed by Congress and signed by President Trump on March 27, 2020. There have been some minor changes from the S.3548 bill, so I’ll discuss the highlights of the changes below.

Section 1102 Paycheck Protection Program Loans (PPP):
1. This is a section 7(a) SBA loan
2. 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.
3. Government guarantees 100% of the loan through December 31, 2020
  1. Guarantee drops to 75% for loans exceeding $150,000 and
  2. 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.
1. Includes sole-proprietors, independent contractors, and self-employed individuals.

How to Calculate the Loan Amount / Maximum Loan Amount:
1. In Summary, average monthly payroll from 2019 multiplied by 2.5.
2. 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.
  1. Payroll Costs as defined in the bill.
    1. Payroll Costs Included:
      1. Salary, wage, commission, or similar compensation
      2. 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
1. Payroll can’t exceed more than $100,000 a year.
Self-employed , Sole Proprietor.
1. 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.
2. 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:
1. An annual salary over $100,000 / year.
2. 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.
1. 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.

Section 1106 Loan Forgiveness:
1. 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.
2. The loan forgiveness seems to be only for PPL / PPP loans.
3. Amount forgiven may not exceed the principal amount of the loan.
4. Eligible payroll costs do not include compensation above $100,000 in wages.
5. 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.
6. Loan forgiveness / cancellation will not be included in borrower’s taxable income.

Section 1110 Emergency EIDL (Economic Injury Disaster Loan) Grant:
1. Allocated $10B in funding for EIDL.
2. 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.
3. 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.
4. 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.
5. The loans may be used for expenses that could have been met had the disaster not occurred, including payroll and other operating expenses.
6. The EIDL grant does not need to be repaid, even if the grantee is subsequently denied an EIDL.
7. 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.
8. Eligible grant recipients must have been in operation on January 31, 2020.
9. 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.
10. Typically, the $10,000 grant would be subtracted from the amount forgiven in the payroll protection plan.
11. Waived personal guarantee on advances and loans not exceeding $200,000.
12. The approval should be based on solely on the credit score of the applicant and no requirement for tax returns or tax return transcripts.

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 “V3” (version 3) 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.

1. Businesses & Other Employers:
  1. 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.
1. 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:
1. 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.
  1. The rebates phase out at $99,999 for single and $199,000.
2. Expansion of unemployment benefits, including self-employed, and gig-economy workers. Unemployment insurance to include an additional $600 / week for an additional 13 weeks.
3. 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.
4. Exclusion of certain employer payments of student loans up to $5,250 will not be treated as taxable income to the employee.
5. Temporary Relief Federal Student Loan: Deferral of student loan payments on principal and interest for 6 months through September 30, 2020.
Other Items:
1. 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.
  1. 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 ,
1. Relief for Individuals, Families, and Businesses. Rebates and Other individual Provisions.
  1. 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:
    1. Net income tax liability, or
    2. $1,200 ($2,400 in the case of joint returns)
      1. The credit should not be less than $600
      2. $500 per qualifying children
    3. Eligible individuals are based on adjusted gross income (AGI) of
      1. $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.
    4. 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.
      1. This means that IRA, HAS and MSA contributions are extended to July 15, 2020 also.
    5. Individual ES Payments: Different from the Senate bill, 1^st quarter estimated tax payments are delayed and due on July 15, 2020. 2^nd quarter estimated tax payments are still due on June 15, 2020. This is stated on IRS Notice 2020-18 and Notice 2020-20.
      1. You can read about these due date extensions at:

https://www.irs.gov/newsroom/filing-and-payment-deadlines-questions-and-answers

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.
1. 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.
2. 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.
1. 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.
1. 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:
1. 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.
2. 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.
  1. 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.
3. 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.
  1. 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.
4. A taxpayer may elect out of the 5-year NOL carry back. If elected, it can’t be changed. It is irrevocable.
  1. 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.
5. 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).
  1. 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.
6. 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.
  1. VA Comment: This means a taxpayer that this limitation would apply to will be allowed more of an interest deduction.
7. Technical correction for qualified Improvement Property: This bill corrected a prior law error.
  1. 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.
  2. Due to legislative oversight, the law accidentally excluded improvements property to be eligible from 100% bonus depreciation.
  3. 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.
8. Foreign controlled corporation/shareholder:
  1. The bill is changing the US owned foreign corporation from 10% to 50%.
9. 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.

