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Update 4: Tax and Financial Update due to Coronavirus

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 advisors@verticaladvisors.com. We are focused on staying up to date on the tax, accounting and finance updates to assist everyone with these challenges. The final Coronavirus bill that was signed by President Trump on March 27, 2020 is H.R. 748 called the CARES Act.  This passed bill was different than the Senate bill I wrote about on March 25, 2020.  Some provisions are the same or similar.

Based on new information reviewed and the discussions with our clients, I’m providing an update.

  1. Section 1102 Paycheck Protection Program Loans (PPL):
    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. VA Update: look at https://home.treasury.gov/system/files/136/PPP–Fact-Sheet.pdf for information about the PPP loans.
      1. Apparently, small business can apply starting April 3, 2020. However, banks need to be prepared.  Most banks have sent out emails to their customer to begin compiling information regarding payroll, and health care costs.
      2. Starting April 10, 2020, independent contractors and self-employed individuals can apply.
        1. We are assuming the banks will want to look at and / or have the net self-employed income from your 2019 tax return or financial statements, and they may ask for 1099’s.
  1. VA Update: Based on additional information received from tax discussions, it seems as if a taxpayer can apply for BOTH a PPL and an EIDL, however, if they apply for both, the EIDL can’t be used for payroll, and the PPL is supposed to be used for payroll.
    1. Some businesses may need more money than just the PPL, so the EIDL will be required. Loans under $250,000 seems to require less information and no personal guarantee.
  2. 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.
  1. 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.
  2. VA Comment: Seems like most every business has been negatively affected from COVID-19 and if a business has payroll, they will apply for the PPL.

 

  1. 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.
  • VA Comment: The current PPL application, just asks for “payroll costs” and the form doesn’t provide a definition of “payroll costs”, so we are suggesting looking at the summary of the bill that defines “payroll costs”. However, we have seen the banks asking for supporting information about “payroll costs”. These items are:
    1. 2019 Payroll, including the last 12 months
    2. 2019 Employees – 1099’s for 2019 employees and independent contractors that would otherwise be an employee of your business (Note: Do NOT include 1099s for services)
    3. Health care costs. All insurance premiums paid by the business owner under a group health plan.
    4. Retirement – your company retirement plan funding paid by the company.
  1. Some banks, like Bank of America, have stated that they are currently only going to provide PPL’s for customers that have deposit and lending relationships.
  2. Payroll Costs as defined in the bill.
    1. Payroll Costs Included:
      1. Salary, wage, commission, or similar compensation (not to exceed $100,000. So, if an employee earns $150,000 a year, the company can only use $100,000 a year for the calculation.)
      2. Payment of cash tip or equivalent
  • Payment for vacation, parental family, medical or sick leave
  1. Allowance for dismissal or separation
  2. Payment required for the provision of group health care benefits including insurance premiums.
  3. 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. 
  1. Excluded Payroll Costs:
    1. An annual salary over $100,000 / year.
    2. Payroll taxes
  2. If a seasonal employer, there is an alternative calculation for an average 12-week period from February 15, 2019 and ending June 30, 2019.
  3. Multiplied by 2.5. NOT to Exceed $10MM
  4. VA Example: If average monthly payroll was $100,000, then multiple by 2.5 = $250,000.
  5. If the business was not in business from February 15, 2019 to June 30, 2019, there is another calculation.
  6. 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. 

 

 

  1. 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.
  2. Defines covered loan period as beginning on February 15, 2020 and ending on June 30, 2020.
  3. 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.
  4. 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.
  5. 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.
  6. 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 duplicate funds for the same uses from another SBA program.
  7. Waives both borrower and lender fees for participation in the Paycheck Protection Program (PPP).
  8. Waives the credit elsewhere test for funds provided under this program.
  9. Waives collateral and personal guarantee requirements under this program.
  10. 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.
  11. Maximum interest rate will be 4%.
  12. No prepayment fees.
  13. Allows complete deferment of 7(a) loan payments for at least six months and no more than a year.
  14. Increases SBA Express loan from $350,000 to $1MM through December 31, 2020.
  15. If head count reduces 25% or more, it will hurt the loan forgiveness, or make the loan not forgiven at all.

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  1. 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.
    7. VA Update: We are reading that Treasury is now stating that 75% or more of the loan forgiveness needs to be for payroll. Thus, no more than 25% of the loan forgiveness can be for non-payroll.
  2. 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.
      1. VA Update: If a business needs more money than they can get from the PPL, then they can apply for an EIDL for items other than payroll which the PPL would be used for.
    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.
    13. VA Update: For loans over $250,000, there seems to be more underwriting requirements. May require financial statements, and tax returns.  However, we haven’t heard or seen if these rules are being applied. 

