The administration of President Joe Biden announced Monday that it would institute a two-week period starting Wednesday during which only businesses with fewer than 20 employees will be able to apply for Paycheck Protection Program (PPP) loans.
The exclusive application window is one of several moves the White House said it is making to further target the PPP to the smallest businesses. The administration also will:
Change the PPP loan calculation formula to help sole proprietors, independent contractors, and self-employed individuals receive more financial support. In addition, $1 billion will be set aside for businesses in this category that don’t have employees and are located in low- and moderate-income areas. Details of the changes have not yet been released.
Eliminate a restriction preventing small business owners with prior non-fraud felony convictions from obtaining relief through the PPP.
Remove a rule preventing small business owners who are delinquent on federal student loan payments from securing a PPP loan.
Allow noncitizen small business owners who are lawful U.S. residents to use individual taxpayer identification numbers (ITINs) to apply for relief.
The administration said the 14-day exclusive application period is designed to help the 98% of small businesses that have fewer than 20 employees. Noting that these businesses often struggle more than larger businesses to collect the necessary paperwork and secure a PPP loan through a lender, the statement said that the targeted application window will free up lenders to focus on serving these smallest businesses.
The White House statement also said that the administration would continue to work with lenders and other stakeholders to address PPP processing delays caused by anti-fraud validation checks that must be completed before loan guaranty approval is granted. The statement said the U.S. Small Business Administration (SBA) would continue to work with lenders to create streamlined processes to resolve issues as quickly as possible while still working to ensure taxpayer funds are spent wisely.
The administration also will make the following moves:
Update key areas of SBA websites to help more applicants find resources for understanding relief options and completing applications.
Continue to conduct stakeholder outreach to learn more about challenges and opportunities in the implementation of current emergency relief plans.
Launch a new initiative to increase communication with lenders. Specifically, the SBA will increase opportunities for lenders to provide recommendations and ask questions about the PPP. The goal is to drive resolution of open questions and concerns in a more streamlined way.
We will keep you updated on these and other relevant matters.
Earlier this month, the IRS issued notices to approximately 260,000 taxpayers stating they haven’t filed their 2019 federal tax return. These notices, referred to as CP59 notices, are issued yearly to identified taxpayers who have failed to file a tax return that was due the prior calendar year (Tax Year 2019). Due to pandemic related shutdowns, the IRS has not completed processing all 2019 returns at this time. Therefore, the CP59 notices should not have been sent because some portion of the recipients may actually have filed a return that is still being processed. People who filed their 2019 return but nevertheless received the CP59 notice, can disregard the letter and do not need to take any action. There is no need to call or respond to the CP59 notice because the IRS continues to process 2019 tax returns as quickly as possible. The IRS regrets any confusion caused by this mailing.
We will keep you updated on these and other events
Maryland’s RELIEF Act signed into law
The Maryland Legislature passed Governor Larry Hogan’s Maryland RELIEF Act of 2021 this past Friday and the bill was signed into law on Monday, February 15. The relief package will bring more than $1 billion in tax relief and economic aid to Maryland residents and small businesses.
The final bill includes:
Economic Impact Payments – eligible individuals would receive an economic impact payment of $300. Spouses, surviving spouses, and head of household filers will receive $500 if eligible.
Unemployment Benefits – Non-taxable: Unemployment benefits would be non-taxable for state purposes for individuals earning less than $75,000 and married joint filers, heads of households, and surviving spouses earning less than $100,000.
Covid Relief Payments on loans and grants applied after March 5, 2020 would be non-taxable
Enhanced State Refundable Earned Income Credit – for years 2020 – 2022, the refund percentage of the federal EITC is increased from 28% to 45%
Sales/Use Tax Discount – The Act provides a credit against sales/use tax for March, April, and May 2021. The credit is equal to the lessor of $3,000 or the sales tax collected during the month of qualification.
Unemployment Contributions – The Act adjusts certain business’ calculation of unemployment contributions.
EPIP Loan Forgiveness – loans from the Equity Participation Investment Program would be converted to grants. Loans provided under the program during 2021 and 2022 are eligible for forgiveness.
More information on the Relief Act can be found here: https://www.marylandtaxes.gov/RELIEFAct/docs/2.16.21-748am-RELIEF-Act-Tax-Alert.pdf?campaign=365
We will keep you updated on these and other relevant matters
SBA has released the application forms for PPP first draw and second draw. The links are below.
If you meet the eligibility requirements, please review the forms and begin to gather your documents so that you are ready to submit to your lender when the window opens.
The Paycheck Protection Program (PPP) will reopen Monday for select lenders and borrowers, the U.S. Small Business Administration and Treasury announced Friday.
The SBA and Treasury said in a news release that initially only community financial institutions that serve minority- and women-owned businesses will be able to make loans. Specifically, these community financial institutions can begin making loans to first-time PPP borrowers on Monday and second-time PPP borrowers on Wednesday.
The application window for forgivable PPP loans will open to all lenders “shortly thereafter,” according to the news release, which did not specify a date. The closing date for the new PPP is March 31.
Will keep you updated on these developments
The U.S. Small Business Administration (SBA) and Treasury issued guidance late Wednesday night for the reconstituted Paycheck Protection Program (PPP).
The guidance came in the form of two interim final rules (IFRs).
· The 82-page IFR “Business Loan Program Temporary Changes; Paycheck Protection Program as Amended” consolidates the rules for PPP forgivable loans for first-time borrowers and outlines changes made by the Economic Aid to Hard-Hit Small Businesses, Nonprofits, and Venues Act, P.L. 116-260).
· The 42-page IFR “Business Loan Program Temporary Changes; Paycheck Protection Program Second Draw Loans” lays out the guidelines for new PPP loans to businesses that previously received a PPP loan.
Congress revived the PPP as part of the $900 billion COVID-19 relief bill that was signed into law on Dec. 27. The program provided $525 billion in forgivable loans over five months before it stopped accepting applications in August. The Economic Aid Act rebooted PPP (or PPP2, as some call it) with many of the same parameters as the first program but also several important differences from the original PPP.
One of the biggest changes is making PPP funding available to businesses that previously received a PPP loan. Businesses are eligible for a second PPP loan of up to $2 million, provided they have 300 or fewer employees, have used or will use the full amount of their first PPP loan, and can show a 25% gross revenue decline in any 2020 quarter compared with the same quarter in 2019. If a business has an annual decline in revenues of 25% or more than it may use its tax returns as substantiation.
Fresh PPP loans also are available to first-time borrowers from 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 (those with North American Industry Classification System (NAICS) codes starting with 72) with fewer than 300 employees per physical location.
The legislation also allows borrowers that returned all or part of a previous PPP loan to reapply for the maximum amount available to them.
PPP loan terms
As with PPP1, the costs eligible for loan forgiveness in PPP2 include payroll, rent, covered mortgage interest, and utilities. PPP2 also makes the following potentially forgivable:
· Covered worker protection and facility modification expenditures, including personal protective equipment, to comply with COVID-19 federal health and safety guidelines.
· Expenditures to suppliers that are essential at the time of purchase to the recipient’s current operations.
· Covered operating costs such as software and cloud computing services and accounting needs.
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 of either eight or 24 weeks — the same parameters PPP1 had when it stopped accepting applications in August.
PPP borrowers may receive a loan amount of up to 2.5 times their average monthly payroll costs in the year prior to the loan or the calendar year, the same as with PPP1, but the maximum loan amount has been cut from $10 million in the first round to the previously mentioned $2 million maximum. PPP borrowers with NAICS codes starting with 72 (hotels and restaurants) can get up to 3.5 times their average monthly payroll costs, again subject to a $2 million maximum.
Simplified application and other terms of note
The new COVID-19 relief bill also:
· Creates a simplified forgiveness application process for loans of $150,000 or less. Specifically, a borrower shall receive forgiveness if the borrower signs and submits to the lender a certification that is not more than one page in length, 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 must create the simplified application form within 24 days of the bill’s enactment and may not require additional materials unless necessary to substantiate revenue loss requirements or satisfy relevant statutory or regulatory 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.
· Repeals the requirement that PPP borrowers deduct the amount of any Economic Injury Disaster Loan advance from their PPP forgiveness amount.
· Includes set-asides to support first- and second-time PPP borrowers with 10 or fewer employees, first-time PPP borrowers that have recently been made eligible, and for loans made by community lenders.
It’s too early to know exactly when lenders will begin accepting applications as the rules were published last night. We anticipate you would be able to apply mid-January.
We will keep you updated on these and other developments.
Maryland extended deadlines for certain Maryland Tax Filings and Payments in 2021
The state of emergency related to COVID-19 proclaimed by Governor Lawrence J. Hogan, Jr. on March 5, 2020 continues. Due to the economic impact on individuals and businesses, the Comptroller has extended due dates for certain tax types. This tax alert addresses additional actions taken by the Office of the Comptroller of Maryland due to the hardships caused by the COVID-19 pandemic. Tax Alert 04-14-20A announced the revised due dates for Maryland returns and payments with statutory due dates falling between April 1, 2020 and July 14, 2020. Tax Alert 01-06-21 provides notice of deadline relief expanded to certain taxes with statutory filing or payment deadlines between January 1, 2021 and April 14, 2021. Please see below for details of the relief being offered for each tax type. The information in this Tax Alert applies only to tax filings under the authority of the Comptroller, as described below. Taxpayers may need to consult other state agencies regarding the deadlines for other tax filings (e.g., personal property, unemployment insurance)
Extension of Time for Corporate and Pass-Through Entity Income Tax Filings and Payments
By law, corporate and pass-through entity income tax returns and remittances for fiscal-year taxpayers are due on or before the 15th day of the fourth month after the end of the entity’s tax year.1 Due to the ongoing state of emergency, the Comptroller finds that good cause exists to extend the time to file corporate and pass-through entity income tax returns with statutory due dates between January 1, 2021 and April 14, 2021 to April 15, 2021. Additionally, corporate and pass-through entity income tax remittances with statutory due dates between January 1, 2021 and April 14, 2021 are extended to April 15, 2021. Interest and penalty shall be assessed on any unpaid tax from April 16, 2021 until the date the tax is paid. Corporations and S-Corp entities who are calendar year filers and who are filing quarterly declarations of estimated income tax for tax year 2020 are required to file their declaration and make their 4th quarter payment on or before December 15, 2020. For fiscal-year corporate and pass-through entity filers, the declarations and remittances are due on or before the 15th day of the 4th, 6th, 9th, and 12th month following the beginning of the fiscal year. Due to the state of emergency, the Comptroller finds that good cause exists to extend the time to file corporate and pass-through entity estimated income tax declarations and payments due between January 15, 2021 and April 14, 2021 to April 15, 2021. The extension to April 15, 2021 for filing of corporate and pass-through entity income tax returns and payment of taxes with a statutory due date of January 1, 2021 through April 14, 2021, as well as estimated tax payments for fiscal year filers, is automatic; no filing or request is required to take advantage of the extended deadline. If no tax is due and you requested a federal extension, you do not need to file a Form 500E, 510E, or take any other action to obtain an automatic extension to November 15.