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.

Action Items:

Get your information ready for a loan if you need it. We are expecting PPL loans to be processed quicker than other SBA loans. However, we don’t know yet. See the US Chamber of Commerce publication attached. If you need assistance, please contact us.
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 1^st quarter estimated tax payments are due July 15, 2020. 2^nd quarter ES payments are still due June 15, 2020.
Consider amending 2018 and/or 2019 tax returns for the following:
1. NOL’s: Now NOL’s from 2018 – 2020 can be carried back up to 5 years.
  1. 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.
2. Interest deduction limitations
3. Business loss limitations

Lastly, and as always, please contact us if you need assistance or have any questions.

Tax and Financial Updates Related to COVID-19

March 18, 2020Uncategorizedaccounting, assistance, business, congress, coronavirus, covid-19, economy, Employee, financial, IRS, IRS Update, new tax law, policies, policy, senate, small business, tax, tax bill, tax deduction, tax return deadline[email protected]

The novel coronavirus (COVID-19) crisis has touched so many lives, both with illness and hardship. 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 tax, accounting and finance updates to assist everyone with these challenges.

The tax and financial laws are changing daily, therefore I marked “V1” (version 1) on my memo above. There are various other social service updates, but our memos will focus mainly on finance, business and tax updates.

CONGRESS PASSED HR 6201, FAMILIES FIRST COONRAVIRUS RESPONSE ACT, which is highlighted below. However, this bill hasn’t passed the Senate as of March 17, 2020 at 7 p.m. PST.

Employer tax credits: The Act provides tax credits to employers to cover wages paid to employees while they are taking time of under the bill’s sick leave and family leave programs.

1. The sick leave credit for each employee would be equal to his wages, limited to $511 per day while the employee is receiving paid sick leave to care for themselves, or $200 if the sick leave is to care for a family member or child whose school is closed. An additional limit applies to the number of days per employee: the excess of 10 days over the aggregate number of days considered for all preceding calendar quarters.
2. The family leave credit for each employee is limited to $200 per day with a maximum of $10,000.
3. The credits are refundable to the extent they exceed the employer’s payroll tax.
4. Employers don’t receive the credit if they’re also receiving the credit for paid family and medical leave in IRC Sec. 45S. These rules apply only to wages paid with respect to the period beginning on a date selected by the Secretary of the Treasury which is during the 15-day period beginning on the date of the enactment of the Act and ending on December 31, 2020. (Act Sec. 7001; Act Sec. 7003)

Comparable credits for self-employed: The Act provides for similar refundable credits against the self-employment tax. It covers 100% of self-employed individual’s sick leave equivalent amount, or 67% of the individual’s sick-leave equivalent amount if they are taking care of sick family member or taking care of a child following the child’s school closing. The sick leave equivalent amount is the lesser of average daily self-employment income, or $51/ day to care for the self-employed individual, or $200 / day to care for a sick family member or child following a school closing.

1. Self-employed individuals could receive family leave credit for as many as 50 days multiplied by the lesser of $200 or their average self-employment income.
2. These rules apply only to days occurring during the period beginning on a date selected by the Secretary of the Treasury, which is during the 15-day period beginning on the date of the enactment of this Act and ending on December 31, 2020.

Employer FICA exclusion: Under the Act, sick leave and family and medical leave paid under the Act will not be considered wages under IRC section 3111(a) (employer tax and disability insurance portion of FICA ; 2%).

VA Note: The seems to mean the employer tax will not be required to be paid on qualified sick leave, family and medical leave, so make sure you inform your payroll processor.

