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News + Updates
Deductibility of Expenses Paid with PPP Funds
An early Happy Thanksgiving to all this week! Today’s commentary is not part of our regular bi-weekly publications, but rather a response to the recently issued guidance issued by the IRS regarding the PPP loan program.
Deductibility of Expenses Paid with PPP Funds
For months, we have been waiting on guidance regarding the deductibility of expenses that were paid with PPP loan proceeds. Revenue Ruling 2020-27 issued last week offers some clarity, but some questions remain unanswered. In short, the IRS has taken the position that if the taxpayer reasonably believes that the loan will be forgiven, the related expenses are not deductible.
Two examples are given in the Revenue Ruling.
- In the first example, the taxpayer submits the application for forgiveness, but is not informed on whether the loan will be forgiven by the end of 2020.
- In the second example, the taxpayer satisfies all the requirements for forgiveness but does not submit the application by the end of 2020.
In both examples, the IRS takes the position that the expenses are not deductible in 2020, since the taxpayer reasonably expects the loan to be forgiven. The Revenue Ruling also indicates that if the amount of actual loan forgiveness is different than what the taxpayer anticipated, the taxpayer would have the ability to either amend the 2020 tax return or deduct expenses in the year of forgiveness.
The IRS did however provide guidance regarding a safe-harbor for allowing a taxpayer to deduct these expenses. Three criteria must be met.
- The expenses must be paid or incurred during the 2020 tax year,
- The taxpayer expects the loan to be forgiven in a year after 2020, and
- In that subsequent tax year, the request for forgiveness is denied or the request is never made.
As we mention above, the Revenue Ruling leaves us with unanswered questions. For instance, if a portion of the loan is forgiven, which expenses are deductible vs. non-deductible? Is the expense disallowance pro-rata? Is the expense disallowance at the taxpayer’s discretion? The disallowance could impact other aspects of the taxpayer’s return, like the calculation of the 199A deduction. The guidance is also silent on issues involving self-employed taxpayers and taxpayers with fiscal year ends. While this continues to be a frustrating area for tax practitioners and taxpayers in general, we will continue to look for additional guidance.
Your Bertz, Hess & Co. tax and business advisor will be happy to discuss any of these topics.
Biden Tax Plan & PPP Questionnaires
Greetings to all in our first post-election publication……well, kind of post-election anyway, right? Today’s topics include a high-level look at a potential Biden tax plan as well as the recently issued PPP loan questionnaires and an upcoming tax filing reminder.
Biden Tax Plan
In the wake of last week’s Presidential election, many Americans are wondering how the Biden tax plan might impact them. The President-elect has not been shy about raising taxes on individuals earning more than $400,000, which has many taxpayers nervous. First and foremost, let’s be clear, the President can not implement tax law with an executive order. Tax legislation must be passed by both the House and Senate, and the Senate may still end up with Republicans in the majority. This would make it very difficult and in fact unlikely for any tax legislation to pass. That being said, below are some bullet points on what the tax plan might include.
Tax Increases:
- The top income tax rate would increase from 37% to 39.6%
- The top rate for capital gains and qualified dividends would increase from 20% to 39.6%
- Social Security payroll taxes of 6.2% would apply to wages in excess of $400,000.
- The Qualified Business Income Deduction would be phased out for taxpayers with taxable income in excess of $400,000.
- Itemized deductions will be phased out similar to pre-2018 tax law
- The corporate tax rate would increase from 21% to 28%
- The estate tax rate would increase from 40% to 45% and the exemption amount would drop from $11.58 million to $3.5 million
Tax Decreases/Credits:
- Child Tax Credit would increase from $2,000 to $3,600 and be fully refundable
- Child and Dependent Care Credit would increase from $3,000 to $8,000 ($16,000 per family) and be 50% refundable
- New $5,000 credit for caregivers of the elderly
- First time homebuyer credit of up to $15,000
This is certainly not an all-inclusive list, but more of a glimpse of what the President-elect has proposed. As we mention above, any tax legislation would have to make it through both the House and Senate, so the end product could look much different. Of course, if Republicans maintain the majority in the Senate, any tax law changes at all would seem unlikely.
