Harless Tax Blog
Saturday, a divided Senate passed the $1.9 trillion stimulus plan, paving the way for $1,400 checks and jobless aid. The bill must now clear the House again!
The package would include direct payments of up to $1,400 for Americans, jobless aid of $300 a week to last till September 6th, with the first $10,200 in federal unemployment benefits tax-free for households making less than $150,000 per year.
Known as the American Rescue Plan Act, the bill will be sent to President Biden’s desk to be signed into law if it passes the House without changes. Congress is under pressure because legislation authorizing $300 a week in federal funds added to unemployment checks expires on March 14th.
Eligibility for the recovery rebate credits (stimulus checks) would phase out more quickly than it did previously. For single taxpayers, the phaseout will begin at an adjusted gross income (AGI) of $75,000 and the credit will be completely phased out for taxpayers with an AGI over $80,000. For married taxpayers who file jointly, the phaseout will begin at an AGI of $150,000 and end at AGI of $160,000. And for heads of households, the phaseout will begin at an AGI of $112,500 and be complete at AGI of $120,000.
The challenging economic environment continues to be fueled by the pandemic, and has left many businesses holding “bad debt” in the form of payments owed that will never be collected from customers. Why should a business manager worry about bad debt? The balance sheet is an accurate and fair indicator of the company’s financial position on a given day at the end of the financial reporting period and the balance sheet must be adjusted to reflect the impact of bad debts. How much should a company hold relative to their revenue? Let’s discuss some strategies you can use to keep uncollectable balances and bad debt as low as possible.
- Look for warning signs: You should assume that due to the pandemic and the hardships it has imposed on both businesses as well as individuals that uncollectable balances will pop up. The key is to not let them spiral out of control. Benchmark internally and track your numbers over time. How many uncollectables were there 30/60/90 days ago? Over time they could turn into bad debt.
- Examine your revenue-to-cash ratio: If your sales are a million dollars a month, ideally the cash flowing in during the subsequent period should be around 80%. If less, look for where the gap might be.
- Know your customers, and how flexible you can be with them: Are they in the hospitality industry or other industry hard hit by COVID? They might truly have challenges paying on time. Talk to them, be ready to extend terms, take a percentage. Don’t sacrifice your bottom line, but it may be worth agreeing to extended payment terms for important and strategic customer relationships, even if COVID means accepting slower or lower payments while they ride out the crisis.
- Revisit your credit policies: You may have to tighten your credit policies. Generally, with items over 120 days it becomes more unlikely you will collect, you may have to write off that bad debt, accordingly.
- Be proactive about bringing in cash:
- Train your staff to prioritize accounts for collection, how to work with customers in difficulty, and identify those deserving of extended payment terms.
- Require a deposit, often it is more likely the customer will pay the balance.
- Offer “early pay” discounts!
- Leverage credit holds till customers pay their balance.
- Look into a customer pay portal, it facilitates customer payments.
Uncollectable balances represent money you won’t get for a service or product you’ve already delivered. With many areas of the country still battered by the pandemic, a portion of uncollectable balances should be expected at this time. It’s more important than ever to monitor, measure and track the trend, to work with customers to recover whatever you can in order to keep your own boat afloat.
Remember, a business-related bad debt is a deductible item when filing the business income tax returns, but the federal government allows this deduction only if it was previously included in the gross income while filing the taxes. It can be claimed as an operating loss and can be subtracted from gross profits as a tax deduction, but if the books of accounts are maintained on a cash basis, bad debts cannot be claimed as a deduction, as all income is recognized only when received in cash.
Reach Out To Us: Some companies in today’s economic environment are struggling to keep their business above water or to continue making their payroll. You are not alone – we are here to help! A good finance manager should know when their company is holding too much bad debt. Let us help you recognize if trouble is on the way, and devise solutions to limit the amount of uncollectables and recognize red flags before it gets too late. Call 855-542-7537 or email CPA@fuoco.com.
In pandemic times, every penny saved counts. Tax planning can reduce business taxes, but there are additional savings opportunities. When it comes to research and development tax credits, certain costs related to wages, supplies and contract research are eligible, and can save you $$$. Taxpayers often overlook processes and routine work that counts towards extra tax savings. Why?
- Because the list of what might be eligible is more extensive than most business owners realize, and
- The R&D Tax Credit is for businesses of all sizes, not just major corporations with research labs.
Activities related to applied sciences and other technical projects qualify for companies in numerous industries; there doesn’t have to be a groundbreaking invention or revolutionary technology, it can be as simple as products and processes that are improved. Some years ago the PATH Act not only made the R&D Tax Credit permanent, it modified the credit for the benefit of small and mid-size businesses and opened up its availability to startups. If your company does any of the following, your business may qualify for the R&D Tax Credit:
- Develops or designs new products or processes
- Enhances existing products or processes
- Develops or improves upon existing prototypes and software
Since the credit may be claimed for both current and prior tax years, companies can benefit from documenting their R&D activities to ensure they are positioned to claim the credit in both situations. To claim the credit, the taxpayer must evaluate and document their research activities to establish the amount of qualified research expenses paid for each eligible research activity. While taxpayers may estimate some research expenses, but must have documentation for the estimates. Examples of such documentation includes:
- Payroll records
- General ledger expense detail
- Project lists and budgets
- Project process and notes
- Third party agreements
These records combined with credible employee testimony can form the basis of a R&D Tax Credit claim. Remember the 4-part test the IRS uses to determine if a project qualifies:
- Technical Uncertainty
- Process of Experimentation
- Technical in Nature
- Qualified Purpose
Startups and small businesses may qualify for up to $1.25 million (or $250,000 each year for up to five years) of the federal R&D Tax Credit to offset the FICA portion of their annual payroll taxes. Ensure you are receiving the full value you are entitled to under relevant IRS guidelines and Treasury regulations. To be eligible, a company must:
- Have less than $5 million in gross receipts for the credit year
- Have no more than five years of gross receipts
Standard procedure for claiming an R&D tax credit is to complete the required documentation and submit form 6765 alongside your company’s original filing. Companies either forget, or are unaware of the need to include this form.
Generally, you have at least 3 years from the date you file your tax return to amend your return to correct any errors or include any missing items. Additionally, this 3 year period can be further extended if you incur net operating losses, make subsequent tax payments, or voluntarily extend the time to assess deficiencies. Innovative companies that claim the credit every year will realize the highest return on their investment. Even if unutilized in a given tax year, credits can be carried forward up to 20 years, and, in some cases, recorded as deferred tax assets on your balance sheet.
Don’t fail to claim R&D tax credits because you think day-to-day activities don’t qualify for this dollar-for-dollar reduction in income tax liability. Here are some qualifiers that might surprise you:
- Cloud computing server, platform and SaaS software application innovation costs may be qualified research expenses (QREs) eligible for federal and state R&D credits. Cloud-hosted development platforms and beta testing of pre-released software programs are included (operating platforms are not).