Income Tax Updates as of March 17, 2020:

Federal April 15, 2020 Deadline for Tax Due Payment is extended to July 15, 2020:

1. 1. This change was announced on March 17, 2020 in the afternoon by Treasury Secretary Steven Mnuchin.
  2. Treasury Secretary Steven Mnuchin announced that taxpayers owing a payment to the IRS may defer the payment for 90 days.
  3. Individual can defer up to $1MM and Corporations may defer up to $10MM.
    1. The $1MM limit for individuals was established to cover small businesses and passthrough entities.
  4. No interest and penalties will be charged on these deferred payments.
    1. The Treasury Secretary is recommending filing tax returns timely even if you owe money as the taxpayer would still get the payment extension with no interest or penalties as discussed above.
  5. If you have a refund, you should file timely to get the refund quicker.

VA Note: Please contact us if you have an urgent need for tax returns with refunds.

1. 1. Currently, I’m reading that the tax returns are still due April 15, 2020, but the date for payment of taxes is extended to July 15, 2020. So, at this time, April 15, 2020 extensions are still required to be processed.
    1. This may change, perhaps they will also add that extensions will not be required, so stay tuned.
  2. Many details remain unclear with respect to this relief and no official written guidance has been released as of March 17, 2020.

State Tax Filing Guidance for Coronavirus Pandemic:

1. Some states have enacted some extensions like the Federal / IRS, but much more need to come out. Please see the AICPA Guidance: https://www.aicpa.org/content/dam/aicpa/advocacy/tax/downloadabledocuments/coronavirus-state-filing-relief.pdf
2. California: California has extended the due date to file returns and pay tax until June 15, 2020, which includes partnerships which were due on March 15, 2020, but it doesn’t discuss S Corporations, but I’m assuming that is an oversight.

IRS Coronavirus Tax Relief:

1. Website that doesn’t really provide much information yet. https://www.irs.gov/coronavirus
2. IRS Notice 2020-17 is accessible from the link above. This notice is dated March 13, 2020. Some of the highlights are as follows:
  1. President Trump issued an emergency declaration under the Robert T. Stafford Disaster Relief and Emergency Assistance Act in response to the Coronavirus pandemic (Emergency Declaration).

VA Note: Please consider reviewing your business insurance for any loss of revenue or extra expense reimbursement due to this emergency declaration act. Perhaps this “Emergency Declaration” will allow some coverage.

1. 1. The Emergency Declaration instructed to Secretary of the Treasury “to provide relief from tax deadlines to Americans who have been adversely affected by the OVID-19 emergency pursuant to IRC section 7508A(a). This code section is entitled, “Authority to postpone certain deadlines by reason of Presidentially declared disaster or terroristic or military actions.” Pursuant to IRC section 7508A(a), a period of up to one year may be given. Currently, the relief for tax payments as discussed above is 90 days.
2. The relief granted by the Federal government is federal income tax payments due on April 15, 2020.
3. The relief provided is available solely with respect to Federal income tax payments (including payments of tax on self-employment income) due on April 15, 2020 in respect of an affected taxpayer’s 2019 taxable year, and federal estimated income tax payments due on April 15, 2020.

VA Note: Our interpretation is April 15, 2020 tax due payments for 2019 tax liabilities and 2020 1^st quarter estimated tax payments are provided a 90-day relief, to July 15, 2020. There doesn’t seem to be any extension/relief for other taxes like payroll taxes. However, some employers will find relief related to employer payroll tax as discussed above. As of this current notice, interest and penalties would begin on July 16, 2020.

SBA Relief/Small Business Loans: Small businesses will probably need cash/financing assistance to get us through this COVID-19 shutdown period. Currently, it seems SBA financial assistance is based on a state by state decision. Let’s discuss the current options
- One can go to https://www.sba.gov/about-sba/sba-newsroom/press-releases-media-advisories/sba-updates-criteria-states-requesting-disaster-assistance-loans-small-businesses-impacted Updates as of March 17, 2020.
- Relaxed criteria will have two immediate impacts:
  1. Faster, easier Qualification process for states seeking SBA disaster Assistance.
  2. Expanded Statewide access to SBA Disaster Assistance loans for Small business. SBA disaster assistance loans are typically only available to small businesses within counties identified as disaster areas by a Governor. Under the revised criteria issues on March 17, 2020, disaster assistance loans will be available statewide following an economic injury declaration. This will apply to current and future disaster assistance declaration related to Coronavirus.
- Process for Accessing SBA’s Coronavirus (COVID-19) Disaster Relief Lending:
  1. SBA is offering designated states ad territories low interest federal disaster loans for working capital to small businesses suffering substantial economic injury as a result of COVID-19. Upon request received from a state’s Governor, SBA will issue under its own authority, Supplemental Appropriations.
  2. Any such Economic Injury Disaster Loan assistance declaration issued by SBA makes loans available statewide to small businesses and private, non-profit organizations to help alleviate economic injury caused by COVID-19.

