Do you have Tax Questions Related to COVID-19? Here are some answers-

The coronavirus (COVID-19) pandemic has affected many Americans’ finances. Here are some answers to questions you may have right now.

My employer closed the office and I’m working from home. Can I deduct any of the related expenses?

Unfortunately, no. If you’re an employee who telecommutes, there are strict rules that govern whether you can deduct home office expenses. For 2018–2025 employee home office expenses aren’t deductible. (Starting in 2026, an employee may deduct home office expenses, within limits, if the office is for the convenience of his or her employer and certain requirements are met.)

Be aware that these are the rules for employees. Business owners who work from home may qualify for home office deductions.

My son was laid off from his job and is receiving unemployment benefits. Are they taxable?

Yes. Unemployment compensation is taxable for federal tax purposes. This includes your son’s state unemployment benefits plus the temporary $600 per week from the federal government. (Depending on the state he lives in, his benefits may be taxed for state tax purposes as well.)

Your son can have tax withheld from unemployment benefits or make estimated tax payments to the IRS.

The value of my stock portfolio is currently down. If I sell a losing stock now, can I deduct the loss on my 2020 tax return?

It depends. Let’s say you sell a losing stock this year but earlier this year, you sold stock shares at a gain. You have both a capital loss and a capital gain. Your capital gains and losses for the year must be netted against one another in a specific order, based on whether they’re short-term (held one year or less) or long-term (held for more than one year).

If, after the netting, you have short-term or long-term losses (or both), you can use them to offset up to $3,000 ordinary income ($1,500 for married taxpayers filing separately). Any loss in excess of this limit is carried forward to later years, until all of it is either offset against capital gains or deducted against ordinary income in those years, subject to the $3,000 limit.

I know the tax filing deadline has been extended until July 15 this year. Does that mean I have more time to contribute to my IRA?

Yes. You have until July 15 to contribute to an IRA for 2019. If you’re eligible, you can contribute up to $6,000 to an IRA, plus an extra $1,000 “catch-up” amount if you were age 50 or older on December 31, 2019.

What about making estimated payments for 2020?

The 2020 estimated tax payment deadlines for the first quarter (due April 15) and the second quarter (due June 15) have been extended until July 15, 2020.

Need help?

These are only some of the tax-related questions you may have related to COVID-19. Contact us if you have other questions or need more information about the topics discussed above.

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Hiring Independent Contractors? Make sure they’re properly classified

As a result of the coronavirus (COVID-19) crisis, your business may be using independent contractors to keep costs low. But you should be careful that these workers are properly classified for federal tax purposes. If the IRS reclassifies them as employees, it can be an expensive mistake.

The question of whether a worker is an independent contractor or an employee for federal income and employment tax purposes is a complex one. If a worker is an employee, your company must withhold federal income and payroll taxes, pay the employer’s share of FICA taxes on the wages, plus FUTA tax. Often, a business must also provide the worker with the fringe benefits that it makes available to other employees. And there may be state tax obligations as well.

These obligations don’t apply if a worker is an independent contractor. In that case, the business simply sends the contractor a Form 1099-MISC for the year showing the amount paid (if the amount is $600 or more).

No uniform definition

Who is an “employee?” Unfortunately, there’s no uniform definition of the term.

The IRS and courts have generally ruled that individuals are employees if the organization they work for has the right to control and direct them in the jobs they’re performing. Otherwise, the individuals are generally independent contractors. But other factors are also taken into account.

Some employers that have misclassified workers as independent contractors may get some relief from employment tax liabilities under Section 530. In general, this protection applies only if an employer:

  • Filed all federal returns consistent with its treatment of a worker as a contractor,
  • Treated all similarly situated workers as contractors, and
  • Had a “reasonable basis” for not treating the worker as an employee. For example, a “reasonable basis” exists if a significant segment of the employer’s industry traditionally treats similar workers as contractors.

Note: Section 530 doesn’t apply to certain types of technical services workers. And some categories of individuals are subject to special rules because of their occupations or identities.

Asking for a determination

Under certain circumstances, you may want to ask the IRS (on Form SS-8) to rule on whether a worker is an independent contractor or employee. However, be aware that the IRS has a history of classifying workers as employees rather than independent contractors.

Businesses should consult with us before filing Form SS-8 because it may alert the IRS that your business has worker classification issues — and inadvertently trigger an employment tax audit.

It may be better to properly treat a worker as an independent contractor so that the relationship complies with the tax rules.

