Harless Tax Blog

Harless Tax Blog

Window Of Opportunity Closing For Opportunity Zones

Monday, January 24, 2022

By Susan Kaplan

The possibility of higher capital gains rates has fueled interest by investors in Qualified Opportunity Zone funds. Investment is incentivized by a deferral of capital gains that otherwise would be reported in the year they were realized. With the tax recognition deadline of December 31, 2026, still in place, taxpayers who wish to invest unrecognized gains in QOZs need to do so prior to December 31, 2021, in order to obtain any step-up in basis benefit.

Although some investors missed the original deadlines, they can still get a 10% break on the taxable amount of their investment if they hold it for at least five years by the end of 2026, but that benefit that goes away after 2021. The icing on the cake is the 100% exclusion of tax on the appreciation of assets placed into the fund. The 10% forgiveness after five years applies to the gain on the sale of assets put into the fund, while the entire exclusion from tax applies to any appreciation after the amount is in the fund.

Understand the risks – and the rules. Recently, taxpayers were granted additional relief with respect to the 180-day window for investment, the reasonable cause exception to the 90% test, and additional time for any property being substantially approved. However, the gain recognition deadline has not yet been extended. For taxpayers, this means that any deferred gain on assets held in a QOZ must be recognized by the taxpayer by December 31, 2026.

Only a few states have not followed the federal treatment of qualified opportunity funds. New York decided that, effective in 2021, they would pull out of the program for new investments.

CONTACT US: Qualified opportunity zones allow investors to redirect some or all of their unrecognized capital gains into underserved, economically distressed communities in exchange for tax breaks assuming certain requirements are satisfied. With the tax recognition deadline of December 31, 2026, still in place, taxpayers who wish to invest unrecognized gains in QOZs need to do so prior to the yearend 2021, in order to obtain any step-up in basis benefit. An increase in the basis of the unrecognized gain is available if the unrecognized gain is invested in a QOZ for five years (10% basis step-up). Even if satisfying the five-year requirement for a 10% basis step-up is not possible, investors will still receive the benefits of a deferral of capital gains until December 31, 2026 and an elimination of the tax on any gains from a QOZ investment if the QOZ investment is held for 10 years. Questions? We have answers!

IRS Has S-Corps Under Scrutiny

Monday, January 03, 2022

By Susan Kaplan

For years, the IRS has been gunning for a fight with S-Corporations over reasonable compensation. Their guns are now loaded, so get ready, because since 2000 when the IRS established its authority to reclassify distributions as wages and reinforced the employment status of shareholders as employees, it has had S-corps in its sights. Things got serious in 2009, the IRS recognized that reasonable compensation under-reporting was a major compliance issue, and set out to correct it.

COVID brought a short ceasefire. By 2019, examiners were trained to address the long-standing concern over inadequate reasonable compensation and bring S-Corp owners into compliance. Audits picked up momentum, but then COVID hit. So, will the IRS resume its assault on S-Corps and owners’ compensation in 2021? Get ready, because even if the IRS doesn’t show up until 2022, they will likely show up with guns loaded.

The best way to prepare for a reasonable compensation challenge is to be proactive. This means determining reasonable compensation using the IRS’s own criteria and guidelines, not poor past practices.

Advice For Our S-Corporation Clients:

  1. We must compute and document shareholder basis in the S-Corporation each and every year. The TCJA strongly implies that in the case of shareholders claiming a loss, basis be calculated, and in your best interest, Fuoco Group believes this should not be limited to a loss year. It is to an owner’s advantage to be well aware of their basis in their entity. We firmly believe that the honeymoon period is over for S-Corps.
  2. It has long been a requirement that S-Corporation owners need to pay themselves “reasonable” W-2 compensation. Put simply, if you’re making money, you’d better be giving yourself a paycheck. And hidden in the TCJA is a latent license for the IRS to go hunting for this. As your tax advisor, Fuoco Group simply cannot let you ignore this. It needs to be resolved and resolved quickly.

And Some Advice For Our Partnership Clients:

Each year, partner capital accounts have to be presented on a tax basis. Your capital account = your tax basis in the partnership, and the IRS wants to see it. Your Fuoco Group tax advisor CANNOT release the tax return without the calculation.