Typically, a claim for refund must be filed within three years of the due date of the return. The extension for filing of returns and payment of income tax owed also extends the statute of limitations for filing a claim for refund of income tax for returns filed with a statutory due date between January 1, 2021 and April 14, 2021. Claims for refund for these returns must be filed no later than April 15, 2024.
New Extensions for Other Business Taxes
Sales and use tax
Generally, sales and use tax returns are due on or before the 20th day of the month that follows the month in which a vendor made a retail sale. The payment of sales and use tax must accompany the return.4 The Comptroller may extend the time to file a sales and use tax return for good cause. The Comptroller is extending the time to file sales and use tax returns that are due between January 20, 2021 and April 14, 2021 to April 15, 2021. This affects returns for sales taking place in December 2020, January 2021, and February 2021. Sales and use tax returns, and their accompanying payments, may be submitted by April 15, 2021 without incurring interest or penalties.
Do not combine separate reporting periods into a single return. Instead, file the separate returns reflecting the sales and the tax collected for each filing period as if they had been filed according to their original due dates
Generally, every employer must withhold estimated income tax from employees’ wages and submit estimated payments to the Comptroller. The Comptroller is extending the time to file withholding returns and make withholding payments for periods beginning January 1, 2021 through March 31, 2021 to April 15, 2021. This affects withholding payments due for periods including January, February and March of 2021, but does not include any payment due with the 2020 year end withholding reconciliation due on or before January 31, 2021. Any withholding payments originally due between February 1, 2021 and April 14, 2021 may be submitted by April 15, 2021 without incurring interest or penalties.
Please note, withholding returns and payments for all periods through December 31, 2020, including the 2020 year end reconciliation due in January are due on their statutory due dates.
Do not combine withholding for separate reporting periods into a single return. Instead, file the separate returns reflecting the tax withheld for each filing period as if they had been filed according to their original due dates.
New Extension of Time for Individual and Fiduciary Declaration of Estimated Income Tax Filings and Payments
Individuals and fiduciaries who are calendar year filers and who are filing quarterly declarations of estimated income tax for tax year 2020 are required to file their declaration and make their 4th quarter payment on or before January 15, 2021. For fiscal-year individual and fiduciary filers, the declarations and remittances are due on or before the 15th day of the 4 th, 6th, 9th, and 13th month following the beginning of the fiscal year. Due to the state of emergency, the Comptroller finds that good cause exists to extend the time to file individual and fiduciary estimated income tax declarations and payments due between January 15, 2021 and April 14, 2021 to April 15, 2021. The extension to April 15, 2021 for filing individual and fiduciary declarations of income tax and payments is automatic; no filing or request if required to take advantage of the extended deadline
We will keep you updated on these and other relevant matters.
We are tracking the pending legislation to provide emergency relief from Covid-19. The latest summary is attached here: Emergency Coronavirus Relief Act of 2020
As it stands now, the bill will include:
PPP expense deductibility (currently, expenses paid with PPP funds cannot be deducted for tax purposes).
Second round of PPP funding of $300 billion for businesses that had a 30% reduction in revenues in any quarter in 2020
501c6 organizations would be included with limitations
Automatic loan forgiveness of $150,000 or less.
The legislation could pass by Friday at midnight. Once it passes, Treasury and SBA are expected to move quickly to implement.
Please be mindful of these pending developments and be prepared to put in applications as soon as possible if eligible.
We will keep you informed
Yesterday, the IRS issued Revenue Procedure 2020-51 and Revenue Ruling 2020-27 pertaining to the deductibility of expenses paid for by paycheck protection funds.
In Revenue Ruling 2020-27, the IRS provides guidance on whether a Paycheck Protection Program (PPP) loan participant that paid or incurred certain otherwise deductible expenses can deduct those expenses in the taxable year in which the expenses were paid or incurred if, at the end of such taxable year, the taxpayer reasonably expects to receive forgiveness of the covered loan. The revenue ruling also provides guidance if, as of the end of the 2020 taxable year, the PPP loan participant has not applied for forgiveness, but intends to apply in the next taxable year.
The ruling holds that expenses paid by a PPP loan (in which the participant expects to be forgiven) will not be deductible for tax purposes. The concept is that since the PPP amount forgiven is not taxable income, the related expenses paid by the PPP loan forgiven cannot be deducted. Eliminating deductions paid by PPP funds that were forgiven effectively increases taxable income. This must be factored in for your 2020 tax planning.
In Revenue Procedure 2020-51, the IRS outlines a safe harbor for deducting expenses paid by PPP funds. In the situation where a participant’s loan forgiveness has been partially or fully denied, or who decides to forego requesting loan forgiveness, the expenses paid by the amount not forgiven can be deducted on the 2020 original tax return or an amended 2020 tax return.
In both Revenue Ruling 2020-27 and Revenue Procedure 2020-51, the IRS is outlining long standing tax law pertaining to expenses paid by income that was not taxable. Any changes to taxation pertaining to PPP loan forgiveness requires legislation. Congress is aware of this issue and we will keep you informed if any legislative changes occur. In the meantime, if you have received PPP funds and intend to apply for forgiveness, we encourage you to factor in these developments in your 2020 tax planning.
We are available to assist you in estimating the tax impact of these developments. Please call the office to schedule an appointment.
The passage of the Tax Cuts and Jobs Act on December 22, 2017 limited an individual’s deduction for State and Local taxes (SALT deduction limitation) to $10,000 ($5,000 in the case of married individual filing separately). This includes real property taxes, personal property taxes, and state income taxes. The impact of the limitation began with the 2018 tax year. Many individuals exceed the $10,000 limitation and have lost tax deductions on the 2018 and 2019 federal tax returns.
Several states such as Connecticut, Louisiana, Maryland, New Jersey, Oklahoma, Rhode Island, and Wisconsin have adopted as a “workaround” an entity level tax for partnerships and S corporations. Effective July 1, 2020, Maryland partnerships and S corporations may elect to pay tax on behalf of individual resident members at the top marginal state tax rate of 5.75% plus the lowest local income tax rate of 2.25% of the members share of income.
On November 9, 2020, the IRS announced in Notice 2020-75 that the Department of Treasury and IRS intend to issue proposed regulations to clarify that SALT taxes imposed on and paid by a partnership or an S corporation on its income are allowed as a deduction by the partnership or S corporation in computing it’s taxable income and therefore, the payments would not be subject to the SALT tax deduction for the member.
As an example: Sue is a member of Sunrise Partnership. Sue pays real estate taxes of $10,000. In addition, Sue normally pays estimated Maryland income taxes of $30,000 (assume 8% state tax rate) from her share of income from Sunrise Partnership. Sue’s SALT deduction is limited to $10,000 and the $30,000 would be considered lost tax deductions on her federal tax return. Effective July 1, 2020, the Sunrise Partnership can make an election to pay the $30,000 of Sue’s Maryland state income taxes at the Partnership level. Sunrise will be allowed a tax deduction for the full $30,000 which would effectively reduce Sue’s federal taxable income from the Partnership. According to IRS Notice 2020-75 announced on November 9, 2020, the $30,000 paid by the Partnership will not be subject to the $10,000 SALT limit on Sue’s personal tax return. When Sue files her Maryland individual tax return, she would add back the $30,000 to income as previously required by Maryland law.
We consider this a major development for business owners of partnerships and S corporations. There are some unanswered questions that need clarification and we intend to keep you informed on these developments. This will impact upcoming estimated tax payments for the 4th quarter as the partnership or s corporation must make the payments before December 31, 2020.
Please let us know if you have any questions how this may impact your business and your personal tax liabilities. Stay tuned for more information from us on this matter.
All the best,
The Maryland Department of Labor announced on Wednesday October 29, 2020 that an additional $20 million in funding is available for Maryland’s small businesses through an expansion of the successful COVID-19 Layoff Aversion Fund. Businesses undergoing financial stresses due to the pandemic can apply for up to $50,000 in flexible and customizable funding to maintain their workforce beginning Wednesday, October 28.
“Initially introduced in March, the COVID-19 Layoff Aversion Fund has already helped 445 small businesses with an average of 20 employees stay open and saved nearly 9,000 Maryland jobs,” said Governor Larry Hogan. “Through our Economic Recovery Initiative, we have allocated an additional $20 million to expand the COVID-19 Layoff Aversion Fund and to provide further financial support to our state’s small businesses as they continue to adapt to and overcome the challenges presented by the pandemic.”
The governor’s initiative expands total funding to $30 million for the state’s COVID-19 Layoff Aversion Fund. Since announced by the Governor last Thursday, Labor has already reached out to all 130 small businesses who submitted an application prior to the program closing, but did not receive funding because the initial $10 million was exhausted. Seven of these priority applicants have been approved and 20 are under review.
