Apr 15, 2020
The recently enacted Coronavirus Aid, Relief, and Economic Security (CARES) Act provides a refundable payroll tax credit for 50% of wages paid by eligible employers to certain employees during the COVID-19 pandemic. The employee retention credit is available to employers, including nonprofit organizations, with operations that have been fully or partially suspended as a result of a government order limiting commerce, travel or group meetings.
The credit is also provided to employers who have experienced a greater than 50% reduction in quarterly receipts, measured on a year-over-year basis.
IRS issues FAQs
The IRS has now released FAQs about the credit. Here are some highlights.
How is the credit calculated? The credit is 50% of qualifying wages paid up to $10,000 in total. So the maximum credit for an eligible employer for qualified wages paid to any employee is $5,000.
Wages paid after March 12, 2020, and before Jan. 1, 2021, are eligible for the credit. Therefore, an employer may be able to claim it for qualified wages paid as early as March 13, 2020. Wages aren’t limited to cash payments, but also include part of the cost of employer-provided health care.
When is the operation of a business “partially suspended” for the purposes of the credit?The operation of a business is partially suspended if a government authority imposes restrictions by limiting commerce, travel or group meetings due to COVID-19 so that the business still continues but operates below its normal capacity.
Example: A state governor issues an executive order closing all restaurants and similar establishments to reduce the spread of COVID-19. However, the order allows establishments to provide food or beverages through carry-out, drive-through or delivery. This results in a partial suspension of businesses that provided sit-down service or other on-site eating facilities for customers prior to the executive order.
Is an employer required to pay qualified wages to its employees? No. The CARES Act doesn’t require employers to pay qualified wages.
Is a government employer or self-employed person eligible?No.Government employers aren’t eligible for the employee retention credit. Self-employed individuals also aren’t eligible for the credit for self-employment services or earnings.
Can an employer receive both the tax credits for the qualified leave wages under the Families First Coronavirus Response Act (FFCRA) and the employee retention credit under the CARES Act? Yes, but not for the same wages. The amount of qualified wages for which an employer can claim the employee retention credit doesn’t include the amount of qualified sick and family leave wages for which the employer received tax credits under the FFCRA.
Can an eligible employer receive both the employee retention credit and a loan under the Paycheck Protection Program? No. An employer can’t receive the employee retention credit if it receives a Small Business Interruption Loan under the Paycheck Protection Program, which is authorized under the CARES Act. So an employer that receives a Paycheck Protection loan shouldn’t claim the employee retention credit.
For more information
Here’s a link to more questions: https://bit.ly/2R8syZx .
© 2020
Apr 1, 2020
On March 27, President Trump signed into law another coronavirus (COVID-19) law, which provides extensive relief for businesses and employers. Here are some of the tax-related provisions in the Coronavirus Aid, Relief, and Economic Security Act (CARES Act).
Employee retention credit
The new law provides a refundable payroll tax credit for 50% of wages paid by eligible employers to certain employees during the COVID-19 crisis.
Employer eligibility. The credit is available to employers with operations that have been fully or partially suspended as a result of a government order limiting commerce, travel or group meetings. The credit is also provided to employers that have experienced a greater than 50% reduction in quarterly receipts, measured on a year-over-year basis.
The credit isn’t available to employers receiving Small Business Interruption Loans under the new law.
Wage eligibility. For employers with an average of 100 or fewer full-time employees in 2019, all employee wages are eligible, regardless of whether an employee is furloughed. For employers with more than 100 full-time employees last year, only the wages of furloughed employees or those with reduced hours as a result of closure or reduced gross receipts are eligible for the credit.
No credit is available with respect to an employee for whom the employer claims a Work Opportunity Tax Credit.
The term “wages” includes health benefits and is capped at the first $10,000 paid by an employer to an eligible employee. The credit applies to wages paid after March 12, 2020 and before January 1, 2021.
The IRS has authority to advance payments to eligible employers and to waive penalties for employers who don’t deposit applicable payroll taxes in anticipation of receiving the credit.
Payroll and self-employment tax payment delay
Employers must withhold Social Security taxes from wages paid to employees. Self-employed individuals are subject to self-employment tax.
The CARES Act allows eligible taxpayers to defer paying the employer portion of Social Security taxes through December 31, 2020. Instead, employers can pay 50% of the amounts by December 31, 2021 and the remaining 50% by December 31, 2022.
Self-employed people receive similar relief under the law.
Temporary repeal of taxable income limit for NOLs
Currently, the net operating loss (NOL) deduction is equal to the lesser of 1) the aggregate of the NOL carryovers and NOL carrybacks, or 2) 80% of taxable income computed without regard to the deduction allowed. In other words, NOLs are generally subject to a taxable-income limit and can’t fully offset income.
The CARES Act temporarily removes the taxable income limit to allow an NOL to fully offset income. The new law also modifies the rules related to NOL carrybacks.
Interest expense deduction temporarily increased
The Tax Cuts and Jobs Act (TCJA) generally limited the amount of business interest allowed as a deduction to 30% of adjusted taxable income.
The CARES Act temporarily and retroactively increases the limit on the deductibility of interest expense from 30% to 50% for tax years beginning in 2019 and 2020. There are special rules for partnerships.