Most of the financial assistance offered through the first bill called, HR 6201, FAMILIES FIRST CORONRAVIRUS RESPONSE ACT (discussed on our previous memo), and the CARES Act S. 3548 which concluded as HR 748 was included in my discussion below.

The tax and financial laws are changing daily, therefore I marked this memo with “V4” (version 4) on my memo above. There are various other social service updates, but our memos will focus mainly on finance, business and tax updates.

  1. 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.

 

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  1. 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.
  2. 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%.
  3. 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.
  4. 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.
  5. 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.
  6. 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. 

 

 

  1. 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.
  2. 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.

 

The CARES Act Has Passed: Here Are The Highlights

  1. 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, 1st quarter estimated tax payments are delayed and due on July 15, 2020. 2nd quarter estimated tax payments are still due on June 15, 2020.  This is stated on IRS Notice 2020-18 and Notice 2020-20.
          1. You can read about these due date extensions at:

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

  1. 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.
  2. 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.
  3. 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%.   
  4. 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.
  1. 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.
  • Other Considerations:
    1. Lost Income/ Business Interruption insurance coverage: Our firm and clients have reviewed our insurance policies, and considered filing a claim for lost income or additional expense base on “Civil Authority”, in which the argument is that since the state government demanded the residents to stay at home, there has been some business interruption. In conversations with insurance brokers that the coverage is excluded for a “virus”. However, the argument is that the company didn’t close their business for a virus, as they probably didn’t close during influenza season, they closed because of the state government made a demand. As one can guess, lawsuits are already starting, so we are receiving information that if a business has lost of income or business interruption coverage, review your policy and consider filing a claim.
    2. You can review a lawsuit regarding this at https://www.insurancejournal.com/news/national/2020/03/19/561638.htm

 

Please read our earlier memos dated March 17, 2020, March 25, 2020, and March 30, 2020, which were Versions 1 through 3. If you can’t find it, please contact us at advisors@verticaladvisors.com to request a copy or you can read it on our website at www.verticaladvisors.com under blogs.

Action Items:

  1. 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 at https://www.google.com/search?q=us+chamber+of+commerce+coronavirus+emergency+loans&oq=us+chamber+of+&aqs=chrome.5.0l2j69i59j69i57j0l3j69i60.11468j0j4&sourceid=chrome&ie=UTF-8
  2. 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.
  3. 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.
  4. 2019 taxes are due July 15, 2020, and 1st quarter estimated tax payments are due July 15, 2020. 2nd quarter ES payments are still due June 15, 2020.
  5. 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.  Contact us at advisors@verticaladvisors.com

Update 3: Tax and Financial Update Due to Coronavirus

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 advisors@verticaladvisors.com. 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.

 

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  1. 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. 
  1. 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.

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  1. 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
  1. Allowance for dismissal or separation
  2. Payment required for the provision of group health care benefits including insurance premiums.
  3. 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.

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  1. Excluded Payroll Costs:
    1. An annual salary over $100,000 / year.
    2. Payroll taxes
  2. If a seasonal employer, there is an alternative calculation for an average 12-week period from February 15, 2019 and ending June 30, 2019.
  3. Multiplied by 2.5. NOT to Exceed $10MM
  4. VA Example: If average monthly payroll was $100,000, then multiple by 2.5 = $250,000.
  5. If the business was not in business from February 15, 2019 to June 30, 2019, there is another calculation.
  6. 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. 
  1. 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.
  2. Defines covered loan period as beginning on February 15, 2020 and ending on June 30, 2020.
  3. 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.
  4. 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.
  5. 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.
  6. 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.
  7. Waives both borrower and lender fees for participation in the Paycheck Protection Program (PPP).
  8. Waives the credit elsewhere test for funds provided under this program.
  9. Waives collateral and personal guarantee requirements under this program.
  10. 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.
  11. Maximum interest rate will be 4%.
  12. No prepayment fees.
  13. Allows complete deferment of 7(a) loan payments for at least six months and no more than a year.
  14. Increases SBA Express loan from $350,000 to $1MM through December 31, 2020.
  1. 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.

 

  1. 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.

  1. 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.

Corporate Earnings are Flatlining—and That's Bad News for the ...

    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.
  1. 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.
  2. 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%.
  3. 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.
  4. 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.
  5. 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.
  6. 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. 

Young Family Stock Photos, Pictures & Royalty-Free Images - iStock

  1. 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.
  2. 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.

 

  1. 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, 1st quarter estimated tax payments are delayed and due on July 15, 2020. 2nd quarter estimated tax payments are still due on June 15, 2020.  This is stated on IRS Notice 2020-18 and Notice 2020-20.
          1. You can read about these due date extensions at:

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

  1. 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.
  2. 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.
  3. 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%.   
  4. 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.

