Congress recently passed, and President Trump signed, a new law providing additional relief for businesses and individuals during the COVID-19 pandemic.
The CAA permits certain smaller businesses who received a PPP loan to take out a “PPP Second Draw Loan” of up to $2 million. To qualify, you must:
Eligible entities include for-profit businesses (including those owned by sole proprietors), certain nonprofit organizations, housing cooperatives, veterans’ organizations, tribal businesses, self-employed individuals, independent contractors and small agricultural co-operatives.
Loan terms. Borrowers may receive a PPP Second Draw Loan of up to 2.5 times the average monthly payroll costs in the year preceding the loan or the calendar year.
However, borrowers in the hospitality or food services industries may receive PPP Second Draw Loans of up to 3.5 times average monthly payroll costs. Only a single PPP Second Draw Loan is permitted to an eligible entity.
Gross receipts and simplified certification of revenue test. PPP Second Draw Loans of no more than $150,000 may submit a certification, on or before the date the loan forgiveness application is submitted, attesting that the eligible entity meets the applicable revenue loss requirement.
Nonprofits and veterans’ organizations may use gross receipts to calculate their revenue loss standard.
Loan forgiveness. Like the first PPP loan, a PPP Second Draw Loan may be forgiven for payroll costs of up to 60% (with some exceptions) and nonpayroll costs such as rent, mortgage interest and utilities of 40%. Forgiveness of the loans isn’t included in income as cancellation of indebtedness income.
Application of exemption based on employee availability. The CAA extends current safe harbors on restoring full-time employees and salaries and wages. Specifically, it applies the rule of reducing loan forgiveness for a borrower reducing the number of employees retained and reducing employees’ salaries in excess of 25%.
Deductibility of expenses paid by PPP loans. The CARES Act didn’t address whether expenses paid with the proceeds of PPP loans could be deducted. The IRS eventually took the position that these expenses were nondeductible. The CAA, however, provides that expenses paid both from the proceeds of loans under the original PPP and PPP Second Draw Loans are deductible.
Contact David Mills, CPA, LLC with any questions you might have about PPP loans, including applying for a Second Draw Loan or availing yourself of forgiveness.
The Consolidated Appropriations Act 2021 is expected to be signed by President Trump today. There are key provisions for both individuals and businesses.
This is a 5,600-page document so it will take some time to provide all the details but the following is what has been released so far:
For Individuals: The full credit is $600 per individual, $1,200 per couple, and $600 for children. Children 17 and older are not eligible for the credit. There are income limits as in the first round of payments.
Payments are expected to start early next week. If you have not received the first payment or it was incorrect, you will be able to receive this on your 2020 tax return filing.
If you do not receive the second payment or it is an incorrect amount, you can claim this on your 2020 tax filing. For example, if a family has a child born in 2020 the additional $600 will not be included in the next round of payments. This amount will be claimed as a credit when filing the 2020 tax return.
Unemployment assistance is extended by 16 weeks. Supplemental federal unemployment benefits will continue to April 2021 instead of ending in December. The current CDC eviction moratorium will be extended until January 31, 2021.
For Businesses: Business expenses paid for with PPP proceeds are tax-deductible and the funds are not income. This will be the same rule for the second round of PPP funds.
There will be a second round of PPP funding (PPP2) to both first-time borrowers and those who have received a previous loan.
Previous PPP recipients may apply if:
PPP2 first time borrowers include:
Borrowers that returned all or part of a previous PPP loan can reapply for the maximum amount available to them. As with the first round of PPP, you will apply through your bank for funds.
More details will follow as they’re available. If you have any questions, contact us at David Mills, CPA, LLC.
The Coronavirus Aid, Relief and Economic Security (CARES) Act made changes to excess business losses. This includes some changes that are retroactive and there may be opportunities for some businesses to file amended tax returns.
If you hold an interest in a business, or may do so in the future, here is more information about the changes.
