Here are some of the key tax-related deadlines affecting businesses and other employers during the fourth quarter of 2022. Keep in mind that this list isn’t all-inclusive, so there may be additional deadlines that apply to you. Contact us to ensure you’re meeting all applicable deadlines and to learn more about the filing requirements.
Note: Certain tax-filing and tax-payment deadlines may be postponed for taxpayers who reside in or have businesses in federally declared disaster areas.
The last day you can initially set up a SIMPLE IRA plan, provided you (or any predecessor employer) didn’t previously maintain a SIMPLE IRA plan. If you’re a new employer that comes into existence after October 1 of the year, you can establish a SIMPLE IRA plan as soon as administratively feasible after your business comes into existence.
Contact us if you’d like more information about the filing requirements and to ensure you’re meeting all applicable deadlines.
The business entity you choose can affect your taxes, your personal liability, and other issues. A limited liability company (LLC) is somewhat of a hybrid entity in that it can be structured to resemble a corporation for owner liability purposes and a partnership for federal tax purposes. This duality may provide you with the best of both worlds.
Like the shareholders of a corporation, the owners of an LLC (called “members” rather than shareholders or partners) generally aren’t liable for business debts except to the extent of their investment. Thus, they can operate the business with the security of knowing that their personal assets are protected from the entity’s creditors. This protection is far greater than that afforded by partnerships. In a partnership, the general partners are personally liable for the debts of the business. Even limited partners, if they actively participate in managing the business, can have personal liability.
LLC owners can elect under the check-the-box rules to have the entity treated as a partnership for federal tax purposes. This can provide a number of important benefits to them. For example, partnership earnings aren’t subject to an entity-level tax. Instead, they “flow through” to the owners, in proportion to the owners’ respective interests in profits, and are reported on the owners’ individual returns, and are taxed only once. To the extent the income passed through to you is qualified business income, you’ll be eligible to take the Section 199A pass-through deduction, subject to various limitations.
In addition, since you’re actively managing the business, you can deduct on your individual tax return your ratable shares of any losses the business generates. This, in effect, allows you to shelter other income that you (and your spouse, if you’re married) may have.
An LLC that’s taxable as a partnership can provide special allocations of tax benefits to specific partners. This can be an important reason for using an LLC over an S corporation (a form of business that provides tax treatment that’s similar to a partnership). Another reason for using an LLC over an S corporation is that LLCs aren’t subject to the restrictions the federal tax code imposes on S corporations regarding the number of owners and the types of ownership interests that may be issued.
In summary, an LLC would give you corporate-like protection from creditors while providing you with the benefits of taxation as a partnership. Be aware that the LLC structure is allowed by state statute, and states may use different regulations. Contact us to discuss in more detail how use of an LLC might benefit you and the other owners.
A key provision of the American Rescue Plan Act passed in 2021 includes lowering the thresholds that trigger a Form 1099-K – Payment Card and Third-Party Network Transactions. This means businesses and individuals may receive this form for tax year 2022, something they may not have seen in previous years.
For tax years before January 1, 2022, third-party processors were required to file a Form 1099-K when sales-related transactions exceeded both $20,000 and 200 in number. Beginning in 2023, third-party processors, including Venmo, PayPal, Square, Zelle, and others, must use this form to report when sales-related transactions exceed $600, regardless of how many transactions are involved.
Organizations dealing with credit cards, cash, or checks most likely will not receive a Form 1099-K. However, if an organization uses third-party organizations, which includes many gig-economy jobs such as Uber and Lyft, or online retailers such as eBay and Etsy, there’s a chance they’ll see this form arrive with their tax documents for tax year 2022. Funds sent by friends and family are not included in the $600 threshold.
Businesses and individuals need to pay attention to how they manage their books and transactions from these payment types to make tax filing easier for the next tax season. Correctly logging any income received can help prevent unexpected tax bills in the future.
Form 1099-K is used to report the total amount of transactions received, and the form does not include calculations for credits, discounts, fees, and/or returns. Properly tracking income and debits will help business owners and individuals deduct these business costs come tax time.
If an individual receives Form 1099-K, it may help to file a Schedule C with their Form 1040. Our tax professionals can help identify if this is the best course of action and any additional benefits a Schedule C may offer.