Be aware that workers who want an official determination of their status can also file Form SS-8. Disgruntled independent contractors may do so because they feel entitled to employee benefits and want to eliminate self-employment tax liabilities.

If a worker files Form SS-8, the IRS will send a letter to the business. It identifies the worker and includes a blank Form SS-8. The business is asked to complete and return the form to the IRS, which will render a classification decision.

Contact us if you receive such a letter or if you’d like to discuss how these complex rules apply to your business. We can help ensure that none of your workers are misclassified.

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Paycheck Protection Program Loan Forgiveness Quick Reference Guide

Now that many small businesses have received their Payroll Protection Program loans, the next question becomes: "How much of my loan is eligible for forgiveness?"

The below guide provides an overview of the steps to determine the amount of loan forgiveness an entity is eligible for under the Paycheck Protection Program. The information below is subject to change as additional details emerge around how the loan forgiveness will be implemented.

The loan amount will be forgiven in its entirety as long as the following conditions are met:

  • The loan proceeds are used for permissible costs (i.e. payroll costs*, mortgage interest, rent, utilities, etc.) paid and incurred over the 8 week covered period, which begins on the date the lender makes the first disbursement of the PPP loan to the borrower. Note: Mortgages and leases must have been in place by February 15, 2020. Payroll costs in excess of $100,000 annual salary for an employee are not eligible for forgiveness.
  • Employee headcount is maintained.
  • Compensation levels for employees earning less than $100,000 per year are maintained.
  • Not more than 25% of the forgiveness amount is used for non-payroll costs.

If these factors are not fully satisfied, a portion of the loan will not be forgiven and must be repaid. In order to determine the amount eligible for forgiveness, the following three-step analysis should be followed.

*Payroll costs are defined as the sum of payments of any compensation with respect to employees that is a salary, wage, commission, or similar compensation; payment of cash tip or equivalent; payment for vacation, parental, family, medical, or sick leave; allowance for dismissal or separation; payment required for the provisions of group health care benefits, including insurance premiums; payment of any retirement benefit; or payment of State or local tax assessed on the compensation of employees. Payroll costs does not include the compensation of an individual employee in excess of an annual salary of $100,000 or any compensation of an employee whose principal place of residence is outside of the United States. Payroll costs also doesn't include any qualified sick leave wages or qualified family leave wages for which a credit has been allowed under the Families First Coronavirus Response Act.

Step 1:

Multiply the amount of loan which qualifies for forgiveness by the following fraction:

Average number of full-time equivalent employees (FTEEs) per month employed
by the company during the 8 week covered period
_____________________________________________________

Lower of (i) average number of FTEEs per month employed by the company during the period from February 15, 2019-June 30, 2019 or (ii) average number of FTEEs per month employed by the company during the period from January 1, 2020-February 29, 2020

Step 2:

Subtract a dollar amount computed as follows:

  • Identify all employees earning less than $100,000 who are still employed during the 8 week covered period.
  • For each of those employees, take their wages/salary rate during the 8 week covered period and compare it to their wages/salary rate for the most recent full quarter during which the employee was employed before the covered period.
  • For any of those employees whose wages/salary rate dropped by more than 25%, take the wages/salary rate for the most recent full quarter during which the employee was employed before the covered period multiplied by 75% and subtract the amount the employee received during the 8 week covered period.
  • Combine all salary reduction amounts and subtract from the loan forgiveness amount.

Step 3:

Correct decreases from Step 1 or Step 2 as follows:

  • Restore any reduction in FTEEs for the period between February 15, 2020 and April 26, 2020 before June 30, 2020.
  • Restore any reduction in wages/salary rate to the rate employees were earning as of February 15, 2020 by
    June 30, 2020.

NOTE:  Records to substantiate all amounts must be maintained.

We understand that this is a complex calculation.  Additionally, lenders are still waiting for clarification from Treasury on many aspects under the loan forgiveness formula.  You should work with your lender to ensure that you are compiling accurate information to ultimately determine the amount of loan forgiveness under this program.

 

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Answers to Questions You May Have About Economic Impact Payments

Millions of eligible Americans have already received their Economic Impact Payments (EIPs) via direct deposit or paper checks, according to the IRS. Others are still waiting. The payments are part of the Coronavirus Aid, Relief, and Economic Security (CARES) Act. Here are some answers to questions you may have about EIPs.

Who’s eligible to get an EIP?

