Last night President Trump signed the Consolidated Appropriations Act, 2021, the act includes $900 billion in Covid-19 Stimulus. While we are in the processing of studying the new law so that we can present a Webinar that lays out what it means and what to expect we wanted to a little preview of what the law contains.
- Expect to see an additional $600.00 per person in Economic Stimulus Payments for qualifying taxpayers including dependents under 17 years of age.
- Unemployment benefits paid by the federal government have been extended through March 14, 2021, at a rate of $300.00 per week.
- Charitable Contributions of $1,200.00 on Married Filing Jointly returns and $600.00 for all others may be deducted as an adjustment to income even if they don’t itemize for 2020 and 2021.
- Earned Income Credit & Child Tax Credits may be calculated using 2019 Earned income if it provides a larger credit than 2020 income.
- Qualifying businesses may not tax the Employee Retention Credit even if they received forgiveness on a PPP loan.
- Employee Retention Credit has increased from 50% to 70% and the revenue decrease required is lowered from 50% to 20%.
- Families First Coronavirus Response Act, credit extended to the first quarter of 2021.
- Business meals will be 100% deductible for 2021 and 2022 as long as the meal is provided by a restaurant.
- Expenses paid with funds from forgiven PPP loans will be tax-deductible and PPP loans forgiven will add to the tax basis of the owner.
- A Second round of PPP loans PPP2 will be available to business with less than 300 employees that has a 25% or more reduction in gross revenue in 2020 over 2019.
- The bill funds many the government along with many other programs that are not Covid-19 related for the coming year.
In a recent revenue ruling, the IRS presented two situations in which a taxpayer used funds from a Paycheck Protection Program (PPP) loan to pay eligible expenses. In the first situation, the taxpayer applied for forgiveness of the loan in November 2020, but did not receive a decision from the lender before the end of 2020. In the second situation, the taxpayer did not apply for forgiveness of the loan before the end of 2020, but expects to in 2021. Both taxpayers satisfied all requirements under the CARES Act for forgiveness of the loans. The IRS ruled that a PPP loan recipient that paid or incurred certain otherwise deductible expenses may not deduct those expenses in the tax year in which they were paid or incurred if, at the end of such tax year, the taxpayer reasonably expects to receive forgiveness of the covered loans, even if the taxpayer has not submitted an application for forgiveness of the loan by the end of such tax year. Rev. Rul. 2020-27.
The IRS has released final regulations (TD 9935) addressing Section 1031 like-kind exchanges. The final regulations adopt, with modifications, proposed regulations (REG-117589-18) issued in June 2020 and implement the TCJA’s limitation of Section 1031 treatment to exchanges of real property held for use in a trade or business or for investment. Under the final regulations, real property generally includes land, anything permanently built on or attached to land, and property characterized as real property under applicable state or local law. In addition, certain intangible property, such as leaseholds and easements, qualifies as real property under IRC Sec. 1031 . The final regulations also provide a rule addressing the receipt of personal property that is incidental to real property received in a like-kind exchange. News Release IR 2020-262.
Now is the time to start thinking about your 2020 income taxes. This tax planning worksheet is designed to assist you uncover areas that could reduce help reduce your tax bill if you are self-employed. Review each area below marking an X is the box when an area applies to your situation. Record questions in the notes box. Then call your tax advisor to review the strategies you have marked along with your questions.