With the new threshold, third-party settlement companies may increase the number of tax document issues, which may lead them to create new infrastructure to help with their reporting accuracy. As with any large change, there may be growing pains, which means potential errors on some of the forms issued.
Some of the expected errors include:
If you receive Form 1099-K and suspect an error, contact the Payment Settlement Entity (third-party settlement company) and request a corrected Form 1099-K. Keep a copy of the original and corrected forms and any communication with your tax documents.
There is no need to panic if you receive a Form 1099-K for the first time. Simply reach out to Hamilton Tharp for more help.
Do you own a successful small business with no employees and want to set up a retirement plan? Or do you want to upgrade from a SIMPLE IRA or Simplified Employee Pension (SEP) plan? Consider a solo 401(k) if you have healthy self-employment income and want to contribute substantial amounts to a retirement nest egg.
This strategy is geared toward self-employed individuals, including sole proprietors, owners of single-member limited liability companies, and other one-person businesses.
With a solo 401(k) plan, you can potentially make large annual deductible contributions to a retirement account.
For 2022, you can make an “elective deferral contribution” of up to $20,500 of your net self-employment (SE) income to a solo 401(k). The elective deferral contribution limit increases to $27,000 if you’ll be 50 or older as of December 31, 2022. The larger $27,000 figure includes an extra $6,500 catch-up contribution that’s allowed for these older owners.
On top of your elective deferral contribution, an additional contribution of up to 20% of your net SE income is permitted for solo 401(k)s. This is called an “employer contribution,” though there’s technically no employer when you’re self-employed. (The amount for employees is 25%.) For purposes of calculating the employer contribution, your net SE income isn’t reduced by your elective deferral contribution.
For the 2022 tax year, the combined elective deferral and employer contributions can’t exceed:
Net SE income equals the net profit shown on Form 1040 Schedule C, E or F for the business minus the deduction for 50% of self-employment tax attributable to the business.
Besides the ability to make large deductible contributions, another solo 401(k) advantage is that contributions are discretionary. If cash is tight, you can contribute a small amount or nothing.
In addition, you can borrow from your solo 401(k) account, assuming the plan document permits it. The maximum loan amount is 50% of the account balance or $50,000, whichever is less. Some other plan options, including SEPs, don’t allow loans.
The biggest downside to solo 401(k)s is their administrative complexity. Significant upfront paperwork and some ongoing administrative efforts are required, including adopting a written plan document and arranging how and when elective deferral contributions will be collected and paid into the owner’s account. Also, once your account balance exceeds $250,000, you must file Form 5500-EZ with the IRS annually.
If your business has one or more employees, you can’t have a solo 401(k). Instead, you must have a multi-participant 401(k) with all the resulting complications. The tax rules may require you to make contributions for those employees. However, there’s an important loophole: You can exclude employees who are under 21 and employees who haven’t worked at least 1,000 hours during any 12-month period from 401(k) plan coverage.
Bottom line: For a one-person business, a solo 401(k) can be a smart retirement plan choice if:
Before you establish a solo 401(k), weigh the pros and cons of other retirement plans — especially if you’re 50 or older. Solo 401(k)s aren’t simple, but they can allow you to make substantial and deductible contributions to a retirement nest egg. Contact us before signing up to determine what’s best for your situation.
The Inflation Reduction Act (IRA), signed into law by President Biden on August 16, contains many provisions related to climate, energy, and taxes. There has been a lot of media coverage about the law’s impact on large corporations. For example, the IRA contains a new 15% alternative minimum tax on large, profitable corporations. And the law adds a 1% excise tax on stock buybacks of more than $1 million by publicly traded U.S. corporations.
But there are also provisions that provide tax relief for small businesses. Here are two:
Under current law, qualified small businesses can elect to claim a portion of their research credit as a payroll tax credit against their employer Social Security tax liability rather than against their income tax liability. This became effective for tax years that begin after December 31, 2015.
Qualified small businesses that elect to claim the research credit as a payroll tax credit do so on IRS Form 8974, “Qualified Small Business Payroll Tax Credit for Increasing Research Activities.” Currently, a qualified small business can claim up to $250,000 of its credit for increasing research activities as a payroll tax credit against the employer’s share of Social Security tax.