“Labor’s COVID-19 Layoff Aversion Fund has already provided critical funding to small businesses representing nearly 20 diverse industry sectors, ranging from health care to retail, that are located in all 24 jurisdictions in Maryland,” said Labor Secretary Tiffany Robinson. “By expanding the program, Governor Hogan is giving our team the opportunity to help hundreds of additional businesses stay afloat, forego layoffs of thousands of employees, and remain open for business.”
The COVID-19 Layoff Aversion Fund is designed to support businesses undergoing economic stresses due to the pandemic by preventing or minimizing the duration of unemployment resulting from layoffs. The award of up to $50,000 per applicant will be a quick deployable benefit that is customizable to the specific needs of the business to minimize the need for layoffs. Applications will be accepted through 30 days after the State of Emergency ends or until funding has been fully exhausted. Businesses will receive approval or denial within 5 days of applying for the funding.
Award recipients have used the average award size of $22,738 per business for such things as purchasing remote access equipment and software to promote teleworking, assisting with employee training and education, purchasing cleaning supplies and services to maintain an onsite workforce, and taking advantage of the Maryland Department of Labor’s Work Sharing Unemployment Insurance Program by supplementing employee income.
To download the policy, application, and learn more about the eligibility requirements of the COVID-19 Layoff Aversion Fund, please visit our website. If you have any questions, please email email@example.com.
The American Institute of Certified Public Accountants (AICPA) and its business and technology arm, CPA.com, today announced the launch of a Paycheck Protection Program (PPP) loan forgiveness platform, PPPForgivenessTool.com, which automates the forgiveness process for small business owners who received funds from the PPP.
The dynamic platform, powered by fintech lender Biz2Credit, incorporates the PPP forgiveness calculator created by the AICPA in May and is available to any business approved for a PPP loan, regardless of the lender or bank they worked with to receive funding. Borrowers or their CPA advisors can log onto the platform to fill out the forgiveness application and the tool produces all government-mandated forms automatically. The PPP applicant will be able to electronically sign the 3508 or 3508 EZ forms and all the required source documents will also be included in a downloadable file that can be provided to their lenders. The platform will likely save hours of manual work for any applicant going through the process.
Should you have any questions, please contact our office at (301) 622-1200.
Dear Client – last night the Senate passed the House bill that creates more flexibility for borrowers using PPP funds. If signed into law by Trump, the Paycheck Protection Program Flexibility Act would:
- 1. Borrowers can extend the 8 week period to 24 weeks: this makes it easier for borrowers to get full or close to full forgiveness on their loans. Borrowers also have the ability to make an election to have the original 8 week period apply in lieu of the 24 week period. This would make senses for borrowers that have already spent the funds on sufficient expenses that provide for full forgiveness, so they can confirm their loan forgiveness.
- 2. Penalty and calculations for reduction in workforce rolled back from June 30th to December 31st. The provision which reduces forgiveness in proportion to the reduction of the employer workforce during the 8 week period if the same number of employees are not rehired by June 30th is now changed. The new bill would modify the provision by using the 24 week period instead of the current 8 week period, while extending the June 30th amnesty rehire date to December 31st. Example – if a business had 100 employees before the virus and reduces its workforce to 50 employees during the 24 week period, it will receive complete forgiveness if it has 100 employees on December 31, 2020.
- 3. Remove the limits on loan forgiveness for small businesses that were unable to rehire employees, hire new employees or return to the same level of business activity as before the virus. The bill provides an exemption from a reduction in loan forgiveness for employers that have reduced their workforce if, during the period beginning Feb 15,2020 and ending Dec 31, 2020, the employer, in good faith, is able to document one of the following:
- Employer could not find qualified employees to hire
- Employer could not restore business to comparable level of activity because of social distancing or other federal health guidance
- 4. The 75% test now become a 60% cliff. The bill would change the requirement that 75% of amounts forgiven have to be spent on payroll expenses. The borrower will now be required to use at least 60% of the loan amount for payroll costs, and may use up to 40% for permitted rent, utilities, and interest on secured debt, as defined by law. As the bill is written, there would be no partial forgiveness if the 60% test is not met.
- 5. Two year deferral of employer payroll taxes –borrowers would now be eligible for the deferral of payment of the employer's share of social security payroll taxes (6.2%), regardless of whether the borrower received loan forgiveness. This allows borrowers to now defer payment of the employer's share of social security until 2021 (50% payment due) and 2022 (remaining 50% due).
- 6. Repayment period extended to 5 years with 1% interest during the 5 year term.
- 7. Extend the period for when a business can apply for loan forgiveness, from within six months to within 10 months of the last day of the covered period, before it must start making interest and principal payments. Under the new bill, PPP loan interest and payment of principal and fees will be deferred until the loan is forgiven by the lender.
We will keep you updated on these and other developments.
Implementation of the Paycheck Protection Program (PPP) continues to evolve. Below are important updates you should be aware of:
Economic Necessity Certification
On the PPP application, borrowers must make a certification that "current economic necessity makes the loan request necessary to support ongoing operations of the applicant". When the program launched, large public companies were able to secure millions in funding under the program. This was not the intent of Congress when the legislation was enacted. On April 23rd, the Treasury Department issued new guidance in FAQs #31 which provides as an example that it's unlikely that a "public company with substantial market value and access to capital markets" would be able to make this economic necessity certification in good faith. Furthermore, the Treasury Department and SBA issued a new Interim Final Rule on April 24 that included the following loan eligibility certifications:
- Hedge funds and private equity firms are NOT eligible for PPP loans
- Portfolio companies of private equity funds may be eligible for PPP loans, however, they must apply the SBA's affiliation rules and must carefully review the economic necessity certification
Given these developments, all PPP loan applicants should confirm that they meet the required criteria for the economic necessity certification taking into account their particular economic situation and facts surround their business. If the certification cannot be made in good faith, then the PPP loans should be paid back in full by May 7, 2020 to avoid penalties for making the certification in bad faith.
We recommend borrowers take the following action:
- Document the financial analysis made to support your conclusion that your PPP loan request was necessary to support ongoing operations. This should take into account both the revenue and expense sides of the business, with particular focus on how current economic conditions will impact cash flow
- Show how the financial analysis would lead the company, in the absence of the PPP loan, to terminate workers and/or miss mortgage, rent, or utility payments. The use of PPP funds for payroll expenses is the primary component of the CARES Act loan forgiveness program
- Document whether the owners were/are willing to contribute additional capital to the company.
- If you had substantial liquid net working capital and or liquid reserves at the time of your application, you should consider whether you properly made the good faith certification in light of the new guidance, and determine if you should return the PPP funds by the May 7, 2020 amnesty date.
Loan forgiveness: Laid off employee / Attempted to rehire / Employee declined
SBA updated FAQs #40 on May 3, 2020 to state that a borrower will still be eligible for loan forgiveness if they attempted to rehire a laid off employee but the employee declined the offer. SBA and Treasury intend to issue an interim final rule excluding laid-off employees whom the borrower offered to rehire (for the same salary/wages and same number of hours) from the CARES Act's loan forgiveness reduction calculation. The interim final rule will specify that, to qualify for this exception, the borrower must have made a good faith, written offer of rehire, and the employee's rejection of that offer must be documented by the borrower. Employees and employers should be aware that employees who reject offers of re-employment may forfeit eligibility for continued unemployment compensation.
I will be participating on a call with Senators Marco Rubio (Chairman), and Ben Cardin (Ranking Member) US Senate Committee on Small Business & Entrepreneurship on Wednesday May 6th to discuss relief programs for small businesses. We will continue to keep you informed on these developments.
Many have begun to receive funds from the Paycheck Protection Program. As you are aware, the program has a loan forgiveness clause if at least 75% of the funds were used for payroll costs over 8 weeks beginning after loan origination. No more than 25% may be used for the specific items of mortgage obligations, rent, and utilities.
The Paycheck Protection funds that subsequently are forgiven are not included in taxable income. This would be considered tax exempt income. IRS released Notice 2020-32 yesterday which clarifies that any expenses related to tax exempt income are not deductible for tax purposes. Therefore, there is no tax deduction for payroll costs, mortgage, rent, and utilities paid with forgiven Paycheck Protection funds.
We also want to highlight the accounting treatment for the funds forgiven. Under Generally Accepted Accounting Principles, when a loan is forgiven it is referred to as an Extinguishment of Debt. Extinguishment of Debt would be considered Income for accounting purposes. The related items of payroll, mortgage (interest portion), rent, and utilities would still be allowed to be expensed for accounting purposes.
In short, when the Paycheck Protection funds are forgiven, they are recorded as Income for accounting purposes with related expenses allowed. For tax purposes, the forgiven funds are Not considered income and the related costs are Not tax deductible.
Statement from SBA and Treasury: "The Small Business Administration will resume accepting PPP loan applications on Monday, April 27 at 10:30AM EDT from approved lenders on behalf of any eligible borrower. This will ensure that SBA has properly coded the system to account for changes made by the legislation." https://www.sba.gov/about-sba/sba-newsroom/press-releases-media-advisories/joint-statement-sba-administrator-jovita-carranza-and-treasury-secretary-steven-t-mnuchin-resumption
On Friday, April 24, Labor will be launching a new, one-stop unemployment insurance application to allow Marylanders to file claims for all unemployment programs entirely online. This includes the Pandemic Unemployment Assistance program, the Pandemic Emergency Unemployment Compensation program, and those who were previously required to file by phone like federal employees, members of the military, individuals who have worked in multiple states, and those who have worked for more than 3 employers in the last 18 months.
The Secretary of the Maryland Department of Labor opted into providing ALL three of the expanded unemployment insurance programs offered through the provisions of the CARES Act:
- Pandemic Unemployment Assistance (PUA)
- Individuals who are not usually eligible for regular UI and who cannot work due to COVID-19 are eligible for a maximum of 39 weeks of benefits, which includes $600 Federal Pandemic Unemployment Compensation (FPUC).
- Effective January 27, 2020 through Dec. 31, 2020.
