Harless Tax Blog
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.
- 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.
- 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.
- 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.
- 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.
- 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.
- 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.
- 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.
- 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.
- 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.
- 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!
- 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.
The American Rescue Plan Act signed in March extended the Employee Retention Tax Credit (ERTC) through December 2021, and made a number of related changes. The ERTC remains a key resource available to businesses seeking to recover from the effects of the COVID pandemic, potentially returning $28,000 per employee to qualifying employers for wages paid in 2021. The ERTC was also extended to new businesses, which started after February 15, 2020, with average annual receipts of under $1,000,000. For such businesses, the amount of the credit may not exceed $50,000 per quarter.
The Consolidated Appropriations Act (CAA) increased the value of the ERTC for wages paid from January 1, 2021 through June 30, 2021 to 70% (from 50%) of qualified wages, which were increased from $10,000 per year to $10,000 per quarter. Thus, the maximum credit per employee for wages paid between January and June 2021 is $14,000. The American Rescue Plan reaffirms the credit percentage remains 70% of up to $10,000 in qualified wages per employee per quarter; i.e., a $28,000 maximum credit per employee for 2021.
The CAA changing the 100-employee threshold to 500 for 2021 made it easier to qualify, as well. Employers became eligible in 2021 if they were able to demonstrate revenue declines of 20% (formerly 50%) to determine eligibility.
Legislation also enabled employers that received PPP loans to qualify for the ERTC as well. This provision was both effective in 2021 — and retroactive to March 2020. The maximum credit remains $5,000 per employee for 2020 while other limits in effect in 2020 continue to apply (e.g., revenue declines of 50% or more). Qualifying employers who received PPP loans in 2020 can amend their federal employment tax returns to request refunds for the ERTC.
More information on juggling both the PPP and ERTC HERE: https://www.fuoco.cpa/maximizi...
And HERE: https://www.fuoco.cpa/new-ppp-...
Contact Us: The information above should be evaluated to determine whether the ERTC may be available to an employer. Please consult with your Fuoco Group tax advisors to assess your situation and make sure you are taking advantage of all the tax credits and financial assistance available to you at this time.
Thanks to COVID-19 vaccines, business is now bouncing back but many challenges will likely linger for real estate. COVID made financial reporting and accounting much more difficult for owners of real estate due to closures, tenants who stopped paying rent, rule changes for lease accounting, and the office or retail space that went unused.
When preparing their 2020 GAAP year-end financial statements, clients that own real estate property had to deal with issues like asset impairment, going-concern evaluations, tenant receivables, the new lease standard, and accounting for Paycheck Protection Program loans. Where to go from here? Looking forward to 2021 consider the following:
COVID would seem to qualify as a triggering event to asset impairment due to the widespread losses and business closures it triggered, and we are still suffering from. It also precipitated decreased cash flow, reduced occupancy, and created a “deterioration in the environment in which an entity operates,” for some sooner rather than later. For those clients, an impairment assessment would seem important. There is potential for an asset write-down when your tenants are suffering and experiencing losses that leads to a dent in your future net cash flow. When an impairment has been identified, the entity may need to recognize the loss and report it as a current net income item.
Income-producing real estate entities for residential and commercial industrial property should have a conversation with their Fuoco CPA about whether there could be an impairment based on carrying value versus the future net cash flow. Compare cash flow forecasts to contractual rent obligations, and consider the true collectability of postponed rent payments as well as tenants’ readiness to renew their leases. You may also need to consider property valuations as part of an impairment assessment.
Many commercial tenants are asking landlords for rent concessions, or reducing their real estate footprint as they consider whether they can have more of their workforce become remote, or put on a “flex” schedule. There’s probably been a higher frequency of modifications or terminations and lease contract changes, and some clients may not be used to accounting for those. If too many tenants stop paying rent or ask for steep rent concessions, that could affect a landlord’s ability to continue operating as a “going concern.” If an entity is looking at an asset impairment, it could mean they have losses and tenants terminating their leases earlier. Maybe there are liquidity and capital resources issues? All these things impact the indication of a going concern. Private companies do need to satisfy their lender who is looking at the financial statement and may be asking if they going to be able to pay down their loan over the rest of the term. Disclosures may need to be provided to reassure lenders. Some clients may be able to get deferrals on principal and interest payments on their loans, but how does that impact future maturities of long-term debt? When are those deferrals going to come due? Are they going to amortize the debt?
With the strong economic recovery underway this year, more landlords and more tenants are making overdue improvements as they reopen their businesses. Some construction that was started, was halted during COVID so there are construction costs. Tenants continue to be late in paying. Receivables are up, accrued expenses are up, yet clients haven’t actually paid for the capital expenditures. Could be a non-cash item if there are construction costs not yet paid for. If this is your situation, consider the impact on your current year cash flow as well as next year.