Make the Most of Your Mobility–Related Tax Breaks

Monday, December 27, 2021

By Susan Kaplan

The new 2022 car and truck models will be in dealership showrooms soon. If you’re in the market for a vehicle for your self-employed business, don’t forget to factor taxes into the equation. You may deduct vehicle expenses in one of two ways.

  1. Actual expense method, which allows you to deduct your actual expenses based on the percentage of business use, and you ‘re in line for depreciation deductions, (subject to certain limits).
  2. Standard mileage rate, which for 2021 is 56 cents per business mile, plus you can add on business-related tolls and parking fees.

Regardless of which method you use, keep detailed contemporaneous records as proof in case the IRS challenges your deductions. Notably, you must record each business trip, including the date, location, distance and business purpose. But the record keeping for the actual expense method is even more burdensome because you must account for every deductible expense.

Often the actual expense method will produce a bigger annual deduction, and justify the hassle. You may get a tax boost from the rules associated with depreciation deductions. However, to deter excessive deductions, the tax law imposes “luxury car” limits, which actually kick in for moderately-priced vehicles

There are two critical tax breaks available for business vehicle purchases:

  • You can claim a current deduction under Section 179 up to the annual luxury car limits. Example: For a passenger car placed in service in 2020, the limit was $10,100. (The 2021 limits will be announced shortly.) Then you are entitled to a deduction in succeeding years under cost recovery tables.
  • You can claim a first-year bonus depreciation deduction. Currently, the maximum deduction for a passenger vehicle is $8,000.
  • The actual deduction amounts are based on the percentage of business use. If you’re entitled to a $10,000 maximum Section 179 deduction for a car and you use it 90% for business, your deduction is $9,000.
  • Comparable rules apply if you lease a car instead of buying it. In either event, a self-employed taxpayer is in line for generous write-offs.

CONTACT US: This just the tip of the iceberg on Tax Deductions for Self-Employed Business Vehicles. The tax aspects can be critical in this area. Make sure you understand all the rules before you go car shopping. Generally, you can claim deductions for vehicle expenses as a self-employed taxpayer, but other special rules may come into play. For instance, if you buy a heavy duty SUV instead of a passenger vehicle, you may qualify for a deduction of up to $25,000. Also, you might benefit from a special tax credit for electric cars of up to $7,500.

Inflation Impacts 2022 Tax Brackets

Monday, December 13, 2021

By Susan Kaplan

Planning means comparing! Effective tax planning means knowing how your current tax year’s circumstances might be different in the one ahead.

Comparing the numbers helps you determine if you should postpone some earnings into 2022, where the income tax brackets are a bit wider, so you won’t be bumped into a higher one on your 2021 return.

And what about deductions? It could be better, based on the current and next year’s standard amounts, for you to shift some deductible tax expenses from this year into the next or vice versa and itemize.

So, yes, the IRS annual inflation adjustments are useful. But, this year they are downright intimidating. The high inflation amounts that households and businesses have been experiencing this year are likely to lead to larger increases in tax brackets and other inflation-adjusted tax items in 2022.

Bloomberg Tax & Accounting released its 2022 Projected U.S. Tax Rates report last week, estimating the inflation-adjusted amounts in the Tax Code that will eventually come officially from the Internal Revenue Service. This is a sneak peek at the amount of tax savings clients may realize thanks to increases in deduction limitations, and upward adjustments to tax bracket thresholds. From 2021 to 2022, most inflation-adjusted amounts in the Tax Code, including the threshold dollar amounts for tax rate brackets, are expected to increase by about 3%.

Married Filing Jointly (MFJ) and Surviving Spouses

10% – $0 to $20,550
12% – $20,550 to $83,550
22% – $83,550 to $178,150
24% – $178,150 to $340,100
32% – $340,100 to $431,900
35% – $431,900 to $647,850
37% – $647,850 or more

Married Filing Separate (MFS)

10% – $0 to $14,650
12% – $14,650 to $55,900
22% – $55,900 to $89,050
24% – $89,050 to $170,050
32% – $170,050 to $215,950
35% – $215,950 to $323,925
37% – $323,925 or more

Head of Household

10% – $0 to $14,650
12% – $14,650 to $55,900
22% – $55,900 to $89,050
24% – $89,050 to $170,050
32% – $170,050 to $215,950
35% – $215,950 to $539,900
37% – $539,900 or more