Eligible taxpayers who filed their 2018 or 2019 returns and chose direct deposit of their refunds automatically receive an Economic Impact Payment. You must be a U.S. citizen or U.S. resident alien and you can’t be claimed as a dependent on someone else’s tax return. In general, you must also have a valid Social Security number and have adjusted gross income (AGI) under a certain threshold.

The IRS also says that automatic payments will go to people receiving Social Security retirement or disability benefits and Railroad Retirement benefits.

How much are the payments?

EIPs can be up to $1,200 for individuals, or $2,400 for married couples, plus $500 for each qualifying child.

How much income must I have to receive a payment?

You don’t need to have any income to receive a payment. But for higher income people, the payments phase out. The EIP is reduced by 5% of the amount that your AGI exceeds $75,000 ($112,500 for heads of household or $150,000 for married joint filers), until it’s $0.

The payment for eligible individuals with no qualifying children is reduced to $0 once AGI reaches:

  • $198,000 for married joint filers,
  • $136,500 for heads of household, and
  • $99,000 for all others

Each of these threshold amounts increases by $10,000 for each additional qualifying child. For example, because families with one qualifying child receive an additional $500 Payment, their $1,700 Payment ($2,900 for married joint filers) is reduced to $0 once adjusted gross income reaches:

  • $208,000 for married joint filers,
  • $146,500 for heads of household,
  • $109,000 for all others

How will I know if money has been deposited into my bank account?

The IRS stated that it will send letters to EIP recipients about the payment within 15 days after they’re made. A letter will be sent to a recipient’s last known address and will provide information on how the payment was made and how to report any failure to receive it.

Is there a way to check on the status of a payment?

The IRS has introduced a new “Get My Payment” web-based tool that will: show taxpayers either their EIP amount and the scheduled delivery date by direct deposit or paper check, or that a payment hasn’t been scheduled. It also allows taxpayers who didn’t use direct deposit on their last-filed return to provide bank account information. In order to use the tool, you must enter information such as your Social Security number and birthdate. You can access it here: https://bit.ly/2ykLSwa

I tried the tool and I got the message “payment status not available.” Why?

Many people report that they’re getting this message. The IRS states there are many reasons why you may see this. For example, you’re not eligible for a payment or you’re required to file a tax return and haven’t filed yet. In some cases, people are eligible but are still getting this message. Hopefully, the IRS will have it running seamlessly soon.

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CARES ACT - Part II

The Coronavirus Aid, Relief and Economic Security (CARES) Act, the third item of federal legislation enacted in response to the unprecedented COVID-19 pandemic, was passed by Congress on March 27th and swiftly signed into law the same day.

The scope of the relief bill is far-reaching, providing financial assistance through channels ranging from additional funding for medical institutions to emergency grants for small businesses to targeted relief via federal tax law changes. These tax law changes, many of which were given retroactive effect, will help taxpayers and businesses cope with cash flow issues over the coming weeks and months by reducing the tax burden and/or providing a larger refund than would be allowed under pre-CARES Act law.

In this article, we are focusing on some of the business provisions within the law.

Payroll Tax Due Date Delays

The CARES Act delays the due date for the employer's share of Social Security taxes. Under the Act 50% of the employer's share of Social Security taxes may be deferred until December 31, 2021, and the other half may be deferred until December 31, 2022.  Similarly, for self-employed taxpayers, the Act delays payment of 50% of 2020 self-employment taxes until 2021 and 2022. The relief isn't available if the taxpayer has had debt forgiveness for certain loans under the Small Business Act as modified by the CARES Act.

Loss Carryback

Taxpayers can carryback 100% of net operating losses (NOLs) realized in 2018, 2019, and 2020, to the prior five years. Such carryback had been eliminated by the Tax Cuts and Jobs Act of 2017 ("TCJA"). The Act also temporarily liberalizes the treatment of NOL carryforwards. For tax years beginning before 2021, taxpayers can take an NOL deduction equal to 100% of taxable income (rather than the present 80% limit).

