PPP ForgivenessPosted on June 24th, 2020
Loan Forgiveness Under the Paycheck Protection Plan
As part of the Coronavirus Aid, Relief, and Economic Security (CARES) Act, signed into law March 27, many small business owners were able to apply for – and receive – a loan of up to $10 million under the Paycheck Protection Program (PPP). Businesses – including nonprofits, veterans’ organizations, Tribal entities, self-employed individuals, sole proprietorships, and independent contractors – that were in operation on February 15 and that have 500 or fewer employees are eligible for the PPP loans. The deadline for applying for a PPP loan is June 30, 2020. If the loan proceeds are used as specified, business owners may apply to have the loan forgiven.
Here’s what you need to know about loan forgiveness under the PPP:
The loan covers eight weeks (56 days) of payroll, rent, mortgage interest and utility expenses; however, the Paycheck Protection Program Flexibility Act of 2020 (PPPFA) allows PPP loan borrowers that received loans before June 5th the option to extend the covered period to 24 weeks. The original June 30 deadline for rehiring workers and spending the PPP funds has also been extended to December 31 to allow for the 24-week period.
Generally, the first day of the covered period is the same day as the loan disbursement. For example, if the loan proceeds were received on Wednesday, April 22, that is the first day of the covered period. The last day of the covered eight-week period, for example, would then be Tuesday, June 16.
Alternate Payroll Covered Period. If you pay your employees weekly or bi-weekly, you may elect to have the eight-week (56-day) period – or 24-week period – begin on the first day of the first pay period following the PPP loan disbursement date. In the case of an eight-week period, if the loan proceeds were received on Wednesday, April 22, and the first day of the first pay period following the loan disbursement is Monday, April 27, the first day of the Alternative Payroll Covered Period is April 27 and the last day of the Alternative Payroll Covered Period is Sunday, June 21.
PPP loans cover both payroll costs and nonpayroll costs; however, to be eligible for loan forgiveness, 60 percent of the PPP loan proceeds must go toward payroll costs (previously 75 percent), with the remaining 40 percent to be used toward nonpayroll costs.
If your business does not meet the 60 percent requirement, there will be a proportionate reduction in loan forgiveness – not a complete loss.
Here’s an example using the eight-week covered period: A business owner that received loan proceeds of $250,000 must use $150,000 of that amount on payroll costs to be eligible for loan forgiveness. The remaining $100,000 can be used to pay nonpayroll costs as specified below.
Under the PPPFA, businesses that received PPP loan funds are now able to delay payment of their payroll taxes. This was previously prohibited under the CARES Act.
Eligible payroll costs. Payroll costs include costs for employee vacation, parental, family, medical, and sick leave. The total amount of cash compensation – payroll costs paid and payroll costs incurred – for each individual employee may not exceed $15,385 for the covered period of eight weeks (56 days) based on an annualized salary of $100,000. If the borrower chooses a covered period of 24 weeks, then each individual employee may not exceed $46,154 for the covered period of 24 weeks based on an annualized salary of $100,000. Bonuses can be included as long as this threshold amount is not exceeded.
Payroll expenses for independent contractors or sole proprietors only include wages, commissions, income, or net earnings from self-employment, or similar compensation. PPP loan funds can be used to cover the owner compensation costs for eight weeks (8/52) of 2019 profit only – up to a maximum of $15,385. However, if the 24-week covered period is chosen, it is limited to 2.5 months (2.5/12) of 2019 net profit from Form 1040 Schedule C – up to a maximum of $20,833.
To count toward eligible payroll expenses, employer contributions for retirement plans as well as health insurance must be paid during the covered period.
Loan forgiveness is based on full-time equivalent (FTE) workers and a standard 40-hour work week. A simplified method allows 1.0 FTE for 40 hour work weeks and 0.5 FTE for less than 40 hour work weeks. Calculations can be done using either method to determine which one is most advantageous to the employer. Special rules apply for workers whose salary has been reduced by 25 percent or more. Please call if you have any questions about this.
Businesses that received PPP loans can exclude laid-off employees from loan forgiveness reduction calculations if the employees turn down a written offer to be rehired.