7 Things You Need to Know About Tax-Loss Harvesting | The Motley Fool

  1. 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 advisors@verticaladvisors.com to request a copy or you can read it on our website at www.verticaladvisors.com under blogs.

Action Items:

  1. 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.
  2. 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.
  3. 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.
  4. 2019 taxes are due July 15, 2020, and 1st quarter estimated tax payments are due July 15, 2020. 2nd quarter ES payments are still due June 15, 2020.
  5. 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. 

Update 2: Tax and Financial Updates due to Coronavirus

Coronavirus - Harford County Health

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 advisors@verticaladvisors.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.

Congress Stock Photos, Pictures & Royalty-Free Images - iStock

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

Business images · Pexels · Free Stock Photos

    1. Businesses & Other Employers:
      1. 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.
      2. Deferral of employer portion of payments for certain payroll taxes.
      3. 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.
      4. Modification of the deduction limitation on business interest rules of IRC section 163(j).
      5. Qualified improvement property technical correction, allowing qualifying interior improvements of buildings to be immediately expenses rather than depreciated over 15 years.
      6. 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.
      7. Expansion of the ways the SBA can help small business.
        1. 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.
        2. The portion of the loan used to cover payroll and payments on pre-existing debt would be forgiven.
        3. Loans are supposed to be streamlined with SBA, and SBA approved banks.
        4. If a business doesn’t have payroll, or not a large amount of payroll, SBA will expand loans for:
          1. Payroll, supply chain disruption, mortgage payments, and other debt obligations.
          2. SBA express loans would be increased from $350k to $1MM.

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  1. 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.
    2. Expansion of unemployment benefits, including self-employed, and gig-economy workers.
    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.

 

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:

    1. Division A – Small Business Interruption Loans
      1. SBA 7(a) Loan Program
        1. This is the most popular loan program with the SBA for small business.
        2. Covered period beginning on March 1, 2020 and ending on December 31, 2020.
        3. 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.
          1. 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.
          2. Secretary of the Treasury also stated the following:
            1. The loans are supposed to be for 8 weeks of payroll, and overhead.
              1. 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.
            2. This part of the law is for companies with no more than 500 employees.
            3. The maximum loan amount would be the lesser of:
            4. 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
              1. Then multiple by 4.
              2. or;$10,000,000.
                1. 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.
  1. Allowable Uses of Program Loans:
    1. Payroll support, including paid sick, medical, family leave and costs related to the continuation of group health care benefits during the periods of leave.
      1. Employee salaries (calculating based on the average number of employees for each pay period)
      2. Mortgage payments
  • Rent (including rent under a lease agreement)
  1. Utilities and
  2. Other debt obligations that were incurred before the covered period.
  1. Loan Considerations: The proposed bill is requiring that the lending institution only consider the following:
    1. Was the borrower in operations on March 1, 2020; and
    2. Had employee for whom the borrower paid salaries and payroll taxes.
    3. Fees will be waived for these loans.
    4. The Federal government will guarantee 100% of the loan.
  2. Eligible Borrower means:
    1. Small business concern; or
    2. An organization made eligible by section (b) which discuses private or public nonprofit organizations with 500 or less employees.
      1. VA Comment: Prior to this bill, the SBA typically didn’t allow loans to non-profits.
    3. Deferment of 7(a) Loan. The proposed bill requires the lender to provide complete deferment relief for impacted borrowers with 7(a) loans.
      1. VA Comments: This provision seems to state that payments for the covered loans would be deferred for a period of not more than 1year. 
    4. Express Loans will be increased from $350,000 to $1,000,000.
      1. Substantially affected by COVID-19 means:
        1. Supply chain disruptions
        2. Staffing challenges.
        3. A decrease in sales or customers; or
        4. Shuttered business.
          1. 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. 
  1. No Prepayment Penalty for loans made on or before December 31, 2020.
  2. Loan Forgiveness:
    1. A 7(a) loan for the covered period which is beginning on March 1, 2020 to June 30, 2020.
    2. 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.
      1. Payroll costs have limits.
        1. Compensation to an individual employee can’t exceed $33,333 during the covered period.
        2. Qualified sick leave wages for which a credit is allowed under section 7001 of the Families First Coronavirus Response Act; or
        3. Qualified family leave wages for which a credit is allowed under section 7003 of the Families First Coronavirus Response Act.
          1. 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. 
          2. 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.
      2. 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.
  1. Treatment of Amounts Forgiven: Amounts which have been forgiven under the law shall be considered canceled indebtedness by lenders, BUT Not Taxable.
    1. 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.
  2. If there is a reduction of employees, then there can be a reduction of the loan forgiveness.
    1. 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.   

 

  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.
      5. 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.

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  1. 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.
  2. 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.
  3. 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%.   

