School Closings Due to COVID-19 and 529 Plan Impact

Due to COVID-19, numerous schools throughout the country have been shut-down or have moved their classes and programs to online-learning. As a result, colleges and universities are issuing partial refunds to students for this semester's tuition and room and board. If the original tuition and room and board was paid for utilizing withdrawals from a 529 plan, this could lead to a potential tax risk for the owner of the plan.

What is the tax risk of receiving a refund for tuition and room and board that was paid for with 529 withdrawals?

As many students or their parents are receiving refunds for a portion of their tuition and room and board, the amounts paid for using 529 withdrawals are no longer being utilized for qualified educational expenses. Due to this, the IRS could re-characterize those withdrawals as taxable distributions. Withdrawals not utilized for qualified education expenses are subject to a 10% penalty, as well as, tax on the earnings portion of the distribution.

How do I avoid the penalties and tax on the 529 distribution?

In order to avoid the 10% penalty and the tax on the earnings of the distribution, the 529 account owner has two options. The account owner can utilize the 529 withdrawals funds to pay for qualified higher education expenses (QHEEs) in the same year as the withdrawal or by March 31st of the following year. If the withdrawal will not be used for QHEEs in the specified time-frame, the account owner must recontribute the refunded amounts to their 529 accounts within 60 days from the date the refund was issued.

What qualifies as qualified higher education expenses?

Tuition, fees, books, supplies and equipment required for the enrollment or attendance of a designated beneficiary at an eligible educational institution are considered qualified higher education expenses. In addition, expenses for the purchase of computer or equipment, computer software, or Internet access and related services, if such equipment, software, or services are to be used primarily by the beneficiary during any of the years the beneficiary is enrolled at an eligible educational institution. In addition, the Tax Cuts and Jobs Act changed federal law for QHEEs to include tuition at an elementary or secondary (k-12) public, private or religious school the beneficiary is enrolled at.  Please note that the State of Nebraska has not coupled with changes to the federal law under the Tax Cuts and Jobs Act.

How much do I have to recontribute to the 529 plan if I'm recontributing?

You are only required to recontribute the portion of the refund paid for using 529 plan withdrawals.

What steps are needed to recontribute amounts to a 529 plan?

Most 529 plan providers will require a variation of the following steps:

Step 1:

Retain documentation stating the date and the amount of the refund received from the institution.  

Step 2:

When submitting the re-contribution, you should include a letter detailing the information surrounding the re-contribution. The letter should include the amount you are recontributing, statement indicating the payment should be characterized as a re-contribution of a previous qualified withdrawal, proof that you are making the payment within 60 days of receiving the refund, account number and name of the student beneficiary, and the original date and amount of the qualified withdrawal.

Step 3:

The 529 account owner should send a check for the amount to be recontributed. It is recommended the check indicate in the memo the payment is for a "529 plan re-contribution of 2020 school refund amount". Send the check and letter via certified mail to document your timely re-contribution.  

It is recommended that you contact your 529 plan provider to ensure all necessary information is documented and the appropriate steps are taken in regards to the re-contribution.

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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:

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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