Eligible nonpayroll costs. Specific nonpayroll costs are also eligible for forgiveness; however, they cannot exceed 40 percent of the total forgiveness amount. They must be paid or incurred during the covered period and paid on or before the next regular billing date, even if the billing date is after the covered period and can include costs that were paid and incurred one time.
Payments of interest on any business mortgage obligation on real or personal property incurred before February 15, 2020. These amounts do not include any prepayment or payment of principal Business rent or lease payments (including leases for vehicles and office machinery) entered into force before February 15, 2020; and Business utility payments for services begun before February 15, 2020 such as electricity, gas, water, transportation, telephone, or internet access. Interest payments on debt obligations incurred before February 15, 2020 Refinancing an SBA EIDL loan made between January 31, 2020, and April 3, 2020
Self-employed individuals can use PPP loan funds to cover interest, rent and utility payments are also eligible as long as these amounts are deductible on Form 1040 Schedule C.
Loan Amounts not Forgiven
Any amounts that aren’t forgiven must be repaid at an interest rate of 1 percent, which begins to accrue upon loan disbursement. Payments, however, are deferred for six months once the SBA makes a determination of forgiveness. Under the PPPFA borrowers now have five years to repay new loans approved on or after June 5, 2020 (previously it was two years). Borrowers with loans disbursed prior to June 5, will still need to abide by the two-year loan period unless the lender agrees to extend it to five years.
Business owners need to keep accurate records of how PPP loans are used. Failing to document or falsely claiming eligible expenses could lead to criminal penalties.
Don’t Delay. Start Planning Now to Maximize PPP Loan Forgiveness
Applications for forgiveness must be submitted within 10 months of the date of receiving the loan or it won’t be forgiven. If you’ve received a PPP loan and want to make sure your loan is forgiven, help is just a phone call away.
2019 Year EndPosted on December 22nd, 2019
Individual Taxpayers: Recap for 2019
As we close out the year and get ready for tax season, here’s what individuals and families need to know about tax provisions for 2019.
Personal exemptions are eliminated for tax years 2018 through 2025.
The standard deduction for married couples filing a joint return in 2019 is $24,400. For singles and married individuals filing separately, it is $12,200, and for heads of household, the deduction is $18,350.
The additional standard deduction for blind people and senior citizens in 2019 is $1,300 for married individuals and $1,650 for singles and heads of household.
Income Tax Rates
In 2019 the top tax rate of 37 percent affects individuals whose income exceeds $510,300 ($612,350 for married taxpayers filing a joint return). Marginal tax rates for 2019 are as follows: 10%, 12%, 22%, 24%, 32%, 35%, and 37%. As a reminder, while the tax rate structure remained similar to prior years under tax reform (i.e., with seven tax brackets), the tax-bracket thresholds increased significantly for each filing status.
Estate and Gift Taxes
In 2019 there is an exemption of $11.40 million per individual for estate, gift, and generation-skipping taxes, with a top tax rate of 40 percent. The annual exclusion for gifts is $15,000.
Alternative Minimum Tax (AMT)
For 2019, exemption amounts increased to $71,700 for single and head of household filers, $111,700 for married people filing jointly and for qualifying widows or widowers, and $55,850 for married taxpayers filing separately.
Pease and PEP (Personal Exemption Phaseout)
Both Pease (limitations on itemized deductions) and PEP (personal exemption phase-out) have been eliminated under TCJA.
Flexible Spending Account (FSA)
A Flexible Spending Account (FSA) is limited to $2,700 per year in 2019 (up from $2,650 in 2018) and applies only to salary reduction contributions under a health FSA. The term “taxable year” as it applies to FSAs refers to the plan year of the cafeteria plan, which is typically the period during which salary reduction elections are made.
Long-Term Capital Gains
In 2019 tax rates on capital gains and dividends remain the same as 2018 rates (0%, 15%, and a top rate of 20%); however, taxpayers should be reminded that threshold amounts don’t correspond to the tax bracket rate structure as they have in the past. For example, taxpayers whose income is below $39,375 for single filers and $78,750 for married filing jointly pay 0% capital gains tax. For individuals whose income is at or above $434,550 ($488,850 married filing jointly), the rate for both capital gains and dividends is capped at 20 percent.
