Mar 16, 2020
The coronavirus (COVID-19) outbreak — officially a pandemic as of March 11 — has prompted global health concerns. But you also may be worried about how it will affect your business and its financial statements for 2019 and beyond.
Close up on financial reporting
The duration and full effects of the COVID-19 outbreak are yet unknown, but the financial impacts are already widespread. When preparing financial statements, consider whether this outbreak will have a material effect on your company’s:
- Supply chain, including potential effects on inventory and inventory valuation,
- Revenue recognition, in particular if your contracts include variable consideration,
- Fair value measurements in a time of high market volatility,
- Financial assets, potential impairments and hedging strategies,
- Measurement of goodwill and other intangible assets (including those held by subsidiaries) in areas affected severely by COVID-19,
- Measurement and funded status of pension and other postretirement plans,
- Tax strategies and consideration of valuation allowances on deferred tax assets, and
- Liquidity and cash flow risks.
Also monitor your customers’ credit standing. A decline may affect a customer’s ability to pay its outstanding balance, and, in turn, require you to reevaluate the adequacy of your allowance for bad debts.
Additionally, risks related to the COVID-19 may be reported as critical audit matters (CAMs) in the auditor’s report. If your company has an audit committee, this is an excellent time to engage in a dialog with them.
Disclosure requirements and best practices
How should your company report the effects of the COVID-19 outbreak on its financial statements? Under U.S. Generally Accepted Accounting Principles (GAAP), companies must differentiate between two types of subsequent events:
1. Recognized subsequent events. These events provide additional evidence about conditions, such as bankruptcy or pending litigation, that existed at the balance sheet date. The effects of these events generally need to be recorded directly in the financial statements.
2. Nonrecognized subsequent events. These provide evidence about conditions, such as a natural disaster, that didn’t exist at the balance sheet. Rather, they arose after that date but before the financial statements are issued (or available to be issued). Such events should be disclosed in the footnotes to prevent the financial statements from being misleading. Disclosures should include the nature of the event and an estimate of its financial effect (or disclosure that such an estimate can’t be made).
The World Health Organization didn’t declare the COVID-19 outbreak a public health emergency until January 30, 2020. However, events that caused the outbreak had occurred before the end of 2019. So, the COVID-19 risk was present in China on December 31, 2019. Accordingly, calendar-year entities may need to recognize the effects in their financial statements for 2019 and, if applicable, the first quarter of 2020.
Need help?
There are many unknowns about the spread and severity of the COVID-19 outbreak. We can help navigate this potential crisis and evaluate its effects on your financial statements. Contact us for the latest developments.
© 2020
Mar 13, 2020
Many people who launch small businesses start out as sole proprietors. Here are nine tax rules and considerations involved in operating as that entity.
1. You may qualify for the pass-through deduction. To the extent your business generates qualified business income, you are eligible to claim the 20% pass-through deduction, subject to limitations. The deduction is taken “below the line,” meaning it reduces taxable income, rather than being taken “above the line” against your gross income. However, you can take the deduction even if you don’t itemize deductions and instead claim the standard deduction.
2. Report income and expenses on Schedule C of Form 1040. The net income will be taxable to you regardless of whether you withdraw cash from the business. Your business expenses are deductible against gross income and not as itemized deductions. If you have losses, they will generally be deductible against your other income, subject to special rules related to hobby losses, passive activity losses and losses in activities in which you weren’t “at risk.”
3. Pay self-employment taxes. For 2020, you pay self-employment tax (Social Security and Medicare) at a 15.3% rate on your net earnings from self-employment of up to $137,700, and Medicare tax only at a 2.9% rate on the excess. An additional 0.9% Medicare tax (for a total of 3.8%) is imposed on self-employment income in excess of $250,000 for joint returns; $125,000 for married taxpayers filing separate returns; and $200,000 in all other cases. Self-employment tax is imposed in addition to income tax, but you can deduct half of your self-employment tax as an adjustment to income.