Deferral of the excess business loss limits The Tax Cuts and Jobs Act (TCJA) provided that net tax losses from active businesses in excess of an inflation-adjusted $500,000 for joint filers, or an inflation-adjusted $250,000 for other covered taxpayers, are to be treated as net operating loss (NOL) carryforwards in the following tax year.
The covered taxpayers are individuals, estates and trusts that own businesses directly or as partners in a partnership or shareholders in an S corporation. The $500,000 and $250,000 limits, which are adjusted for inflation for tax years beginning after calendar year 2018, were scheduled under the TCJA to apply to tax years beginning in calendar years 2018 through 2025.
But the CARES Act has retroactively postponed the limits so that they now apply to tax years beginning in calendar years 2021 through 2025. The postponement means that you may be able to amend: Any filed 2018 tax returns that reflected a disallowed excess business loss (to allow the loss in 2018) and Any filed 2019 tax returns that reflect a disallowed 2019 loss and/or a carryover of a disallowed 2018 loss (to allow the 2019 loss and/or eliminate the carryover).
Note that the excess business loss limits also don’t apply to tax years that begin in 2020. Thus, such a 2020 year can be a window to start a business with large up-front-deductible items (for example capital items that can be 100% deducted under bonus depreciation or other provisions) and be able to offset the resulting net losses from the business against investment income or income from employment (see below).
Changes to the excess business loss limits The CARES Act made several retroactive corrections to the excess business loss rules as they were originally stated in the 2017 TCJA.
Most importantly, the CARES Act clarified that deductions, gross income or gain attributable to employment aren’t taken into account in calculating an excess business loss.
This means that excess business losses can’t shelter either net taxable investment income or net taxable employment income. Be aware of that if you’re planning a start-up that will begin to generate, or will still be generating, excess business losses in 2021.
Another change provides that an excess business loss is taken into account in determining any NOL carryover but isn’t automatically carried forward to the next year.
And a generally beneficial change states that excess business losses don’t include any deduction under the tax code provisions involving the NOL deduction or the qualified business income deduction that effectively reduces income taxes on many businesses.
Because capital losses of non-corporations can’t offset ordinary income under the NOL rules: Capital loss deductions aren’t taken into account in computing the excess business loss and the amount of capital gain taken into account in computing the loss can’t exceed the lesser of capital gain net income from a trade or business or capital gain net income.
Contact David Mills, CPA, LLC with any questions you have about this or other tax matters.
COVID-19 has affected small businesses in ways they never could have imagined. It’s more important than ever to have an up-to-date and accurate understanding of your business financials. Outsourcing your bookkeeping to the experts at David Mills, CPA, LLC is the answer.
When the clock struck midnight on Jan. 1, few people could have envisioned the year that 2020 would become. The worldwide COVID-19 pandemic has upended businesses and forced companies large and small to re-evaluate.
Some businesses have struggled during COVID-19 with lost business, redacted productivity, disrupted supply chains and more. Others have found their niche during the pandemic and have experienced business growth.
Businesses on both ends of the spectrum have realized now, more than ever, accurate financial data is key.
With offices in Morton and East Peoria, we’re Central Illinois small business bookkeeping experts. We understand most business owners don’t have the time to learn the skills necessary to accurately keep their set of books. That’s especially true in 2020 when business owners are faced with hundreds of additional decisions and challenges. Outsourcing your bookkeeping is the solution.
Our bookkeepers are current and up-to-date on all bookkeeping and payroll laws, so there’s no need to train your staff. This is especially vital in 2020 where cuts to payroll taxes, PPP loans and other COVID-related government programs have made the year unlike any other.
When you use David Mills, CPA, LLC to provide your small business bookkeeping services, you know you’ll receive timely financial information, allowing you to make sound decisions.
Will you need to take out a small business loan? Should you refinance existing loans? The business climate in 2020 means many are re-evaluating their finances. Up-to-date information gives you the knowledge you need to make the best decisions for your business.
The pandemic has forced Americans to change their habits and spending. Perhaps your business has been one that’s benefitted from COVID-19. Trying to manage your bookkeeping while also staying on top of business demands can be a daunting task.
Running your business and catering to your customers’ needs is what you do best. Leave the bookkeeping to us.