PPP Questionnaires
The Small Business Administration (SBA) recently announced that two new questionnaires have been created for PPP borrowers with loans of $2 million or more. One questionnaire is for For-Profit borrowers (Form 3509 click here ) and the other is for Non-Profit Borrowers (Form 3510 click here ). These forms address the business activity and liquidity of the borrowers. It is anticipated that they would be filled out in addition to the loan forgiveness applications and be due to the lender within 10 days of receipt by the borrower. This is consistent with previous guidance from the SBA that it would be reviewing loans of $2 million or more to ensure that there was a need. The forms are nine pages long and include 21 questions. Guidance at this point is somewhat limited, but the SBA is expected to release more information in the upcoming weeks.
Due Date Reminder
Federal Form 990 – As mentioned in our previous publication, don’t forget that the extended due date for the Federal Form 990 for 2019 calendar year-end is Monday, November 16th!
Your Bertz, Hess & Co. tax and business advisor will be happy to discuss any of these topics with you.
Accrued Compensation & Inflation Adjustments
Hello all and Happy Halloween! With the election right around the corner, today’s topics include some thoughts and considerations regarding accrued wages and vacation as well as the recently issued inflation adjustments, and an upcoming tax filing reminder.
Accrued Wages and Vacation
As we approach the end of this year, business owners may be faced with circumstances they haven’t seen in the past. Due to the global pandemic, year-end compensation and vacation time could look substantially different than in prior years. Below are some issues to consider:
- Employees may be willing to travel more around the holidays than they were earlier in the year and, as a result, take more vacation time, particularly if there is a “use it or lose it” policy. Business owners should be proactive in planning for any additional staffing needs or operational interruptions that might result from the increase in vacation to be taken towards year-end.
- In the absence of a “use it or lose it” policy, business owners need to be prepared to either pay out unused vacation time (if your policy is to pay out unused time), or understand that only accrued vacation paid out in the first two and a half months of the following year is deductible.
- If you are planning to accrue bonuses at year-end and pay them after year-end, the IRS has several criteria that must be met in order for the accrued bonuses to be deductible. The amount must be determined with reasonable accuracy, the services to which the bonus relates need to have been performed by year-end, and the amount must be paid out in the first two and a half months of the following year.
- There are additional limitations on deductibility of accrued bonuses to the owners; however, these limitations depend on the type of entity and the percentage ownership.
These issues can be quite complex. Please don’t hesitate to call your Bertz, Hess & Co. tax and business advisor to discuss in more detail.
Inflation Adjustments
The IRS recently issued Revenue Procedure 2020-45 which includes inflation adjustments for 2021. The tables below serve as a summary for some of the most notable adjustments. The full Revenue Procedure, which includes 2021 tax brackets, can found here. You can also view a summary of the 2021 Social Security adjustments here.
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Due Date Reminder
Federal Form 990 – Don’t forget that the extended due date for the Federal Form 990 for 2019 calendar year-end is Monday, November 16th!
Your Bertz, Hess & Co. tax and business advisor will be happy to discuss any of these topics.
PPP Update, Employing your child and Free Beer!
Hello all! We can now put this October 15th deadline in the rearview mirror. Today’s topics include an update on PPP loan forgiveness, the benefits of employing your children at an early age, and we’re replacing our usual updates and reminders with a crazy tax deduction story you might enjoy.
PPP Loan Forgiveness
Late last week the SBA issued a new PPP loan forgiveness application. It is called Form 3508-S. The “S” stands for “simple”. The 3508-S application can be used if the PPP loan amount is less than $50,000. The forgiveness is not automatic as the borrower will still need to submit paperwork to their lender proving that they used the PPP loan proceeds for compensation/other forgivable costs. However, with this new form/change there are a few interesting tweaks:
- The forgiveness amount is not reduced due to a reduction in the salary or hourly rate paid to an employee or due to a reduction of FTE employees.
- The application requires information related to an EIDL advance, if the borrower received an EIDL loan. However, there is no reference in the instructions for the 3508-S that reduce the forgivable amount for an EIDL advance issued to the borrower. Under previously issued guidance and forgiveness applications, if the borrower received a PPP loan for $50,000 and an EIDL advance for $10,000, the maximum amount that could be forgiven was $40,000. The 3508-S application appears to allow the full $50,000 PPP loan to be forgiven. The SBA may issue new guidance clarifying that the forgiveness amount does need to be reduced for an EIDL advance when filing Form 3508-S.
- The borrower must initial several bullet points that seem to provide more detailed representation that the funds were spent for authorized purposes.