Bonus depreciation for qualified improvement property
The TCJA amended the tax code to allow 100% additional first-year bonus depreciation deductions for certain qualified property. The TCJA eliminated definitions for 1) qualified leasehold improvement property, 2) qualified restaurant property, and 3) qualified retail improvement property. It replaced them with one category called qualified improvement property (QIP). A general 15-year recovery period was intended to have been provided for QIP. However, that period failed to be reflected in the language of the TCJA. Therefore, under the TCJA, QIP falls into the 39-year recovery period for nonresidential rental property, making it ineligible for 100% bonus depreciation.
The CARES Act provides a technical correction to the TCJA, and specifically designates QIP as 15-year property for depreciation purposes. This makes QIP eligible for 100% bonus depreciation. The provision is effective for property placed in service after December 31, 2017.
Mar 30, 2020
Every company has faced unprecedented challenges in adjusting to life following the widespread outbreak of the coronavirus (COVID-19). Small businesses face particular difficulties in that, by definition, their resources — human, capital and otherwise — are limited. If this describes your company, one place you can look to for some assistance is the Small Business Administration (SBA).
New loan, relaxed criteria
The agency has announced that it’s offering Economic Injury Disaster Loans under the Coronavirus Preparedness and Response Supplemental Appropriations Act, which was recently signed into law.
Here’s how it works: The governor of a state or territory must first submit a request for Economic Injury Disaster Loan assistance to the SBA. The agency’s Office of Disaster Assistance then works with the governor to approve the request. Upon completion of this process, affected small businesses within the state gain access to information on how to apply for loan assistance.
To speed the process, the SBA has relaxed its usual disaster-loan criteria. A state or territory now needs to certify that at least five small businesses have suffered substantial economic injury anywhere in the state. Previously, at least one of the companies had to be in each of the disaster-declared counties or parishes.
Along similar lines, once the submission process is completed, Economic Injury Disaster Loans will be available across the state. Under previous criteria, only businesses in counties identified as disaster areas could obtain financial assistance. Given the expected widespread and economically drastic effect of the coronavirus, most states will have likely garnered approval by the time you read this.
Amount, interest and terms
Economic Injury Disaster Loans offer up to $2 million in financial assistance to help small businesses mitigate their revenue losses. You could use the money to pay overhead costs such as utilities and rent, keep up with accounts payable and cover payroll.
For qualifying small businesses, the interest rate is 3.75%. Some nonprofits may also be eligible for this assistance. For them, the interest rate is 2.75%. The specific loan terms will vary according to each borrower’s ability to pay. The agency does say that it “offers loans with long-term repayments in order to keep payments affordable.”
Mitigate and manage
Bear in mind that these loans are just one form of assistance offered by the SBA. Your small business may qualify for other loans, and there might be training programs that benefit your company. Our firm can help you assess your financial situation in light of the coronavirus crisis and formulate a strategy for mitigating and managing your risks going forward.
© 2020
Mar 25, 2020
Businesses across the country are being affected by the coronavirus (COVID-19). Fortunately, Congress recently passed a law that provides at least some relief. In a separate development, the IRS has issued guidance allowing taxpayers to defer any amount of federal income tax payments due on April 15, 2020, until July 15, 2020, without penalties or interest.
New law
On March 18, the Senate passed the House’s coronavirus bill, the Families First Coronavirus Response Act. President Trump signed the bill that day. It includes:
- Paid leave benefits to employees,
- Tax credits for employers and self-employed taxpayers, and
- FICA tax relief for employers.
Tax filing and payment extension
In Notice 2020-18, the IRS provides relief for taxpayers with a federal income tax payment due April 15, 2020. The due date for making federal income tax payments usually due April 15, 2020 is postponed to July 15, 2020.
Important: The IRS announced that the 2019 income tax filing deadline will be moved to July 15, 2020 from April 15, 2020, because of COVID-19.
Treasury Department Secretary Steven Mnuchin announced on Twitter, “we are moving Tax Day from April 15 to July 15. All taxpayers and businesses will have this additional time to file and make payments without interest or penalties.”
Previously, the U.S. Treasury Department and the IRS had announced that taxpayers could defer making income tax payments for 2019 and estimated income tax payments for 2020 due April 15 (up to certain amounts) until July 15, 2020. Later, the federal government stated that you also don’t have to file a return by April 15.
Of course, if you’re due a tax refund, you probably want to file as soon as possible so you can receive the refund money. And you can still get an automatic filing extension, to October 15, by filing IRS Form 4868. Contact us with any questions you have about filing your return.
Any amount can be deferred
In Notice 2020-18, the IRS stated: “There is no limitation on the amount of the payment that may be postponed.” (Previously, the IRS had announced dollar limits on the tax deferrals but then made a new announcement on March 21 that taxpayers can postpone payments “regardless of the amount owed.”)
In Notice 2020-18, the due date is postponed only for federal income tax payments for 2019 normally due on April 15, 2020 and federal estimated income tax payments (including estimated payments on self-employment income) due on April 15, 2020 for the 2020 tax year.
As of this writing, the IRS hasn’t provided a payment extension for the payment or deposit of other types of federal tax (including payroll taxes and excise taxes).
Contact us
This only outlines the basics of the federal tax relief available at the time this was written. New details are coming out daily. Be aware that many states have also announced tax relief related to COVID-19. And Congress is working on more legislation that will provide additional relief, including sending checks to people under a certain income threshold and providing relief to various industries and small businesses.
We’ll keep you updated. In the meantime, contact us with any questions you have about your situation.
© 2020
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
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