- Starting Friday, April 24, those who are self-employed, independent contractors, gig workers, or have insufficient work history will be able to apply online. To receive an e-mail with additional information and instructions once the new application is ready, please sign up here
- Federal Pandemic Unemployment Compensation (FPUC)
- $600 per week on top of current regular UI benefits.
- Effective March 29, 2020 through July 31, 2020.
- Starting Friday, April 17, everyone eligible for benefits ending the week of April 4 will begin receiving an additional $600 per week as part of the Federal Pandemic Unemployment Compensation program on top of current regular benefits. Marylanders will begin to see the increase in their next regularly scheduled payment.
- If you have questions specifically about the $600 weekly payment, please visit our Federal Pandemic Unemployment Compensation FAQs.
- Pandemic Emergency Unemployment Compensation (PEUC)
- 3 additional weeks of UI benefits, plus $600 FPUC.
- Effective March 29, 2020 through Dec. 31, 2020.
- Starting Friday, April 24, new claimants and those who are already receiving benefits will automatically receive an additional 13 weeks of benefits under the CARES Act. Current eligible claimants do not need to take any additional steps to receive these extended benefits. Labor will be directly contacting claimants who have recently exhausted their benefits, so they can reapply for the additional 13 weeks.
The United States Chamber of Commerce Foundation has established the Save Small Business Fund to provide short-term relief to small employers affected by the COVID-19 crisis. The Save Small Business Fund will provide a one-time grant of $5,000 to small businesses to use for business expenses.
Save #SmallBusiness Fund: Provides Grants to the Smallest of Small Businesses, Opens Today - April 20. In order to be eligible for the grant, the small business must:
- Employ between 3 to 20 people
- Be located in an economically vulnerable community
- Have been harmed financially by the COVID-19 pandemic.
Learn more. https://savesmallbusiness.com/#eligibility
On its website, the IRS has provided guidance for taxpayers reporting the employee retention credit for certain employers subject to closure due to the COVID-19 crisis, including that the credit with respect to wages paid in March should be reported on the 2nd quarter 2020 employment tax return. For your convenience, we have provided a link to IRS website on the employee retention credit here: https://www.irs.gov/newsroom/faqs-employee-retention-credit-under-the-cares-act
Background. The Coronavirus Aid, Relief, and Economic Security Act (CARES Act, PL 116-136) provides a refundable payroll tax credit (employee retention credit) for 50% of wages paid by Eligible Employers to certain employees during the COVID-19 crisis.
The credit is available to employers, including non-profits, whose operations 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.
The maximum amount of qualified wages taken into account with respect to each employee for all calendar quarters is $10,000, so that the maximum credit for an Eligible Employer for qualified wages paid to any employee is $5,000.
The refundable tax credit is equal to 50% of qualified wages paid to employees after March 12, 2020 and before January 1, 2021.
Reporting the employee retention credit. Eligible Employers who paid qualified wages between March 13, 2020 and March 31, 2020, inclusive, will report 50% of those wages together with 50% of any qualified wages paid during April, May, and June 2020 on their 2nd quarter Form 941, Employers QUARTERLY Federal Tax Return, to claim the employee retention credit. Employers should not include the credit on their 1st quarter Form 941.
This guidance also applies for Form 941-SS, Employers QUARTERLY Federal Tax Return for American Samoa, Guam, the Commonwealth of the Northern Mariana Islands, and the U.S. Virgin Island, and Form 941-PR, Employers QUARTERLY Federal Tax Return for Puerto Rico.
Please Note: You cannot receive the Employee Retention Credit if you receive a loan under the Paycheck Protection Program.
On March 17, 2020 Treasury Secretary Mnuchin announced that TAX RETURNS ARE STILL DUE APRIL 15. However, payments that are due on April 15th, or due with an extension on April 15th, may be delayed until July 15, 2020 without penalty or interest. If the return is not timely filed, or properly extended the 90-day relief will not apply.
The maximum amount of deferral is $1,000,000 for an individual and $10,000,000 for a corporation
The relief is available solely with respect to Federal income tax payments (including payments of tax on self-employment income) due on April 15, 2020 in respect of an affected person's 2019 taxable year and federal estimated income tax payments due on April 15, 2020, for an affected person's 2020 taxable year.
Refunds remain unaffected. Interest, penalties, and additions to tax for any postponed amount will begin to accrue on July 16, 2020. In addition, interest, penalties and additions to tax will accrue on any amount above the postponed amount that wasn't paid by April 15, 2020. For example, if an individual owes $1,200,000, then $200,000 is still due by April 15, 2020. The remaining $1,000,000 can be paid by July 15, 2020 without interest or penalties.
The Maryland Comptroller's Office will conform with the Internal Revenue Service's 90-day extension of federal income tax payments from April 15 to July 15, 2020. Comptroller Franchot said Maryland individual and corporate income taxpayers will be afforded the same relief for state income tax payments. No interest or penalty for late payments will be imposed if 2019 tax payments are made by July 15, 2020. Taxpayers must file for an extension for the filing of FEDERAL taxes by April 15. Taxpayers should refer to the IRS for further details.
Comptroller Franchot also extended business-related tax filing deadlines. The June 1 extension applies to certain business returns with due dates during the months of March, April and May 2020 for businesses filing sales and use, withholding, admissions & amusement, alcohol, tobacco, and motor fuel taxes, as well as tire recycling fee and bay restoration fee returns.
Business taxpayers who file and pay by June 1, 2020 will receive an automatic waiver of interest and penalties.
The Families First Coronavirus Response Act passed by Congress requires private employers with fewer than 500 workers and all public employers to provide paid sick leave to employees affected by the coronavirus (exceptions for health care providers, emergency responders and certain small businesses are allowed). Full-time workers get up to 80 hours of sick leave, while part-time workers get sick leave for the average number of hours they work over a two-week period. A worker is only able to take paid leave if he or she is:
- Subject to a federal, state or local coronavirus quarantine or isolation order:
- Advised by a health care provider to self-quarantine due to the coronavirus concerns:
- Experiencing coronavirus symptoms and seeking a medical diagnosis;
- Caring for someone else who is subject to a coronavirus-related federal, state or local quarantine or isolation order, or who has been advised by a health care provider to self-quarantine due to coronavirus-related concerns
- Caring for a son or daughter if the child's school or daycare has been closed, or the child's care provider is unavailable, due to coronavirus precautions; or
- Experiencing any other substantially similar condition specified by the Secretary of Health and Human Services.
Workers who are sick or quarantined get full pay while on coronavirus leave, up to $511 per day ($5,110 in total). Workers caring for another person or on leave because of an HHS-specified condition get two-thirds of their normal pay while on leave, up to $200 per day ($2,000 in total).
The new law also extends the existing Family and Medical Leave Act (FMLA) to cover a worker's absence (including an inability to telework) to care for a minor son or daughter if the child's school or daycare has been closed, or the child's care provider is unavailable, because of the coronavirus.
Workers receive two-thirds of their regular salary while on coronavirus-related FMLA leave, but compensation is capped at $200 per day and $10,000 in total. However, this leave does not kick in until after 10 days. (During that time, workers are presumably able to take sick leave as described above.)
The expanded FMLA provisions apply to employers with fewer than 500 employees, but not to certain health care providers and emergency responders. Exemptions are also available for small businesses with fewer than 50 employees if the new requirements jeopardize the business's viability.
Tax Credits for Employers
Employers will receive a credit through refundable tax credits against the 6.2% Social Security (or Railroad Retirement) payroll tax imposed on employers. The credits are, however, subject to certain restrictions and limitations.
For the new sick leave benefits, the credit is limited to $511 per day for workers taking leave because they are sick or quarantined. The limit is $200 per day for workers taking leave to care for another person or on leave because of an HHS-specified condition. The credit is further reduced by a 10-sick-days-per-worker limit.
For the expanded FMLA benefits, the credit is limited to $200 per day, per employee. The credit also can't exceed $10,000 in total for any worker.
Employers are also given additional payroll tax credits for group health plan costs for, and the 1.45% Medicare payroll tax on wages paid to, workers on coronavirus sick or family leave.
Tax Credits for Self-Employed
Self-employed people receive refundable tax credits against the self-employment tax that are similar to those allowed for employers.
The sick leave credit is based on a self-employed person's "qualified sick leave equivalent amount." That amount is equal to (1) up to 10 days during the year that the person can't work for a reason that would entitle them to coronavirus-related sick leave if he or she were an employee, (2) multiplied by the lesser of:
- 1 $511 per day for people who are sick or quarantined, or $200 per day for people caring for another person or on leave because of an HHS-specified condition; or
- 2 100% of a sick or quarantined person's average daily self-employment income for the year, or 67% of the average daily self-employment income for a person caring for another person or on leave because of an HHS-specified condition.
A self-employment tax credit is also be available for 100% of a person's "qualified family leave equivalent amount." That amount is equal to (1) up to 50 days during the year that the person can't work for a reason that would entitle them to coronavirus-related family leave if he or she were an employee, (2) multiplied by the lesser of:
- $200; or
- 67% of the person's average daily self-employment income for the year.
Please consult your payroll service provider on utilization of the credits.
Treasury Secretary Mnuchin announced the tax filing deadline has been moved from April 15th to July 15th. If you have sent your tax packages in, we are still working to complete those shortly. If you are still working on your tax packages, we encourage you to still send those in via mail or portal when you are completed. Should you have any questions, please contact Christine at firstname.lastname@example.org.
The U.S. Small Business Administration is offering low-interest federal disaster loans for working capital to the District of Columbia small businesses suffering substantial economic injury as a result of the Coronavirus (COVID-19), SBA Administrator Jovita Carranza announced today. SBA acted under its own authority, as provided by the Coronavirus Preparedness and Response Supplemental Appropriations Act that was recently signed by the President, to declare a disaster following a request received from Mayor Muriel Bowser on March 15, 2020.
The disaster declaration makes SBA assistance available in the District of Columbia; the contiguous counties of Montgomery and Prince George's in Maryland; and Alexandria (City), Arlington County and Fairfax County in Virginia. SBA Customer Service Representatives will be available to answer questions about SBA's Economic Injury Disaster Loan program and explain the application process.