- If companies migrate their platform or legacy systems during a merger, the development efforts related to the move may qualify if moving workloads and tasks from one system to another involves design, process improvements, technical uncertainty and points of failure, the baseline criteria for federal research credits.
- Replacing an obsolete part or product with a new design, or changing a product to accommodate a new part currently available on the market. This would require design changes and taxpayers who can provide proof of concept, demonstrate how the innovation made the product better, and document the failure points, may be able to recoup expenses related to design and testing.
- Process Automation tools that improve efficiencies such as automated shelving, robotic arms and labeling systems, which improve workflows and manufacturing processes. The time invested in designing the type of robot (static or dynamic), how and where that robot is used, and the trial runs testing the product or process may be qualified expenses.
- Any product or process using machine learning and artificial intelligence to learn how to do something better, faster and more efficiently qualifies for research credits.
Reach Out To Us: Many companies are eligible for R&D tax credits, with an expansive list of activities qualifying for the credit. Although it’s too late to claim your 2019 research credit as a payroll tax offset, companies can amend their return to monetize it as an income tax credit – and can even consider performing a ‘look-back’ to capture up to 3 years of unclaimed tax credits. To find out more about R&D tax credits, or to discuss whether your business qualifies, contact us at 855-542-7537 or CPA@fuoco.com.
For 2020, eligible employers with a PPP loan can now claim the Employee Retention Credit (ERC), although the same wages cannot be counted for both. The IRS has made clarifications to the CARES Act changes passed late December that expanded eligibility for the ERC in 2020. It now may be easier for employers to both achieve PPP Loan forgiveness and get ERCs, but it is a balancing act!
With the first round of the PPP, forgiveness and the ERC were mutually exclusive, so you had to pick one or the other, but now business owners and employers have options. The key is finding a way to maximize the benefits of each one. There is a limitation on the dollars used for the PPP and the ERC, but if done right you can get full PPP Loan forgiveness and the full ERC amount available to you. We are here to help.
For 2020, the ERC can be claimed by employers who paid qualified wages after March 12, 2020, and before January 1, 2021, if they experienced a full or partial suspension of their operations, or a significant decline in gross receipts. The ERC is equal to 50% of qualified wages paid, including health plan expenses, for up to $10,000 per employee in 2020 for all calendar quarters. The maximum credit for qualified wages paid to any employee is $5,000. Eligible employers that received a PPP loan can now claim that ERC, BUT the same wages can not be counted both for seeking forgiveness of the PPP loan and for calculating the ERC!
Key Point: The filing of a PPP Loan forgiveness application should not constitute an election to forgo the ERC with respect to the amount of wages reported on the application exceeding the amount of wages necessary for loan forgiveness.
More ERC changes for 2021:
- The Employee Retention Credit has been extended through the first 2 quarters of 2021;
- Credit amount increases to 70% of qualified wages;
- Cap on qualified wages is increased from $10,000 total to $10,000 per quarter;
- Reduction in gross receipts to qualify if the business was not shut down by government order is now reduced to 20% year-over-year;
- Businesses with less than 500 employees can now take the credit for all employees; and
- Some non-profits now qualify as eligible employers.
Our tax professionals have been advising patience, amended returns, and quantitative analysis to guide clients through the complexities of claiming both the PPP forgiveness and the ERC. Businesses that got PPP loans last year can apply for a “second draw” if they still need resources, full story HERE: https://www.fuoco.cpa/drill-down-on-2nd-round-ppp-loans/. Many small businesses are going to qualify for it (and the ERC!) through a gross receipts analysis or a partial suspension of operations analysis. For some businesses owners the economic benefit and tax benefit of the PPP will far outweigh the ERC, but every business situation is different.
Eligibility for the PPP loan is priority #1, but analyzing payroll for the 1st Quarter of 2021 may provide some insight for the ERC. Look at the date of your loan and perhaps you will be able to take advantage of the ERC for a certain period of the year without affecting the PPP forgiveness. For the PPP, whenever your covered period runs out on this new loan, you’re going to apply for forgiveness. The 941 at the end of April of 2021 may be used to get the ERC credit, but you can get an ERC credit upfront via the 7200 form.
We also have clients taking a first round PPP loan that didn’t qualify or couldn’t obtain funds last year. For them it makes sense to analyze the payroll and non-payroll costs for the PPP. There may be an opportunity to use some PPP proceeds to potentially get forgiveness – then for the non-payroll costs, maximize those up to that 60/40 ratio. That may make you eligible to go after the ERC. Timing of the funds used for forgiveness will matter. If you’re outside the covered window, then what is spent on payroll should be applicable to the ERC. If an employee makes more than the $100,000 cap in the PPP, you might be able to take advantage of the ERC….we are waiting for further guidance for more complex scenarios.
Remember, Congress also affirmed deductibility of expenses paid by forgiven PPP loans within The Consolidated Appropriations Act, 2021. There were also tax extenders and enhanced tax credits included in the bill. A full list is HERE.
Reach Out To Us: Just when you thought things could not become more complex, new legislation arrives, and with it more questions. There are retroactive changes to the ERC that apply to 2020. Keep in mind that new legislation extended and modified the ERC for the first two calendar quarters in 2021, but the recent guidance only addresses the rules applicable to 2020. More guidance is on the way regarding the changes for 2021. Let our tax team and PPP Loan advisors help guide you and your business. After all, opportunities lost and mistakes made can cost you $$$. Contact us at CPA@Fuoco.com or call 855-542-7537 for assistance.
Owner-operator businesses usually start out as sole proprietorships, which is fine until your business starts to grow, and your family status changes. Life can throw your business a curve ball when you least expect it. Retirement, divorce, illness, even irreconcilable differences with a new partner or staff. Whatever life pitches, you should have a plan for possible risks and choose the right structure to protect both the business and your family. There are also important tax considerations!
Here are some insights into the choices you have regarding business structure:
Smaller owner-operator businesses are usually structured as sole proprietorships with no legal separation between the owner and the business. All properties and liabilities are in the owner’s name and the owner is liable for any legal or financial issues in the business. Startup and compliance requirements are minimal, and profits and losses are passed down to the owner and claimed on the owner’s personal tax form using Schedule C (Form 1040).
Here’s a common scenario: one day you get married, and before you know it your spouse and your children now work hand in hand with you. Your sole proprietorship is now a family business. What choices do you have?
1. The business can stay a sole proprietorship with your spouse and children hired as employees. You get a bit of a tax break because if one spouse is employed by another, the wages of the spouse are not subject FUTA, and wages of your kids under age are not subject to Social Security and Medicare taxes and not subject to FUTA if the kids are under age 21. WOW!
2. If you and your spouse run the business together while sharing both profits and losses, the business is now considered a partnership even if there is no formal partnership agreement. Business income and loss are no longer reported on a Schedule C, Form 1065 is now required.