Unmarried Individuals (other than Surviving Spouses and Heads of Households)

10% – $0 to $10,275
12% – $10,275 to $41,775
22% – $41,775 to $89,075
24% – $89,075 to $170,050
32% – $170,050 to $215,950
35% – $215,950 to $539,900
37% – $539,900 or more

Estates and Trusts

10% – $0 to $2,750
12% – $2,750 to $9,850
22% – $9,850 to $13,450
24% – $13,450 or more

Standard Deduction

Bloomberg Tax & Accounting has projected the following standard deduction amounts for 2022:

Filing Status Projected 2022

Standard Deduction

Married Filing Jointly/Surviving Spouses $25,900
Heads of Household $19,400
All Other Taxpayers $12,950

Alternative Minimum Tax (AMT)

Projected 2022 AMT exemption amounts are shown below.

Filing Status Projected 2022

AMT Exemption Amount

Married Filing Jointly/Surviving Spouses $118,100
Unmarried Individuals

(other than Surviving Spouses)

$75,900
Married Individuals Filing Separate Returns $59,050
Estates and Trusts $26,500

The following provisions have changed from last year’s report based on recent tax legislation:

  • The disqualified income limitation, for purposes of the §32 earned income tax credit, increased from $2,200 to $10,000.
  • The limitation on the §179D deduction for energy efficient commercial building property is now adjusted for inflation.
  • The phaseout range for the Section 25A Lifetime Learning Credit is no longer adjusted for inflation.

Reach Out To Us: Now is the time to start planning ahead to cut your tax bill for next year. Let our tax experts help you minimize your tax liability so you can keep more of your profit in your pocket!

Increase in Capital Gains Taxes Will Affect Your Business in Many Ways

Thursday, December 02, 2021

By Susan Kaplan

The White House has proposed a plan that will essentially double the capital gains tax for investors making over $1,000,000 to fund trillion dollar initiatives like the American Families Plan, American Jobs Plan, and The Infrastructure Investment Act. The goal of the Administration is to eliminate the loopholes that allow taxpayers making $1 million a year or more to pay a lower rate on their capital gains than ordinary working Americans pay.

The current top capital gains rate is 20%, but could increase to a tax more in line with the top income tax rate of 37%, for those making $1 million or more. The White House is also entertaining the idea of increasing the top income tax bracket to 39.6%. The proposal has left many business owners worrying how an overall 19.6% increase in the tax investors will face will affect their businesses.

The increase in capital gains taxes will not only affect big businesses, but smaller ones as well. Significantly increasing the capital gains tax results in less capital investment, so for smaller businesses the increase creates a hurdle to raising capital from outside investors that is needed to start businesses and support growth. The proposal has negative implications on new investment, but also on the future sales of investments, resulting in less revenue. It will also have an impact on the creation of jobs and growth of the economy.

What happens when you decide to exit your business? Raising the capital gains tax will come into play as business owners liquidate their life’s work. Selling a $10 million business after the proposal goes into effect, they will end up paying 39.6% in taxes on the proceeds from the sale, leaving them with a little over $6 million, a number far below the appraised value. It could be wise to sell before the tax law comes into effect, or to have a plan to minimize tax liabilities in the event the sale occurs after the tax law has come into effect.

Here are some strategies clients can use to minimize this liability:

  1. Set up a trust fund from which to take distributions on a monthly, quarterly or yearly basis. Putting the proceeds from the sale of a company in the trust prevents being taxed initially, since the proceeds have not been received yet. The trust holds the proceeds and invests them in real estate, securities or other business ventures to generate a return to pay you back over time. They are taxed at the applicable tax rate associated with the amount taken out each year. If a distribution of interest is taken the trust has earned, then ordinary income tax is paid on said amount. If principal is taken after the interest has been paid, then capital gains tax would be paid on that amount.
  2. Seller financing is a scenario in which the owner acts as a bank, allowing the buyer to make payments over time. Therefore, the owner is not taxed immediately on the overall value of the company. They will be taxed in the applicable bracket based on the payment received each year. They will also earn interest utilizing seller financing.
  3. Earn outs are a method of payment in which the proceeds from the business are tied directly to the performance of the company. Specific financial goals are set that determine the payment received each year. This is an option that will minimize tax liability, but carries significant risk as the payment is tied to performance. If the financial goals set in place are not met, you may not receive the proceeds initially agreed upon.
  4. A 1031 exchange can be useful to avoid paying capital gains tax on the real estate component of a company. The client sells an investment property and reinvests the proceeds from the sale within certain time limits in a property or properties of like kind and equal or greater value. The proceeds from the sale are transferred to a qualified intermediary, rather than the seller of the property, and the qualified intermediary transfers them to the seller of the replacement property or properties. Capital gains tax is deferred, freeing up more capital for investment, and allowing the client to reap the benefits of the rental income that will be produced. This method could be used alongside one of the strategies above, allowing business owners to avoid and defer capital gains on not only the real estate, but the business as well.