"SBA is strongly committed to providing the most effective and customer-focused response possible to assist District of Columbia small businesses with federal disaster loans. We will be swift in our efforts to help these small businesses recover from the financial impacts of the Coronavirus (COVID-19)," said Administrator Carranza.
"Economic Injury Disaster Loans provide vital economic assistance to small businesses to help overcome a temporary loss of revenue. Small businesses, private non-profit organizations of any size, small agricultural cooperatives and small aquaculture enterprises financially impacted as a direct result of COVID-19 since January 31, 2020, may qualify for up to $2 million to help meet financial obligations and operating expenses, which could have been met had the disaster not occurred," said SBA Mid-Atlantic Regional Administrator Steve Bulger, who oversees the SBA's programs in D.C., Virginia, Maryland, Delaware, Pennsylvania and West Virginia. "These loans may be used to pay fixed debts, payroll, accounts payable and other bills that can't be paid because of the disaster."
Eligibility for Economic Injury Disaster Loans is based on the financial impact of COVID-19. The interest rate is 3.75 percent for small businesses, and 2.75% for private non-profit organizations. The SBA offers loans with long-term repayments to keep payments affordable – up to a maximum of 30 years and are available to entities without the ability to offset the adverse impact without hardship.
Applicants may apply online and receive additional disaster assistance information at https://disasterloan.sba.gov/ela. Paper-based application materials may be downloaded for printing at https://disasterloan.sba.gov/ela/Information/PaperForms. Applicants may also call SBA's Customer Service Center at (800) 659-2955 or email email@example.com for help in completing the application process. Individuals who are deaf or hard?of?hearing may call (800) 877-8339. Completed paper-based application packets should be mailed to U.S. Small Business Administration, Processing and Disbursement Center, 14925 Kingsport Road, Fort Worth, TX 76155. The deadline to apply for an Economic Injury Disaster Loan is December 17, 2020.
"One of the best ways for borrowers to increase cash flow is by making a request to delay monthly loan payments," added Antonio Doss, District Director of the SBA-Washington Metropolitan Area District Office. "The SBA makes that option available on existing 7(a) Business Loans, 504 Business Loans and Microloans." Borrowers must ask their lenders directly for such deferrals, which may be granted for a period of up to six months.
Our Washington Metropolitan Area District Office team, funded resource partners (SCORE, Small Business Development Centers, Veterans Business Outreach Centers, and Women's Business Centers), and participating lenders want to help you successfully navigate through this period of the COVID-19 epidemic. Learn more about SBA's programs and services, including free one-on-one business counseling that may be offered remotely, by accessing the 2020 Small Business Resource Guide for the Washington Metropolitan Area at https://www.sba.gov/sites/default/files/files/resourceguide_3106.pdf.
MD Gov Hogan has issued a stay at home order for non-essential businesses effective 5pm today. The Gov has established through the MD Department of Commerce 3 new business assistance programs in response to the COVID-19 pandemic
- Emergency relief Fund - $75M loan fund offers no interest or principal payments due for the first 12 months, then converts to a 36 mo term loan of principle and interest payments, with a rate of 2% rate.
- Emergency relief Grant - $50M grant program offers grant amounts up to $10,000, not to exceed 3 months of demonstrated cash operating expenses for the first quarter of 2020.
- Emergency Relief Manufacturing Fund: This $5 million incentive program helps Maryland manufacturers to produce personal protective equipment (PPE) that is urgently needed by hospitals and health-care workers across the country
Please see more details here: https://govstatus.egov.com/md-coronavirus-business
We realize you have been inundated with emails from various sources. Below is a recap of recent provisions for small businesses. Of note is the MD Dept. of Labor loans designed as an alternative to laying off employees.
Here are websites for loans. Some of them (MD funds) have a 2-day approval response:
https://govstatus.egov.com/md-coronavirus-business Maryland Corona virus COV-19 Business Response
http://www.labor.maryland.gov/employment/covidlafund.shtml MD Dept. of Labor loans
https://www.sba.gov/page/coronavirus-covid-19-small-business-guidance-loan-resources SBA Small Business Loan
https://commerce.maryland.gov/fund/maryland-small-business-covid-19-emergency-relief-fund-programs MD Dept. of Commerce Loans
On March 12, Governor Hogan issued an executive order that requires the Maryland State Department of Assessments and Taxation (SDAT) extend all expiration and renewal dates to the 30th day after the date on which the state of emergency is terminated. SDAT is automatically extending the Annual Report Filing and/or Personal Property Return filing date from April 15 to July 15th for all entities, although it may take a few days for this to be reflected online. SDAT will soon provide additional information related to the delay of due dates for trade name renewals/expirations, penalty due dates, and any other related items. As always, we will keep you posted with any updates.
WASHINGTON — To help people facing the challenges of COVID-19 issues, the Internal Revenue Service announced today a sweeping series of steps to assist taxpayers by providing relief on a variety of issues ranging from easing payment guidelines to postponing compliance actions.
"The IRS is taking extraordinary steps to help the people of our country," said IRS Commissioner Chuck Rettig. "In addition to extending tax deadlines and working on new legislation, the IRS is pursuing unprecedented actions to ease the burden on people facing tax issues. During this difficult time, we want people working together, focused on their well-being, helping each other and others less fortunate."
"The new IRS People First Initiative provides immediate relief to help people facing uncertainty over taxes," Rettig added "We are temporarily adjusting our processes to help people and businesses during these uncertain times. We are facing this together, and we want to be part of the solution to improve the lives of all people in our country."
These new changes include issues ranging from postponing certain payments related to Installment Agreements and Offers in Compromise to collection and limiting certain enforcement actions. The IRS will be temporarily modifying the following activities as soon as possible; the projected start date will be April 1 and the effort will initially run through July 15. During this period, to the maximum extent possible, the IRS will avoid in-person contacts. However, the IRS will continue to take steps where necessary to protect all applicable statutes of limitations.
"IRS employees care about our people and our country, and they have a strong desire to help improve this situation," Rettig said. "These new actions reflect just one of many ways our employees are working hard every day to assist the nation. We care, a lot. IRS employees are actively engaged, and they have always delivered for their communities and our country. The People First Initiative is designed to help people take care of themselves and is a key part of our ongoing response to the coronavirus effort."
More specifics about the implementation of these provisions will be shared soon. Highlights of the key actions in the IRS People First Initiative include:
- Existing Installment Agreements –For taxpayers under an existing Installment Agreement, payments due between April 1 and July 15, 2020 are suspended. Taxpayers who are currently unable to comply with the terms of an Installment Payment Agreement, including a Direct Deposit Installment Agreement, may suspend payments during this period if they prefer. Furthermore, the IRS will not default any Installment Agreements during this period. By law, interest will continue to accrue on any unpaid balances.
- New Installment Agreements – The IRS reminds people unable to fully pay their federal taxes that they can resolve outstanding liabilities by entering into a monthly payment agreement with the IRS. See IRS.gov for further information.
- Offers in Compromise (OIC) – The IRS is taking several steps to assist taxpayers in various stages of the OIC process:
- Pending OIC applications – The IRS will allow taxpayers until July 15 to provide requested additional information to support a pending OIC. In addition, the IRS will not close any pending OIC request before July 15, 2020, without the taxpayer's consent.
- OIC Payments – Taxpayers have the option of suspending all payments on accepted OICs until July 15, 2020, although by law interest will continue to accrue on any unpaid balances.
- Delinquent Return Filings - The IRS will not default an OIC for those taxpayers who are delinquent in filing their tax return for tax year 2018. However, taxpayers should file any delinquent 2018 return (and their 2019 return) on or before July 15, 2020.
- New OIC Applications – The IRS reminds people facing a liability exceeding their net worth that the OIC process is designed to resolve outstanding tax liabilities by providing a "Fresh Start." Further information is available at IRS.gov
- Non-Filers –The IRS reminds people who have not filed their return for tax years before 2019 that they should file their delinquent returns. More than 1 million households that haven't filed tax returns during the last three years are actually owed refunds; they still have time to claim these refunds. Many should consider contacting a tax professional to consider various available options since the time to receive such refunds is limited by statute. Once delinquent returns have been filed, taxpayers with a tax liability should consider taking the opportunity to resolve any outstanding liabilities by entering into an Installment Agreement or an Offer in Compromise with the IRS to obtain a "Fresh Start." See IRS.gov for further information.
- Field Collection Activities - Liens and levies (including any seizures of a personal residence) initiated by field revenue officers will be suspended during this period. However, field revenue officers will continue to pursue high-income non-filers and perform other similar activities where warranted.
- Automated Liens and Levies – New automatic, systemic liens and levies will be suspended during this period.
- Passport Certifications to the State Department – IRS will suspend new certifications to the Department of State for taxpayers who are "seriously delinquent" during this period. These taxpayers are encouraged to submit a request for an Installment Agreement or, if applicable, an OIC during this period. Certification prevents taxpayers from receiving or renewing passports.
- Private Debt Collection – New delinquent accounts will not be forwarded by the IRS to private collection agencies to work during this period. Field, Office and Correspondence Audits – During this period, the IRS will generally not start new field, office and correspondence examinations. We will continue to work refund claims where possible, without in-person contact. However, the IRS may start new examinations where deemed necessary to protect the government's interest in preserving the applicable statute of limitations.
- In-Person Meetings - In-person meetings regarding current field, office and correspondence examinations will be suspended. Even though IRS examiners will not hold in-person meetings, they will continue their examinations remotely, where possible. To facilitate the progress of open examinations, taxpayers are encouraged to respond to any requests for information they already have received - or may receive - on all examination activity during this period if they are able to do so.
- Unique Situations - Particularly for some corporate and business taxpayers, the IRS understands that there may be instances where the taxpayers desire to begin an examination while people and records are available and respective staffs have capacity. In those instances when it's in the best interest of both parties and appropriate personnel are available, the IRS may initiate activities to move forward with an examination -- understanding that COVID-19 developments could later reduce activities for an agreed period.