Miscellaneous deductions that exceed 2 percent of AGI (adjusted gross income) are eliminated for tax years 2018 through 2025. As such, you can no longer deduct on Schedule A expenses related to tax preparation, moving (except for members of the Armed Forces on active duty who move because of a military order), job hunting, or unreimbursed employee expenses such as tools, supplies, required uniforms, travel, and mileage. Business owners are not affected and can still deduct business-related expenses on Schedule C.
Individuals – Tax Credits
In 2019 a nonrefundable (i.e., only those with tax liability will benefit) credit of up to $14,080 is available for qualified adoption expenses for each eligible child.
Child and Dependent Care Credit
The Child and Dependent Care Tax Credit was permanently extended for taxable years starting in 2013 and remained under tax reform. As such, if you pay someone to take care of your dependent (defined as being under the age of 13 at the end of the tax year or incapable of self-care) in order to work or look for work, you may qualify for a credit of up to $1,050 or 35 percent of $3,000 of eligible expenses.
For two or more qualifying dependents, you can claim up to 35 percent of $6,000 (or $2,100) of eligible expenses. For higher-income earners, the credit percentage is reduced, but not below 20 percent, regardless of the amount of adjusted gross income.
Child Tax Credit and Credit for Other Dependents
For tax years 2018 through 2025, the Child Tax Credit increases to $2,000 per child. The refundable portion of the credit increases from $1,000 to $1,400 – 15 percent of earned income above $2,500, up to a maximum of $1,400 – so that even if taxpayers do not owe any tax, they can still claim the credit. Please note, however, that the refundable portion of the credit (also known as the additional child tax credit) applies higher-income when the taxpayer isn’t able to fully use the $2,000 nonrefundable credit to offset their tax liability.
Under TCJA, a new tax credit – Credit for Other Dependents – is also available for dependents who do not qualify for the Child Tax Credit. The $500 credit is nonrefundable and covers children older than age 17 as well as parents or other qualifying relatives supported by a taxpayer.
Earned Income Tax Credit (EITC)
For tax year 2019, the maximum earned income tax credit (EITC) for low and moderate-income workers and working families increased to $6,557 (up from $6,431 in 2018). The maximum income limit for the EITC increased to $55,952 (up from $54,884 in 2018) for married filing jointly. The credit varies by family size, filing status, and other factors, with the maximum credit going to joint filers with three or more qualifying children.
Individuals – Education Expenses
Coverdell Education Savings Account
You can contribute up to $2,000 a year to Coverdell savings accounts in 2019. These accounts can be used to offset the cost of elementary and secondary education, as well as post-secondary education.
American Opportunity Tax Credit
For 2019, the maximum American Opportunity Tax Credit that can be used to offset certain higher education expenses is $2,500 per student, although it is phased out beginning at $160,000 adjusted gross income for joint filers and $80,000 for other filers.
Lifetime Learning Credit
A credit of up to $2,000 is available for an unlimited number of years for certain costs of post-secondary or graduate courses or courses to acquire or improve your job skills. For 2019, the modified adjusted gross income (MAGI) threshold at which the Lifetime Learning Credit begins to phase out is $114,000 for joint filers and $57,000 for singles and heads of household. The credit cannot be claimed if your MAGI is $67,000 or more ($134,000 for joint returns)
Employer-Provided Educational Assistance
As an employee in 2019, you can exclude up to $5,250 of qualifying postsecondary and graduate education expenses that are reimbursed by your employer.
Student Loan Interest
In 2019, you can deduct up to $2,500 in student-loan interest as long as your modified adjusted gross income is less than $65,000 (single) or $135,000 (married filing jointly). The deduction is phased out at higher income levels.
Individuals – Retirement
For 2019, the elective deferral (contribution) limit for employees who participate in 401(k), 403(b), most 457 plans, and the federal government’s Thrift Savings Plan is $19,000 ($18,500 in 2018). For persons age 50 or older in 2019, the limit is $25,000 ($6,000 catch-up contribution).