Reach Out to Us: The recent change in the White House is set to bring about substantial adjustment to the way high-net worth individuals are taxed in relation to capital gains. It’s important to look at the bigger picture and plan ahead so you can be prepared once the proposals become reality. Consulting a tax strategist could be beneficial in reducing capital gains tax liability when it comes time to sell a business. We have a team of Business Exit Planners to help you! They can help with the allocation of the purchase price, as well as facilitating the strategies mentioned above. We are also great intermediaries to engage in order to help minimize tax liabilities when it comes time to sell.

2022 Estate Planning Necessary for Business Owners

Thursday, November 04, 2021

October 24, 2021 By Susan Kaplan

Estate planning tends to be avoided due to the distress and fears that facing our mortality brings. But, just like Business Exit Planning is needed to protect the value in your business so it can be transitioned to your heirs, so too is estate planning a necessity for any business owner with financial assets wishing to protect loved ones, or give to charity after their passing.

A comprehensive financial and legal plan for protecting your assets after your death (or incapacity) and passing them on to your beneficiaries should be a top priority. Your assets include anything of value like business and personal property, bank accounts, business dealings and more.

There are many benefits to creating an estate plan before you need one, it is easier than you think. Unexpected illnesses and accidents can occur at any time. An estate plan can keep your business and personal assets out of probate court, and give you full control over what happens to your business and other assets. Estate planning is not just for the wealthy; it benefits anyone who has any type of asset that they want to protect. Here are some essential estate planning tips for business owners:

  1. Appoint a Financial Power of Attorney: This will be a trusted individual to handle your finances after death, or if you can no longer make decisions due to poor health. As a business owner, you may have a complex financial system that will require the right person to handle operations and transactions when you can no longer oversee your business and finances.

  2. Develop a Living Trust: As a business owner, you have many assets that are tied specifically to your business. It may even be that many of these assets are vital to how smoothly it runs. A living trust is a legal document which provides directives involving your assets for a trustee. This can be a legal entity or person you choose. Keep the Living Trust up to date, because assets change as the business grows over time. A Living Trust is especially important for small business owners and sole proprietors. There is no legal separation between you and your business, you are your business and must protect are the assets that keep the business running. You will want to be sure to list these assets in a Living Trust to guarantee their protection.

  3. Create a Succession Plan: This is a strategic plan to guarantee a seamless transition of business operations, management and ownership to partners, heirs or successor owners. It’s important to create a succession plan to ensure that whoever replaces you as owner is someone trusted. Creating a succession plan in advance provides stakeholders with the expectation of a smooth transition that adheres to the company’s mission and vision.

  4. Put a Buy/Sell Agreement in Place: Anyone with a closely held business and one or more partners needs to take certain steps to guard against business disruption. If one partner dies suddenly, or becomes disabled or leaves abruptly, serious confusion and conflicts can ensue. A buy-sell agreement stipulates precisely how ownership interests will be valued and purchased. In most situations, payouts for a buy-sell agreement are funded with a cash-value life insurance policy or a disability buyout insurance policy. There are two main types of life insurance-funded buy-sell agreements:

  • Cross-purchase agreement. Partners buy insurance policies on each other, using the proceeds to buy a deceased or disabled partner’s ownership shares. They receive a step-up in cost basis that may reduce taxes if the business is later sold. This option is usually preferable if there are three or fewer business partners.

