Economic Recovery Rebate Credit

The Economic Recovery Rebate Credit has caused many people to question their filing status. The amount of the credit as well as qualifying for the credit (payment) depends a lot on filing status and income. Dependents attending college have heard that they can get the credit only if their parents don’t claim them and that what they receive will be greater than the amount their parents would receive if they were claimed as a dependent.

The truth is that filing status and dependency are not based on how you get the most money. Filing status is based on circumstances. Married people must file either, Married Filing Jointly or Married Filing Separately unless they have not lived with their spouse at all during the last half of the year and provided more than half the expense of a household for a qualifying child or qualifying relative. Then they may qualify as a Head of Household.

If a taxpayer provides more than half the support of a Qualifying Child or Qualifying Relative, that person is a dependent of the taxpayer and should be included on the taxpayer’s return.

Thus, while it may seem prudent for a child that you support not to be shown on your return so that they can get an Economic Recovery Rebate Credit (payment), that is just not how the systems works. The question that must be answered is not, does someone else claim you as a dependent on their return, but could you be claimed by someone else as a dependent?

Chart of requirements for dependency

PPP and PPP2 Updates & Highlights

Payroll Protection Loan Update Banner

PPP updates include:

  • PPP borrowers can set their PPP loan’s covered period to be any length between 8 and 24 weeks to best meet their business needs;
  • PPP loans will cover additional expenses, including operations expenditures, property damage costs, supplier costs, and worker protection expenditures;
  • The Program’s eligibility is expanded to include 501(c)(6)s, housing cooperatives, direct marketing organizations, among other types of organizations;
  • The PPP provides greater flexibility for seasonal employees;
  • Certain existing PPP borrowers can request to modify their First Draw PPP Loan amount; and
  • Certain existing PPP borrowers are now eligible to apply for a Second Draw PPP Loan.

PPP2 takin a second bite:

A borrower is generally eligible for a Second Draw PPP Loan if the borrower:

  • Previously received a First Draw PPP Loan and will or has used the full amount only for authorized uses;
  • Has no more than 300 employees; and
  • Can demonstrate at least a 25% reduction in gross receipts between comparable quarters in 2019 and 2020.

For more information on SBA’s assistance to small businesses, visit sba.gov/ppp or treasury.gov/cares.

2020 Tax Organizer Avaliable

Did we complete your 2019 tax return?

If we completed your prior-year return we can provide you with a custom tax organizer that includes last year’s information so that you can compare it to this year’s information just send an email to info@RMSAccounting.com. Be sure to include your first and last name along with your address and phone number.

Your first tax year with RMS Accounting or just need help collecting your tax information?

Download our 2020 Tax Organizer right here.

2020 Tax Organizer

PPP Update – NEWS RELEASE – 01/08/2020

SBA and Treasury Announce PPP Re-Opening; Issue New Guidance

WASHINGTON – The U.S. Small Business Administration (SBA), in consultation with the Treasury Department, announced today that the Paycheck Protection Program (PPP) will re-open the week of January 11 for new borrowers and certain existing PPP borrowers. To promote access to capital, initially, only community financial institutions will be able to make First Draw PPP Loans on Monday, January 11, and Second Draw PPP Loans on Wednesday, January 13.  The PPP will open to all participating lenders shortly thereafter. Updated PPP guidance outlining Program changes to enhance its effectiveness and accessibility was released on January 6 in accordance with the Economic Aid to Hard-Hit Small Businesses, Non-Profits, and Venues Act.

This round of the PPP continues to prioritize millions of Americans employed by small businesses by authorizing up to $284 billion toward job retention and certain other expenses through March 31, 2021, and by allowing certain existing PPP borrowers to apply for a Second Draw PPP Loan.

“The historically successful Paycheck Protection Program served as an economic lifeline to millions of small businesses and their employees when they needed it most,” said Administrator Jovita Carranza.  “Today’s guidance builds on the success of the program and adapts to the changing needs of small business owners by providing targeted relief and a simpler forgiveness process to ensure their path to recovery.”

“The Paycheck Protection Program has successfully provided 5.2 million loans worth $525 billion to America’s small businesses, supporting more than 51 million jobs,” said Treasury Secretary Steven T. Mnuchin.  “This updated guidance enhances the PPP’s targeted relief to small businesses most impacted by COVID-19.  We are committed to implementing this round of PPP quickly to continue supporting American small businesses and their workers.”

Key PPP updates include:

  • PPP borrowers can set their PPP loan’s covered period to be any length between 8 and 24 weeks to best meet their business needs;
  • PPP loans will cover additional expenses, including operations expenditures, property damage costs, supplier costs, and worker protection expenditures;
  • The Program’s eligibility is expanded to include 501(c)(6)s, housing cooperatives, direct marketing organizations, among other types of organizations;
  • The PPP provides greater flexibility for seasonal employees;
  • Certain existing PPP borrowers can request to modify their First Draw PPP Loan amount; and
  • Certain existing PPP borrowers are now eligible to apply for a Second Draw PPP Loan.

A borrower is generally eligible for a Second Draw PPP Loan if the borrower:

  • Previously received a First Draw PPP Loan and will or has used the full amount only for authorized uses;
  • Has no more than 300 employees; and
  • Can demonstrate at least a 25% reduction in gross receipts between comparable quarters in 2019 and 2020.

Covid-19 Funding Bill aka Consolidated Appropriations Act, 2021

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.

Revenue Ruling Addresses Deductibility of PPP-funded Expenses

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.

Final Regulations on Like-kind Exchanges

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.

Schedule C Year End Tax Planning Worksheet

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.

Download Worksheet Here

Schedule C Year End Tax Planning Guide
Here are some ideas you can use to help reduce your 2020 and 2021
Planning Considerations   Notes
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?
Expenses   Notes
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.

Nexus for Business Taxes Based on COVID-19 Telecommuting

TelecommutingMany 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 State Taxes Signan 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.