3. Another option for a married couple owning and operating a business together is to elect treatment as a “qualified joint venture,” in order to continue filing as sole proprietors for federal tax purposes. In this case, each spouse must file a separate Schedule C to report their share of profits and losses.
There is no legal separation between the owner and the business in a sole proprietorship, so should the owner die, the business will terminate, and its assets will become part of the owner’s estate. The business does not necessarily get passed down to the remaining family members. A sole proprietor must include a provision in their will directing that the business be sold or a successor is appointed.
If a divorce between the sole proprietor and the spouse occurs, unless the spouse is a co-owner, there is no automatic sharing of the assets and the details are decided in the divorce proceedings.
In a partnership there is more than one owner. That could mean two spouses, two siblings or a parent and child. In a partnership the owners share legal, financial, and management responsibilities. Profits and losses are passed down to the partners, and each partner is equally taxed. For the family’s sake, be sure there is a partnership agreement in place. Without predetermined resolution methods, any argument over who works harder or disagreement about how to run the business can wreak havoc.
A partnership is like a sole proprietorship in the sense it has no legal separation from the owners. We highly recommend putting a buy-sell agreement in place for how to handle the business in the event of a partner’s death, retirement, divorce or departure.
C Corporations are legal entities separate from the owners. Owners and shareholders have a substantial amount of protection from personal liability and those operating the corporation are employees. Family members in the business are also employees and may also be shareholders. If the business wants to sell stock to raise money for growth, the C Corp structure is a good choice.
A corporation files its own tax return, IRS Form 1120. The corporation claims deductions for business expenses and a flat corporate rate of 21%. The disadvantage is the “double taxation” factor where the company is not only taxed on its profits but then the owners are taxed again when they receive dividend distributions which are taxed on their personal income tax return. There are compliance requirements and fees, but the advantages of tax saving deductions, liability protection and the ability to sell shares may make the C Corp worth it.
Incorporating a business involves filing Articles of Incorporation with the state. The corporation bylaws dictate how the company deals with divorces, deaths, succession and whether or not the company must stay in the family or can be sold to an outside party. There must also be rules on what happens to the shares in case of death, divorce, or company buy-out. Some family members may run the business and others may serve on the board. If the family corporation goes public, the board of directors governs decision-making. By creating bylaws mandating only family members can be on the board, a family can retain better control. Families can also decide to limit the number of shares going to non-family members.
The S Corp is a special election which allows owners/members to pass business income, losses, deductions, and credits through to their member shareholders for federal tax purposes. Shareholders of S Corps are then required to report the income and losses on their personal tax returns. Many family-owned businesses choose to elect S Corp status because of the treatment of employment taxes. Only wages are subject to self-employment taxes and other business profits can be distributed as dividends, which are only subject to income tax, but no payroll taxes are required. To elect S Corp status, the business must file IRS Form 2553 by March 15th, and meet ongoing filing requirements such as:
- Reporting financial activity (Form 1120S, Schedule K-1s for shareholders),
- Withholding federal income tax, Social Security and Medicare taxes from employees’ wages,
- Filing IRS Form 941 each quarter to report these withholdings, and
- Filing a Federal Unemployment Tax Return annually (IRS Form 940).
Family Limited Liability Company (LLC)
The LLC structure offers the liability protections of a corporation without the stringent compliance regulations. In a Family LLC, owners are called members and must be related by blood or marriage, and one family member acts as the managing member. LLCs are required to have an operating agreement which defines the rights related to ownership, decision making, transferring of assets and what happens in the case of divorce, death, retirement, etc.
LLC member’s personal assets are protected if the company gets sued or can’t pay its debts. An LLC is a pass-through entity, and all income flows through to members and is reported on their personal tax returns. The LLC can choose to be taxed as a C Corp or an S Corp. For example:
- The LLC taxed as a sole proprietorship or partnership will pay payroll taxes on all profits, so paying an immediate family member makes no difference to the owner’s taxes.
- The LLC taxed as an S Corp can decide to split up profits as wages and shares so only part of the profits is subject to payroll taxes.
- The LLC taxed as a C Corp with be double-taxed, profits taxed at the corporation level and then wages taxed.
Reach Out to Us: Let our tax professionals and business consultants help you choose the right entity for your family businesses to put you on a straight path to success. Contact us at 855-666-4201 or firstname.lastname@example.org. More info on the benefits of the C corp vs the S corp, and small business structuring for tax efficiency HERE: Harless Blog >
The Consolidated Appropriations Act of 2021 is a long-awaited bill that combined individual stimulus payments and the expansion of the Paycheck Protection Program. The bill also has far-reaching tax consequences, it confirmed that “no amount shall be included in the gross income of the eligible recipient by reason of forgiveness,” and “no deduction shall be denied, no tax attribute shall be reduced, and no basis increase shall be denied, by reason of the exclusion from gross income.” This means that the forgiven amount from a PPP loan will have no effect on income or tax credits, and a company can now deduct expenses paid for with PPP funds.
“PPP 2” is a new, more targeted small-business assistance program. Here are the answers to the most frequently asked questions.
When will the new PPP loans will be available?
The application window for Paycheck Protection Program (PPP) forgivable loans was opened Friday, January 15, for lenders with $1 billion or less in assets, and applies for both first- and second-draw PPP loans. The program will begin accepting applications for first- and second-draw loans from large lenders on Tuesday, January 19.
For all types of PPP loans, no collateral or personal guarantee is required. For these new loans, any amount not forgiven becomes a loan at 1% for five years.
What kinds of PPP loans will be available?
- At the high level, there is funding for three categories of PPP loans in this legislation: 1st time PPP loans for businesses who qualified under the CARES Act but did not get a loan;
- 2nd draw PPP loans for businesses that obtained a PPP loan but need additional funding; and
- More funds for businesses that returned their first PPP loan, or did not get the full amount for which they qualified.
- Are there PPP loan maximum amounts?
The loans are capped at $10 million for first-time borrowers, and $2 million for second-time PPP borrowers.
In general, first- and second-time PPP borrowers may receive a loan amount of up to 2.5 times their average monthly payroll costs (with a cap per employee of $100,000 annualized) in 2019, 2020, or the year prior to the loan. PPP borrowers with such as hotels and restaurants can receive up to 3.5 times their average monthly payroll costs on second-draw loans.
The maximum for a first-draw PPP loan is $10 million, the same as in the original PPP. Applicants must provide a Form 941, Employer’s Quarterly Federal Tax Return, and state quarterly wage unemployment insurance tax reporting forms from each quarter in 2019 or 2020 (whichever is used to calculate the loan amount), or equivalent payroll processor records, along with evidence of any retirement and health insurance contributions.
The maximum loan amount for second draw loans is $2 million. In all the examples below, the loan amount caps out at $2 million. Businesses that are part of a single corporate group can’t receive more than $4,000,000 of second draw PPP loans total. An eligible entity may receive only one second draw loan.