  • Entity purchase agreement. The business entity buys insurance policies on each partner and uses the proceeds to buy a deceased or disabled owner’s shares, which are divided among surviving partners. Partners receive no step-up in cost basis with this type of agreement. This option is usually preferable if there are four or more partners, because it eliminates the need for each partner to buy so many insurance policies.

As a business owner, you may often be too busy juggling the tasks of running your business, raising a family, and completing a multitude of other daily tasks, to think about estate planning. Just like retirement planning, it should be a top priority on your financial list of things to do. Nobody can predict the future, but you can plan for it. Having an estate plan in place can provide an immeasurable level of relief and peace of mind for your loved ones should the unthinkable happen.

SBA Answers to PPP Loan and EIDL FAQs

Thursday, October 28, 2021

Original article from Fuoco.com >

Some frequently asked questions on federal coronavirus measures were answered in guidance recently issued by the SBA and Treasury, but new questions have arisen as well related to the Paycheck Protection Program (PPP) and to the Economic Injury Disaster Loans (EIDL). An interim final rule also was issued to establish procedures for prospective borrowers who want to appeal certain SBA loan decisions.

The New Answers to PPP FAQs:

• Establish that the payment or nonpayment of fees of an agent or other third party is not material to the SBA’s guarantee of a PPP loan or to the SBA’s payment of fees to lenders.

• Permit payments for vision and dental benefits to be included in the group health care benefits and insurance premiums that are eligible to be paid with PPP funds.

New Answers to FAQs related to the PPP Loan forgiveness and an EIDL:

• Describe how a lender will be able to confirm the amount of any EIDL advance that will be automatically deducted by the SBA from a PPP borrower’s loan forgiveness amount when the borrower has received both EIDL and PPP funds. Lenders can confirm the advance amount through the PPP Forgiveness Platform.

• Instruct lenders on how to handle any remaining balance due on a PPP loan after the SBA remits the forgiveness amount to the lender, including if there has been a reduction in the forgiveness amount for an EIDL advance. Lenders must notify the borrower of the amount remitted by the SBA and when the first payment will be due. The loan must be repaid by the borrower before the maturity date, either two or five years. Previous guidance indicates that PPP loans originating before June 5, 2020, have a two-year term, unless the lender and borrower mutually agree to extend the maturity of such loans to five years. If the loan originated on or after June 5, 2020, the term is five years.

• Outline what a lender should do if a borrower received an EIDL advance in excess of the amount of its PPP loan. Lenders must notify the borrower when the first payment will be due, and the loan must be repaid by the borrower before the maturity date, either two or five years.

The new interim final rule establishes numerous review procedures, including:

• The right for a PPP borrower to request a review of a lender decision or an SBA decision that a borrower is ineligible for loan forgiveness. Final SBA decisions can be appealed to the Office of Hearings and Appeals.

• Documentation requirements, time limits, and a walkthrough of the processes. Oral hearings are permitted only in specific scenarios following a request or at the judge’s election.

Many clients have asked us how to pay a Paycheck Protection Program loan back if it wasn’t used for payroll or other qualified expenses. At this time, loans from the federal government's small business-relief program are forgivable if at least 60% of the loan goes toward a business' payroll expenses. It must be paid back if that threshold isn't met, but no payments have to be made until 12 months from the date that a business received the money. After that time period, if the loan is not forgiven, it is expected that the loan will be paid back within two years if your loan was issued before June 5, and five years if your loan was issued after June 5. The interest rate for the PPP loan is 1%.

The legislature is considering whether to automatically forgive any PPP Loans under $100,000 or possibly $150,000.

More recently, the SBA and Treasury issued an interim final rule which establishes that owner-employees with less than a 5% stake in a C corporation or S corporation are exempted from the PPP owner-employee compensation rule for determining the amount of their compensation for loan forgiveness. The exemption’s intent is to cover owner-employees who have no meaningful ability to influence decisions over how loan proceeds are allocated.

The guidance also seeks to maintain equitable treatment between a business owner that holds property in a separate entity and one that holds the property in the same entity as its business operations.

In the first decision, the SBA and Treasury declare that the amount of loan forgiveness requested for non-payroll costs may not include any amount attributable to the business operation of a tenant or subtenant of the PPP borrower.