- General Requests for Information - In addition to compliance activities and examinations, the IRS encourages taxpayers to respond to any other IRS correspondence requesting additional information during this time if possible.
- Earned Income Tax Credit and Wage Verification Reviews – Taxpayers have until July 15, 2020, to respond to the IRS to verify that they qualify for the Earned Income Tax Credit or to verify their income. These taxpayers are encouraged to exercise their best efforts to obtain and submit all requested information, and if unable to do so, please reach out to the IRS indicating the reason such information is not available. Until July 15, 2020, the IRS will not deny these credits for a failure to provide requested information.
- Independent Office of Appeals – Appeals employees will continue to work their cases. Although Appeals is not currently holding in-person conferences with taxpayers, conferences may be held over the telephone or by videoconference. Taxpayers are encouraged to promptly respond to any outstanding requests for information for all cases in the Independent Office of Appeals.
- Statute of Limitations - The IRS will continue to take steps where necessary to protect all applicable statutes of limitations. In instances where statute expirations might be jeopardized during this period, taxpayers are encouraged to cooperate in extending such statutes. Otherwise, the IRS will issue Notices of Deficiency and pursue other similar actions to protect the interests of the government in preserving such statutes. Where a statutory period is not set to expire during 2020, the IRS is unlikely to pursue the foregoing actions until at least July 15, 2020.
- Practitioner Priority Service – Practitioners are reminded that, depending on staffing levels and allocations going forward, there may be more significant wait times for the PPS. The IRS will continue to monitor this as situations develop.
On March 27, 2020, President Trump signed into law the Coronavirus Aid, Relief, and Economic Security Act (the ''CARES Act"). This is the 3rd piece of legislation aimed at the coronavirus (COVID-19) pandemic and is sometimes referred to as "Phase 3." ("Phase 1" was the $8.3 billion spending bill enacted March 6. "Phase 2" was the Families First Coronavirus Response Act enacted March 18.) The CARES Act is a massive stimulus bill which includes lending facilities to large and small businesses (including targeted distressed businesses), expanded unemployment benefits and individual and business tax changes. The projected cost of the bill is over $2 trillion, of which about $500 billion is allocated to tax changes.
In this Alert we summarize selected individual tax provisions. For Businesses, we refer you to this link from the Senate. It summarizes the business provisions including:
- The Paycheck Protection Program
- Small Business Debt Relief Program
- Economic Injury Disaster Loans and Grants
- Small Business Counseling
- Small Business Contracting
- Small Business Tax Provisions
Individual Stimulus Payment: Who and How Much?
The CARES Act includes stimulus payments of $1,200 for each individual and $500 for each dependent child, defined by the child tax credit rules as under age 17.
Individuals with adjusted gross income (AGI) up to $75,000 a year are eligible for the full $1,200 payment. The payment is reduced by $5 for every $100 in income above $75,000. The payment amount is entirely phased out at an AGI of $99,000.
Married filing joint couples with AGIs up to $150,000 a year are eligible for a $2,400 payment. The payment is reduced by $5 for every $100 in income above $150,000. The payment amount is entirely phased out at an AGI of $198,000 (if the taxpayers have no dependent children). Married couples also will receive an additional $500 for every dependent child under 17.
Example - MFJ with no children. Keith and Norma are married filing joint. They have no dependent children. If they have AGI of $150,000 or less, they are eligible for a $2,400 payment. If they have AGI above $150,000, their rebate will be reduced and finally phased out at an AGI of $198,000.
Example - MFJ with two children. Chris and Pat are married filing joint. They have two dependent children under age 17. If they have AGI of $150,000 or less, they are eligible for a $3,400 payment. If they have AGI above $150,000, their rebate will be reduced and finally phased out if their income hits the top of the threshold amount.
Head of household filers with AGIs up $112,500 a year are eligible for the full $1,200 payment and an additional payment of $500 for each dependent child under age 17. The payment is reduced by $5 for every $100 in income above $112,500. Head of household taxpayers will also receive an additional $500 per dependent child under age 17. With no eligible children, a head of household filer is phased out at AGI of $137,000. With one eligible dependent child, a head of household filer is entirely phased out of the rebate payment at AGI of $146,400.
Example. Head of Household- no children under 17. Heather has an 18-year-old high school senior living with her and qualifies as a head of household filer. If her AGI is $100,000, Heather's payment is $1,200. Her dependent child does not qualify her for the additional $500 payment because the child is not under age 17. If Heather's dependent child is under age 17, her payment is $1,700.
Phaseout of the rebate. If your income is above the threshold amounts, a reduced payment will result. The reduced amount using your own income (AGI) can easily be calculated using the Washington Post calculator.
What needs to be done to get the Stimulus Rebate?
Nothing. The IRS will deposit the calculated amount directly into your bank account, using the AGI and the bank information on your 2019 tax return. If your 2019 return hasn't been filed, the IRS will use the AGI and the bank information from your 2018 tax return. If there's no bank information on the return, the IRS will mail a check.
When Will the Payments Arrive?
The IRS says that a direct deposit should be in your bank account in about three weeks. Checks should start arriving in six to eight weeks.
2020 Tax Return
Technically the stimulus rebate is a 2020 refundable tax credit. The payment received in the next few weeks is an IRS advance. If you have less income in 2020 than in 2019 because of layoffs, reduced hours and closed businesses, and your rebate payment was reduced by the income threshold, you'll receive a credit for the difference on your 2020 return. If for some reason, you receive too much of an advanced payment, you do not have to pay back the excess.
Other provisions affecting individuals:
- 1 Tax favored withdrawals from retirement plans- withdrawals up to $100,000 from retirement plans during 2020 are not subject to the 10% penalty for those under 59 ½. The monies can be repaid over 3 years. The amounts not repaid within 3 years can be included in taxable income ratably over 3 years.
- 2 Loans from Retirement plans: Currently the limit for loans is $50,000. Under the Act, loans up to $100,000 is allowed during the 180-day period beginning March 27.
- 3 Waiver of Required Minimum Distributions: - You do not have to take RMDs for 2020. For beneficiaries who inherit a plan that requires the 5 year rule for distributions, the deadline can be ignored for 2020 which effectively makes it a 6 year rule.
- 4 Charitable contributions: Up to $300 of charitable donations can be deducted by those who do not itemize. Contributions must be made in cash and cannot be made to a donor advised fund and certain supporting organizations.
- 5 Student Loan Relief – all federal student loan payments are suspended for 6 months through Sept 20, 2020.
Contact us if you have questions and stay safe.
Dear Client – treasury has published the application for the Paycheck Protection Program. The application and guidance can be found at this link: https://home.treasury.gov/policy-issues/top-priorities/cares-act/assistance-for-small-businesses
The Small Business Administration (SBA) will begin accepting applications on the following dates:
- April 3, 2020 for small businesses and sole proprietorships
- April 10, 2020 for independent contractors and self-employed individuals
To help prepare for the application, we recommend that business owners begin to gather the following information and documents:
- 1 2019 IRS Quarterly 940, 941 or 944 payroll tax reports
- 2 Last 12 months of Payroll Reports beginning with your last payroll date and going backwards 12 months (e.g. gross wages for each employee, paid time off for each employee, vacation pay for each employee)
- 3 1099s for 2019 for independent contractors that would otherwise be an employee of your business
- 4 Documentation showing total of all health insurance premiums paid by the Company Owner under a group health plan
Document the sum of all retirement plan funding that was paid by the Company Owner (do not include funding that came from the employee's out of their paycheck deferrals
Treasury Secretary Steven Mnuchin announced yesterday that small businesses can start applying for the Paycheck Protection Program today. Applications can be received by any existing SBA lender or through any federally insured depository institution, federally insured credit union, and Farm Credit System institution that is participating.
We must inform you that there are unanswered questions the financial institutions are trying to address with Treasury. The current uncertainty regarding the program may result in delays in when you can apply with your financial institution. We encourage you to reach out to your business banker or branch manager to discuss their application process in more detail.
We will keep you informed on these developments.
Dear Friends, Clients, Colleagues:
Twenty-six years ago I took a risk and opened my own tax and accounting firm. It has been one of the most rewarding and challenging experiences of my life. Some of you may even remember meeting in my home to discuss taxes while my kids were running through my office. I am humbled to have grown this firm to where it is today, all thanks to my dedicated staff and loyal clients. I cannot be more grateful for the opportunity to serve your tax and accounting needs.
At this time, I am very pleased to announce that James Marshall, a colleague of many years, will be joining and ultimately taking over my practice. This will provide me with more time to spend with family and to pursue interests outside of accounting, including the remote possibility of tackling my wife’s to-do list.
I believe that James’ calm demeanor, work ethic, and extensive tax and accounting knowledge will be great assets in seamlessly transitioning the firm. James graduated from Penn State University in 1991 with a BS in Accounting & Finance. He joined the Big 4 Accounting Firm Price Waterhouse in 1992 (now PricewaterhouseCoopers – PwC) and subsequently completed a Masters in Taxation Degree at American University in 2010. Seeking more time with his family, James left PwC after 17 years and started J Marshall & Associates LLC in July 2008.
James grew up in Harrisburg, Pennsylvania. After graduating high school, James joined the Pennsylvania Air National Guard, serving our country for 29 years prior to retiring as a Lieutenant Colonel in December 2015. He has been married to his wife Camilla for 13 years and together they have two sons, James III, 10 and Joshua, 8.
Effective August 1, 2018, I became a member of J Marshall & Associates LLC. The combined firms will do business under the trade name of Marshall and Reumont CPAs. All staff at Reumont CPA, including myself, have transitioned to the combined firm and will continue to support your tax and accounting needs, headquartered at our Silver Spring office on Tech Road. Accordingly, you will not experience significant change other than the way we answer the phone or update our website.
We are excited about this change and are happy to field any questions or concerns that this time. I greatly value our relationship and I look forward to continuing them as I gradually transition into retirement over the next few years.