As before, a business may qualify for up to 2.5 times average monthly payroll costs. You can arrive at this figure either by one of two methods— your choice (except hospitality businesses see below):
- Multiply average gross monthly payroll cost for the 1-year period before the date the loan is made by 2.5, or
- Multiply average gross monthly payroll cost for 2019 or 2020 (borrower’s choice) by 2.5.
New companies not yet in business for the 1-year period preceding February 15, 2020, will use a slightly different formula to arrive at the average monthly payroll costs. They will divide the payroll costs paid or incurred by the date they apply by the number of months in which those costs were incurred and multiply the result by 2.5 (or 3.5 for hospitality businesses). Again, new businesses must have been in business by February 15, 2020 in order to be eligible.
Seasonal businesses may apply based on the average monthly payroll costs for any 12-week period between February 15, 2019 and February 15, 2020. A seasonal employer is defined as one that:
- “Does not operate for more than 7 months in any calendar year; or
- During the preceding calendar year, had gross receipts for any 6 months of that year that were not more than 33.33 percent of the gross receipts of the employer for the other 6 months of that year.”
Businesses with a NAICS code beginning in 72 (generally hospitality and restaurant businesses) may receive up to 3.5 times average monthly payroll cost using their choice of these two methods:
- Multiply average gross monthly payroll cost for the 1-year period before the loan is made by 3.5 or
- Multiply average gross monthly payroll cost for 2019 or 2020 (borrower’s choice) by 3.5.
Note that all of these methods allow the business to use payroll costs incurred or paid during the applicable time period. (You may incur a payroll cost but not actually pay it until the pay period.)
What are eligible costs? Anything new?
PPP borrowers can have their first- and second-draw loans forgiven if the funds are used on eligible costs. As with the first round of the PPP, the costs eligible for loan forgiveness in the revised PPP include payroll, rent, covered mortgage interest, and utilities. To be eligible for full loan forgiveness, PPP borrowers will have to spend no less than 60% of the funds on payroll over a covered period between eight or 24 weeks.
In addition, the following costs are now eligible:
- Covered worker protection and facility modification expenditures, including PPE, personal protective equipment, to comply with COVID-19 federal health and safety guidelines, including:
- a drive-through window facility;
- an indoor, outdoor, or combined air or air pressure ventilation or filtration system;
- a physical barrier such as a sneeze guard;
- an expansion of additional indoor, outdoor, or combined business space;
- an onsite or offsite health screening capability.
- Covered property damage costs related to property damage and vandalism or looting due to public disturbances in 2020, that were not covered by insurance or other compensation.
- Expenditures to suppliers that are essential at the time of purchase to the recipient’s current operations.
- Covered operating expenditures, and a number of back-office functions, including accounting. Payments for any business software or cloud computing service for business operations; product or service delivery; the processing, payment, or tracking of payroll expenses; human resources; sales and billing functions; or accounting or tracking of supplies, inventory, records, and expenses.
Who is eligible for “simplified” forgiveness?
Borrowers that receive a PPP loan of $150,000 or less shall receive forgiveness if the borrower signs and submits to the lender a certification that includes a description of the number of employees the borrower was able to retain because of the loan, the estimated total amount of the loan spent on payroll costs, and the total loan amount.
The SBA has yet to create the simplified application form which includes all PPP loans, both under the first round and the new ones, by late January. The form may not require additional materials unless necessary to substantiate revenue loss requirements. Borrowers are required to retain relevant records related to employment for four years and other records for three years, as the SBA may review and audit these loans to check for fraud.
We recommend considering opening a separate bank account to deposit your PPP funds and track expenditures.
What if I didn’t get a PPP loan before?
There is funding for “first draw” PPP loans and you can apply on terms similar to the original CARES Act. You do not have to demonstrate the 25% revenue loss for a first-time loan, and your business may qualify if it has more than 300 employees, provided it qualifies based on the previous CARES Act rules.
First time PPP loans are available to borrowers that were in operations on February 15, 2020, and are from one of the following groups:
- Businesses with 500 or fewer employees that are eligible for other SBA 7(a) loans.
- Sole proprietors, independent contractors, and eligible self-employed individuals.
- Not-for-profits, including churches.
- Accommodation and food services operations with NAICS codes starting with 72 that have fewer than 500 employees per physical location.
- 01(c)(6) business leagues, such as chambers of commerce, visitors’ bureaus, etc., and “destination marketing organizations” that have 300 or fewer employees and do not receive more than 15% of receipts from lobbying. The lobbying activities must comprise no more than 15% of the organization’s total activities and have cost no more than $1 million during the most recent tax year that ended prior to Feb. 15. 2020. Sports leagues are not eligible.
- News organizations that are majority-owned or controlled by an NAICS code 511110 or 5151 business or not-for-profit public broadcasting entities with a trade or business under NAICS code 511110 or 5151. The size limit for this category is no more than 500 employees per location.
PPP applicants must submit documentation sufficient to establish eligibility and to demonstrate the qualifying payroll amount, which may include, as applicable, payroll records; payroll tax filings; Form 1099-MISC, Miscellaneous Income; Form 1040, Schedule C, Profit or Loss From Business, or Schedule F, Profit or Loss From Farming; income and expenses from a sole proprietorship; or bank records.
Who is eligible for second draw PPP loans?
Many small businesses and independent contractors may be eligible for second draw PPP loans if they received a PPP loan previously and qualify. First, similar to the first rounds of PPP, eligible small businesses may include:
- Small businesses, nonprofit organizations, organizations for veterans, tribal business concerns, and small agricultural cooperatives.
- Sole proprietors, self-employed individuals or independent contractors.
- Certain small news organizations, destination marketing organizations, housing cooperatives, and 501(c)(6) nonprofits may now also be eligible.
Borrowers are eligible for a 2nd-draw PPP loan of up to $2 million, provided they have:
- 300 or fewer employees. Businesses with multiple locations that qualified under the CARES Act may qualify for a second draw provided they employ fewer than 300 people in each location. Affiliation rule waivers from the CARES Act still apply.
- Used or will use the full amount of their first PPP loan on or before the expected date for the second PPP loan to be disbursed to the borrower. The borrower must have spent the full amount of the first PPP loan on eligible expenses.
- Experienced a revenue reduction of 25% or more in all or part of 2020 compared with all or part of 2019. This is calculated by comparing gross receipts in any 2020 quarter with an applicable quarter in 2019, or, a borrower that was in operation for all four quarters of 2019 can submit copies of its annual tax forms that show a reduction in annual receipts of 25% or greater in 2020 compared with 2019.
Gross receipts defined to include all revenue in whatever form received or accrued (in accordance with the entity’s accounting method) from whatever source, including from the sales of products or services, interest, dividends, rents, royalties, fees, or commissions, reduced by returns and allowances. Forgiven first-draw PPP loans are not included in the 2020 gross receipts.