In the second decision, the SBA and Treasury rule that rent or lease payments to a related party are eligible for loan forgiveness provided that (1) the amount of loan forgiveness requested for those payments is no more than the amount of mortgage interest owed on the property during the covered period that is attributable to the space being rented by the business, and (2) the lease and the mortgage were entered into prior to February 15, 2020.

However, mortgage interest payments to a related party are not eligible for forgiveness. Per the ruling, PPP loans are intended to help businesses cover non-payroll costs owed to third parties, not payments to a business’s owner that occur because of how the business is structured.

Reach Out To Us: The PPP forgiveness applications are extremely detailed, and the final rules are uncertain in some areas. Documentation is critical regarding any facts that could become an issue related to forgiveness. Let us help you through the process. Our PPP Professional team can be reached at CPA@Fuoco.com. We can also help you with EIDLs, business strategy, new projections, budgeting and cost analysis.

SBA Updates Guidance and Increases Cap for Economic Injury Disaster Loans

Thursday, September 30, 2021

September 19, 2021 By Susan Kaplan

The most recent good news from the SBA is the increasing of the cap for COVID Economic Injury Disaster Loans from $500,000 to $2 million starting October 8th.

The SBA, is targeting hard-hit sectors of the economy. There will be an exclusive 30-day window for approving and disbursing funds for loans of $500,000 or less. Approval and disbursement of loans over $500,000 will begin after the 30-day period. To ease the COVID EIDL application process for small businesses, the SBA has established more simplified affiliation requirements to model those of the Restaurant Revitalization Fund.

COVID EIDL funds can be used for normal operating expenses and working capital, to make regular payments for operating expenses, including payroll, rent/mortgage, utilities, purchasing equipment, paying ordinary business expenses, and to pay business debt incurred at any time (past present or future). COVID EIDL funds will now be eligible to prepay commercial debt and make payments on federal business debt.

Reminders:

  1. The SBA is authorized to make COVID EIDL loans through December 31, 2021, or when funds are exhausted, whichever occurs sooner.
  2. Interest rates are: businesses: 3.75% fixed; private nonprofit organizations: 2.75% fixed
  3. Loan term is 30 years. COVID EIDL repayment is deferred until 2 years after loan origination, but interest will accrue. Payments of principal and interest are made over the remaining 28 years. No penalty for prepayment.
  4. Fees will vary but are minimal, credit scores will be taken into consideratio0n as well. A personal guaranty is required for loans more than $200,000, except in the case of a non-profit. Loans of $200,001 to $2,000,000 require a full personal guaranty from:
    • All individuals or entities owning 20% or more of the applicant business;
    • For sole proprietorships, the proprietor;
    • For independent contractors, the contractor;
    • For General Partnerships, all general partners;
    • For Limited Partnerships, all general partners and any limited partner who owns 20% or more of the partnership;
    • For Limited Liability Entities, the Managing Member and any member who owns 20% or more of the entity;
    • For Corporations, any individual or legal entity who owns 20 percent or more of the voting stock.
    • If no single owner owns 20% or more, then at least one individual or entity must provide a full guaranty.
  5. For loans under $25,000 no collateral is required, however:
    1. From $25,001 to $500,000 collateral requirements are as follows: Security agreement (UCC-1) lien required on business assets. A UCC filing is a legal notice that SBA will file with the Secretary of State to record a security interest against your business assets ($100 fee).
    2. $500,001 – $2,000,000: Security agreement (UCC-1) lien required on business assets and a best available mortgage on real estate owned by the applicant business. SBA will charge a one-time $100 fee for filing the UCC-1 lien. Additionally, the borrower will be responsible for recording the real estate lien and paying the associated fees.
  6. You may be eligible for a targeted EIDL advance that does not have to be repaid:
    1. Targeted EIDL Advance: If you are located in a low-income community, have 300 or fewer employees, and suffered greater than 30% reduction in revenue, you may be eligible for up to $10,000.
    2. Supplemental Targeted Advance: If you are located in a low-income community, have 10 or fewer employees, and suffered greater than 50% reduction in in revenue, you may be eligible for an additional $5,000 Supplemental Targeted Advance, for a total of $15,000 in Advances.
  7. You can apply for an increase at this time in your EIDL portal
  8. If you suffered working capital losses due to the Coronavirus pandemic, and meet the size and other eligibility requirements, you can apply for a new COVID EIDL here: https://covid19relief.sba.gov/#/
  9. More information on eligibility requirements and documents you need for the application can be found here: https://www.sba.gov/sites/default/files/2021-09/COVID-EIDL-FAQs-090821-508.pdf and here: https://www.sba.gov/funding-programs/loans/covid-19-relief-options/eidl/covid-19-eidl