Retirement Savings Contributions Credit (Saver’s Credit)
In 2019, the adjusted gross income limit for the saver’s credit for low and moderate-income workers is $64,000 for married couples filing jointly, $48,000 for heads of household, and $32,000 for married individuals filing separately and for singles. The maximum credit amount is $2,000 ($4,000 if married filing jointly). Also of note is that starting in 2018, the Saver’s Credit can be taken for your contributions to an ABLE (Achieving a Better Life Experience) account if you’re the designated beneficiary. However, keep in mind that your eligible contributions may be reduced by any recent distributions you received from your ABLE account.
If you have any questions about these and other tax provisions that could affect your tax situation, don’t hesitate to call.
New credit for Family and Medical LeavePosted on September 29th, 2018
Guidance on Paid Family and Medical Leave Credit Allows Retroactive Written Policies (Notice 2018-71; IR-2018-191),(Sep. 25, 2018)
Written Policy Requirement
An employer must have a written policy in place that provides for paid family and medical leave. The policy must contain specified provisions that guarantee that all qualifying employees will receive at least two weeks of paid family and medical leave (pro-rated for part-time employees) based on at least 50 percent of an employees normal wages. The policy must include a “non-interference” provision if an employer has any employee not covered by the Family Medical Leave Act of 1993 (P.L. 103-3) such as an employee who works less than 1,250 hours per year. The Notice provides sample language of a non-interference provision.
The written policy may consist of one or more documents or be included in the same document that governs an employer’s other leave policies.
Generally, the written policy must in place before the leave is taken for which the credit is claimed. A policy is in place on the earlier of the date of adoption or the effective date. A transitional rule for the 2018 tax year provides that a policy (or amendment to an existing policy) is treated as in place on the retroactive effective date if the policy is adopted on or before December 31, 2018. The employer may make retroactive leave payments under the policy by the end of its 2018 tax year.
An employer is not required to notify employees that it has a written policy for providing paid family and medical leave. However, if notice is given, all eligible employees should be notified.
Qualifying Types of Family and Medical Leave
The employer’s written policy may only provide qualifying family and medical leave for the following purposes:
– birth of an employee’s child and to care for the child;
– placement of a child with the employee for adoption or foster care;
– care for the employee’s spouse, child, or parent who has a serious health condition;
– a serious health condition that makes the employee unable to perform the functions of his or her position;
– any qualifying exigency due to an employee’s spouse, child, or parent being on covered active duty (or having been notified of an impending call or order to covered active duty) in the Armed Forces (including National Guard and Reserves); and
– care for a service member who is the employee’s spouse, child, parent, or next of kin.
However, a policy may provide paid leave to care for additional individuals not specified above, such as the care of grandchildren and grandparents with a serious illness. This paid leave, however, does not qualify for the credit.
The policy must provide a minimum of two weeks of paid leave to all qualifying full-time employees. The policy may not exclude any class of qualifying employees such as unionized employees.
Part-time employees are at minimum entitled to a proportionate amount of the paid leave time provided to full-time employees. For example, if full-time employees work 40 hours a week, a part-time employee who works 20 hours a week is entitled to 50 percent of the paid leave time given to full-time employees. An employee who customarily works 30 hours per week is a full-time employee. An employer may use any reasonable method to determine the number of hours customarily worked.
Leave paid to an employee who earned more than $72,000 in 2017 does not qualify for the credit.
It is not necessary to cover employees with less than one year of service. An employer may use any reasonable method to determine length of employment. However, the employer cannot require employment for 12 consecutive months and may not require an employee to work a minimum number of hours per year.
An employer may not claim the credit for wages paid to an employee who is not a qualifying employee when the family or medical leave is taken but who becomes a qualifying employee later during the tax year.
Rate of Leave Payment
The written policy must provide for leave payments at least equal to 50 percent of wages normally paid. Leave payments made by a State or local government or paid by the employer to comply with State or local law are not taken into consideration in determining whether an employee receives 50 percent of the wages normally paid.