|Schedule C Year End Tax Planning Guide|
|Here are some ideas you can use to help reduce your 2020 and 2021|
||Form of Business. Consider whether another legal form of business is appropriate [for example, corporation, subchapter S corporation or limited liability company (LLC)], given such issues as the deduction for qualified business income, legal liability and double taxation?|
||Hobby Loss Rules. If there is consistently a net loss, review the business to determine if it is subject to the hobby loss rules and, if so, consider planning strategies to help avoid these rules.|
||Employing Family Members. Consider the tax benefits of employing family members in the business such as (1) shifting income to lower tax rate family members; (2) reducing self-employment (SE) income by employing an under-age- 18 child; and (3) if the spouse is the business’s only employee, obtaining a 100% deduction for health costs by setting up a medical reimbursement plan for the spouse/employee. The increased wages for the business may also help increase the QBI deduction.|
||Additional Medicare Tax. Self-employment earnings over a certain threshold are subject to the 0.9% additional Medicare tax. The threshold is $200,000 ($250,000 for joint filers; $125,000 if MFS), reduced by wages considered for FICA tax. Taxpayers potentially subject to the additional Medicare tax might consider using an S corporation to reduce that tax.|
||Qualified Business Income. If taxable income exceeds $326,600 (for MFJ; $163,300 for Single and HOH; $163,300 for MFS), strategies for maximizing the QBI deduction should be considered?|
||Retirement Plan Options. The self-employed taxpayer’s should consider taking advantage of the deductions allowed for contributions to profit-sharing, SIMPLE, or SEP retirement plans. A 401(k) plan is also an option, especially if there are no other employees.|
|Health Care Costs. Self-employed taxpayer’s should consider the tax advantages of establishing and contributing to a health savings account (HSA). HSAs can be set up for individuals with certain high- deductible health insurance policies. Also, eligible sole proprietors that do not offer group health insurance coverage to their eligible employees should consider offering a qualified employer health reimbursement arrangement (QSEHRA).|
||Medical Insurance Premiums. Self-employed taxpayer’s generally claim medical insurance premiums as an adjustment to income rather than an itemized deduction. Self-employed taxpayers who can employ only their spouse in their business may be able to provide health insurance to the employee/spouse and deduct the premiums on Schedule C, which reduces SE income. S-Corporation shareholders need to be sure health insurance is included on their W-2 and they they have wages.|
||Business Property Purchased. Consider using the Section 179 deduction to expense qualifying property to reduce SE income and avoid the midquarter convention. Also consider purchasing business property eligible for bonus depreciation. Section 179 can be used to expense up to $1,040,000 in 2020.|
||Home Office. Are you or could you be eligible to claim business deductions for a portion of the home used exclusively and regularly as the principal place of business? This opportunity may be more frequently encountered as taxpayers shift to operating a business from their home full time in response to the COVID-19-related economic downturn and social distancing considerations.|
||Business Travel. If you are incurring significant travel costs, review your travel policies and procedures with your tax advisor to be sure you have required records. Take advantageof planning strategies to ensure travel qualifies as “away from home,” convert commuting expenses into deductible travel, preserve deductions for combined business and pleasure travel, and ease the recordkeeping burden.|
||Entertainment Expenses. Since business entertainment expenses are no longer deductible, pay close attention to these to minimize the amount of nondeductible expenses? Be sure to keep non-deductable entertainment seperated from deductable means and travel.|
Many businesses have employees telecommuting due to Covid-19. Because of this and the fact that having an employee working in another state can create nexus to that state making the business responsible for paying income taxes to that state even though the only activity that take place is telecommuting by an employee. Many but not all states have addressed this issue with specific guidance or through information issued by their state tax departments.
To protect your business from becoming subject to taxes for states that employees temporarily reside it’s important to know what states will and what states will not count these temporary employees that working outside their normal location due to Covid-19 as creating nexus for tax purposes.
The following states through guidance issued by their tax departments, or by statute or other means have addressed this issue and determined that temporary workers located in their state due to Covid-19 will NOT create a nexus for business income taxes. These states are: Alabama, Arizona, California, District of Columbia, Indiana, Kentucky, Louisiana, Maine, Maryland, Massachusetts, Michigan, Minnesota, Mississippi, New Jersey, North Dakota, Ohio, Oklahoma, Oregon, Rhode Island, South Carolina, and Wisconsin.
It should be noted that the remaining states ether have not yet provided guidance and employees temporary working from these states due to Covid-19 may or may not create an ongoing nexus which creates an income tax nexus for the business to the state.
This area is subject to continuing updates and even the states that have issued guidance have specific rules, information provided here should be relied on as definitive and every business with employees temporarily located in other states due to Covid-19 or for any other reason should check with their tax advisor and or state taxing authorities in the states in which they have employees temporarily or permanently residing. The information included here was deemed accurate as of 12/01/2020 but is subject to changes and revisions.
Senate Finance Committee Chairman, and Ranking Member Disagree With Treasury’s PPP Guidance On Deductibility
Senate Finance Committee Chairman Chuck Grassley, R-Iowa, and Ranking Member Ron Wyden, D-Ore., have criticized Treasury’s latest PPP guidance on deductibility as missing “the mark.”