David A. Reumont CPA CFP CVA MAFF PFPS
David A. Reumont CPA, PC
Great news--perhaps the IRS really does care!!
While the Maryland legislature still has work to do to fix the “free vasectomies” insurance mandate for future years so as to not disqualify Health Savings Accounts-qualified High Deductible Health Plans, the IRS has granted retroactive relief for 2018 and for 2019 as well if needed. So employees and individuals can once again make pre-tax contributions to their HSAs for 2018 and contributions made earlier this year will not be subjected to penalties. Note—You must still have an otherwise HSA-qualified HDHP and the vasectomy clause must be the only reason for HSA disqualification. Following is an excerpt from the IRS.
The Treasury Department and the IRS are aware that certain states require benefits for male sterilization or male contraceptives to be provided without a deductible, and that individuals have enrolled in health insurance policies and other arrangements that otherwise would qualify as HDHPs with the understanding that coverage for male sterilization or male contraceptives without a deductible did not disqualify the policies or arrangements from being HDHPs. The Treasury Department and IRS also understand that certain states may wish to change their laws that require benefits for male sterilization or male contraceptives to be provided without a deductible in response to this notice, but may be unable to do so in 2018 because of limitations on their legislative calendars or for other reasons. Until these states are able to change their laws, residents of these states may be unable to purchase health insurance coverage that qualifies as an HDHP and would be unable to deduct contributions to an HSA.
Accordingly, this notice provides transition relief for periods before 2020 (including periods before the issuance of this notice), to individuals who are, have been, or become participants in or beneficiaries of a health insurance policy or arrangement that provides benefits for male sterilization or male contraceptives without a deductible, or with a deductible below the minimum deductible for an HDHP. For these periods, an individual will not be treated as failing to qualify as an eligible individual under section 223(c)(1) merely because the individual is covered by a health insurance policy or arrangement that fails to qualify as an HDHP under section 223(c)(2) solely because it provides (or provided) coverage for male sterilization or male contraceptives without a deductible, or with a deductible below the minimum deductible for an HDHP.
Should you have any questions, Reumont CPA is here to help.
A significant legislative issue related to health savings accounts (or HSAs) and high-deductible health insurance plans (or HDHPs) could impact you in the near future. The Contraceptive Equity Act was enacted in Maryland in 2016. Effective on Jan. 1, 2018, the Act mandates that male contraceptive services (vasectomies) must be covered as a preventive service — i.e., without any deductible or cost-sharing required.
HSA-qualified HDHPs are prohibited from covering any benefits before the deductible is met, except for IRS-approved preventive care services. This effectively means HSAs may be no longer available in Maryland, since the Contraceptive Equity Act made no exemption for HSA-qualified HDHPs. This would be a big loss to Marylanders as 2 out of 3 Americans rely upon the use of a HDHP in conjunction with an HSA account to combat rising health insurance costs.
I encourage you to read on if:
- You are an individual planning to make additional contributions into your HSA for calendar year 2018—either directly or via payroll deduction: You may want to delay your 2018 contributions until dust has settled. Meanwhile, perhaps you can top off your account for calendar year 2017 by making a direct contribution before April 15th if you have not already maxed out; if you do this, be sure to designate the contributions as catch up for year 2017.
- You are an individual who was planning to start an HSA account in 2018: Consider putting in just a few dollars or whatever minimum the financial institution will accept for the purpose of activating the account; then wait until dust has settled before making additional contributions.
Why the few dollars? To keep any penalties to a minimum while simultaneously trying to establish an earlier start date for your new HSA account so more of you upcoming medical expenses will qualify for payment via the HSA. For example, let's say you create an HSA account on 1/2/18 by contributing $5 and then sit tight. In between account creation and a legislative fix to allow contributions for 2018, your toboggan collides with a tree and you incur $1,200 in medical expenses. Your HDHP will not cover these expenses since you have not yet met your deductible. Having the HSA account in place before the accident may enable you to ultimately use pre-tax dollars to pay those bills. How do we figure that when you only have $5 in the account??
Once the dust settles, and the green light is back on for making contributions, you can put more money into the HSA account and then pay the bills directly from the HSA account. Or, if you've already paid the bills directly from your pocket, you can put more money into the HSA account and then reimburse yourself. Either way, you've saved money by using pre-tax dollars to pay. At a minimum, you've saved income taxes; if you contribute via a cafeteria plan at work, you've also saved social security and Medicare taxes.
- You work for a bank: Consider policy changes/exposures/client communications in regards to accepting new HSA accounts as well contributions for 2018 into HSA for Maryland residents.
- You are a payroll service provider: Consider policy changes/exposures/client communications in regards to accepting new HSA accounts as well contributions for 2018 into HSA for Maryland residents. A significant portion of HSA contributions occur via payroll activity—via employee cafeteria plan elections and/or via contributions employers "gift" on your behalf. HSA contributions made via payroll generally impact the calculation of social security and Medicare tax withholdings and employer match.
- You are a health insurance broker: Consider alerting employers to issue/helping evaluate exposures/employee communications and payroll strategies. Note, cessation of HSA contributions via a cafeteria plan will result in more tax to both employee and the employer (FICA match.)
If the IRS determines after Jan. 1, 2018 that male sterilization is a preventive service AND that position is treated retroactively, no further legislative action will be needed. However, if no such determination is made, new Maryland legislation would be required to preserve HSA contributions in Maryland.
Emergency legislation is expected to be introduced in the upcoming General Assembly session, which convenes on Jan. 10. If this legislation is passed in the 2018 session, there is still a strong possibility it will NOT BE retroactive to Jan. 1, 2018.
Please email Mari@reumontcpa.com if you have any questions.
"Tax Cuts and Jobs Act" (TCJA)
Congress has passed the tax reform law, commonly called the "Tax Cuts and Jobs Act" (TCJA). It is the biggest federal tax law overhaul in 31 years, and it has both good and bad news for taxpayers.
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While the changes are significant, there is one item in particular that all taxpayers should consider doing before December 31, 2017 and that is to pay all state income taxes and real estate income taxes due for 2017 or earlier years before December 31, 2017.
Beginning in 2018 the tax deduction for the combination of state, local and real estate taxes will be capped at $10,000 per year. The provision only pertains to schedule A expenses (itemized deductions).
So check your 2016 Form Schedule A and add together the real estate taxes and state income taxes. If the combination is greater than $10,000, pay your 2017 state estimated payments, any additional estimated state income taxes and any real estate taxes currently due before December 31, 2017. If you are unsure, please contact our firm as soon as possible.
Highlights of the new tax reform law:
Below are highlights of some of the most significant changes affecting individual and business taxpayers. Except where noted, these changes are effective for tax years beginning after December 31, 2017.
- • Drops of individual income tax rates ranging from 0 to 4 percentage points (depending on the bracket) to 10%, 12%, 22%, 24%, 32%, 35% and 37% — through 2025
- • Near doubling of the standard deduction to $24,000 (married couples filing jointly), $18,000 (heads of households), and $12,000 (singles and married couples filing separately) — through 2025
- • Elimination of personal exemptions — through 2025
- • Doubling of the child tax credit to $2,000 and other modifications intended to help more taxpayers benefit from the credit — through 2025
- • Elimination of the individual mandate under the Affordable Care Act requiring taxpayers not covered by a qualifying health plan to pay a penalty — effective for months beginning after December 31, 2018
- • Reduction of the adjusted gross income (AGI) threshold for the medical expense deduction to 7.5% for regular and AMT purposes — for 2017 and 2018
- • New $10,000 limit on the deduction for state and local taxes (on a combined basis for property and income taxes; $5,000 for separate filers) — through 2025
- • Reduction of the mortgage debt limit for the home mortgage interest deduction to $750,000 ($375,000 for separate filers), with certain exceptions — through 2025
- • Elimination of the deduction for interest on home equity debt — through 2025
- • Elimination of the personal casualty and theft loss deduction (with an exception for federally declared disasters) — through 2025
- • Elimination of miscellaneous itemized deductions subject to the 2% floor (such as certain investment expenses, professional fees and unreimbursed employee business expenses) — through 2025
- • Elimination of the AGI-based reduction of certain itemized deductions — through 2025
- • Elimination of the moving expense deduction (with an exception for members of the military in certain circumstances) — through 2025
- • Expansion of tax-free Section 529 plan distributions to include those used to pay qualifying elementary and secondary school expenses, up to $10,000 per student per tax year
- • AMT exemption increase, to $109,400 for joint filers, $70,300 for singles and heads of households, and $54,700 for separate filers — through 2025
- • Doubling of the gift and estate tax exemptions, to $10 million (expected to be $11.2 million for 2018 with inflation indexing) — through 2025
- • Replacement of graduated corporate tax rates ranging from 15% to 35% with a flat corporate rate of 21%
- • Repeal of the 20% corporate AMT
- • New 20% qualified business income deduction for owners of flow-through entities (such as partnerships, limited liability companies and S corporations) and sole proprietorships — through 2025
- • Doubling of bonus depreciation to 100% and expansion of qualified assets to include used assets — effective for assets acquired and placed in service after September 27, 2017, and before January 1, 2023
- • Doubling of the Section 179 expensing limit to $1 million and an increase of the expensing phase-out threshold to $2.5 million
- • Other enhancements to depreciation-related deductions
- • New disallowance of deductions for net interest expense in excess of 30% of the business's adjusted taxable income (exceptions apply)
- • New limits on net operating loss (NOL) deductions
- • Elimination of the Section 199 deduction, also commonly referred to as the domestic production activities deduction or manufacturers' deduction — effective for tax years beginning after December 31, 2017, for non-corporate taxpayers and for tax years beginning after December 31, 2018, for C corporation taxpayers
- • New rule limiting like-kind exchanges to real property that is not held primarily for sale
- • New tax credit for employer-paid family and medical leave — through 2019
- • New limitations on excessive employee compensation
- • New limitations on deductions for employee fringe benefits, such as entertainment and, in certain circumstances, meals and transportation
More to consider
This is just a brief overview of some of the most significant TCJA provisions. There are additional rules and limits that apply, and the law includes many additional provisions. Contact us to learn more about how these and other tax law changes will affect you in 2018 and beyond at 301-622-1200 or 31-475-0100.