The IRA makes changes to the credit beginning next year. It allows for qualified small businesses to apply an additional $250,000 in qualifying research expenses as a payroll tax credit against the employer share of Medicare. The credit can’t exceed the tax imposed for any calendar quarter, with unused amounts of the credit carried forward. This provision will take effect for tax years beginning after December 31, 2022.
A qualified small business must meet certain requirements, including having gross receipts under a certain amount.
Another provision in the new law extends the limit on excess business losses for noncorporate taxpayers. Under prior law, there was a cap set on business loss deductions by noncorporate taxpayers. For 2018 through 2025, the Tax Cuts and Jobs Act limited deductions for net business losses from sole proprietorships, partnerships, and S corporations to $250,000 ($500,000 for joint filers). Losses in excess of those amounts (which are adjusted annually for inflation) may be carried forward to future tax years under the net operating loss rules.
Although another law (the CARES Act) suspended the limit for 2018, 2019 and 2020 tax years, it’s now back in force and has been extended through 2028 by the IRA. Businesses with significant losses should consult with us to discuss the impact of this change on their tax planning strategies.
These are only two of the many provisions in the IRA. There may be other tax benefits to your small business if you’re buying electric vehicles or green energy products. Contact us if you have questions about the new law and your situation.
As you’re aware, certain employers are required to report information related to their employees’ health coverage. Does your business have to comply, and if so, what must be done?
Certain employers with 50 or more full-time employees (called “applicable large employers” or ALEs) must use Forms 1094-C and 1095-C to report the information about offers of health coverage and enrollment in health coverage for their employees. Specifically, an ALE uses Form 1094-C to report summary information for each employee and to transmit Forms 1095-C to the IRS. A separate Form 1095-C is used to report information about each employee. In addition, Forms 1094-C and 1095-C are used to determine whether an employer owes payments under the employer shared responsibility provisions (sometimes referred to as the “employer mandate”).
Under the mandate, an employer can be subject to a penalty if it doesn’t offer affordable minimum essential coverage that provides minimum value to substantially all full-time employees and their dependents. Form 1095-C is also used in determining eligibility of employees for premium tax credits.
On Form 1095-C, ALEs must report the following for each employee who was a full-time employee for any month of the calendar year:
If an ALE offers health coverage through an employer’s self-insured plan, the ALE also must report more information on Form 1095-C. For this purpose, a self-insured plan also includes one that offers some enrollment options as insured arrangements and other options as self-insured.
If an employer provides health coverage in another manner, such as through an insured health plan or a multiemployer health plan, the insurance issuer or the plan sponsor making the coverage available will provide the information about health coverage to enrolled employees. An employer that provides employer-sponsored self-insured health coverage but isn’t subject to the employer mandate isn’t required to file Forms 1094-C and 1095-C and reports instead on Forms 1094-B and 1095-B for employees who enrolled in the employer-sponsored self-insured health coverage.
On Form 1094-C, an employer can also indicate whether any certifications of eligibility for relief from the employer mandate apply.
Be aware that these reporting requirements may be more complex if your business is a member of an aggregated ALE group or if the coverage is provided through a multiemployer plan.
Note: Employers also report certain information about health coverage on employees’ W-2 forms. But it’s not the same information as what’s reported on 1095-C. The information on either form doesn’t cause excludable employer-provided coverage to become taxable to employees. It’s for informational purposes only.
The above is a simplified explanation of the reporting requirements. Contact us with questions or for assistance in complying with the requirements.
The House of Representatives passed The Inflation Reduction Act (IRA) Friday, August 12, and President Joe Biden signed into law August 16. The legislation, which is a pared-down version of the proposed Build Back Better plan, was passed through the budget reconciliation process and is expected to pay for itself and decrease the budget deficit.
Key provisions in the IRA include funding for clean energy tax credits, an infusion of funds to the Internal Revenue Service, changes to Medicare prescription drug policies, and new corporate taxes.
Read on to learn about how these provisions could impact your business.