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  1. 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.
  1. 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 October 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 which was Version 1. If you can’t find it, please contact us at advisors@verticaladvisors.com to request a copy or you can read it on our website at www.verticaladvisors.com under blogs.

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

Tax Return Due Date and Extension Changes

U.S Treasury Department Secretary Steven Mnuchin announced that the 2019 income tax filings deadline will be moved to July 15, 2020 from April 15, 2020, because of the coronavirus (COVID-19) outbreak. Previously, the Secretary extended the April 15, 2020 payment date to July 15, 2020.  Now the tax return deadline has been extended.

So, extensions due April 15, 2020 are not due at April 15, 2020, they would be due July 15, 2020.

Image result for steve mnuchin

We are working remotely on all tax returns, as we need to complete returns and projects to get all tax returns and projects done before all the revised due dates and extended due dates.  So, please continue to send in your tax information.  Also, some bank covenants require tax returns to be sent to the banks by a certain date unless the bank provides a revision.

The tax aspects of selling mutual fund shares

Perhaps you’re an investor in mutual funds or you’re interested in putting some money into them, as a part of your tax strategy. You’re not alone. The Investment Company Institute estimates that 56.2 million households owned mutual funds in mid-2017. But despite their popularity, the tax rules involved in selling mutual fund shares can be complex.

Tax basics

If you sell appreciated mutual fund shares that you’ve owned for more than one year, the resulting profit will be a long-term capital gain. As such, the maximum federal income tax rate will be 20%, and you may also owe the 3.8% net investment income tax.

When a mutual fund investor sells shares, gain or loss is measured by the difference between the amount realized from the sale and the investor’s basis in the shares. One difficulty is that certain mutual fund transactions are treated as sales even though they might not be thought of as such. Another problem may arise in determining your basis for shares sold.

What’s considered a sale

It’s obvious that a sale occurs when an investor redeems all shares in a mutual fund and receives the proceeds. Similarly, a sale occurs if an investor directs the fund to redeem the number of shares necessary for a specific dollar payout.

It’s less obvious that a sale occurs if you’re swapping funds within a fund family. For example, you surrender shares of an Income Fund for an equal value of shares of the same company’s Growth Fund. No money changes hands but this is considered a sale of the Income Fund shares.

Another example: Many mutual funds provide check-writing privileges to their investors. However, each time you write a check on your fund account, you’re making a sale of shares.

Determining the basis of shares

If an investor sells all shares in a mutual fund in a single transaction, determining basis is relatively easy. Simply add the basis of all the shares (the amount of actual cash investments) including commissions or sales charges. Then add distributions by the fund that were reinvested to acquire additional shares and subtract any distributions that represent a return of capital.

The calculation is more complex if you dispose of only part of your interest in the fund and the shares were acquired at different times for different prices. You can use one of several methods to identify the shares sold and determine your basis.

  • First-in first-out. The basis of the earliest acquired shares is used as the basis for the shares sold. If the share price has been increasing over your ownership period, the older shares are likely to have a lower basis and result in more gain.
  • Specific identification. At the time of sale, you specify the shares to sell. For example, “sell 100 of the 200 shares I purchased on June 1, 2015.” You must receive written confirmation of your request from the fund. This method may be used to lower the resulting tax bill by directing the sale of the shares with the highest basis.
  • Average basis. The IRS permits you to use the average basis for shares that were acquired at various times and that were left on deposit with the fund or a custodian agent.

As you can see, mutual fund investing can result in complex tax situations. Contact us if you have questions. We can explain in greater detail how the rules apply to you.

© 2020

The SECURE Act changes the rules for employers on retirement plans

The Setting Every Community Up for Retirement Enhancement (SECURE) Act is the first significant retirement-related legislation in more than a dozen years. It brings many changes that affect employers of all sizes, including some that could be particularly beneficial for smaller employers that sponsor retirement plans. Some of the changes, however, may increase the burden on employers. Here are some of the most important developments for employers, many of which took effect for plan years beginning after December 31, 2019. Please read and see how it can help you design tax strategies for this year

Greater access to multiple employer plans

Multiple employer plans (MEPs) allow small and midsize unrelated businesses to team up to provide their employees a defined contribution plan, such as a 401(k) or SIMPLE IRA plan. By pooling plan participants and assets in one large plan, rather than several separate plans, it’s possible for small businesses to give their workers access to the same low-cost plans offered by large employers. Employers enjoy reduced fiduciary duties and administrative burdens by using outside administrators to manage the plan.

Currently, MEPs generally are limited to participating employers that share some commonality — for example, being in the same industry or geographic location or using the same professional employer organization. The SECURE Act creates a new type of “open MEP” that covers employees of employers with no relationship other than their joint participation in the MEP. These pooled employer plans (PEPs) will be administered by a pooled plan provider (PPP), such as a financial services company. The PPP also will be the named fiduciary of the plan, but each employer is responsible for choosing and monitoring the PPP.