Certain types of businesses are not eligible including most businesses normally not eligible for SBA loans, businesses where the primary activity is lobbying, and businesses with certain ties to China. The CARES Act made an exception for certain non-profits and agricultural cooperatives which are not normally eligible for SBA 7(a) loans. Publicly traded companies are not eligible to receive second draw PPP loans.
How is the 25% reduction in revenues calculated?
Business owners will compare gross receipts of the business before expenses are subtracted. They will compare those for any quarter in 2020 to the same quarter in 2019 to determine if revenues decreased by at least 25%.
Businesses must have been in operation by February 15, 2020 to be eligible. What if you weren’t in business all of 2019?
- If you were not in business during the first or second quarter of 2019 but you were in business in the third and fourth quarter of 2019, then you may compare any quarter in 2020 with the third or fourth quarter of 2019 to determine whether gross receipts were reduced by at least 25%.
- If you were not in business during the first, second or third quarter of 2019, but you were in business in the fourth quarter of 2019, then you may compare any quarter in 2020 with the fourth quarter of 2019 to determine whether gross receipts were reduced by at least 25%.
- A business that wasn’t in business in 2019 but was in business before February 15, 2020 will compare gross receipts from the second, third or fourth quarter of 2020 to that first quarter of 2020 to determine whether gross receipts were reduced by at least 25%.
The periods are now comparing any of the 4 quarters of 2020 to the corresponding quarter in 2019 –or – the entire 2020 year compared to 2019.
Note that according to the legislation, for loans of up to $150,000 you can simply certify your revenue loss when you apply, but on or before you apply for forgiveness you will have to produce documentation of that revenue loss. We won’t know exactly what the SBA will consider acceptable until it provides guidance.
Does it matter if the company is cash or accrual based? The application must be made on the same basis as the company’s tax return.
What counts as payroll?
Payroll is the same as defined in the CARES Act with one new addition: Group benefits are defined to include group life, disability, vision, or dental insurance.
Payroll does not include:
- The compensation paid to an employee in excess of $100,000 on an annualized basis;
- Any compensation of an employee whose principal place of residence is outside the United States;
- Qualified sick and family leave wages for which a credit is allowed under sections 7001 and 7003 of the Families First Coronavirus Response Act.
Do not include amounts paid to 1099 contractors; they may apply on their own!
Self-employed? Independent contractors and the self-employed with no employees will still qualify based on 2.5 months of net profit (capped at $100,000) on their Schedule C tax form for 2019 or 2020. Businesses with a NAICS code beginning in 72 qualify for 3.5 times average monthly payroll.
Partnerships will qualify by using the sum of:
- Net earnings from self-employment of individual general partners in 2019 or 2020 (borrower’s choice), as reported on IRS Form 1065 K-1, reduced by section 179 expense deduction claimed, unreimbursed partnership expenses claimed, and depletion claimed on oil and gas properties, multiplied by 0.923537, that is not more than $100,000, divided by 12;
- The average total monthly payment for employee payroll costs incurred or paid by the borrower during the same year elected by the borrower;
- Multiplied by 2.5 or 3.5 for businesses with a NAICS code beginning in 72.
Can I reapply for a loan if I returned my first one?
Yes! If you returned all or part of your PPP loan, you may apply for an “amount equal to the difference between the amount retained and the maximum amount applicable.” Or, if you did not accept the full amount you may request a modification to allow you to borrow the full amount for which your business is eligible.
Is there loan forgiveness for second draw PPP loans?
Just like the first round of PPP, these loans may be entirely forgiven if spent for primarily payroll during the proper time period. Currently there are three PPP loan forgiveness applications: Form 3508, Form 3508EZ, and Form 3508S. Borrowers can continue to use those forms for PPP loans they received earlier in 2020, unless and until new applications are released. However, we expect Treasury and the SBA to release new loan forgiveness applications.
In addition, there is also simplified (but not automatic) forgiveness for loans of $150,000 or less.
Will an EIDL Grant be subtracted from my PPP for loan forgiveness?
No. The legislation repeals the requirement that an EIDL grant (advance) be deducted for purposes of PPP forgiveness. In addition, the SBA Administrator is required within 15 days of when this legislation is enacted to “ensure equal treatment” for borrowers whose loans have already been forgiven and who had their grants subtracted from the forgiven amount.
How do I apply for one of these PPP loans?
Not all lenders who offered PPP loans in the first round will participate this time around. Lenders approved by the SBA will make these loans. You’ll need to submit the following information with the application:
- If you are self-employed with no employees, your IRS Form 1040 Schedule C (whichever was used to calculate loan amount); documentation that you are self-employed (such as IRS Form 1099-MISC detailing nonemployee compensation received (box 7), invoice, bank statement, or book of record that establishes that the applicant is self-employed); and a 2020 invoice, bank statement, or book of record to establish that the applicant was in operation on or around February 15, 2020.
- If you are not self-employed, Form 941 (or other tax forms containing similar information) and state quarterly wage unemployment insurance tax reporting forms from each quarter in 2019 or 2020 (whichever was used to calculate payroll), as applicable, or equivalent payroll processor records, along with evidence of any retirement and employee group health, life, disability, vision and dental insurance contributions. A partnership must also include its IRS Form 1065 K-1s.
- If you are self-employed with employees, your 2019 or 2020 IRS Form 1040 Schedule C (whichever was used to calculate loan amount), Form 941 (or other tax forms or equivalent payroll processor records containing similar information) and state quarterly wage unemployment insurance tax reporting forms from each quarter in 2019 or 2020 (whichever was used to calculate loan amount), as applicable, or equivalent payroll processor records, along with evidence of any retirement and employee group health, life, disability, vision and dental insurance contributions, if applicable. A payroll statement or similar documentation from the pay period that covered February 15, 2020 must be provided to establish the applicant was in operation on February 15, 2020.
For all of these borrowers, you do not have to include documentation of your reduction of revenues if the loan amount is less than $150,000, but you will have to submit it when you apply for forgiveness.
If the loan amount is greater than $150,000, then you will have to submit documentation of the reduction in revenues, which may include documentation sufficient to establish that your business experienced a 25% reduction in revenue, which may include relevant tax forms (including annual tax forms), or if not available, a copy of the quarterly income statements or bank statements.
If you are applying for a second draw PPP loan with the first lender that processed your first draw loan you don’t need to include duplicate information already submitted.
REACH OUT TO US: Our accountants played a large role in helping many of our clients receive Paycheck Protection Program loans last year. Now, the PPP is back and better, and clients will again need advice and assistance in accessing the 2nd program. We can help you figure out if you are eligible and should apply, whether a 1st time or 2nd time borrower, and how to maximize your forgiveness. We do have the recently released PPP applications and can review them with you. We will continue to delve into this legislation and will provide additional insights by updating this article.We are available for your questions at 855-666-4201.