“Since the CARES Act, we’ve stressed that our intent was for small businesses receiving [PPP] loans to receive the benefit of their deductions for ordinary and necessary business expenses,” Grassley and Wyden said in a November 19 joint statement. “We explicitly included language in the CARES Act to ensure that PPP loan recipients whose loans are forgiven are not required to treat the loan proceeds as taxable income. As we’ve stated previously, Treasury’s approach in Notice 2020-32 effectively renders that provision meaningless.”
Grassley and Wyden went on to criticize Treasury’s choice to “double down” on its position, which ultimately increases the tax burden on small businesses. “Small businesses need help maintaining their cash flow, not more strains on it,” they said.
Additionally, the Senate’s top tax writers alluded to the possibility of addressing this issue in year-end legislation, but encouraged Treasury in the meantime to reconsider its position. Notably, Grassley and Wyden are both cosponsors of Sen. John Cornyn’s, R-Tex., bipartisan Small Business Expense Protection Act, (S. 3612), which would clarify congressional intent that ordinary business expenses paid with forgiven PPP loans are deductible.
Treasury and the IRS have released two pieces of guidance on the tax treatment of expenses paid for with a Paycheck Protection Program (PPP) loan.
Rev. Rul. 2020-27, released late in the evening on November 18, provides sub-regulatory guidance on whether a PPP loan participant who 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 the loan to be forgiven. Additionally, the revenue ruling provides guidance regarding PPP loan participants who have not applied for forgiveness in 2020 but intend to in the following taxable year.
The PPP, created under the Coronavirus Aid, Relief, and Economic Security (CARES) Act, (P.L. 116-136), provided forgivable loans to eligible small businesses, certain non-profit organizations, veteran’s organizations, Tribal business concerns, independent contractors, and self-employed individuals adversely impacted by the COVID-19 pandemic.
Generally, Treasury states that if a business reasonably believes a PPP loan will be forgiven, expenses related to the loan are not deductible, regardless of whether the business has yet filed for forgiveness. However, in the case where a PPP loan is expected to be forgiven in the future but is, in fact, not, applicable business expenses can be deducted.
𝗗𝗶𝗱 𝘆𝗼𝘂 𝗸𝗻𝗼𝘄 𝘁𝗵𝗮𝘁 𝘆𝗼𝘂 𝗱𝗼𝗻’𝘁 𝗵𝗮𝘃𝗲 𝘁𝗼 𝗯𝗲 𝗮 𝗹𝗲𝗴𝗮𝗹 𝗿𝗲𝘀𝗶𝗱𝗲𝗻𝘁 𝗼𝗳 𝘁𝗵𝗲 𝗨.𝗦. 𝘁𝗼 𝗯𝗲 𝗮 𝘁𝗮𝘅 𝗿𝗲𝘀𝗶𝗱𝗲𝗻𝘁 𝗮𝗻𝗱 𝗵𝗮𝘃𝗲 𝗮𝗻 𝗼𝗯𝗹𝗶𝗴𝗮𝘁𝗶𝗼𝗻 𝘁𝗼 𝗳𝗶𝗹𝗲 𝗮 𝗨.𝗦. 𝘁𝗮𝘅 𝗿𝗲𝘁𝘂𝗿𝗻?
Non-U.S. citizens that live in the U.S. as residents are required to file U.S. income tax return and pay tax on their worldwide income even if their status in the U.S. is not that of legal resident.
For tax purposes a non-U.S. citizen is a resident of they meet one of two tests.
1) Under the lawful permanent residence test, a person is a resident alien if the person is a lawful permanent U.S. resident under the U.S. immigration laws.
2) Under the substantial presence test, a person is a resident alien if (i) the person is physically present in the current year for at least 31 days and (ii) the sum of the days present in the U.S. during the current tax year, plus one-third of the days for the immediately preceding tax year, plus one-sixth of the days for the second preceding tax year equals 183 or more. An individual who meets the substantial presence test can remain a nonresident alien he or she is present for fewer than 183 days during the current year, and, during this period, he or she maintains a closer connection with a foreign country. Certain days are excluded, including days present for medical reasons, commuting from Canada or Mexico, and present as a foreign government related individual, teacher or trainee, student, or professional athlete. An individual otherwise classified as a resident alien under these rules can be classified for U.S. tax purposes as a nonresident alien under a U.S. tax treaty if he or she is a dual- resident taxpayer and a resident of the treaty country under the treaty provisions.