© 2017 Reumontcpa.com
With many valuable tax provisions made permanent by last December's PATH Act while others were extended only temporarily, tax planning is more complicated, yet more important than ever. To save the most, you need to be sure you're taking advantage of every tax break you're entitled to.
This is exactly what our Tax Planning Guide is designed to help you do. We hope you find this complimentary copy helpful in understanding recent tax-related legislation and identifying steps you can take to reduce your personal and business tax liability. Click HERE to read our guide.
As you look through the guide, please note the strategies and tax law provisions that apply to your situation or that you would like to know more about. Then contact us with any questions you may have about these or other tax matters.
If you have an ownership interest in or signature or other authority over a financial account located outside the US (aka, an “off-shore account”) with aggregate balances of $10K or more-- listen up! Effective in 2017, the Treasury Department has accelerated the date for filing FinCEN Form 114 (from June 30) to April 15th in order to align the FBAR with the filing deadline for individual income tax returns. Again, you do not want to miss this deadline. The penalties are (1) if non-willful, up to $10,000 or (2) if willful, up to the greater of $100,000 or 50% of the account balance; criminal penalties may also apply. The good news is that you can request an extension to October 15th if necessary—but make sure you do so by April 15th!
Note: Despite the alignment of due dates, the FinCEN Form 114 is not attached to your Form 1040 individual income tax return. Instead, it must be filed electronically at http://bsaefiling.fincen.treas.gov. However, don’t forget to consider income generated by your off-shore accounts. This may be taxable on your Form 1040. US citizens and residents are responsible for reporting their worldwide income on their tax returns, whether FinCEN 114 reporting is required or not.
And watch for personal FBAR filing requirements even when the money is not yours. For instance, if you own over 50% of the stock of a corporation that has foreign accounts or if you have signature authority over foreign accounts belonging to your employer, you may have a personal reporting requirement in addition to your corporation having a filing requirement.
And what does FBAR stand for? Glad you asked: Report of Foreign Bank and Financial Accounts
Early filers eligible for the Earned Income Credit (EITC) or Additional Child Tax Credit (ACTC) on their 2016 returns may experience a delay in receiving their refund. A high percentage of fraudulent returns are submitted during the early days of tax season. The IRS is implementing new measures to counteract this fraud. As a result, refunds for early filers with the EITC and/or ACTC will be held until 2/15/17. You can still file your returns early—just allow more time to received your anticipated refund if you are a very early filer. Normal processing time is expected for all but the very early filers.
We were surprised to find some tax preparers at the IRS National Tax Forum still confused on this one, so in case it slipped past your radar screen as well….
Payments made by credit card are no longer subject to reporting on Form 1099-Misc. Why? A new form 1099-K was introduced wherein credit card processing companies became responsible for this reporting. So ignore payments you made by credit card when (a) determining if there is a 1099 filing requirement and (b) when reporting the amount paid.
The IRS now requires that employers submit 2016 forms W2 and 1099-Misc with Box 7 “Nonemployee Compensation” forms to the IRS by January 31, 2017 regardless of whether you submit the forms electronically or via hardcopy. In prior years, hardcopy submissions were due to the IRS at the end of February and electronic submissions were due the end of March. No longer! The objective of the accelerated due date is to help the IRS combat fraudulent 1040 income tax filings. So if you are an estate, trust, employer, sole proprietor or possibly a landlord who may be required to file form 1099-Misc with Box 7, please plan accordingly. The penalties for late filing are quite significant. And don’t forget payments to attorneys! The IRS require that amounts of $600 or more paid for legal are to be reported on form 1099-Misc Box 7 “Nonemployee Compensation” whether paid directly to an attorney or to a law firm. The due dates for other forms 1099 have not changed.
Not sure if you have a filing requirement or need help with filing? Call Reumont CPA.
The County’s new Earned Sick and Safe Law goes into effect on October 1. The law requires most employers in the County to provide earned sick and safe leave to employees for work performed in Montgomery County. The intent of the law is to provide employees with paid leave or time off to take care of things such as sickness, family illnesses or domestic violence.
Click HERE to learn more about the new law
Changes are happening everyday to our tax laws and we wanted to make sure our clients are aware of all the changes. Please check back often for new updates that may affect you and/or your business. See below for new legislation that was recently passed that may have an inpact on your taxes.
Deduction and Capitalization of Expenditures Related to Tangible Personal Property
On September 19, 2013 the Internal Revenue Service issued new final Regulations Regarding Deduction and Capitalization of Expenditures Related to Tangible Personal Property. These Regulations are in effect for tax years beginning on or after January 1, 2014. The Internal Revenue Service also followed up with two additional Revenue procedures on January 24, 2014 and February 28, 2014 providing further clarification of certain areas in these new rules. These incredibly complex Regulations require you to keep much better records for repairs, maintenance, materials and supplies, and require you to specifically analyze each of these items costing over $2,500.00, assuming you do not have audited financial statements and make the annual de minimis safe harbor election in filing your timely filed (including extension) income tax returns. If you don’t have procedures in place the items costing over $200.00 would require additional analysis and the deduction for these items might be limited.
These new regulations apply to all businesses including rental properties, farms, sole proprietorships, partnerships, corporations (regular and S) and non-profits. So no matter what business form you are required to file, 1040 (individual), fiduciary (1041), partnership (1065), corporations (1120 or 1120S) or Non-Profits (990), these rules affect your tax return.
We are writing this letter to help you understand that if you do not analyze these individual items and classify them appropriately we will be required to spend substantial additional professional time, with substantial additional fees to do so.
Below is a summary of the new rules in effect for 2014 and what you will need to do to comply with the new IRS requirements with the election of the de minimis safe harbor election made with a timely filed tax return (including extension).
Materials and Supplies
The new Regulations allow your business to expense any individual material or supplies costing $200.00 or less (per invoice, or per item), or which you expect to last less than 12 months, or fuel, lubricants or any similar items that will be used in 12 months or less.
Action: Please add a new expense account to your accounting system titled “De Minimis Materials and Supplies” and enter any expense meeting the above qualifications in this account. Materials and supplies costing more than $200.00 that will need to be individually analyzed under the rules below to determine if they are qualified expenses to be deducted in the current year, capitalized until used or treated as equipment that must be depreciated over several years. Special rules apply for extra parts (rotable parts).
Equipment, Repairs and Maintenance
You are now allowed to write off any individual equipment item or equipment repair or maintenance item costing $500 or less (per invoice or per item). For buildings a different rule applies as discussed below.
Action: Please add a new expense account to your accounting system titled “De Minimis Equipment, Repairs and Maintenance” and enter any expense meeting the above qualifications in this account but refrain from adding any items above that cost to this account. Equipment, repair and maintenance items costing more than this will generally be required to be individually analyzed under the rules below to determine if they are qualified expenses, capitalized as materials supplies (deductible when used or disposed) or treated as equipment that must be depreciated over several years.
Building Repairs & Maintenance
If your building has a cost basis of $1,000,000 or less a special rule applies. Any repairs that are expected to occur more than once in ten years, and costing less than $10,000 individually may be written off as repairs.
Items that are not expected to be replaced more once in ten years must also be examined individually under the rules below to determine if they may be treated as expenses or depreciable assets.
Expenses Above the Limits
The IRS now requires you to examine each individual item outside of the above limits to determine if it has results in a betterment, restoration or adaptation of the main unit of property. A unit of property is now defined as the inter-related parts composing one larger unit.
For example a unit of property is a car composed of inter-related parts, so any repairs to the car must be examined as to whether they are a betterment, restoration or adaptation of the car as a whole rather than its individual components.
For buildings the test must first be applied to the building as a whole and then applied to its sub components of HVAC, plumbing, electrical, structure, elevators, security, fire protection or gas distribution.
Any costs resulting in betterment, restoration or adaptation under these rules must capitalize and depreciated; otherwise it is expensed as repairs.
Betterment is defined as fixing a condition that existed at purchase, or an increase in the physical size or capacity of an asset. Betterments must be capitalized and depreciated so they should be added to your building account.
A restoration is generally defined as a cost to return a non-functional asset to use, the cost of rebuilding an asset after the end of its depreciable life or replacing a major component of the unit of property.
For example a transmission replacement would be the replacement of a major component of a unit of property of a truck and must be capitalized and depreciated.
Finally, an adaptation cost is incurred to change the function of a piece of equipment or property to a different use, and must also be capitalized and depreciated.
We are sending a sample accounting policy for the De Minimis safe harbor under these new rules which we recommend be adapted to your business for use in 2014 and after. You need to have a policy for each of your businesses. We will have a copy in a PDF and Word format available on our website, just complete the business or taxpayer’s name, print and sign it. Please send us a copy once completed for our files, and you need to keep the policy with your permanent records.
Also, we are enclosing a summary of the steps to analyze your expenses in applying these rules under the Repairs and Capitalization Guidelines of these new Regulations, which outlines the steps that need to be taken on each purchase. It is complicated but needs to be applied to each purchase.
These new Regulations require many additional steps and analysis and are generally unfriendly to small businesses. We would be happy to discuss them with you, please call us to schedule an appointment with you or your accounting staff to help you keep the costs of IRS compliance down.
David A. Reumont CPA, PC.
With many valuable tax provisions made permanent by last December's PATH Act while others were extended only temporarily, tax planning is more complicated, yet more important than ever. To save the most, you need to be sure you're taking advantage of every tax break you're entitled to.
This is exactly what our Tax Planning Guide is designed to help you do. We hope you find this complimentary copy helpful in understanding recent tax-related legislation and identifying steps you can take to reduce your personal and business tax liability. Click HERE to read our guide.
As you look through the guide, please note the strategies and tax law provisions that apply to your situation or that you would like to know more about. Then contact us with any questions you may have about these or other tax matters.