4. Make quarterly estimated tax payments. For 2019, these are due April 15, June 15, September 15 and January 15, 2021.
5. You may be able to deduct home office expenses. If you work from a home office, perform management or administrative tasks there, or store product samples or inventory at home, you may be entitled to deduct an allocable portion of some costs of maintaining your home. And if you have a home office, you may be able to deduct expenses of traveling from there to another work location.
6. You can deduct 100% of your health insurance costs as a business expense. This means your deduction for medical care insurance won’t be subject to the rule that limits medical expense deductions.
7. Keep complete records of your income and expenses. Specifically, you should carefully record your expenses in order to claim all the tax breaks to which you’re entitled. Certain expenses, such as automobile, travel, meals, and office-at-home expenses, require special attention because they’re subject to special recordkeeping rules or deductibility limits.
8. If you hire employees, you need to get a taxpayer identification number and withhold and pay employment taxes.
9. Consider establishing a qualified retirement plan. The advantage is that amounts contributed to the plan are deductible at the time of the contribution and aren’t taken into income until they’re are withdrawn. Because many qualified plans can be complex, you might consider a SEP plan, which requires less paperwork. A SIMPLE plan is also available to sole proprietors that offers tax advantages with fewer restrictions and administrative requirements. If you don’t establish a retirement plan, you may still be able to contribute to an IRA.
Seek assistance
If you want additional information regarding the tax aspects of your new business, or if you have questions about reporting or recordkeeping requirements, please contact us.
© 2020
Mar 11, 2020
Device policies pertaining to smartphones and other technology tools continue to frustrate business owners as they try to balance their needs for security and functionality against employees’ rights to privacy and freedom. At some companies, loose “bring your own device” (BYOD) policies are giving way to stricter “choose your own device” (CYOD) or “corporate-owned, personally enabled” (COPE) policies.
CYOD: Their device, your data
A CYOD policy lets employees buy a device for combined personal and work purposes from an approved list of products. Generally, the employee owns the device with the business retaining ownership of the SIM card and any proprietary data. Many employers pay for the accompanying mobile plan. Sometimes, high-performance devices are made available only to “power users,” while employees with fewer tech-related job requirements must choose from lesser models.
Under a CYOD policy, you can:
- Ensure device compatibility with your systems,
- Require security protections on the devices, and
- Conduct ongoing security monitoring.
It also makes maintenance and support easier for your IT department, because IT staff will know exactly which devices they’ll need to handle.
Some employees may be unhappy with their choice of devices, which can undermine morale and productivity. Then again, many workers appreciate the improved functionality and flexibility of owning a device that connects them to work.
COPE: All yours
If you’re looking for even greater control and security, look into a COPE policy. They’re most common at large companies or those with heavy compliance burdens.
Here, you buy and own the device, which is intended primarily for business purposes. Most policies do allow for limited personal use — such as phone calls and messaging, approved non-work-related apps and some settings customization.
COPE policies are like CYOD policies in that you can configure employees’ devices for maximum security (including blocking certain features or apps and activating remote wipe capabilities). But they go one step further by minimizing personal use and allowing you to retain possession after an employee leaves the company. Another upside: Many employees will view an employer-provided device as a valuable perk.
One downside is you’ll incur higher costs in covering both the purchase price and mobile plans, though you may be able to lessen the hit through volume discounts. In addition, employees may have concerns about their employer-provided devices inevitably containing some of their own information. “Containerization” tools can help alleviate such worries by segregating business and personal data.
A matter of priorities
The right move for your company comes down to priorities. To tighten security and control costs, a CYOD policy may be a reasonable upgrade to an existing BYOD approach. But if you need absolute security, a COPE policy could be necessary.
Bear in mind that you can always customize a policy to best suit your needs. For example, you might apply different requirements to different departments based on the type of work performed and data accessed. Our firm can help you analyze the potential costs of any device policy and make the right choice.
© 2019
Mar 9, 2020
If you’re the owner of an incorporated business, you probably know that there’s a tax advantage to taking money out of a C corporation as compensation rather than as dividends. The reason is simple. A corporation can deduct the salaries and bonuses that it pays executives, but not its dividend payments. Therefore, if funds are withdrawn as dividends, they’re taxed twice, once to the corporation and once to the recipient. Money paid out as compensation is taxed only once, to the employee who receives it.