One a declaration is made, the information on the application process for Economic Injury Disaster loan assistance will be made available to affected small businesses within the state.

The loans may be used to pay fixed debts, payroll, accounts payable and other bills that can’t be paid because of the disaster impact. The interest rate is 3.75% for small businesses and 2.75% for non-profit.
SBA offers loans with long-term repayments in order to keep payments affordable, up to a maximum of 30 years. Terms are determined on a case-by-case basis, based upon each borrowers’ ability to repay.
To apply for disaster assistance go to https://www.sba.gov/funding-programs/disaster-assistance
1. Need to register
2. Need to apply
3. COVID 19 / Coronavirus application is “Economic Injury”
4. Select your State and County
5. Selection Disaster Name which should be Coronavirus.
6. You must certify and accept a truthful clause
7. You need to accept statement required by EO, which includes information being available for specific reasons.
8. Filings Requirements:
  1. Disaster Business Loan Application
    1. Need FEIN
    2. Need insurance information for flood, hazard, or business interruption.

If you every had a federal loan (like an SBA loan), they will want that information.

Personal Financial Statements SBA form 413
Schedule of Liabilities SBA form 2202
Request for Tax Return transcripts
Business Tax Returns
You will need to be prepared with financial and tax information for the application.

Unemployment Options

This is an option in which a business owner can terminate employees due to some purposes or reason which is based on their state law and employment contracts, like furloughed due to Coronavirus, and the employee would file for state unemployment insurance/income.

Political Discussion / Financial Thoughts:

I think all of us, as business owners, need to communication with our Congress person and Senator. I think one of the best ways to get money to small business is for the Federal Government to utilize SBA to provide loans to small businesses. The application needs to be streamlined. The loans to small businesses would provide financial help to keep those businesses going. Governments needs to be concerned with borrowers not taking advantage of the program could provide some sort of income tax incentives to the business owner in addition to the ones already passed. Here are my initial thoughts:
1. Use SBA to provide disaster loans to small business. I’m sure SBA can get cash to business owners better than Treasury cutting checks to taxpayers.
2. The SBA funds can be used to pay employees, rent, loans, utilities and necessary/fixed overhead would be a tax deduction and a refundable tax credit.
  1. This should provide business owners with an incentive to use the money correctly, because if they don’t, then they will still be on the hook for the loan.
3. Profits will most likely be down, and cash spent to keep employees working and businesses paying the bills, should help the economy. These payments, which the IRS can define later, would be a tax deduction and a refundable credit.
4. The refundable credit should trigger a tax refund, and that money can be used to pay back the SBA loan.
5. If things work out correctly, businesses stay open, employees get paid, employee benefits stay in place, overhead gets paid, and this should help us through this pandemic. Then the IRS could provide tax forms with the 2020 tax returns, in which qualified disaster expenses would be a tax deduction and a refundable credit. The IRS can audit these calculations.
6. Refundable credits would provide business owners with cash upon filing tax returns, and thus the refund can be directly applied to SBA loans.
7. Refundable credits would also reduce the need or amount for 2020 estimated tax payments.
8. Yes, this is going to be an expensive taxpayer assistance package, but we the taxpayers pay the tax, and this time we need help. Based on my quick research, the TARP (Trouble Asset Relief Program) cost the taxpayers around $40 billion. Congress MUST act to save the US economy. Allowing the banks and small business to help should make the process easier.
9. If a financial assistance program isn’t provided, I expect employees will be laid off and businesses will go out of business. Loans won’t be paid, landlords won’t be paid, etc. It would be a ripple effect.
10. I recommend everyone contact their Congress person and / or Senator to such a strategy similar to the above. Business owners don’t want to go into debt to keep the doors open.
11. Hopefully this process or something similar will keep the economy sustained and reduce the chances of uprising. If people can’t work to earn money, they need a process to pay for food, housing, and bills. Plus, this should create an incentive for people to abide by the disaster request/requirements.