As a result of the CARES Act changes there are now three different NOL regimes:

   1.      NOLs generated on or before December 31, 2017

    • Two-year carryback
    • 20- year carryforward
    • Eligible to offset 100% of taxable income

   2.      NOLs beginning after December 31, 2017 and before January 1, 2021

    • Five-year carryback
    • Indefinite carryforward
    • Eligible to offset 100% of taxable income prior to 2021 and 80% of taxable income after 2020

   3.      NOLs beginning on or after January 1, 2021

    • No carryback
    • Indefinite carryforward
    • Eligible to offset 80% of taxable income

Interest Deduction

The CARES Act temporarily increases the net interest deduction limitation to 50% of adjusted taxable income (ATI) (previously limited to 30%). The CARES Act generally allows businesses, unless they elect otherwise, to increase the interest limitation to 50% of ATI for 2019 and 2020, and to elect to use 2019 ATI in calculating their 2020 limitation. There is a special carve out rule for partnerships so that a partnership may not use the increased limitation in 2019, thereby deferring any potential benefit from the 50% threshold to 2020.

Deprecation of QIP

The CARES Act corrects an error in the TCJA by decreasing the depreciation life of "qualified improvement property" to 15 years, thus making such property eligible for 100% bonus depreciation. QIP is defined as any improvement made by the taxpayer to the interior of a non-residential building that is placed in service after the building's initial placed in service date other than improvements attributable to elevators, escalators, building enlargements, or the building's internal structural framework. In giving QIP 15-year MACRS status, it restores the 15-year MACRS write-off, making it eligible for 100% bonus depreciation.

This correction is retroactive to January 1, 2018. Taxpayers may change their depreciation of QIP by filing an automatic accounting method change with the IRS, though, if a QIP asset was only depreciated on a single tax return—e.g., it was placed in service in 2018 and the 2019 return has not yet been filed—the taxpayer may change the asset's depreciation method by filing an amended income tax return

Charitable Contribution Deductions

The limitation on charitable deductions for corporations that is generally 10% of (modified) taxable income doesn't apply to qualifying contributions made in 2020. Instead, a corporation's qualifying contributions, reduced by other contributions, can be as much as 25% of (modified) taxable income. No connection between the contributions and COVID-19 activities is required. 

For contributions of food inventory made in 2020, the deduction limitation increases from 15% to 25% of taxable income for C corporations and, for other taxpayers, from 15% to 25% of the net aggregate income from all businesses from which the contributions were made.

Student Loan Payments Permitted

For employers with qualified educational assistance programs under Internal Revenue Code Section 127, the CARES Act provides a much sought-after change to permit employers to pay employees up to $5,250 per year on a tax-free basis for student loan debt expenses.  Importantly, this change only applies for payments made between March 27, 2020, and December 31, 2020. Eligible student loan repayments are payments by the employer, whether paid to the employee or a lender, of principal and interest on any qualified higher education loan for the education of the employee but not of a spouse or dependent.

Employers with qualified educational assistance programs must amend their plans to permit these tax-free student loan payments.  Employers who do not currently maintain a qualified educational assistance program may adopt such a program, but to be qualified, the program must be maintained under a written plan document and otherwise be compliant with Code Section 127.  We recommend consulting with your employee benefits counsel before adopting a qualified educational assistance program to ensure compliance with the Code.

Employee Retention Credit

Eligible employers (including non-profits) may qualify for an employee retention credit equal to 50% of qualified wages paid to employees beginning March 12, 2020, through December 31, 2020, up to $10,000 per employee.  Thus the maximum credit is $5,000 per employee. The tax credit is applied against the employer's Social Security payroll tax obligation but is reduced by any credits the employer receives under the Families First Coronavirus Response Act (FFCRA).

If the available tax credits exceed the employer's total Social Security tax obligation, the employer may qualify for a refund in the amount of the excess.  Furthermore, the employer's tax credits under the CARES Act may be increased by the employer's qualified health plan expenses allocable to qualified wages paid.

Wages don't include (1) wages taken into account for purposes of the payroll credits provided by the earlier Families First Coronavirus Response Act for required paid sick leave or required paid family leave, (2) wages taken into account for the employer income tax credit for paid family and medical leave or (3) wages in a period in which an employer is allowed for an employee a work opportunity credit. An employer can elect to not have the credit apply on a quarter-by-quarter basis. 

Employers eligible for this tax credit include employers who were carrying on a trade or business during the 2020 calendar year, and either (a) whose operations are partially or fully suspended during any applicable quarter due to orders from the appropriate governmental authority limiting commerce, trade, or group meetings due to COVID-19; or (b) beginning January 1, 2020, whose gross receipts for any quarter are less than 50% of gross receipts for the same quarter in the prior year. Credits will continue until gross receipts exceed 80% of the same quarter's gross receipts in the previous year.

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