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COVID-19 Update for Individuals

This COVID-19 update is to provide information about the recently passed Coronavirus Aid, Relief & Economic Security (CARES) Act, with respect to items affecting individual taxpayers and families. This $2 trillion economic stimulus act was signed into law March 27. The bill is unprecedented in scope and size.  Additional guidance and regulations on this will be forthcoming.

Cash Payments (Recovery Rebates)

Cash payments will be distributed to eligible individuals and families: $1,200 will be sent to each individual (so $2,400 for a married couple), and $500 per child.

Eligible individuals are those with adjusted gross income of $75,000 (single) or $150,000 (married filing joint). Individuals with adjusted gross income over the thresholds may receive reduced payment amounts up to the adjusted gross income phase out limits of $99,000 (single) or $198,000 (married filing joint). Eligibility is determined based on the 2019 tax return that was filed. If the 2019 tax return has not been filed, the 2018 return will be used to determine eligibility. If neither 2018 nor 2019 has been filed, the Social Security records for 2019 will be used.

Payments will be deposited directly into the bank account shown on the filed tax return. If no information was provided, bank information will be able to be input into a Treasury Department web-based portal, so the individual can receive the payment more quickly (instead of waiting to receive a check). Be aware of potential COVID-19 scams to obtain your bank information – the IRS will not call you!

An individual who is ineligible in 2018, but who becomes eligible in 2019, may want to expedite their tax return filing for 2019. Any taxpayer that has not filed 2018 nor 2019 will want to file, and provide direct deposit information on the filed return, in order to expedite receiving their cash payment. These payments will be available through the rest of 2020.

Unemployment Insurance

The act provides an expansion of unemployment benefits including:

  • Adding $600 per week to existing state unemployment benefits being received (up to four months)
  • Waiving the waiting period for unemployment
  • Providing 13 additional weeks of Federal benefits, if the state benefits run out
  • Expands payment eligibility to those not traditionally eligible, including self-employed individuals, independent contractors, and others
  • Temporary financing of short-term compensation programs

Retirement Funds

The 10% penalty on early distributions from qualified retirement plans for COVID-19 related purposes, up to $100,000, for 2020 will be waived. In addition, the withdrawal will not be taxed if it is repaid within three years or it will be taxed over three years.

The required minimum distributions for 2020 are temporarily waived.

Charitable Contributions

Taxpayers who do not itemize may be eligible to have an above the line deduction for up to $300 for cash (not stock) donations to charities.

For taxpayers who itemize, the 60% limit on charitable deductions is suspended for 2020.

This was a massive piece of legislation. Be on the lookout for more guidance. If you need any assistance in navigating any of this please let me know.

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COVID-19 Updates for Small Businesses and Non-Profits, Part II

This second COVID-19 update is to provide information about the recently passed Coronavirus Aid, Relief & Economic Security (CARES) Act.  This $2 trillion economic stimulus act was signed into law last Friday, 3/27.  The bill is unprecedented in scope and size.  Additional guidance and regulations on this will be forthcoming.

Small Business Relief

There are several aspects of the bill aimed at helping small businesses that are struggling due to the COVID-19 epidemic.  Below, I have highlighted some of the features.

Paycheck Protection Program (PPP)

This is one of the most buzzed about items of the CARES Act, mainly because it is unlike other loans or government programs.  Borrowers will be able to self-certify that they qualify, and there are no personal guarantees required in order to receive funding.  Additionally, a portion of the balance may be eligible for loan forgiveness (thereby converting part of the loan into a grant).

Lenders of the funds are approved SBA lenders.  However, it is anticipated that most banks will likely be participating.  Below are some more specifics on how this may work.

Borrowers are eligible if they have less than 500 employees.  Certain industries may also be eligible, even if they have more than 500 employees.  Non-profit organizations are also eligible.  Self-employed individuals and independent contractors are also eligible to apply.

Eligible borrowers can be loaned up to 2.5x their average monthly payroll costs for the prior year (not to exceed $10 million).  Payroll costs will be capped at $100,000 annualized for each employee.