Lawmakers built several new tax provisions into the IRA to fund programs the bill introduces, modifies, or extends. In conjunction with the IRS measures listed below, these taxes are expected to fully fund the program and decrease the budget deficit. The two main taxes are:
Currently, the research tax credit allows for up to $250,000 to be deducted against qualifying payroll taxes which do not include the Medicare portion of FICA taxes. The IRA expands this credit to a $500,000 limit that also includes Medicare payroll taxes.
This goes into effect for tax years beginning after December 31, 2022, and allows for unused credit amounts to be carried forward in certain circumstances.
Much of the funding for the IRA – about $370 billion – is dedicated to green or renewable energy tax deductions. Of that amount, $60 billion is earmarked for growing the renewable energy infrastructure within manufacturing targeted at solar panels and wind turbines.
The IRA also modifies and extends through 2024 tax credits for producing electricity from qualified renewable resources, investments in qualified energy properties, and using alternative fuels and fuel mixtures (including biodiesel and renewable diesel).
New tax credits will be available in the coming years for the production and/or sale of:
With the modifications, businesses that use energy-efficient commercial buildings may see additional tax deduction opportunities. The IRS introduces a new credit for commercial clean vehicles and modifies the refundable tax credit on plug-in electric vehicle purchases.
The IRA provides funds so the Environmental Protection Agency (EPA) can create a greenhouse gas reduction fund and support existing programs that provide financial incentives to reduce air pollution emissions. These include replacing eligible medium- and heavy-duty vehicles with zero emissions options, identifying and reducing emissions from diesel engines, and monitoring air pollution and greenhouse gases.
The IRA provides additional funding for the IRS to hire more customer service representatives, processors, and auditors to decrease the time it takes to process returns for each tax year, lessen the hold times for taxpayers calling in, and increase audits. Audits are expected to target larger businesses and individuals with higher incomes.
The Inflation Reduction Act is expansive and could affect many business tax strategies. We’ll keep you updated as new information comes to light. In the meantime, consider scheduling your annual tax strategy review with one of our tax professionals to discuss how the IRA could impact your business.
Beginning January 1, 2022, the IRS has updated its 1099-K regulations to require all businesses that process payments to file a 1099-K for all sellers with more than $600 in gross sales in a calendar year. The American Rescue Plan Act of 2021 requires that sales completed on all e-commerce platforms —including Ticketmaster, StubHub, etc. — are subject to reporting to the IRS as of 01/01/2022. This means that any seller or fan earning more than $600 annually as a result of a sale, or sales, through any U.S. marketplace is required to complete a 1099 form.
In order to generate a complete Form 1099-K as required by state and federal tax laws, many of these sites will need your Taxpayer Identification Number (TIN). Your TIN is typically either your Social Security Number (SSN) or Employer Identification Number (EIN) for businesses.
If you meet these reporting requirements, you will receive a 1099-K at the beginning of each year. The same information will be sent to the IRS and state tax agencies where applicable. Be sure to keep track of the expenses as well, since these can be used to offset the income of the 1099-K.
For more information, please visit: https://www.irs.gov/businesses/understanding-your-form-1099-k
With inflation rates reaching historical highs and driving up the cost of doing business, business owners are seeking out creative ways to fight inflation. The Series I Savings Bond is one tool that’s been getting some buzz.
Also known as I Bonds, these low-risk savings products depend on higher inflation to produce better returns. The higher the inflation rate, the more interest you earn, rendering the investment inflation-proof.
And they’re not just available to individuals. Business owners can buy I Bonds for multiple entities, including corporations and partnerships.
There are rules specific to I Bonds, and there are more tax considerations for businesses than for individuals. To take full advantage of I Bonds, business owners must know the compliance and reporting rules.
How I Bonds work
A Series I Savings Bond is a security that earns interest based on both a fixed rate and a variable rate based on inflation. The fixed rate will remain for the life of the bond, whereas the variable changes every six months based on inflation levels measured in the U.S. Consumer Price Index.
I Bonds will earn interest for up to 30 years if they aren’t cashed out before then.
I Bonds vs. inflation
One of the advantages of I Bonds is they shield money from inflation. Based on current rates, the returns on an I bond are slightly outpacing the rate of inflation.
The U.S. inflation rate reached 9.1% in June, a 40-year high for the cost of the nation’s goods and services. By comparison, the current interest rate on new Series I savings bonds is 9.62% where it will remain through October 2022.