CONTACT US: The expiration of the PPP, and soon of the Employee Retention Credit, make the EIDL program a great option for small businesses. You cannot expand your business or start a new business with these funds, but you can keep an existing business afloat. If you need assistance, our COVID task force is here to help you with eligibility, documentation, application, tax questions and more.

Fall Into Tax Savings

Thursday, September 30, 2021

QUICK TAX TIPS & GOOD NEWS:

  • Cost of COVID Home Test Reimbursable: We would like to remind clients that the cost of home testing for COVID-19 is an eligible medical expense that can be paid or reimbursed under health flexible spending arrangements (FSAs), health savings accounts (HSAs), or health reimbursement arrangements (HRAs). The cost to diagnose COVID-19 is an eligible medical expense for tax purposes. The IRS has also clarified that the purchase of personal protective equipment, such as masks, hand sanitizer and sanitizing wipes, for the primary purpose of preventing the spread of coronavirus are deductible medical expenses as well.
  • SBA Increases Cap for E.I.D.L to $2 Million: The SBA is increasing the cap for COVID Economic Injury Disaster Loans from $500,000 to $2 million, targeting hard-hit sectors of the economy. The expiration of the PPP, and soon of the Employee Retention Credit, make the EIDL program a great option for small businesses. EIDL funds can be used for normal operating expenses and working capital, including payroll, purchasing equipment, and paying off debt. COVID EIDL funds will now be eligible to prepay commercial debt and make payments on federal business debt. Also, small business owners won’t need to begin COVID EIDL repayment until 2 years after loan origination. The EIDL program expires 12/31/2021.
  • New Safe Harbor for Claiming the ERC: The IRS issued a safe harbor that allows an employer to exclude certain amounts received from other COVID economic relief programs in determining whether it qualifies for the employee retention credit (ERC) based on a decline in gross receipts. The amounts that can be excluded in calculated gross receipts are: 1) Forgiveness of PPP loans; 2) Shuttered Venue Operators Grants; and 3) Restaurant Revitalization Fund grants. The employer must consistently apply this safe harbor for each calendar quarter in which gross receipts for that calendar quarter are relevant to determining eligibility for the ERC.

Don’t Miss Midyear Tax Planning Opportunities

Tuesday, July 27, 2021

Valuable tax planning opportunities exist if you anticipate potential tax changes and take advantage of what’s still available under the Tax Cuts and Jobs Act, CARES Act, and other tax provisions. The American Rescue Plan Act enacted earlier this year included changes that will affect 2021 tax returns and, if enacted, the proposed American Jobs Plan and the American Families Plan could both contain provisions that will impact 2021 tax returns. Are you ready for an increase in the capital gains rate that might be retroactive? Whether you are a business or an individual, being proactive can save you $$$$ – here are some ideas.