Payroll costs include not only gross salaries and wages, but also paid leave (sick pay, paid vacation), health insurance expenses paid by the employer, retirement expenses, and state or local employer payroll taxes.

Excluded from payroll costs are compensation over $100,000 per individual (annually), compensation for employees not living in the United States, and qualified sick or expanded FMLA leave paid under the Families First Coronavirus Response Act.

For a sole proprietor or independent contractor, payroll costs include wages, commissions, income, or net earnings from self-employment, capped at $100,000 on an annualized basis.  Independent contractors will likely file for their own PPP, but more guidance on this is coming.

The biggest part of this program comes from the loan forgiveness aspect.  Borrowers may be eligible for the loan to be forgiven for qualified expenses in the 8-week period starting on the loan origination date, from 2/15/20 – 6/30/20.

Expenses that are eligible for the loan forgiveness include payroll costs (as defined above), mortgage interest payments, rent, or utility payments.  Note – all items must have been in effect prior to 2/15/20.  It is anticipated that due to high demand, at least 75% of the forgiven amount must have been used for payroll.

In order to qualify for the loan forgiveness, the number of employees must be retained, and generally at the same pay rates.  So, the amount of the loan that will be forgiven will be reduced by any reduction in the number of employees compared to the same time frame from 2019.  The borrower may elect to compare the number of employees during the 8-week period to the first two months of 2020 (1/1 – 2/29/20).  The amount of the loan forgiveness will also be reduced if any employee’s pay is reduced more than 25% of their compensation.  In short, in order to qualify for loan forgiveness, payroll and staff must be maintained.

If the borrower had previously laid off employees, they will not be penalized provided the laid-off employees are rehired before June 30, 2020.

Loan payments will be deferred for 6 months.  The amount of the loan that is not forgiven will have a 2-year term and be at 1% fixed rate.

Loan applications will be accepted starting April 3 for small businesses and sole proprietors.  Loan applications will be accepted starting April 10 for independent contractors and self-employed individuals.  Applications may be made through any existing SBA lender or through most banks.  Due to expected high demand, I would recommend gathering documentation and applying earlier to ensure funds are available.

As a part of the application, borrowers must certify that the economic uncertainty makes the loan necessary to support ongoing operations; that the funds will be used to retain workers and maintain payroll or to make mortgage, lease, and utility payments; and the borrower has not received another loan under the program.  Borrowers may also need to include the anticipated uses of the funds (between the eligible expense categories).

Emergency Economic Injury Disaster Loans (EIDL)

Eligibility is expanded to sole proprietors and independent contractors.  In addition to small businesses, non-profit organizations and cooperatives are also eligible.

These grants provide an option for a $10,000 cash advance that does not have to be paid back if used for the below items.

  • Providing sick leave to employees unable to work as a result of COVID-19
  • Maintaining payroll to keep employees
  • Increased materials cost due to supply chain interruptions as a result of COVID-19
  • Rent or mortgage payments
  • Repayment of obligations that cannot be met due to a loss of revenue from COVID-19

Note that if participating in the Paycheck Protection Program a business cannot also double dip with the Emergency EIDL Grants.

Employee Retention Credit

A credit is allowed against applicable employment taxes for each calendar quarter, for 50% of qualified wages up to $10,000.  So, the maximum credit for each employee is $5,000.

In order to qualify for the credit, a 2020 trade or business must have:

  1. Fully or partially suspended business due to government orders limiting commerce, travel, or group meetings due to COVID-19 or
  2. Received gross receipts for at least one calendar quarter that are less than 50% of gross receipts received during the same calendar quarter of the prior year. This decline in gross receipts test continues until gross receipts are greater than 80% of the prior year quarter.

If the business had more than 100 employees in 2019, an employee must be unable to provide services due to the above criteria.

If the business had 100 or less employees in 2019, the credit is allowed regardless of whether or not the employee is able to provide the services, as long as the business meets one of the above criteria.

Note that wages used for this credit cannot be double dipped and used for other tax credits, or if receiving other small business interruption loan relief.