A survey by the Physicians Foundation estimated that 8% of all physician practices nationally — around 16,000 — have closed under the stress of the pandemic. Many physicians are leaving medicine entirely because of the pandemic. According to a survey from Medscape, almost 25% of doctors are considering retiring early.
Practices operating with thin margins, especially primary care practices, are bearing the brunt of patients staying away due to pandemic fears. As revenues drop, overhead remained the same, and the cost of PPE has been added on top of it all. Telehealth services have not been able to completely replace dollars that were lost.
According to the AMA the average physician has experienced a 32% drop in revenue since February of 2020. Some who had emergency reserves to weather the storm has seen those reserves depleted. Many eligible for government loans have little or nothing left moving into 2021. More worrisome is that the fear of catching COVID is preventing folks from getting the care they need for chronic conditions.
Even dental practices are feeling the squeeze. Patient visits are halved, and staggered. Now air purifiers and sneeze guards are de rigueur, as is PPE for staff. Rent and utility bills still come due, but PPP money is mostly gone. Some patients that need treatment are nervous about finances and out of work so they are looking for lower cost alternatives to expensive implants and dental work.
Burnout is taking even more of a toll on healthcare providers than before the pandemic, and financial stress is certainly a contributor.
The COVID crisis has affected short term revenue, but if your financial position is solid, chances are you will emerge stronger in the long term. There are strategies physician practices can pursue to weather the financial storm associated with the coronavirus pandemic.
1. Avoid spending right now, personally and professionally. You can probably do without that new car for the time being, and you probably don’t really need that Peloton bike no matter how much you want it. There may come a time when those dollars that you spent will be greatly needed. Physician practices should limit new spending to practice enhancements. Patient traffic is unpredictable, so it’s better to save for the unknown and wait for more stability. There are expenses required during COVID-19 pandemic, but do not go beyond special air purifiers, sneeze guards, PPE, and required expenses.
2. Speak with your Fuoco Group accountant about taxes. Believe it or not, there are opportunities that can arise during economic crises. Find out if you fall into a lower tax bracket due to reduced income. Is this the year you look at a Roth Conversion to take advantage of lower tax rates? The partnership model creates more control for physicians over their taxable income, individually they can expense a lot more than their corporate counterparts. If you consider the likelihood of future tax increases, the new Secure Act permits physician partners to really reduce their tax savings during retirement with Mega Backdoor Roth 401(k). Beyond those opportunities, partnerships permit highly paid partners to incorporate and implement additional tax savings options.
3. Don't rush to pay down debt. Medical professionals should be careful about taking cash and paying down debt for the next 90 to 180 days. If there is a vaccine in the fall, your practice business is good, and you have saved a lot of money by being ultraconservative, then look at paying debt down. The Federal Reserve System has been taking actions to promote lending, but medical practices cannot count on finding a lender if they experience a cash crunch.
4. Take advantage of the second round of the Paycheck Protection Program (PPP). You have an interest-free period for 24 weeks, and if you follow the rules, such as spending 60% of your funds on payroll, and you get the loan forgiven at the end of 24 weeks, it is a home run. Even if a medical practice cannot get a PPP loan forgiven, remember it is a 1% interest rate loan. So, it may make sense to do the 30-month payback and carry the loan if you can't financially afford to bring your staff back. If you have gotten PPP assistance, keep the funds in a dedicated account to pay for expenses such as payroll and rent. When the practice pays for insurance or for payroll, reimburse out of the separate PPP account for the exact, specific payments to have the proof for the bank and for SBA that the PPP funds were used for the purposes outlined.
Keep in mind The Consolidated Appropriations Act, 2021, has made additional PPP Loan money available, streamlined forgiveness, and extended many tax breaks for medical groups. Let us help guide you if you missed round one, or would like to dip into the well a second time.
5. Develop a new financial plan for your practice. While you are working on a new budget, expense evaluation, cash flow projection, tax estimate etc., don’t forget to do your personal tax planning as well. You may wish to review your retirement plan contributions, and review asset allocations and rebalance your portfolio too.
6. Take the long view. The pandemic has shown that reimbursement for primary care services must be reformed, and fee-for-service is a failure. It is a system that is based on face-to-face visits, which obviously does not work in a pandemic. During the pandemic, the CMS as well as private health plans have moved in the right direction on advance payments which will help primary care practices keep their doors open. This could be a step forward on the road to prospective payments, but that conversation has been a long time coming. In addition, government and private payers need to provide appropriate reimbursement for innovative care delivery models like telemedicine.
REACH OUT TO US: You have to have a passion for caring for your patients but don’t be ashamed to run a profitable business. Money should not be your primary motivator, but you have to run a profitable business so you can practice great medicine. Talk to us about your viable options for 2021. A new financial action plan or restructuring may help you and your practice weather the economic pressures on the medical field right now. Call us toll free at 855-666-4201 or email email@example.com.
You can’t sue Pfizer or Moderna if you have severe Covid vaccine side effects. The government likely won’t compensate you for damages either
If you experience severe side effects after getting a Covid vaccine, lawyers tell CNBC there is basically no one to blame in a U.S. court of law.
is very rare for a blanket immunity law to be passed,” said Rogge Dunn,
a Dallas labor and employment attorney. “Pharmaceutical companies
typically aren’t offered much liability protection under the law.“
You also can’t sue the Food and Drug Administration for authorizing a vaccine for emergency use, nor can you hold your employer accountable if they mandate inoculation as a condition of employment.
Congress created a fund specifically to help cover lost wages and out-of-pocket medical expenses for people who have been irreparably harmed by a “covered countermeasure,” such as a vaccine. But it is difficult to use and rarely pays. Attorneys say it has compensated less than 6% of the claims filed in the last decade.
In February, Health and Human Services Secretary Alex Azar invoked the Public Readiness and Emergency Preparedness Act. The 2005 law empowers the HHS secretary to provide legal protection to companies making or distributing critical medical supplies, such as vaccines and treatments, unless there’s “willful misconduct” by the company. The protection lasts until 2024.
HHS did not respond to CNBC’s request for an interview.
Dunn thinks a big reason for the unprecedented protection has to do with the expedited timeline.
“When the government said, ‘We want you to develop this four or five times faster than you normally do,’ most likely the manufacturers said to the government, ‘We want you, the government, to protect us from multimillion-dollar lawsuits,’” said Dunn.
The quickest vaccine ever developed was for mumps. It took four years and was licensed in 1967. Pfizer’s Covid-19 vaccine was developed and cleared for emergency use in eight months — a fact that has fueled public mistrust of the coronavirus inoculation in the U.S.
Roughly 4 in 10 Americans say they would “definitely” or “probably” not get vaccinated, according to a recent survey by the Pew Research Center. While this is lower than it was two months ago, it still points to a huge trust gap.