Mom and pop shops, local restaurants and other service-based professions will continue to lag. Small shop space vacancies continue downward pressure on rents in commercial real estate. Debts are piling up for many, which may or may not be repaid. See our article on bad debt here: https://www.fuoco.cpa/be-sure-...
PPP Loans and Forgiveness
The Paycheck Protection Program Loans complicated things further this year. You can account for it one of two ways: either the debt method or a grant method. The debt method is similar to how debt would be presented on a normal for-profit company’s balance sheet: you have debt which is recorded as income when it’s actually forgiven. The grant method requires an analysis to say it’s probable that the loan will be forgiven, partially or in full. It’s initially recognized as deferred income and then the gain is recognized in the period over which the related expenses are made. For many clients this would be 2020, so it would not have a balance sheet impact. It would really be all income statement impact.
For many real estate businesses, the PPP is the first time they have participated in a government incentive program and have never had to account for it. For pass-through entities, there are tax considerations as well as the implications of determining when an entity may need some basis or not, which could have an impact on the way that it’s recorded on the financial statement.
Many PPP loans will qualify for full or partial forgiveness. If the loan has not yet been forgiven, real estate professionals and their Fuoco CPA will need to consider the interplay of costs used for forgiveness with employee retention credits prior to filing for forgiveness. See our prior article on maximizing both here: https://www.fuoco.cpa/maximizi...
FASB & Leases
Adding fuel to this financial fire, is the new leases standard, ASC 842, from the Financial Accounting Standards Board. In response to the pandemic, FASB deferred the deadline for adoption by private companies and not-for-profits until fiscal years beginning after December 15, 2021, and interim periods within fiscal years starting after December 15, 2022. Companies still need to get ready to implement the new rules. Finish dealing with the pandemic, but then pay attention to this because it will have a huge impact on the lessees. For those clients who are leasing space where they used to have an operating lease, it will now be on the balance sheet. Have leased equipment? It could have a huge impact there as well.
Reach Out to Us: As a result of the pandemic and its lingering effects, there is still a tremendous amount of uncertainty regarding the commercial real estate market. Many owners of commercial real estate will be contending with the coronavirus pandemic’s impacts on their financial performance for years to come. Interest rates may remain low thru 2021 due to an accommodative Federal Reserve. Keeping short term rates low could provide a favorable backdrop for commercial borrowers. There will be some winners and some losers. As retail, hotel and office prices decline, industrial, data center, life science and single-family homes will continue to increase in value. Let us help you put your company in a more favorable position in the last half of 2021.
Millions to Get Refunds for Tax Paid on Unemployment: July is a great month for folks who filed tax returns early in 2021 reporting their 2020 unemployment benefits. The IRS announced 4 million of those taxpayers are about to get refunds for their tax overpayments. If the IRS has direct deposit data, it will issue refunds starting July 14th. The average refund being delivered is $1,265. The refunds were created by the American Rescue Plan Act which excluded up to $10,200 in 2020 unemployment compensation from taxable income. The nontaxable amount applied to individuals and married couples whose modified adjusted gross income was less than $150,000.
Florida Back to School Sales Tax Holiday: Back-to-school shopping is one of the most expensive times of the year for families. Returning to school for the first time in a year and a half due to Covid-19, may put some parents in a state of financial shock. Being strategic with BTS purchases will help maximize your savings, especially if consumers can delay their purchases until the sales tax holiday dates. Remember - it is not just for kids! From July 31st thru August 9th, consumers can purchase a single article of clothing up to $60 without paying 6% tax on it; the first $1,000 of a computer purchase will also be tax-free. More info on eligible items here: https://floridarevenue.com/tax...
Delinquent Taxes May Affect Your Travel Plans: Many vaccinated U.S. residents are planning trips abroad late Summer and early Fall. But federal tax trouble could pose problems for some overseas travelers. The IRS says that on July 15th it will resume notifying the State Department to revoke or deny renewal of the passports of taxpayers with seriously delinquent tax debt. If you owe Uncle Sam more than $54,000 in back taxes, penalties, and interest, reach out before IRS issues a lien or levy. Proactively working with the IRS could help you resolve your tax debt on better terms.
Fantasy Sports Players May Face Tax Consequences: the IRS has consistently maintained that Fantasy sports competitions involving money are a form of gambling and just reiterated this position in a new ruling. If you play Fantasy sports online for money and win $600 or more, the sponsoring website is legally obligated to report the winnings. Typically, you’ll receive a Form 1099-MISC or a 1099-K for payment from a third party source. The same information is sent to the IRS. If you are eligible to itemize deductions above the standard deduction, you can deduct your gambling expenses to the extent of your winnings. If that is the case, your net profit for tax purposes is the amount of your winnings minus any entry fee.
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 email@example.com. 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.