Delayed Payment of Employer Payroll Taxes

The employer portion of social security tax from 3/27/20 to 12/31/20 can be delayed.

50% of the delayed amount must be deposited by 12/31/21, with the remaining 50% due by 12/31/22.

There is similar relief available for the employer share (50%) of self-employment tax.

Note that this provision is not available for businesses that have debt forgiven under the PPP SBA loan act.

Net Operating Losses

Net operating losses generating in 2018, 2019, or 2020 are temporarily eligible to be carried back five years.

Additionally, the limitation on the net operating loss deduction to 80% of taxable income is suspended for 2020.

Qualified Improvement Property

Improvements that are made to buildings can be immediately written off (instead of depreciating over 39 years).

In addition to the above provisions, the act provides additional provisions to large corporations, health care provisions, education provisions (including a deferment of student loan payments for 6 months through 9/30/20), and other funding provisions and clarifications.  A separate post with more details on the individual provisions of this act will be released shortly.

This was a massive piece of legislation.  Be on the lookout for more guidance.  If you need any assistance in navigating any of this, including the Paychecks Protection Provision Act, please let me know.

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COVID-19 Updates for Small Businesses and Non-Profits

I am sure you have been bombarded with updates related to the COVID-19 public health emergency. I am getting multiple emails and social media updates on a daily, or even hourly basis. Below are some crisis-related hot topics that are applicable to small businesses and small business owners. If I can help you navigate this in any way, please let me know. I truly want to help small businesses during this crazy time.

Tax Update

The 2019 tax filing deadline has been extended automatically from April 15 to July 15. No formal extension application is needed. This extended federal deadline applies to all taxpayers automatically. States have also been coming out with guidance on this. Missouri has extended their deadline to comply with the July 15 federal extended deadline.

What does this mean?

  • Balances due on your 2019 income tax returns are now not due until July 15.
  • First quarter estimated tax payments for 2020 (originally due April 15) are now not due until July 15.
  • Individuals can defer up to $1 million in payments. Businesses can defer up to $10 million in payments.
  • You now have until July 15 to contribute 2019 funds to your Individual Retirement Account.
  • Note that the 2nd quarter estimated tax payments for 2020 are still due June 15 (as of now).
  • Interest and penalties on any tax payments originally due April 15 will not start calculating until the extended July 15 date.

Families First Coronavirus Response Act (HR 6201)

This act was signed into law on March 18, 2020. Part of the Families First Coronavirus Response Act (FFCRA) aims to provide relief to individuals by way of providing leave to eligible employees that have been impacted by COVID-19. Provisions of this act are set to become effective April 1 and expire December 31, 2020. Generally, employers with fewer than 500 employees will be subject to the provisions. Eligible employers must post the notice of FFCRA requirements. See sample poster at:

https://www.dol.gov/sites/dolgov/files/WHD/posters/FFCRA_Poster_WH1422_Non-Federal.pdf

Below is a breakdown of some of the major points of the act. Additional guidance will be forthcoming.

Emergency Family Medical Leave Expansion – Longer Term

The existing Family Medical Leave Act (FMLA) was expanded to include the current COVID-19 pandemic. Under the expansion, paid leave is included for employees who are unable to work (or telework) due to a school or childcare closure, or if the individual is unavailable as a result of COVID-19 precautions.

To be eligible, an employee must have been employed for at least 30 days. Eligible employers shall provide paid leave for each day that the eligible employee takes after an initial period of 10 days.

Generally, the amount to be paid is the lesser of:

The total amount is capped at $10,000. This assumes an eligible employee receives the maximum $200 per day for 50 days (10 weeks).

Note that the first two weeks under FMLA may be unpaid, or the employee may elect to use paid time off. Similar to other FMLA leave events, the employer must restore the employee to their position after the leave has ended.

There may be an exemption for employers that have less than 50 employees. However, the U.S. Secretary of Labor must determine that complying with the act would jeopardize the business’ ability to continue as a going concern. Additional regulations on this will be forthcoming.