PEPs will be permitted for plan years starting in 2021 or later. The U.S. Department of Labor and the IRS are expected to provide guidance before then, as PEPs generally are subject to the same Employee Retirement Income Security Act (ERISA) and Internal Revenue Code rules as single-employer plans.

In addition, the SECURE Act eliminates the so-called “one bad apple” rule that deterred some employers from taking advantage of MEPs. Under the rule, a regulatory violation by one employer participant (such as failing to make contributions to the plan on schedule) could jeopardize the MEP’s tax-qualified status. The SECURE Act lays out certain requirements that a PEP can satisfy to protect its status in such a situation.

The SECURE Act also provides an alternative to MEPs for small employers seeking the economies of scale they provide regarding administration. It allows a group of plans with a common plan administrator to file a consolidated Form 5500 annual report, with a single audit report, if certain conditions are met.

Looser notice and amendment rules on safe harbor plans

As of January 1, 2020, plan sponsors no longer are required to give notice to plan participants before the beginning of the plan year when the sponsor is making qualified nonelective contributions — that is, contributions an employer makes regardless of whether an employee contributes — of at least 3% to all eligible participants. The requirement to provide advance notice when making safe harbor matching contributions continues.

Plan sponsors also can amend 401(k) plans that don’t use a matching contribution safe harbor to include a 3% nonelective contribution safe harbor any time before the 30th day before the end of the plan year. The amendment can be made later than that only if it provides for a qualified nonelective contribution of at least 4% of compensation, rather than 3%, and the amendment is done no later than the close of the following plan year.

Annuity options

Annuities can help reduce the risk that retirees will run out of money before the last years of their lives, when health care expenses can run high. But many employers have been reluctant to offer annuities for fear of facing lawsuits alleging breach of fiduciary duty if the annuity providers they selected run into financial problems down the road. The SECURE Act preempts this hurdle by immunizing employers from liability if they choose a provider that meets certain requirements, starting December 20, 2019.

The SECURE Act, however, also requires employers to include a lifetime income disclosure on a plan participant’s benefit statements at least annually. The disclosure will show the estimated monthly payments the participant would receive if the total account balance were used to purchase an annuity for the participant and his or her surviving spouse. Before employers can implement this requirement, the U.S. Department of Labor must issue applicable guidance.

Participation by part-time employees

Employers generally have been allowed to exclude employees who work fewer than 1,000 hours per year from defined contribution plans, including 401(k) plans. Starting in 2021, the SECURE Act generally expands the rule by requiring employers to allow not just those who work at least 1,000 hours in one year (about 20 hours per week) to participate, but also those who work at least 500 hours in three consecutive years and are at least age 21 at the end of the three-year period.

Employer contributions aren’t a requirement of the new participation rules for part-time employees. And employers can exclude the latter category of part-time employees from testing under the nondiscrimination and coverage rules, as well as from the application of the top-heavy rules.

Expanded tax credits

The SECURE Act establishes a new tax credit of up to $500 per year to offset start-up costs for new 401(k) and SIMPLE IRA plans with an eligible automatic contribution arrangement (EACA), beginning in 2020. This credit is on top of the plan start-up credit already available and is available for three years. It’s also available to employers that convert an existing plan to one with an EACA.

The new law also boosts the amount of the credit available for small employer pension plan start-up costs. (A “small employer” is one with no more than 100 employees.) The new law changes the calculation of the flat dollar amount limit on the credit to the greater of 1) $500 or 2) the lesser of:

  • $250 multiplied by the number of non-highly compensated employees who are eligible to participate in the plan, or
  • $5,000.

Like the automatic enrollment tax credit, it’s available beginning in 2020 and applies for up to three years.

Higher automatic enrollment safe harbor cap

Even before the SECURE Act, employers could automatically enroll employees in a 401(k) plan under a safe harbor with a qualified automatic contribution arrangement (QACA). However, elective deferrals for QACAs have been limited to 10% of compensation.

The SECURE Act increases the maximum amount of an employee’s compensation that can be automatically deferred after the employee’s first plan year, from 10% to 15%. (The cap for the first year in the plan is 10%.) The increase is effective for plan years beginning after December 31, 2019.

Adoption deadlines

Previously, many types of retirement plans were required to be set up during the tax year for which they were to take effect. The SECURE Act extends the adoption deadline for a tax year to the due date of the employer’s tax return (including extensions), providing more flexibility to make contributions and reduce tax liabilities.