It’s also important to remember that U.S. Residents, like citizens are taxable on their world wide income and that the statute of limitations for tax filing does not begin to run until the returns are filed.
Non-resident aliens may also be liable for taxes on U.S. Source income such as U.S. business income, rental income or capital gains generated in the U.S. https://rmsaccounting.com/non-resident-alien/
Because the rules are complex it’s best to discuss your situation with a tax professional that understands the complex laws and rules surrounding taxation if you have U.S source income or spend substantial time in the U.S.
On September 3rd, the IRS held a teleconference for the payroll industry regarding the postponement (commonly referred to as deferral) of the employee’s share of Social Security tax. The conference allowed the IRS to clarify information provided in Notice 2020-65 along with an opportunity for the payroll provider community to ask the IRS questions about the program and its implementation. Both the clarifications and the questions along with the answers to these questions provided by the IRS.
Definition of applicable wages. The IRS clarified that applicable wages are determined on a pay period-by-pay period basis. Specifically, the employer should look at the pay period and determine if whether the employee is eligible for the postponement.
Postponement is optional. The IRS clearly stated that the postponement of the tax is optional for the employer. However, the IRS stated the Notice does not address how to implement the relief so employers are permitted to solicit input from their employees regarding the postponement as well as permitting employees to opt in or opt out if the employer elects to take the postponement.
Employer liability. As the notice clarifies, the employer is the “Affected Taxpayer” and the IRS stated that if an employer is unable to withhold from an employee during January 1, 2021 through April 30, 2021, the employer remains liable for the employee’s share of Social Security tax and must remit the taxes by April 30, 2021 to avoid penalties, interests, and additions. For example, if an employee should terminate on January 2, 2021 before an employer can arrange withholding, the employer remains liable for the postponed amount.
Form 941 reporting. The IRS noted that employers will be reporting the postponement of the employee’s share of Social Security on Form 941 similarly to how employers currently report the deferral of the employer’s share of Social Security (see Payroll Guide ¶20,908). The postponed employee’s share of Social Security tax and deferred employer’s share of Social Security will be reported on line 13b with the postponed employee portion broken out on line 24 in Part 3 of Form 941. The IRS anticipates the final version of Form 941 to be available late September in time for the filing in October.
There will be no schema changes for the 3rd quarter of Form 941. The same elements will be used with new data populations.
Questions & Answers
Repayment of postponed employee tax. The IRS noted that the repayment process will be similar to the repayment process for the deferral of employer’s share of Social Security tax. The IRS is currently working on guidance on this issue. Rather than a tax deposit, an employer would receive a notice.
Employee requests opt-in. A caller asked whether an employer is required to elect the postponement if an employee requests the relief. The IRS emphasized the postponement is optional and while nothing bars an employer from considering employee input, the employer remains the “Affected Taxpayer” and is not required to use the relief even upon an employee’s request.
Further guidance. When asked if further guidance would be issued on the topic, perhaps in the form of FAQs, the IRS replied that taxpayers with questions have been calling the Notice 2020-65 Hotline at (202) 317-5436. The hotline now features some answers to frequently asked questions. The IRS is looking into ways to get the information out as quickly as possible.
W-2 reporting. Two questions came up regarding W-2 reporting: (1) how postponed amounts would be reported; (2) how to report unrecovered tax for a terminated employee questioned about how the postponed is reported on Form W-2. The IRS stated it is currently working on W-2 guidance. However, it did note that if an employer should end up paying the tax without employee withholding, regular employment tax law would kick in. Like a gross-up, the amounts would qualify as wages. The IRS is working out some instructions on this scenario.
Eligibility for postponement. A caller asked if an employee has Year-to-Date (YTD) wages of $104,000 and during September 1, 2020 through December 31, 2020, the employee has a biweekly pay period where they earned less than $4,000, would the employee be eligible for the postponement. The IRS reiterated that the applicable wages are determined on a pay period basis and the YTD wages would not be considered.
Future forgiveness of postponed taxes. When asked if an employer elects not to use the relief, and Congress passes legislation that forgives the employee’s share of Social Security tax that was postponed, will amounts be refunded to employees. The IRS said it could not comment on the future impact of legislation.