However, there’s a limit on how much money you can take out of the corporation this way. Under tax law, compensation can be deducted only to the extent that it’s reasonable. Any unreasonable portion isn’t deductible and, if paid to a shareholder, may be taxed as if it were a dividend. The IRS is generally more interested in unreasonable compensation payments made to someone “related” to a corporation, such as a shareholder or a member of a shareholder’s family.
How much compensation is reasonable?
There’s no simple formula. The IRS tries to determine the amount that similar companies would pay for comparable services under similar circumstances. Factors that are taken into account include:
- The duties of the employee and the amount of time it takes to perform those duties;
- The employee’s skills and achievements;
- The complexities of the business;
- The gross and net income of the business;
- The employee’s compensation history; and
- The corporation’s salary policy for all its employees.
There are some concrete steps you can take to make it more likely that the compensation you earn will be considered “reasonable,” and therefore deductible by your corporation. For example, you can:
- Use the minutes of the corporation’s board of directors to contemporaneously document the reasons for compensation paid. For example, if compensation is being increased in the current year to make up for earlier years in which it was low, be sure that the minutes reflect this. (Ideally, the minutes for the earlier years should reflect that the compensation paid then was at a reduced rate.)
- Avoid paying compensation in direct proportion to the stock owned by the corporation’s shareholders. This looks too much like a disguised dividend and will probably be treated as such by IRS.
- Keep compensation in line with what similar businesses are paying their executives (and keep whatever evidence you can get of what others are paying to support what you pay).
- If the business is profitable, be sure to pay at least some dividends. This avoids giving the impression that the corporation is trying to pay out all of its profits as compensation.
Planning ahead can help avoid problems. Contact us if you’d like to discuss this further.
© 2020
Mar 6, 2020
If you’re a business owner, be aware that a recent tax law extended a credit for hiring individuals from one or more targeted groups. Employers can qualify for a valuable tax credit known as the Work Opportunity Tax Credit (WOTC).
The WOTC was set to expire on December 31, 2019. But a new law passed late last year extends it through December 31, 2020.
Generally, an employer is eligible for the credit for qualified wages paid to qualified members of these targeted groups: 1) members of families receiving assistance under the Temporary Assistance for Needy Families program, 2) veterans, 3) ex-felons, 4) designated community residents, 5) vocational rehabilitation referrals, 6) summer youth employees, 7) members of families in the Supplemental Nutritional Assistance Program, 8) qualified Supplemental Security Income recipients, 9) long-term family assistance recipients and 10) long-term unemployed individuals.
Several requirements
For each employee, there’s a minimum requirement that the employee has completed at least 120 hours of service for the employer. The credit isn’t available for certain employees who are related to the employer or work more than 50% of the time outside of a trade or business of the employer (for example, a maid working in the employer’s home). Additionally, the credit generally isn’t available for employees who’ve previously worked for the employer.
There are different rules and credit amounts for certain employees. The maximum credit available for the first-year wages is $2,400 for each employee, $4,000 for long-term family assistance recipients, and $4,800, $5,600 or $9,600 for certain veterans. Additionally, for long-term family assistance recipients, there’s a 50% credit for up to $10,000 of second-year wages, resulting in a total maximum credit, over two years, of $9,000.
For summer youth employees, the wages must be paid for services performed during any 90-day period between May 1 and September 15. The maximum WOTC credit available for summer youth employees is $1,200 per employee.
Here are a few other rules:
- No deduction is allowed for the portion of wages equal to the amount of the WOTC determined for the tax year;
- Other employment-related credits are generally reduced with respect to an employee for whom a WOTC is allowed; and
- The credit is subject to the overall limits on the amount of business credits that can be taken in any tax year, but a 1-year carryback and 20-year carryforward of unused business credits is allowed.
Make sure you qualify
Because of these rules, there may be circumstances when the employer might elect not to have the WOTC apply. There are some additional rules that, in limited circumstances, prohibit the credit or require an allocation of it. Contact us with questions or for more information about your situation.
© 2020
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