Costlier penalties

The SECURE Act increases the penalties for failing to file retirement plan tax returns, as follows:

  • The penalty for failing to file a Form 5500 is $250 per day, not to exceed $150,000 (up from $25 per day, with a maximum of $15,000).
  • The penalty for failing to file a registration statement (IRS Form 8955-SSA) is $10 per participant per day, not to exceed $50,000 (up from $1 per participant per day, with a maximum of $5,000).
  • The penalty for failure to provide a notification of change of certain information (for example, the plan name, sponsor or administrator) is $10 per day, not to exceed $10,000 (up from $1 per day, with a maximum of $1,000).
  • The penalty for failing to provide a required withholding notice is $100 for each failure, not to exceed $50,000 for all failures during any calendar year (up from $10 for each failure, with a maximum of $5,000).

The penalty hikes apply for filings, registrations and notifications required after December 31, 2019.

Promising, but complicated

These and other changes in the SECURE Act are intended to make it easier and less expensive for employers to offer retirement plans to their employees. (The law also contains a number of significant changes for individuals.) The applicable laws and regulations can prove tricky to navigate. Please contact us with any questions regarding the SECURE Act.

© 2020

Congress gives a holiday gift in the form of favorable tax provisions

A good news for all of those who are planning their Tax Return preparation, as part of a year-end budget bill, Congress just passed a package of tax provisions that will provide savings for some taxpayers. The White House has announced that President Trump will sign the Further Consolidated Appropriations Act of 2020 into law. It also includes a retirement-related law titled the Setting Every Community Up for Retirement Enhancement (SECURE) Act.

Here’s a rundown of some provisions in the two laws.

The age limit for making IRA contributions and taking withdrawals is going up. Currently, an individual can’t make regular contributions to a traditional IRA in the year he or she reaches age 70½ and older. (However, contributions to a Roth IRA and rollover contributions to a Roth or traditional IRA can be made regardless of age.)

Under the new rules, the age limit for IRA contributions is raised from age 70½ to 72.

The IRA contribution limit for 2020 is $6,000, or $7,000 if you’re age 50 or older (the same as 2019 limit).

In addition to the contribution age going up, the age to take required minimum distributions (RMDs) is going up from 70½ to 72.

It will be easier for some taxpayers to get a medical expense deduction. For 2019, under the Tax Cuts and Jobs Act (TCJA), you could deduct only the part of your medical and dental expenses that is more than 10% of your adjusted gross income (AGI). This floor makes it difficult to claim a write-off unless you have very high medical bills or a low income (or both). In tax years 2017 and 2018, this “floor” for claiming a deduction was 7.5%. Under the new law, the lower 7.5% floor returns through 2020.

If you’re paying college tuition, you may (once again) get a valuable tax break. Before the TCJA, the qualified tuition and related expenses deduction allowed taxpayers to claim a deduction for qualified education expenses without having to itemize their deductions. The TCJA eliminated the deduction for 2019 but now it returns through 2020. The deduction is capped at $4,000 for an individual whose AGI doesn’t exceed $65,000 or $2,000 for a taxpayer whose AGI doesn’t exceed $80,000. (There are other education tax breaks, which weren’t touched by the new law, that may be more valuable for you, depending on your situation.)

Some people will be able to save more for retirement. The retirement bill includes an expansion of the automatic contribution to savings plans to 15% of employee pay and allows some part-time employees to participate in 401(k) plans.

Also included in the retirement package are provisions aimed at Gold Star families, eliminating an unintended tax on children and spouses of deceased military family members.

Stay tuned

These are only some of the provisions in the new laws. We’ll be writing more about them in the near future. In the meantime, contact us with any questions.

© 2019

GAAP Memo

REVENUE RECOGNITION

For 2019, there is a new accounting rule for revenue recognition that applies to non-public companies. In addition, there are other accounting rules for coming years.  It is important to know these changes as they will change your accounting and financials and will help in Tax preparation services.  Most banks, lenders, and investors want to see Generally Accepted Accounting Principles (GAAP) financial statements.  Having GAAP financial statements allows a reader to use standard GAAP reporting to understand your financial statements, apply financial ratios and compare to industry ratios.  Be prepared and contact us if we can assist.

Background

In May 2014, the Financial Accounting Standards Board (FASB) and International Accounting Standards Board (IASB) issued substantially converged final standards on revenue recognition. These final standards were the culmination of a joint project between the Boards that spanned many years. The FASB’s Accounting Standards Update (ASU) 2014-09, Revenue from Contracts with Customers (Topic 606), provides a robust framework for addressing revenue recognition issues, and upon its effective date, replaces almost all pre-existing revenue recognition guidance in current U.S. generally accepted accounting principles (GAAP). Implementation of the robust framework provided by ASU 2014-09 should result in improved comparability of revenue recognition practices across entities, industries, jurisdictions and capital markets. The effective dates for the new guidance are staggered. Public entities have already implemented the new guidance, and nonpublic entities are required to implement the new guidance in their first annual reporting period beginning after December 15, 2018.