2021 Form 941 reporting. The IRS confirmed that remitted 2020 postponed amounts as provided by a notice from the IRS would not be reported on the 2021 Form 941 or any other 2021 return.
Multiple pay periods. The IRS advised that employers think through the nuances of their pay structures and how the postponement would apply to a particular payment. For example, if an employee is on a bi-weekly pay period for wages and receives a quarterly commission check, the employer should determine eligibility on a pay period basis. The IRS emphasized that employers should do the best possible in applying the Notice.
One-off bonus. When asked about one-off bonuses, the IRS stated supplemental wages were not addressed in the Notice but some questions that may be guiding are whether the bonus has a separate pay period and what the equivalent amount is in terms of the threshold.
Schedule B reporting. The IRS noted that tax liability for a pay period are not impacted if an employer decides to elect the postponement. Because Schedule B refers to liability and not payments, employers should continue to enter the total tax liability for the period. Liability arises at the time when wages are paid. The IRS emphasized that the Presidential Memorandum authorized a postponement of the due date to withhold and pay and does not defer taxes.
Postponement for payment. A caller asked if it was possible to postpone the payment while not postponing the withholding. The IRS explained that the relief is for the withholding and payment of taxes. The IRS stated it would seem that if the relief is not taken for withholding, then relief would not be available for the payment.
While this guidance and the answers above will be helpful to many employers it needs to be understood that comments and answers provided by the IRS during this teleconference while helpful do not have the authority of law of even represent official guidance. In the coming weeks and months we expect the IRS will issue additional official notices and regulations on this subject matter.
08/29/2020 – Last night the IRS Issued Notice 2020-65 dealing with the employee social security tax deferral announced by the president on August 8, 2020, in a Memorandum to the Secretary of State. The Memorandum directed the Secretary of the Treasury to use his authority, pursuant to section 7508A of the Internal Revenue Code, to defer the withholding, deposit, and payment of certain payroll tax obligations. These obligations are the employee portion of social security tax under section 3102(a) or the railroad retirement tax equivalent under section 3202(a).
While the notice answers some questions it still leaves many questions unanswered and the deferral period starts only a few days from now.
What We Know From the Notice:
The deferral period is Sept 1, 2020 thru December 31, 2020 and it applies only to eligible employees that earn less than $4,000, bi-weekly or the equivalent amount based on their pay period, calculated on a pre-tax basis.
For qualifying workers, the deferral applies to the employee’s portion of Social Security taxes. This is the 6.2% of the total 7.65% of FICA taxes withheld from employees. The deferral does not affect the 1.45% that is designated for Medicare.
The Notice defines Affected Taxpayers not as employees, but as employers! It goes on to say “An Affected Taxpayer must withhold and pay the total Applicable Taxes that the Affected Taxpayer deferred under this notice ratably from wages and compensation paid between January 1, 2021 and April 30, 2021 or interest, penalties, and additions to tax will begin to accrue on May 1, 2021, with respect to any unpaid Applicable Taxes.” This means the repayment obligation is the responsibility of the employer and that the employer will be responsible for any interest and penalties on amounts not repaid.
It also makes clear that it is the employer’s responsibility to collect these deferred taxes from employees who participated in the deferral.
What We Don’t Know From the Notice:
The Notice doesn’t address what happens when an employee leaves the company or doesn’t make enough money to ratably pay back the tax, but it would appear that the obligation to make those payments remains with the employer.
It’s also fails to explain how this will be reported for tax purposes. We can only assume we’re going to see a revamped version of Form 941 (that’s a payroll tax form).
Also missing are any provisions for the self employed and it appears that self employed individuals have been purposely excluded.
Another very important missing item is a clear answer to the question of whether or not the deferral is optional, and if so, is it optional on the part of the employer or employee? While Treasury Secretary Mnuchin, has said that it would be optional, the notice contained no reference to this statement by the Secretary.
As you can see this notice is not the clear definitive statement that anyone wanted and with only days left until the deferral is scheduled to go into effect, those of us in the tax profession are left to argue over how we think things will shake out with very few definitive answers to many tough questions.
Notice 2020-65 https://www.irs.gov/pub/irs-drop/n-20-65.pdf
Presidential Memorandum on Deferring Payroll Tax https://www.whitehouse.gov/presidential-actions/memorandum-deferring-payroll-tax-obligations-light-ongoing-covid-19-disaster/