But drugmakers like Pfizer continue to reassure the public no shortcuts were taken. “This is a vaccine that was developed without cutting corners,” CEO Dr. Albert Bourla said in an interview with CNBC’s “Squawk Box” on Monday. “This is a vaccine that is getting approved by all authorities in the world. That should say something.”
The legal immunity granted to pharmaceutical companies doesn’t just guard them against lawsuits. Dunn said it helps lower the cost of the immunizations.
“The government doesn’t want people suing the companies making the Covid vaccine. Because then, the manufacturers would probably charge the government a higher price per person per dose,” Dunn explained.
Pfizer and Moderna did not return CNBC’s request for comment on their legal protections.
Remember, vaccine manufacturers aren’t the ones approving their product for mass distribution. That is the job of the FDA.
Which begs the question, can you sue the U.S. government if you have an extraordinarily bad reaction to a vaccine?
Again, the answer is no.
“You can’t sue the FDA for approving or disapproving a drug,” said Dorit Reiss, a professor at the University of California Hastings College of Law. “That’s part of its sovereign immunity.”
Sovereign immunity came from the king, explains Dunn, referring to British law before the American Revolution. “You couldn’t sue the king. So, America has sovereign immunity, and even each state has sovereign immunity.”
There are limited exceptions, but Dunn said he doesn’t think they provide a viable legal path to hold the federal government responsible for a Covid vaccine injury.
Bringing workers back to the office in a post-Covid world also carries with it a heightened fear of liability for employers. Lawyers across the country say their corporate clients are reaching out to them to ask whether they can require employees to get immunized.
Dunn’s clients who run businesses serving customers in person or on site are most interested in mandating a Covid vaccine for staff.
“They view it as a selling point,” Dunn said. “It’s particularly important for restaurants, bars, gyms and salons. My clients in that segment of the service industry are looking hard at making it mandatory, as a sales point to their customers.”
While this is in part a public relations tactic, it is legally within an employer’s rights to impose such a requirement.
“Requiring a vaccine is a health and safety work rule, and employers can do that,” said Reiss.
There are a few notable exceptions. If a work force is unionized, the collective bargaining agreement may require negotiating with the union before mandating a vaccine.
Anti-discrimination laws provide some protections as well. Under the Americans with Disabilities Act, workers who don’t want to be vaccinated for medical reasons are eligible to request an exemption. If taking the vaccine is a violation of a “sincerely held” religious belief, Title VII of the Civil Rights Act of 1964 would potentially provide a way to opt out.
Should none of these exemptions apply, employees may have some legal recourse if they suffer debilitating side effects following a work-mandated Covid inoculation.
Attorneys say claims would most likely be routed through worker’s compensation programs and treated as an on-the-job injury.
“But there are significant limits or caps on the damages an employee can recover,” said Dunn. He added that it would likely be difficult to prove.
Mandatory vaccination protocols, however, may not happen until the FDA formally approves the vaccines and grants Pfizer and BioNTech or Moderna a license to sell them, which will take several more months of data to show their safety and effectiveness.
“An emergency use authorization is not a license,” said Reiss. “There’s a legal question as to whether you can mandate an emergency observation. The language in the act is somewhat unclear on that.”
The government has created a way for people to recover some damages should something go wrong following immunization.
In addition to the legal immunity, the PREP Act established the Countermeasures Injury Compensation Program (CICP), which provides benefits to eligible individuals who suffer serious injury from one of the protected companies.
The little-known government program has been around for a decade, and it is managed by an agency under HHS. This fund typically only deals with vaccines you probably would never get, like the H1N1 and anthrax vaccines.
If a case for compensation through the CICP is successful, the program provides up to $50,000 per year in unreimbursed lost wages and out-of-pocket medical expenses. It won’t cover legal fees or anything to compensate for pain and suffering.
It is also capped at the death benefit of $370,376, which is the most a surviving family member receives in the event that a Covid vaccine proves to be fatal.
But experts specializing in vaccine law say it is difficult to navigate. “This government compensation program is very hard to use,” said Reiss. “The bar for compensation is very high.”
Also worrisome to some vaccine injury lawyers is the fact that the CICP has rejected a majority of the compensation requests made since the program began 10 years ago. Of the 499 claims filed, the CICP has compensated only 29 claims, totaling more than $6 million.
David Carney, vice president of the Vaccine Bar Association, said the CICP might deny a claim for a variety of reasons. “One reason might be that the medical records don’t support a claim,” said Carney, who regularly deals with vaccine injury cases. “We have to litigate a lot of really complex issues ... and provide a medical basis for why the injury occurred.”
Proving an injury was a direct result of the Covid vaccine could be difficult, according to Carney. “It’s not as simple as saying. ‘Hey, I got a Covid treatment, and now I have an injury.’ There is a lot of burden of proof there.”
There is also a strict one-year statute, meaning that all claims have to be filed within 12 months of receiving the vaccine.
“People who are harmed by a Covid vaccine deserve to be compensated fast and generously,” said Reiss. “The PREP Act doesn’t do that.”
Lawyers tell CNBC that it would make more sense for Covid vaccine injuries to instead be routed through another program under the HHS called the National Vaccine Injury Compensation Program, which handles claims for 16 routine vaccines. Known colloquially as “vaccine court,” the program paid on about 70% of petitions adjudicated by the court from 2006 to 2018.
And since it began considering claims in 1988, the VICP has paid approximately $4.4 billion in total compensation. That dwarfs the CICP’s roughly $6 million in paid benefits over the life of the program.
The VICP also gives you more time to file your claim. You have three years from the date of the first symptom to file for compensation.
“The VICP allows for recovery of pain and suffering, attorney’s fees, along with medical expenses and lost wages, if any,” said Michael Maxwell, a lawyer who practices in the areas of business litigation and personal injury. “Under the CICP, it’s only lost wages and out-of-pocket medical expenses. That’s it, unless there’s a death.”
The Covid-19 vaccines, however, aren’t on the list of eligible vaccines.
Reiss said the best fix would be to change VICP’s rulebook to add Covid vaccines to its list of covered inoculations. “That will require legislative change. I hope that legislative change happens.”
December 16, 2020 – By Matthew D. Lee and Marissa Koblitz Kingman. Read Original Article Here >
This month’s court-ordered release of Paycheck Protection Program (PPP) loan data is expected to result in intense scrutiny of the loan forgiveness process, highlighting the need for recipients to proceed with caution when filing forgiveness applications.
Multiple news organization sued the Trump administration in May demanding that it release information on the businesses that benefited from federal pandemic relief programs. A federal judge ordered the administration to disclose the information and on the evening of December 1, 2020, the Small Business Administration (SBA) released data on every “small” business that received a loan from the more than $700 billion forgivable loan package approved by Congress.