Donating your vehicle to charity may not be a tax-wise decision

June 18, 2019Advice, Articles, Uncategorizedcharity, deduction, Donating Vehicle, tax deduction, tax savings[email protected]

You’ve probably seen or heard ads urging you to donate your car to charity. “Make a difference and receive tax savings,” one organization states. But donating a vehicle may not result in a big tax deduction — or any deduction at all.

Trade in, sell or donate?

Let’s say you’re buying a new car and want to get rid of your old one. Among your options are trading in the vehicle to the dealer, selling it yourself or donating it to charity.

If you donate, the tax deduction depends on whether you itemize and what the charity does with the vehicle. For cars worth more than $500, the deduction is the amount for which the charity actually sells the car, if it sells without materially improving it. (This limit includes vans, trucks, boats and airplanes.)

Because many charities wind up selling the cars they receive, your donation will probably be limited to the sale price. Furthermore, these sales are often at auction, or even salvage, and typically result in sales below the Kelley Blue Book® value. To further complicate matters, you won’t know the amount of your deduction until the charity sells the car and reports the sale proceeds to you.

If the charity uses the car in its operations or materially improves it before selling, your deduction will be based on the car’s fair market value at the time of the donation. In that case, fair market value is usually set according to the Blue Book listings.

In these cases, the IRS will accept the Blue Book value or another established used car pricing guide for a car that’s the same make, model, and year, sold in the same area and in the same condition, as the car you donated. In some cases, this value may exceed the amount you could get on a sale.

However, if the car is in poor condition, needs substantial repairs or is unsafe to drive, and the pricing guide only lists prices for cars in average or better condition, the guide won’t set the car’s value for tax purposes. Instead, you must establish the car’s market value by any reasonable method. Many used car guides show how to adjust value for items such as accessories or mileage.

You must itemize

In any case, you must itemize your deductions to get the tax benefit. You can’t take a deduction for a car donation if you take the standard deduction. Under the Tax Cuts and Jobs Act, fewer people are itemizing because the law significantly increased the standard deduction amounts. So even if you donate a car to charity, you may not get any tax benefit, because you don’t have enough itemized deductions.

If you do donate a vehicle and itemize, be careful to substantiate your deduction. Make sure the charity qualifies for tax deductions. If it sells the car, you’ll need a written acknowledgment from the organization with your name, tax ID number, vehicle ID number, gross proceeds of sale and other information. The charity should provide you with this acknowledgment within 30 days of the sale.

If, instead, the charity uses (or materially improves) the car, the acknowledgment needs to certify the intended use (or improvement), along with other information. This acknowledgment should be provided within 30 days of the donation.

Consider all factors

Of course, a tax deduction isn’t the only reason for donating a vehicle to charity. You may want to support a worthwhile organization. Or you may like the convenience of having a charity pick up a car at your home on short notice. But if you’re donating in order to claim a tax deduction, make sure you understand all the ramifications. Contact us if you have questions.

7 IRS Triggers

February 28, 2013AdviceIRS, IRS audits, real estate professional, rental income, tax deduction, tax returnsadmin

As we have written previously, IRS audits have significantly increased. Having an audit is not fun. It can consume a lot of ones time and money if you hire a professional to represent you. We seen a lot of audits which in our opinion shouldn’t have been triggered but because the tax return has a certain trigger the taxpayer has to deal with it. To often we see sloppy mistakes that taxpayers and tax preparers make which triggers the audit. So review these items and consider if your tax return should be done differently or by a different person if you have any of these items.