Previously the idea had been floated that the SBA would implement automatic forgiveness if the loan was less than $150,000. The thought was that automatic forgiveness would be granted by having the borrower sign a statement attesting to using the funds for authorized purposes. With the issuance of the new 3508-S, this idea appears to be in question. Click here to review a copy of the 3508-S.
Employing Your Children
Business owners may be able to obtain significant tax benefits from employing their children. First and foremost, they must be bona fide employees. In other words, they must perform work that is ordinary and necessary for the business, and their pay must be reasonable for the actual services performed. If those criteria are met, you may be able to benefit in a number of ways. Below is a bullet point listing of some of those potential benefits:
- The business gets to deduct their wages
- Dependent children may be exempt from payroll taxes
- Your child may earn up to the standard deduction ($12,400 for 2020) without paying Federal income taxes
- The earned income may open the door for your child to make retirement plan contributions
Don’t hesitate to call your Bertz, Hess & Co. tax and business advisor to discuss in more detail.
Crazy Tax Deductions
Free Beer – In a promotional scheme in the 1970’s that wouldn’t fly today, a gas station offered free beer instead of trading stamps (the 1970s equivalent of credit card or store points). The owner deducted the beer as an advertising expense, and the IRS said no. But in Sullivan v. Commissioner, the taxpayer won in Tax Court.
Your Bertz, Hess & Co. tax and business advisor will be happy to discuss any of these topics.
Thank you and enjoy the weekend!
Record Retention and Vacation Rentals
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Sales Tax Exposure and Year-End Business Tax Planning
Hello all, and welcome to the twelfth installation of our bi-weekly publications. Today’s topics include sales tax compliance, year-end planning for businesses, as well as several updates and reminders.
Sales Tax Exposure
In today’s growing economy, it has become much easier for businesses to reach customers all over the country and in many cases all over the world. This can create a number of complex tax issues, as it could create “nexus” in multiple taxing jurisdictions. Nexus is the term used to describe a situation where a business has a connection with a particular taxing authority (e.g. a state) that requires it to collect or pay tax. Due to a Supreme Court Ruling from two years ago (South Dakota v. Wayfair, Inc.), many jurisdictions have become more aggressive with implementing their nexus policies with respect to sales tax. As a result, business owners need to be addressing a number of issues including, but not limited to:
- Varying nexus policies and thresholds across multiple jurisdictions (each state is different)
- Response to nexus questionnaires
- Cost/benefit of disputing assessments
- Use of inventory and fulfillment services (i.e. Amazon)
- Filing requirements and mitigation of exposure
For more detailed information on sales tax nexus click here to read an article in the Journal of Accountancy. Contact us if you have questions on your specific facts and circumstances.
Business Year-End Tax Planning
As we move into the fall months and business owners have a better picture of how 2020 will shake out, please remember that it is never too early to start thinking about year-end tax planning for your business. There are ways to defer or permanently save tax dollars, but you should evaluate any option carefully before moving forward. Below are just a few ideas to consider:
- Purchase of property and equipment
- Year-end bonuses
- Retirement plan contributions
- Choice of entity
- Accounting method changes
Updates and Reminders
October 15th Deadline – Now that the September 15th deadline is behind us, we just wanted to send a reminder that the extended due date for C-corporation returns and individual returns is October 15th. Please don’t hesitate to reach out to us with any questions.
2020-2021 Per Diem Rates – The IRS has recently issued the 2020-2021 per diem rates. The rates are effective from October 1, 2020 through September 30, 2021. You can read more about them here.
Charitable Giving – Just a quick reminder that there is now a deduction available for up to $300 of charitable contributions, even if you do not itemize your deductions.
Your Bertz, Hess & Co. tax and business advisor will be happy to discuss any of these topics.
Social Security Tax Deferral and Home Office Deduction
Greetings to all as we have kicked off another school year and look forward to Labor Day weekend. Today we are covering an update on the social security tax deferral, the home office deduction, as well as our usual updates and reminders.
Social Security Tax Deferral Update
The IRS recently issued Notice 2020-65 regarding the deferral of employees’ social security withholding. The Notice clarified some items mentioned in our last communication, but some areas of concern remain unanswered.
Items that were clarified:
- The $104,000 annualized compensation is on a per pay by per pay basis. If an employee is paid weekly and they earn $1,999 their wages qualify for postponement. If the next pay period they earn $2,001 the wages paid that pay period don’t qualify.