The Original Purpose of the Loans
The loans were designed to help small businesses cover explicit allowable expenses such as payroll, rent and mortgage payments. In a statement that accompanied the data release, the SBA stated “small businesses are the driving force of the American economy and are essential to America’s economic rebound from the global pandemic.”
The Problems Exposed by the Data
As discussed in our prior article, PPP Loan Fraud Enforcement 2.0: Preparing for the Next Round of Scrutiny, a Senate subcommittee’s September 1, 2020 analysis of the more than 5.2 million PPP loans issued suggested a high risk for fraud, waste and abuse. The analysis cited issues including missing information on applications, incorrect information on applications, companies receiving more than one PPP loan, loans going to companies that had been debarred or suspended from contracting with the federal government and companies with known performance and integrity issues.
Much like the data that was released in September, this new round of data again revealed that many loan applicants omitted vital information about the borrower, including company names. For some companies that received over $150,000 in loans, the business name was listed as “Not Available.” Addresses were also omitted. Answers to questions regarding race, gender and veteran status were also left unanswered. In its statement accompanying the release of the December 1 data, the SBA appeared to blame the lenders for the missing information: “PPP loan data reflects the information submitted by lenders to the SBA for PPP loans. Approximately 75% of all PPP loans did not include any demographic information at the time of loan application. The loan forgiveness application expressly requests demographic information for borrowers so that SBA can better understand which small businesses are benefiting from PPP loans.”
The data released disclosed the exact amounts received by the top recipients, revealing that many large companies appeared to have gotten $10 million in loans despite the PPP’s original goal of helping small businesses in need of emergency relief. Some of the big businesses that received the large loans have ties to President Trump, according to media reports. Popular restaurant chains, large law firms and hotel operations also received millions of dollars in loans.
The troubling patterns revealed in the analysis of the December 1 and September 1 data releases mean businesses should expect a wide variety of government agencies to engage in more intense and far-reaching enforcement activity than previously expected.
Importantly, as businesses are gearing up to apply for loan forgiveness, they must proceed with caution. The December 1 SBA statement that was released with the new data explained that the listed borrowers were not necessarily eligible for loan forgiveness, despite lender approval: “However, the lender’s approval does not reflect a determination by SBA that the borrower is eligible for a PPP loan or entitled to loan forgiveness. All PPP loans are subject to SBA review and all loans over $2 million will automatically be reviewed. Eligibility and compliance will be reviewed during the loan forgiveness process. Further, a small business’s receipt of a PPP loan should not be interpreted as an endorsement of the small business’ commercial activity or business model.”
The loan application process was riddled with confusion. Borrowers may have been approved for loans by their lenders and received the funds, despite being ineligible. The loan forgiveness process may trigger audits for companies that were unaware they were not entitled to the funds they received. The PPP forgiveness process will most certainly lead to further investigations of fraud and abuse. Borrowers should work closely with their counsel when applying for forgiveness to ensure that they have the correct supporting documentation, accurately calculated the qualified payroll costs, and appropriately used the PPP funds.
Election Day often brings out the wanderlust in people dissatisfied with the results; the 2020 election is no different. After a tough year, Americans are once again looking into living abroad.
There are currently 9 million U.S. expats living all over the world, a number that stands to grow after this election season as online searches on expat life surge 300 percent above the average. With rising coronavirus numbers in the U.S., combined with the new flexibility offered by remote work, Americans are more inclined than ever to give expat life a try.
While living abroad brings a new lifestyle and a rush of opportunities, it’s important to do the proper research, and consider the logistics and the tax consequences of living abroad, according to Katelyn Minott, a CPA, managing partner of Bright!Tax and currently a resident of Rio de Janeiro.
"The pandemic has created a situation in which many are finding they can work from wherever their computer might be," she said. "And it’s created a global business environment that allows people to travel and follow their heart’s desire to live abroad. But beyond the lifestyle implications of a move abroad, there are financial and tax considerations of a move that many don’t plan for before they pull the trigger on moving."
The most common misunderstanding is the idea that you don’t have to file a tax return from abroad, according to Minott. "Many who live abroad assume that leaving the U.S. and living outside its jurisdiction means no tax returns," she said. "But once they have the basic understanding that U.S. taxes are going to follow them wherever they may be, there are certain mechanisms to reduce and often eliminate U.S. tax. It’s also important to consider that the new country may also have local tax requirements that need to be met."
Many of the countries that are attractive to those looking to relocate have little to no tax, making for significant tax savings overall, Minott observed: "Someone in the British Virgin Islands or the Cayman Islands will be able to take advantage of the low taxes to achieve overall tax savings."
There is quite a bit of recordkeeping involved in properly preparing a U.S. tax return, Minott indicated. "For example, one of the mechanisms utilized to lower U.S. taxable income is the requirement that the taxpayer report their travel to and from the U.S. each year," she said. "There are a couple of ways to qualify for the foreign earned income exclusion. One involves being absent from the U.S. for 330 days during the year. It’s important to keep track of travel, foreign housing expenses, and income earned stateside versus offshore."
A big issue, with possible extremely negative unexpected consequences, is the obligation to report the maximum account balance held in foreign bank and financial accounts to the Treasury Department. The report is made on a Report of Foreign Bank and Financial Accounts, or FBAR, on FinCEN Form 114. A United States "person," including a citizen, resident, corporation, partnership, limited liability company, trust and estate must file an FBAR.
"There are big penalties for failure to do this," said Minott. "The penalties start at $10,000. There’s no reason to miss filing — it’s just a disclosure, it doesn’t yield a tax liability."
State residency is an issue that needs to be carefully examined, according to Minott. "Every U.S. state has different rules surrounding what would be a tax residence," she said. "Some, like California and New York, make it very challenging to break state residency when you’re moving abroad."
"As a result, many taxpayers choose to relocate to a different U.S. state before moving abroad," she said. "Many taxpayers relocate to a non-income-tax state prior to relocation abroad. Texas and Florida are the most popular as interim relocation states."
Not every taxpayer moves to a low or no-tax jurisdiction such as the British Virgin Islands or the Caymans, Minott observed. "Many taxpayers find themselves moving to countries where they do, in fact, have a tax obligation. In those circumstances where they do have a foreign tax obligation, there are also mechanisms to reduce U.S. tax, based on the foreign tax they already paid. More often than not, they won’t be in a double-tax situation thanks to the foreign earned income exclusion, foreign tax credit or a tax treaty in effect with their country of residency."
But for the many freelancers that are taking advantage of the ability to work from anywhere, the self-employment tax does not go away, Minott cautioned. "Unless the country has a totalization agreement with the U.S., the U.S. taxpayer will continue to pay self-employment tax to the IRS," she said.
"Many taxpayers choose to set up a business in their new country," Minott remarked. "This can generate a number of international disclosure requirements with the IRS. Holding a foreign corporation or a partnership interest can create a complex filing situation on the U.S. side. It’s vital that the expat understand the implications of those business interests prior to incorporating or setting up a foreign entity."