Scope

All customer contracts fall within the scope of ASC 606 except those for which other guidance is provided in the ASC (e.g., leases, insurance contracts, financial instruments, guarantees, non-monetary exchanges).

Core principle and key steps

Revenue is now recognized in a five-step process:

  1. Identify the contract with the customer
  2. Identify the performance obligations in the contract
  3. Determine the transaction price
  4. Allocate the transaction price to the performance obligations
  5. Recognize revenue when (or as) each performance obligation us satisfied.

        LEASES

Starting in 2021, there is a new accounting rule for leases that applies to non-public companies. Early adoption is allowed and recommended. Although this new standard doesn’t need to be implemented for private companies until 2021, we are recommending applying it for 2020, so the company will have comparable financial statements for 2021.  We feel this law is mean to get the lease liability on the balance sheet.  For income taxes, a different method will probably apply.

Background

In February 2016, the FASB issued Accounting Standards Update No. 2016-02, Leases (Topic 842). The new standard requires that all leases should result in an asset and corresponding liability be recognized on the balance sheet. This asset reflects the right to use an asset that is owned by someone else. A corresponding liability reflecting future lease payments is also recognized on the balance sheet.

Scope

All leases with a lease term of over 12 months

Core principle and key steps

  1. Capital leases are now called finance leases and the reporting of these types of leases did not significantly change.
  2. Operating leases are now shown on the balance sheet as a liability and a right to use asset for the present value of the future lease payments.

     OTHER NEW PRONOUNCEMENTS

  1. Accounting Standards Update No. 2018-17- Private Company Council (PCC) recommended change to simplify the variable interest entity rules for non-public companies- real estate leased to a related party does not have to be combined now under certain circumstances. Early adoption is permitted. A variable interest entity is a related party entity that cannot stand on its own without a significant financial interest from the related entity.
  2. Accounting Standards Update No. 2017-04-Simplifying the Test for Goodwill Impairment – Step 2 of the goodwill impairment test was eliminated in order to simplify the test for accounting. Early adoption is permitted. Since 2015, private companies have been allowed the option to amortize goodwill over 10 years, but, if the impairment test is still in place, rather than amortization, then step 2 of the impairment process has been eliminated. Step 2 included determining the implied fair value of goodwill and comparing it with the carrying amount of that goodwill.
  3. Accounting Standards Update No. 2018-07-Non-employee stock-based compensation – Simplifies, updates and aligns non-employee stock-based compensation with employee accounting.
  4. Accounting Standards Update No. 2016-15 Cash flow classification –. Aims to eliminate the diversity in practice related to the classification of certain cash receipts and payments.
  5. Accounting Standards Update No. 2016-18 Restricted cash – Eliminates diversity in the classification of restricted cash on the balance sheet and classification and presentation of changes in restricted cash on the cash flows statement.

The table below shows the effective dates for these other new pronouncements:

Summary:

In summary, we are providing you with some information about some new accounting changes.  Other changes may be required, so please contact us to discuss the application of these accounting changes and to review your financial statements if we are not already.  This memo is meant to provide you with information on accounting changes, we are not providing accounting advice.

It’s not too late to trim your 2019 tax bill

Fall is in the air and that means it’s time to turn your attention to year-end tax planning. While several clear strategies and tactics emerged during the first tax filing season under the Tax Cuts and Jobs Act (TCJA), 2019 and subsequent years bring potential twists that must be considered, too. Let’s take a closer look at year-end tax planning strategies that can reduce your 2019 income tax liability.

Deferring income and accelerating expenses

Deferring income into the next tax year and accelerating expenses into the current tax year is a time-tested technique for taxpayers who don’t expect to be in a higher tax bracket the following year. Independent contractors and other self-employed individuals can, for example, hold off on sending invoices until late December to push the associated income into 2020. And all taxpayers, regardless of employment status, can defer income by taking capital gains after January 1. Be careful, though, because by waiting to sell you also risk the possibility that your investment might become less valuable.

Bear in mind, also, that there may be other reasons that taking the income this year can be more beneficial. For starters, future tax rates can go up. It’s possible that income tax rates might increase substantially by 2021, especially for those with higher incomes, depending on 2020 election results. In any event, in 2026, the higher tax rates that were in place for 2017 are scheduled to return.

Moreover, taxpayers who qualify for the qualified business income (QBI) deduction for pass-through entities (that is, sole proprietors, partnerships, limited liability companies and S corporations) could end up reducing the size of that deduction if they reduce their income. It might make more sense to maximize the QBI deduction — which is scheduled to end after 2025 — while it’s available.