Every month, we will:
All of the information is entered into a QuickBooks file, which can be easily retrieved whenever information is needed.
COVID-19 has made 2020 much more challenging, however, your business bookkeeping doesn’t have to be part of that challenge. Contact David Mills, CPA, LLC today.
In light of the novel coronavirus (COVID-19) pandemic, many businesses are interested in donating to charity. In order to incentivize charitable giving, the Coronavirus Aid, Relief and Economic Security (CARES) Act made some liberalizations to the rules governing charitable deductions.
Before the CARES Act, the total charitable deduction that a corporation could generally claim for the year couldn’t exceed 10% of corporate taxable income (as determined with several modifications for these purposes).
Contributions in excess of the 10% limit are carried forward and may be used during the next five years (subject to the 10%-of-taxable-income limitation each year).
What changed? Under the CARES Act, the limitation on charitable deductions for corporations (generally 10% of modified taxable income) doesn’t apply to qualifying contributions made in 2020.
Instead, a corporation’s qualifying contributions, reduced by other contributions, can be as much as 25% of taxable income (modified). No connection between the contributions and COVID-19 activities is required.
At a time when many people are unemployed, your business may want to contribute food inventory to qualified charities.
In general, a business is entitled to a charitable tax deduction for making a qualified contribution of “apparently wholesome food” to an organization that uses it for the care of the ill, the needy, or infants.
“Apparently wholesome food” is defined as food intended for human consumption that meets all quality and labeling standards imposed by federal, state, and local laws and regulations, even though it may not be readily marketable due to appearance, age, freshness, grade, size, surplus, or other conditions.
Before the CARES Act, the aggregate amount of such food contributions that could be taken into account for the tax year generally couldn’t exceed 15% of the taxpayer’s aggregate net income for that tax year from all trades or businesses from which the contributions were made. This was computed without regard to the charitable deduction for food inventory contributions.
What changed? Under the CARES Act, for contributions of food inventory made in 2020, the deduction limitation increases from 15% to 25% of taxable income for C corporations.
For other business taxpayers, it increases from 15% to 25% of the net aggregate income from all businesses from which the contributions were made.
Be aware that in addition to these changes affecting businesses, the CARES Act also made changes to the charitable deduction rules for individuals.
Contact David Mills, CPA, LLC if you have questions about making charitable donations and securing a tax break for them. We can explain the rules and compute the maximum deduction for your generosity.
Specifically, an expense isn’t deductible if both:
The CARES Act allows a recipient of a PPP loan to use the proceeds to pay payroll costs, certain employee healthcare benefits, mortgage interest, rent, utilities, and interest on other existing debt obligations.
A recipient of a covered loan can receive forgiveness of the loan in an amount equal to the sum of payments made for the following expenses during the 8-week “covered period” beginning on the loan’s origination date:
The law provides that any forgiven loan amount “shall be excluded from gross income.”
So the question arises: If you pay for the above expenses with PPP funds, can you then deduct the expenses on your tax return?
The tax code generally provides for a deduction for all ordinary and necessary expenses paid or incurred during the taxable year in carrying on a trade or business.
Covered rent obligations, covered utility payments, and payroll costs consisting of wages and benefits paid to employees comprise typical trade or business expenses for which a deduction generally is appropriate.
The tax code also provides a deduction for certain interest paid or accrued during the taxable year on indebtedness, including interest paid or incurred on a mortgage obligation of a trade or business.
In IRS Notice 2020-32, the IRS clarifies that no deduction is allowed for an expense that is otherwise deductible if payment of the expense results in forgiveness of a covered loan pursuant to the CARES Act and the income associated with the forgiveness is excluded from gross income under the law.
The Notice states that “this treatment prevents a double tax benefit.” Two members of Congress say they’re opposed to the IRS stand on this issue. Senate Finance Committee Chair Chuck Grassley (R-IA) and his counterpart in the House, Ways and Means Committee Chair Richard E. Neal (D-MA), oppose the tax treatment.