Wages normally paid are determined without regard to overtime that is not regularly scheduled and without regard to discretionary bonuses. An employer may determine the normal hourly rate of a salaried employee using any reasonable method. Wages normally paid to employees who do not receive salaries or hourly rates are determined using rules under the Fair Labor Standards Act.
Subject to the minimum 50 percent wage payment and two-week leave requirements, an employer’s policy may provide different rates of payment and different leave periods for different types of qualifying events that trigger family and medical leave. In addition, leave rates and periods may be based on the length of an employee’s service. For example, a policy could provide the minimum 50 percent wage rate and two-week paid leave period for employees with less than 10 years service and the maximum 100 percent wage rate and 12-week paid leave period for other qualifying employees.
Calculation of Leave Credit
The credit is a percentage of the amount of wages paid to a qualifying employee while on family and medical leave for up to 12 weeks per tax year. The minimum percentage is 12.5 percent of wages paid and is increased by 0.25 percent for each percentage point by which the amount paid to a qualifying employee exceeds 50 percent of the employee’s regular wages. Therefore, the maximum credit rate for an employee is 25 percent if 100 percent of normal wages are paid.
Wages are defined by reference to the definition of remuneration in Code Sec. 3306 for FUTA tax purposes without regard to the $7,000 FUTA wage limitation. For example, wages paid by a tax-exempt 501(c)(3) organization are excluded from the definition of FUTA wages and, therefore, do not qualify for the credit even if the organization is subject to the unrelated business income tax during the tax year. Wages that are used in computing any other tax credit, such as the research credit, do not qualify for the family and medical leave credit. An employer’s deduction for wages is also reduced by the amount of the credit.
Amounts paid by a State or local government or required by State or local law do not qualify for the credit. Amounts paid for a qualifying purpose under an employer’s short-term disability program, however, may qualify. An eligible employer may also claim the credit on wages paid to a qualified employee for the employer by a third-party payor such as an insurance company, professional employer organization, or Certified Professional Organization.
The credit is claimed on Form 8994, Employer Credit for Paid Family and Medical Leave, and reported on IRS Form 3800, General Business Credit.
Effective Date and Comments on Proposed Regulations
The guidance is effective September 24, 2018 and applies to wages paid in tax years beginning after December 31, 2017, and before January 1, 2020.
Tax Tips for Small Business OwnersPosted on July 7th, 2018
Every year, investigative tax notices are mailed to small business owners. While these are not always official audits, they raise a red flag, and proprietors should know how to prevent and address these inquiries in turn.
This list addresses the best tax practices for small businesses to keep them abreast of tax changes and trends, and away from IRS scrutiny.
List of top 15 Best Tax Practice Tips for Entrepreneurs
1. Maintain thorough and separate records of employees and contractors.
2. If you set up any location based business, even temporarily, keep records of all expenditures and educate yourself on the local tax laws.
3. Use a tax software accounting system – this can help you develop appropriate reports at tax time and can alert you of changing tax rules.
4. If you hire a tax accountant make sure they have experience with taxes as they relate to your specific business.
5. Keep records—including serial numbers and detailed receipts—for all business equipment, office machines, and vehicles.
6. Don’t use funds that are earmarked for taxes as a means to tide your business over in hard times. This will result in a worse financial crunch come tax time and if you can’t pay, you risk the loss of your tax ID.
7. Educate yourself on the correct way to estimate your taxes – This may be overwhelming and a tax professional is highly recommended for small business owners.
8. Determine an appropriate fiscal year so that you can plan better for tax time: A fiscal year refers to an accounting year that does not end on December 31.
9. Tax records should be kept for a minimum of three years – unless related to property and depreciation. In that case, tax records should be kept for three years past the time ownership ends.
10. Keep detailed records on business vehicles’ usage – both on the job and off.
11. When operating on foreign soil and dealing with other currencies and tax laws, be sure your tax professional is vigilant in obeying the new rules on foreign bank accounts enacted in the Foreign Account Tax Compliance Act, or FATCA.
12. Work with your tax professional to determine whether you should operate as a partnership, an S corporation, an LLC, or a sole proprietorship.