Timing itemized deductions

The TCJA substantially boosted the standard deduction. For 2019, it’s $24,400 for married couples and $12,200 for single filers. With many of the previously popular itemized deductions eliminated or limited, some taxpayers can find it challenging to claim more in itemized deductions than the standard deduction. Timing, or “bunching,” those deductions may make it easier.

Bunching basically means delaying or accelerating deductions into a tax year to exceed the standard deduction and claim itemized deductions. You could, for example, bunch your charitable contributions if it means you can get a tax break for one tax year. If you normally make your donations at the end of the year, you can bunch donations in alternative years — say, donate in January and December of 2020 and January and December of 2022.

If you have a donor-advised fund (DAF), you can make multiple contributions to it in a single year, accelerating the deduction. You then decide when the funds are distributed to the charity. If, for instance, your objective is to give annually in equal increments, doing so will allow your chosen charities to receive a reliable stream of yearly donations (something that’s critical to their financial stability), and you can deduct the total amount in a single tax year.

If you donate appreciated assets that you’ve held for more than one year to a DAF or a nonprofit, you’ll avoid long-term capital gains taxes that you’d have to pay if you sold the property and (subject to certain restrictions) also obtain a deduction for the assets’ fair market value. This tactic pays off even more if you’re subject to the 3.8% net investment income tax or the top long-term capital gains tax rate (20% for 2019).

What if you’re looking to divest yourself of assets on which you have a loss? Rather than donate the asset, the better move from a tax perspective is more likely going to be to sell it to take advantage of the loss and then donate the proceeds.

Timing also comes into play with medical expenses. The TCJA lowered the threshold for deducting unreimbursed medical expenses to 7.5% of adjusted gross income (AGI) for 2017 and 2018, but it bounces back to 10% of AGI for 2019. Bunching qualified medical expenses into one year could make you eligible for the deduction.

You also could bunch property tax payments (assuming local law permits you to pay in advance). This approach might, however, bring your total state and local tax deduction over the $10,000 limit, which means that you’d effectively forfeit the deduction on the excess.

As with income deferral and expense acceleration, you need to consider your tax bracket status when timing deductions. Itemized deductions are worth more when you’re in a higher tax bracket. If you expect to land in a higher bracket in 2020, you’ll save more by timing your deductions for that year.

Loss harvesting against capital gains

2019 has been a turbulent year for some investments. Thus, your portfolio may be ripe for loss harvesting — that is, selling underperforming investments before year end to realize losses you can use to offset taxable gains you also realized this year, on a dollar-for-dollar basis. If your losses exceed your gains, you generally can apply up to $3,000 of the excess to offset ordinary income. Any unused losses, however, may be carried forward indefinitely throughout your lifetime, providing the opportunity for you to use the losses in a subsequent year.

Maximizing your retirement contributions

As always, individual taxpayers should consider making their maximum allowable contributions for the year to their IRAs, 401(k) plans, deferred annuities and other tax-advantaged retirement accounts. For 2019, you can contribute up to $19,000 to 401(k)s and $6,000 for IRAs. Those age 50 or older are eligible to make an additional catch-up contribution of $1,000 to an IRA and, so long as the plan allows, $6,000 for 401(k)s and other employer-sponsored plans.

Accounting for 2019 TCJA changes

Most — but not all — provisions of the TCJA took effect in 2018. The repeal of the individual mandate penalty for those without qualified health insurance, for example, isn’t effective until this year. In addition, the TCJA eliminates the deduction for alimony payments for couples divorced in 2019 or later, and alimony recipients are no longer required to include the payments in their taxable income.

Act now

The future of tax planning is uncertain — even without dramatic change in Washington, D.C., many of the most significant TCJA provisions are set to expire within six years. Contact us for help with your year-end tax planning.

© 2019

Passports and Taxes – Can your passport be revoked?

If you owe the IRS back taxes, they can revoke or refuse to renew your USA passport.

The Fixing America’s Surface Transportation (FAST) Act of 2015, the IRS is required to notify the State Department of taxpayers the IRS has certified as owing a “seriously delinquent tax debt” (IRC Sec. 7345). In July 2019, the IRS temporarily suspended passport certification procedures for anyone who had a case open with the Taxpayer Advocate Service (TAS).

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Since then, the agency has determined that a blanket, systemic exception for anyone with an open TAS case is overly broad and could undermine the effectiveness of the FAST Act to collect a seriously delinquent tax debt. Therefore, the IRS will resume passport revocation procedures for affected taxpayers. According to the IRS, the agency will continue to fairly and impartially oversee the certification process with the State Department to uphold the law while also respecting the rights of all taxpayers.

For more information, see www.irs.gov/newsroom/update-on-passport-certifications-and-taxpayer-advocate-service .