- Compensation is defined as gross compensation before any pretax items. If an employee is paid weekly and their gross pay is $2,100 and they defer $150 into their HSA (meaning their taxable SS wages are $1,950) they don’t qualify for deferral because their gross pay is $2,100. However, there is disagreement over how the wage threshold is calculated. More to come on this topic.
- An employer must withhold and deposit any taxes deferred under this Notice pro rata during pay periods paid between January 1, 2021 and April 30, 2021.
Areas of concern:
- The deferral window started September 1. Many companies already have their payroll completed for this week and it is highly unlikely their software contained the update to defer employee SS tax.
- The Notice does not adequately indicate if the deferral is optional for employers and/or employees – can one or both elect out of the deferral?
- If employment is terminated, the employer is responsible for the deferred amount and would need to recover it from the former employee. That could be an administrative nightmare and burden to employers. Also, if the employer is unable to recover the amount, it would be considered taxable wages to the former employee.
- As was mentioned in our previous communication, the elimination of the obligation to repay the deferred taxes will still require Congressional action.
- There was no mention of self-employed individuals.
Finally, if social security taxes are deferred, we recommend that the employer have the employee sign a statement to authorize the tax deferral and acknowledge that the deferred tax will be withheld in 2021. The statement should also explain repayment if employment is terminated before all the deferred taxes are recovered.
Home Office Deduction
In today’s world, people are working from home more than ever. This has many individuals inquiring on the availability of the home office deduction. Below are some bullet points regarding that deduction.
- There must be a dedicated area of the home used exclusively for conducting business on a regular basis.
- For an employee, this deduction falls in the category of “Miscellaneous Itemized Deductions.” These deductions were suspended until 2025 under the Tax Cuts and Jobs Act of 2017, so absent new legislation, most taxpayers are unable to benefit from this deduction until 2026.
- Partners in partnerships and businesses reported on Schedule C can benefit from deducting home office expenses. Thorough records must be kept to substantiate the amounts.
For more details, click here to read an article from the Journal of Accountancy.
Updates and Reminders
September 15th Deadline – As mentioned in our previous communications, the extended due date for calendar year end partnerships and S-corporations is right around the corner. Also, don’t forget that many third quarter estimated payments are due on September 15th. Please don’t hesitate to reach out to us with any questions.
Individual Year-end Planning – It’s never too early to think about year-end planning and projections. Below are some items for individuals to think about:
1. Retirement plan contributions
2. Charitable giving
2. Gifting
4. Education funding
Your Bertz, Hess & Co. tax and business advisor will be happy to discuss any of these topics.
Executive Order and Unemployment Compensation
Welcome to another delightful week in South-Central PA! Today, we will be covering the President’s recent Executive Order/Memorandum, unemployment compensation issues and our usual updates and reminders.
President’s Executive Order/Memorandum
You may have seen or heard about the POTUS signing an Executive Order (EO) roughly 10 days ago. On August 8 he signed one EO covering housing and he also issued three Memorandums. One of the Memorandums he issued proposed deferring the withholding of the 6.2% employee Social Security tax. Below are some of the details of the Memorandum:
- Covers wages paid beginning Sept. 1, 2020 and ending December 31, 2020.
- Only covers wages paid to employees who earn less than $4,000 bi-weekly ($104,000 annual).
- Only DEFERS the withholding of the 6.2% SS tax and the deposit/payment of that tax by the employer. It does not remove the requirement to eventually have the taxes withheld; however, see the next point.
- The Memorandum directs the Treasury Secretary to “explore avenues, including legislation, to eliminate the obligation to pay the taxes deferred pursuant to the implementation of this memorandum”.
There are many unanswered questions related to the Memorandum. Below are a few of the bigger issues:
- What happens if an employee is paid weekly and earns less than $2,000 one week and then earns more than $2,000 the next?
- There is confusion on the $4,000 bi-weekly limit – is that wages earned before any eligible pre-tax items are deducted or is it the amount of taxable Social Security wages?
- The Memorandum indicates the deferral should be “available” to employees who qualify. Does that mean employees who are eligible can elect to not participate? If someone is earning $1,000 per week, do they have any interest in receiving an extra $62 in their net pay for the 17 paychecks they receive if they have to eventually pay back the $1,054 that wasn’t withheld?