Neal said it doesn’t follow congressional intent and that he’ll seek legislation to make certain expenses deductible.
At the moment, tax rates are at historic lows. We have record deficits and are looking to add more. Where do you think tax rates will be at in 1 year? 3 years? 5 years or more? Here are a few things to consider when thinking about taxes in 2020.
While everyone’s situation is different, we believe this is a serious consideration in tax planning for many individuals.
Most IRA fund balances are at a low point and many taxpayers may see lower income in 2020. This may be a good time to convert some or all your funds to a Roth IRA.
You can manage the tax brackets. For example, an estimate of income can be prepared to find out how much more income you can have to stay in the same tax bracket. This way you can effectively manage your tax burden.
If your modified adjusted gross income in 2020 for married filing jointly is $196,000 or less you can contribute directly to a Roth IRA. Income at $206,000 cannot make a Roth contribution.
You can contribute to a traditional IRA. You can then convert to a Roth IRA. There are other limitations so be sure to discuss this with your financial adviser or make an appointment with us to discuss how this works and if a conversion will help you in retirement.
The IRS has a $300 cash (not non-cash such as a Goodwill donation) charitable deduction for 2020 which can be used whether you itemize or not.
If you have not begun taking required minimum distributions (RMD’s) in 2020 you can wait until age 72 to start. The previous rules were at age 70 ½. Note that if you have already started your RMD’s you cannot skip them until age 72-you are bound by the previous rules.
There are other considerations for this so it is best to consult your financial adviser.
As a result of the coronavirus (COVID-19) crisis, your business may be using independent contractors to keep costs low. But you should be careful that these workers are properly classified for federal tax purposes. If the IRS reclassifies them as employees, it can be an expensive mistake.
The question of whether a worker is an independent contractor or an employee for federal income and employment tax purposes is a complex one.
If a worker is an employee, your company must withhold federal income and payroll taxes, pay the employer’s share of FICA taxes on the wages, plus FUTA tax.
Often, a business must also provide the worker with the fringe benefits that it makes available to other employees. And there may be state tax obligations as well. These obligations don’t apply if a worker is an independent contractor.
In that case, the business simply sends the contractor a Form 1099-MISC for the year showing the amount paid (if the amount is $600 or more).
Who is an “employee?” Unfortunately, there’s no uniform definition of the term. The IRS and courts have generally ruled that individuals are employees if the organization they work for has the right to control and direct them in the jobs they’re performing.
Otherwise, the individuals are generally independent contractors. But other factors are also taken into account. Some employers that have misclassified workers as independent contractors may get some relief from employment tax liabilities under Section 530.
In general, this protection applies only if an employer:
Note: Section 530 doesn’t apply to certain types of technical services workers. And some categories of individuals are subject to special rules because of their occupations or identities.
Under certain circumstances, you may want to ask the IRS (on Form SS-8) to rule on whether a worker is an independent contractor or employee.
However, be aware that the IRS has a history of classifying workers as employees rather than independent contractors.
Businesses should consult with the staff at David Mills, CPA, LLC before filing Form SS-8 because it may alert the IRS that your business has worker classification issues — and inadvertently trigger an employment tax audit.
It may be better to properly treat a worker as an independent contractor so that the relationship complies with the tax rules. Be aware that workers who want an official determination of their status can also file Form SS-8.
Disgruntled independent contractors may do so because they feel entitled to employee benefits and want to eliminate self-employment tax liabilities. If a worker files Form SS-8, the IRS will send a letter to the business. It identifies the worker and includes a blank Form SS-8.
The business is asked to complete and return the form to the IRS, which will render a classification decision.
Contact the small business experts at David Mills, CPA, LLC if you’d like to discuss how these complex rules apply to your business.
For businesses who are part of the Paycheck Protection Program, there are a few tips and guidelines to know and understand:
For more information, contact the experts at David Mills, CPA, LLC.
To help you wade through all the information about the COVID-19 stimulus payment, also known as the Economic Impact Payment, we’re offering tips to a few key things you should know:
For more information, contact the tax professionals at David Mills, CPA, LLC.