There may also be an exemption for employers that have less than 25 employees with regards to restoring the employee to their position after leave. Employers may qualify only if the position no longer exists due to the economic conditions caused by the COVID-19 emergency; the employer reasonably tries to restore the employee to a similar position with equivalent pay and benefits; or if that is not possible, the employer makes reasonable efforts in the following year to let the employee know when an equivalent position exists again.

Emergency Paid Sick Leave – Short Term

Unlike FMLA, which is for unemployment for a longer time frame, the FFCRA also added an Emergency Paid Sick Leave act. Under this act, the employer shall provide paid sick time if the employee is unable to work (or telework) due to any of the below needs to leave:

  • Employee is subject to a Federal, State, or Local quarantine or isolation order
  • Employee is subject to a health care directed self-quarantine
  • Employee is having COVID-19 symptoms and seeking a medical diagnosis
  • Employee is caring for someone with any of the above
  • Employee is caring for a child whose school or childcare facility has been closed

Emergency Paid Sick Leave is to be provided for up to 2 weeks (80 hours) for full-time employees. Part-time employees are eligible for the average number of hours worked over a two-week period.

Unlike the FMLA provision, the emergency paid sick leave provision does not have an employment length requirement.

Employers cannot require employees to use other paid leave first (before paying the emergency paid sick leave). So, the employee can elect to use emergency paid leave before their regular accrued paid sick time.

The amount that shall be paid is dependent on the reason for the leave.

If the employee is caring for a child due to school or childcare facility closure, the amount to be paid is:

For all other reasons, the amount to be paid is the full regular rate of pay, up to $511 per day.

Employees who are health care workers or emergency responders are exempt.

Note that the Emergency Paid Sick Leave provision will not carry to future years, as the provision expires on December 31, 2020.

The FMLA expansion and Emergency Paid Sick Leave will result in payments to qualified individual employees that are affected. Additionally, the FFCRA includes provisions to reimburse employers for these payments.

Tax Credits for Employers

Part of the act provides for some relief for employers in the form of tax credits. While these tax credits will help reimburse payments the employer made to employees, the employers may still bear a bit of the burden. Since the payments are paid up front by the employer, they would bear the burden up front. The reimbursement will take place in the form of a credit on payroll tax forms filed at a later date. This could cause cash flow issues to businesses that are already struggling in the current economic environment.

The amounts to be claimed as a credit against payroll taxes include 100% of the qualified emergency family medical leave and emergency paid sick leave. These will be capped based on the calculation amounts mentioned in the sections above.

But what about individuals who are not employees, but self-employed?

Tax Credits for Self-Employed Individuals

To provide a similar relief for self-employed individuals, there will be a credit available against self-employment tax. These are calculated as if the individual was an employee qualifying for the leave but are claimed as a credit on the income tax return (as a reduction to self-employment tax).  It is anticipated that these tax credits can be used to offset estimated tax payments.

The amount of the credit is dependent on the reason for the leave.

If the self-employed individual is caring for a child due to school or childcare facility closure, the amount to be paid is

2/3 of the average daily self-employment income of the individual for the tax year, up to $200 per day.

The average daily self-employment income is calculated as:

For all other reasons, the amount of the credit is the full average daily self-employment income, up to $511 per day.

*All of the above will be covered via payroll tax credits for employers or tax credits for self-employed individuals, as discussed in the above sections.

Employees & Employers:

OR

 COVID-19 Testing & Treatment

One other item to note under the FFCRA is in regard to COVID-19 testing and treatment.  The act instructs that all health insurance plans are required to cover testing and any related health-care visits (office, urgent care, ER, or telehealth) free of charge related to COVID-19.  No copays or deductibles should apply.

SBA Disaster Loans

Under SBA Disaster Loan relief, small businesses and private non-profit organizations may be eligible for up to $2 million in assistance loans.

Funds may be used to pay debts, payroll, accounts payable, and other bills. Unlike the tax credits, these are loans that must be repaid.  However, the cash influx may be necessary for some small businesses to stay afloat.  The interest rate on these loans is 3.75% for small businesses and 2.75% for non-profits.