13. Become familiar with your requirements in regards to the Affordable Care Act.
14. If you are not able to pay taxes owed to the IRS, or another tax agency, contact your tax professional right away. There are appropriate steps that can be taken and ignoring it only makes it worse.
15. If you are paid in cash – that payment is taxable. The IRS has sophisticated technology to track spending habits and bank accounts to build their case.
Let the experts handle your taxes for you. It is usually a mistake for a business owner to complete their own taxes, and doing so can distract you from making your company a success.
Should I Choose a Roth or Traditional IRA?Posted on April 20th, 2018
Do you have questions about which type of Individual Retirement Account (IRA) is right for you? When deciding between a traditional IRA and a Roth IRA, consider factors to such as tax incentives, age restrictions, and income restrictions before making your decision.
One of the main differences between the traditional IRA and the Roth IRA is the tax incentives provided by each. When deciding which is right for you, focus on what tax bracket you plan to be in when you retire and if that bracket will be higher or lower than the one you’re in now.
- Traditional IRAs – A traditional IRA is the best choice for you if you believe your tax rate will be lower in retirement than it is right now. With traditional IRAs, you are not taxed when you contribute money to your account. Taxes are paid when you withdraw the funds.
- Roth IRAs – Roth IRAs are the best choice for you if you believe your tax rate will be higher in retirement than it is now. When you contribute to a Roth IRA, you pay taxes on the funds as you put them in. You will not have to pay taxes on funds when you’re able to withdraw.
In addition to considering tax incentives when choosing between a traditional IRA and a Roth IRA, it is important to keep in mind that with a traditional IRA, there are age restrictions for contributions.
- Traditional IRAs – Anyone younger than 70 ½ with earned income can contribute to a traditional IRA.
- Roth IRAs – Roth IRAs don’t have age restrictions.
- Traditional IRAs – You can contribute to a traditional IRA regardless of how much money you make. However, the amount of money you contribute can’t exceed the amount of income you earned that year.
- Roth IRAs – For some high-income earners, Roth IRAs are out of the question. To contribute to a Roth IRA, single tax filers must have a modified gross income of less than $135,000 (in 2018). Married couples filing jointly must have modified AGIs of less than $199,000 (in 2018) to be able to contribute to a Roth IRA. The amount you contribute to a Roth IRA can’t exceed the amount of income tax you earned that year.
Both traditional and Roth IRAs allow their owners to begin taking penalty-free distributions at age 59 ½. A major difference between traditional IRAs and Roth IRAs is when the savings must be withdrawn:
- Traditional IRAs – Traditional IRAs require you to start withdrawing funds at age 70 ½, even if you don’t need the money.
- Roth IRAs – Roth IRAs don’t require withdrawals during the owner’s lifetime, which means that you can let your Roth IRA continue to grow throughout your life (tax-free) if you don’t need the money. To avoid incurring a tax payment, Roth IRAs require that the first contribution be made at least five years before the first withdrawal.
Since Roth IRAs don’t require that you withdraw funds in your lifetime, and beneficiaries aren’t required to pay taxes on withdrawals, Roth IRAs can be a good wealth transfer strategy.
- Traditional IRAs – Contributing to a traditional IRA lowers your adjusted gross income for that year, which can help you qualify for other tax incentives such as the child tax credit or the student loan interest deduction.
With traditional IRAs, if you are under 59 ½, you can withdraw up to $10,000 from your account to pay for qualified first-time homebuyer expenses and higher education expenses, without paying the 10% early-withdrawal penalty. You are still required to pay taxes on the distribution.
- Roth IRAs – Roth contributions (but not earnings) can be withdrawn penalty and tax-free at any time. Even before age 59 ½.
If you are under age 59 ½, you can withdraw up to $10,000 of Roth earnings penalty-free to pay for qualified first-time-home-buyer expenses, if at least five tax years have passed since your first contribution.
Roth IRAs can be invested in almost anything you want: index funds, lifecycle funds, individual stocks, or other investments.
Remember, whether you choose a traditional IRA or a Roth IRA, it is important that you begin contributing as soon as possible to accrue savings, and avoid withdrawing earnings before age 59 ½ to avoid penalties.