BUSINESSES

  1. The TCJA deduction for foreign-derived intangible income is often an overlooked tax benefit. It’s not just geared toward products sold overseas using U.S. intellectual property, it’s potentially available for any domestic corporation that sells, licenses or leases any products to any foreign entity for use outside the United States. It may be a benefit that disappears under the Biden administration, so use it now if you can.
  2. The TCJA’s Global Intangible Low Taxed Income (GILTI) rules attempted to coax U.S.-based multinational businesses back from sheltering their profits in lower-tax jurisdictions overseas. The new tax rules featured a 10.5% statutory rate with a 50% earnings deduction, an exclusion of 10% return on foreign tangible assets, and the ability to pool foreign profits, losses and tax credits for a company’s U.S. tax bill. Careful planning with foreign tax credits and an assessment whether a retroactive election for the high-tax exception in the regulations could result in a prior-year refund. There also may be planning opportunities to benefit from rate arbitrage by adjusting the timing of items before an increase in the GILTI rate.
  3. The R&D credit is still underused. Many taxpayers leave money on the table because they don’t understand how broadly the credit can apply. See our prior article HERE: https://www.fuoco.cpa/surprising-tax-saving-expenses-eligible-for-rd-credits/. Beginning in 2022, the federal research tax credit must be amortized: over a 5 year period if incurred inside the U.S., or a 15 year period if incurred outside the U.S. Taxpayers may need to begin preparing to track these costs now in order to be able to comply for 2022. A bill is being proposed which would repeal mandatory capitalization of R&D costs.
  4. Meals and entertainment deductibility has taken a roller coaster ride due to TCJA and CARES Act changes. The TCJA repealed any deduction for entertainment expenses but left a 50% deduction for meals. The CARES Act raised the deduction to a full 100% to help restaurants return to normal in 2021 and 2022. Businesses should have tracking systems in place to identify which meal costs may be eligible for a 50% deduction or a 100% deduction.
  5. There are significant tax refund opportunities regarding sales and use tax – look at your state and local compliance. Many states and localities offer sales and use tax exemptions from machinery and equipment or from property purchased for further manufacture or resale. If your company makes frequent or large purchases, perhaps consider a review of purchases to identify if any exemptions might apply.
  6. Check out our update on the Employee Retention Credit, which has been extended and enhanced, HERE: https://www.fuoco.cpa/employee-retention-tax-credits-available-thru-december-2021/. The IRS has interpreted the rules generously, so that if remote employees are getting their full salaries but are not performing full services, the employer can claim the credit for them as well.

INDIVIDUALS

  1. The 3d round of Economic Impact Payments will impact 2021 returns. So if you haven’t received yours, examine why! It should be based on your 2019 return, but if it was paid based on the 2019 return and your 2020 return is filed by August 17, 2021, you might get a second check if they were entitled to more based on their 2020 return.
  2. The American Rescue Plan expanded the Child Tax Credit for 2021, with up to $3,600 per child under the age of six, and $3,000 for those ages six to 17. The credit is fully refundable, and will be mailed in monthly installments of up to $300 per child from July 15th through December 15th. There is an IRS portal to report a child born in 2021. Just remember, if a taxpayer receives more than they were entitled to, they have to pay it back.
  3. Recent college graduates might qualify for the Earned Income Tax Credit, since the American Rescue Plan expanded the EITC for 2021 primarily for childless low-income individuals.
  4. For the 2021 tax year, the Child and Dependent Care Credit can get you up to 50% of up to $8,000 of child care and similar costs for a child under 13, a spouse or parent who cannot care for themselves, or another dependent so that you can work (and up to $16,000 of expenses for two or more dependents). Be sure to document care providers to qualify for the Dependent Care Credit – you will need to prove how much care was provided and have the ID number of the provider. Summer day camp counts!
  5. Be prepared for an increase in the capital gains rate that might be retroactive! Under the Biden plan, capital gains for those earning more than $1 million would be taxed at their marginal tax rate, which is currently 37% and which the administration hopes to increase to 39.6% in 2022. Those taxpayers would also have to continue paying the 3.8% Medicare surtax on capital gains, bringing the total levy to 40.4% in 2021 and 43.4% in 2022. The key to avoiding the higher capital gains tax is to keep income below $1 million, but any pre-emptive moves should not inflict harm if the tax hike doesn’t pass, which is also a possibility.
  • If proceeds from a sale (business or asset) are being paid out in increments over several years, perhaps elect out of the installment tax payment plan and pay the full tax liability this year.
  • If planning a big sale sometime soon, consider doing it this year instead of next year.
  • Use other traditional methods to reduce tax liability like increasing retirement plan contributions, deferring other income, harvesting tax losses and making charitable contributions, including securities, to a donor-advised fund.
  • Structure future sales to keep as much of the proceeds, combined with a taxpayer’s income, under $1 million for any given year to avoid the higher capital gains tax. String out payments to keep income under $1 million and pay just 20% on capital gains instead of the higher income tax rate.

Contact Us: This is just the tip of the iceberg. Financial transactions can be negatively impacted by “tax drag” if appropriate tax planning isn’t conducted beforehand. With potentially significant changes to the tax landscape looming, we want to take stock of our clients’ financial health now, especially for those who are most at-risk.


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