- The Memorandum calls for a deferral of taxes, not a cut in taxes. That means the taxes not withheld will eventually need to be withheld, unless Congress will agree to make the tax deferral a permanent tax cut. This seems highly unlikely, given the current climate of cooperation in Congress.
Receiving Unemployment Compensation? Taxes being withheld?
Many taxpayers are receiving unemployment compensation for the first time. As a reminder, unemployment compensation benefits are included in federal taxable income and taxed at ordinary income tax rates. Each recipient will receive a Form 1099-G in January 2021 from the state that paid the unemployment benefits.
Federal income tax is not required to be withheld from unemployment compensation benefits. In order to avoid unexpected taxes due in April 2021, taxpayers can elect to withhold income tax at a rate of 10% from each payment by completing Form W-4V and filing it with the agency making the payments. Another option is to file quarterly estimated tax payments. There is some good news! Unemployment compensation benefits are not taxable for PA personal income tax or the PA local earned income tax.
Your Bertz, Hess tax professional can assist you in determining any amounts that should be paid in to avoid an underpayment penalty or to help you plan for an amount due on your 2020 tax return. If you have any questions on unemployment compensation or its taxability in states other than PA, please contact us.
Updates and Reminders
Form 1041 (Estates and Trusts) Notices – The IRS is generating a number of notices indicating balances are owed for 2019 1041 tax returns. The problem is that the IRS is lagging behind in processing 1041 payments, but they are timely processing tax returns, which results in the computer generating a balance due notice. Please reach out to us if you receive one of these notices.
September 15th Deadline – As mentioned in our previous communication, the extended due date for calendar year end partnerships and S-corporations is right around the corner. Also, don’t forget that many third quarter estimated payments are also due on September 15th. Please don’t hesitate to reach out to us with any questions.
Where’s my Economic Impact Payment? – Still waiting on your Economic Impact Payment? You can click here to check the status and payment type.
Where’s my Refund? – For those of you still waiting on your refund, don’t forget that you can check the status here. With refunds being delayed, many taxpayers are receiving their refunds plus interest!
Your Bertz, Hess & Co. tax and business advisor will be happy to discuss any of these topics.
PPP Loan and Employee Retention Tax Credit Update
It’s now August and we are on the verge of kicking off a new school year that will look like no other. As Congress moves closer to a second COVID-19 relief package, we will be covering some news on the Paycheck Protection Program (PPP), Employee Retention Tax Credits (ERTC) and of course, more updates and reminders.
PPP Loan Forgiveness Applications
As a follow-up to our last communication, there is no need to rush to apply for PPP loan forgiveness at this time. There are a number of reasons to exercise some patience here, not the least of which is the expected second round of COVID-19 relief, which could include changes to the loan forgiveness requirements. Further, it will take lenders some time to get their own portals properly set up to accept applications from borrowers. Finally, you have 10 months from the time your covered period ends to submit the application. This allows plenty of time to plan for the maximum amount of loan forgiveness. More details on this can found here in a recent article in the Journal of Accountancy. Additionally, the Small Business Administration has just issued a new set of FAQ’s here this past Tuesday.
Employee Retention Tax Credit
If your business did not receive a PPP loan, you may still benefit from the ERTC. The credit is equal to 50% of each employee’s qualified wages up to $10,000 (maximum credit of $5,000 per employee). The wages must be earned between March 12, 2020 and January 1, 2021. To qualify for the credit, the business must experience either a full or partial suspension of operations during any calendar quarter due to COVID-19, or a significant decline in gross receipts. A significant decline begins when gross receipts for a 2020 calendar year quarter are less than 50% of gross receipts for the same quarter in 2019. For more on the ERTC, click here.
Updates and Reminders
September 15th Deadline – It’s hard to believe, but the extended due date for calendar year end partnerships and S-corporations is right around the corner. Also, don’t forget that many third quarter estimated payments are also due on September 15th. Please don’t hesitate to reach out to us with any questions.
Where’s my Economic Impact Payment? – Still waiting on your Economic Impact Payment? You can click here to check the status and payment type.
Where’s my Refund? – For those of you still waiting on your refund, don’t forget that you can check the status here. With refunds being delayed, many taxpayers are receiving their refunds plus interest!
Your Bertz, Hess & Co. tax and business advisor will be happy to discuss any of these topics.
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