Conclusion

Stay tuned for more relief efforts and guidance in the upcoming days (or even hours).  Part II will focus on the recently passed Coronavirus Aid, Relief, and Economic Security Act (CARES Act), which was passed last week.

In closing, know my thoughts and prayers are with all of the small businesses and non-profit organizations out there.  This truly is a trying and unprecedented time for all.  I will continue to support local as much as I can with the restrictions, and also help you all in any way I can.  If you need any assistance or guidance with any of the above, let me know.

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Unexpected Tax Bill

I OWE taxes?!?!  How can that be when I had a loss?

It is the midst of THE season. What season might that be? The dreaded tax season…

For those of you who have already optimized your finances, you can stop reading, as you will likely have minimal surprises when your tax return is complete. But those of you who haven’t should read on to figure out what might be causing you to owe money to the government, when you thought you had a LOSS for the year.

Cash vs. Accrual Basis

First, it’s important to know what your basis of accounting is. For a more detailed discussion on the basis of accounting, see the prior post “A Tale of Two Methods.” To briefly simplify, under the cash basis of accounting, you pay tax on income when you receive the money and you deduct the expense when it is paid or charged on a credit card. Under the accrual basis of accounting, you pay tax on income when you perform the service or complete the sale, and you deduct the expense when it’s incurred.

Many small businesses will be able to file under the cash basis of accounting, which is simpler. However, there may be impactful differences among the two methods. It is my experience that not understanding the methods or knowing what method you follow for tax purposes can create a major problem at tax time.

Without getting into too much accounting detail, the timing of when income and expenses are recognized can cause major differences between what is filed on a tax return, and what is kept in your internal accounting system. And, not only does this cause a difference in one year, but the opposite impact may occur the following year.

Small business scenario

The best way to understand this is to look at a simple example: John’s Janitorial Service performed a job for Rebecca on December 30. John booked the Accounts Receivable invoice on 12/30, as he needed to send the invoice to Rebecca so he could get paid. But Rebecca didn’t pay John until January 4.

On the accrual basis of accounting, John would pick that income up (and be taxed) on the current year tax return. However, if he is following the cash basis of accounting, he wouldn’t pick that income up (and be taxed) until the following year.

As you can see, the cash basis could cause a difference in the income shown on his books when compared to what is reported on his tax return for BOTH years. Depending on the change in Accounts Receivable and Accounts Payable, the fluctuations could be extreme and have a large impact.

Many times, businesses are looking at their accrual basis financial statements (which is how they run their business), without factoring in the cash basis financial statements (which is how they pay their taxes). This is the first issue that many have when getting hit with an unexpected tax bill.

Deduction limitations & other issues

The second issue is that there may be limitations on what can be deducted. For example, meals are only deductible at 50% for tax purposes. This means that half of the meal cost doesn’t provide a tax benefit.  Starting in 2018, entertainment expenses are not deductible at all for tax purposes — so no tax benefit for that golf membership or tickets to the Mizzou game. Political donations and some portions of dues also are not deductible at all. These expenses are examples of what accountants refer to as “book-tax differences,” meaning that there is a different treatment on the books (100% deductible) as opposed to on the tax return. There are numerous other items that may cause book-tax differences; these are just some of the more common ones.

Finally, errors in coding may also cause issues. Many times, financial statements have “adjustments” done due to incorrect entries that were made. A common example is coding the entire amount of the loan payment to interest expense. In reality, the principal repayment portion is not an expense, only the interest is. There may be other mistakes that are made that could cause major changes to the book financial statements.

One of the goals of Optimized CFO + Controller Services is to help business owners avoid surprises at tax time. By regularly looking at the financials, we can minimize any errors in coding. We can also project out estimated taxable income, factoring in some of these book-tax differences, and differences with the basis of accounting. If you’ve recently been shocked by an unexpected tax due, or unhappy with the amount of adjustments that are made each year on your tax return, I would love to talk.