Loss from a flow through (S Corporation, Partnerships, LLCs): We have seen an significant increase in audits in which the tax return is taking a deduction for a loss from a flow through. The loss may be justified, but the IRS is looking for these attributes more often and they are finding mistakes. Once selected, they will look for a calculation that should be part of the tax return that shows that the taxpayer has adequate tax basis to take the loss. There must be tax basis to take the loss. Too often we have seen that the tax preparer has not prepared the proper tax basis calculation and thus triggered the audit. Most of the taxpayers didn’t know that the tax preparer didn’t’ prepare all the necessary forms. So, if you have losses from flow through, double check with your tax preparer. This issue can also be expanded to the flow through and all the shareholders or partners and for multiple years.
Large decreased in taxable income: Even though most of the country has just came out of the recession, and most of us had to work harder and earned less, the IRS is still pulling tax returns for audit when the taxable income as decreased significantly. If your taxable income decreased significantly, please make sure you take extra care that your tax return is correct, so if you are audited, it will go smoother.
Real Estate Professional: Real Estate professional is a tax status that if met can allow a taxpayer to use that loss against other non rental income. Typically rental losses are considered a passive activity and outside of some minor rules, is only able to be offset against other passive income. So, if a taxpayer has rental losses, and has other non passive income, certain rules have to be met to net the amounts together and thus pay tax on the net. The real estate professional status continue to be a hot audit item.
Not reporting income: The IRS computers receive information on taxpayer that typically deals with income and certain deductible items like mortgage interest. If the IRS computers show a larger amount of income than reported on your tax return, your chances of an audit have significantly increased. If the amount is small, the IRS may just send you a letter, but if the amount is large, you will probably have to deal with an audit. So, make sure you review all your W-2’s, 1099, even including your investment transactions. Even if the amount reported isn’t fully taxable your tax preparer should be aware of the income and properly report it to agree with the IRS computers.
Being Self-Employed (Sole Proprietorship): The IRS audits self employed taxpayers more often than others. They have statistics that these taxpayers as a whole try to reduce taxable income illegally. They also have seen that these taxpayers typically don’t’ have the best records, so they audit them and find more tax dollars to send back to Washington D.C. If you are self employed that is fine, make sure you have good accounting records. Try using a simple program like Quick Books to keep track of your income, expense, and liabilities which include credit cards. We highly recommend that self employed set up a DBA bank account and have separate credit cards for just the business. This makes it easier to track business transactions. Our opinion is that if your net income is approaching $100,000 or larger, you should consider incorporating and electing S Corporation. Generally your income tax can be decreased, you can create some asset protection and your audit risk should be reduced.
Foreign Bank Accounts: The IRS is still allocating a lot of resources to find taxpayers that have foreign bank accounts and haven’t properly reported them. If a taxpayer has a foreign bank account or even signature authority they need to properly complete the proper forms to disclose them.
Research Credit: The tax code allows tax credits for money spent on research costs. The government wants to create an incentive for the US taxpayer to strive to create new or better technology. However, too often have we seen that the company didn’t properly follow the rules to support the research credit.

A lot of audits could have been alleviated if the tax return was prepared properly. Also, the taxpayer needs to be prepared for an audit. This means one must keep organized records. We recommend using an accounting software program that is appropriate for your business. Depending on the type of business you have, you will need to create some best practices to be more organized in accounting. For example, if you purchase goods or services with cash, make sure you keep the receipts. Taxpayers that have organized books and records can complete an examination much quicker. So be prepared if you are audited.

The IRS isn’t the only one taxpayers need to be prepared for. Depending on your business, make sure you are prepared for state audits, sales tax audits, and payroll audits. All the government agencies are out there looking for more tax revenue.

Tax Deduction for Meals

January 11, 2012Advicemeals, tax deductionadmin

Typically business expenses for meals and entertainment are only 50% deductible for income tax purposes pursuant to IRC section 274(n). This is because the government feels that the taxpayer receives some enjoyment, so only 1/2 is deductible. But for financial statement purposes, 100% is an expense.

However, there is a special rule all business owners should be aware of. Meals furnished to employees can be 100% deductible pursuant to IRC 274(e) if they furnished to employees on the employers facility. We discuss this law with our clients all the time. These sorts of meals should be tracked separately on the taxpayers general ledger. So meals that our brought into the business or delivered and the food is for the employees would qualify as 100% deductible. Don’t forget this one when you are preparing your tax returns.