It’s worth noting this rate applies to the six months after the bond is purchased. So even if you buy an I Bond in October 2022, the bond will earn 9.62% interest for the next six months.
When leveraged and reported appropriately, I Bonds can generate respectable returns.
How to Buy I Bonds
While individuals can purchase I bonds electronically and in paper form (up to $5,000 each year by using their federal income tax refund), businesses, including corporations, partnerships, and other entities, can only do so in electronic form.
To purchase I bonds electronically, buyers must set up an account on TreasuryDirect, the federal government’s clearinghouse for purchasing and cashing in U.S. savings bonds, where they can purchase up to $10,000 in electronic bonds each year. However, if you own multiple business entities, each one can buy up to the $10,000 maximum, as long as the money is in a separate account for each business.
If you’re buying both personal and business I Bonds, keep them in separate accounts and avoid transferring funds from one account to another if you have purchased the annual maximum for both.
Series I Bonds are not subject to state or local taxes, but federal taxes are required on any interest you earn. You can choose between one of two methods to pay these taxes:
Any interest you earn on an I bond must be reported on Schedule B of Form 1040.
There are considerable differences when it comes to tax breaks for individuals and businesses:
The minimum term of ownership for an I Bond is one year. If you redeem your bond before the five-year mark, you will forfeit the interest from the previous three months. There is no interest penalty after that point.
I Bond compliance and reporting can get complicated, especially when managing a business in a challenging financial climate. If you need help navigating the savings bond landscape, our team of professionals can help you take full advantage of this investment vehicle.
Sometimes, bigger isn’t better: Your small- or medium-sized business may be eligible for some tax breaks that aren’t available to larger businesses. Here are some examples.
For 2018 through 2025, the qualified business income (QBI) deduction is available to eligible individuals, trusts, and estates. But it’s not available to C corporations or their shareholders.
The QBI deduction can be up to 20% of:
Pass-through business entities report tax items to their owners, who then take them into account on their owner-level returns. The QBI deduction rules are complicated, and the deduction can be phased out at higher income levels.
Eligibility for cash-method accounting
Businesses that are eligible to use the cash method of accounting for tax purposes have the ability to fine-tune annual taxable income. This is accomplished by timing the year in which you recognize taxable income and claim deductions.
Under the cash method, you generally don’t have to recognize taxable income until you’re paid in cash. And you can generally write off deductible expenses when you pay them in cash or with a credit card.
Only “small” businesses are potentially eligible for the cash method. For this purpose under current law, a small business includes one that has no more than $25 million of average annual gross receipts, based on the preceding three tax years. This limit is adjusted annually for inflation. For tax years beginning in 2022, the limit is $27 million.
Section 179 deduction
The Sec. 179 first-year depreciation deduction potentially allows you to write off some (or all) of your qualified asset additions in the first year they’re placed in service. It’s available for both new and used property.
For qualified property placed in service in tax years 2018 and beyond, the deduction rules are much more favorable than under prior law. Enhancements include:
Higher deduction. The Sec. 179 deduction has been permanently increased to $1 million with annual inflation adjustments. For qualified assets placed in service in 2022, the maximum is $1.08 million.
Liberalized phase-out. The threshold above which the maximum Sec. 179 deduction begins to be phased out is $2.5 million with annual inflation adjustments. For qualified assets placed in service in 2022, the phase-out begins at $2.7 million.
The phase-out rule kicks in only if your additions of assets that are eligible for the deduction for the year exceed the threshold for that year. If they exceed the threshold, your maximum deduction is reduced dollar-for-dollar by the excess. Sec. 179 deductions are also subject to other limitations.
While Sec. 179 deductions may be limited, those limitations don’t apply to first-year bonus depreciation deductions. For qualified assets placed in service in 2022, 100% first-year bonus depreciation is available. After this year, the first-year bonus depreciation percentages are scheduled to start going down to 80% for qualified assets placed in service in 2023. They will continue to be reduced until they reach 0% for 2028 and later years.
Contact us to determine if you’re taking advantage of all available tax breaks, including those that are available to small and large businesses alike.
A business or individual might be able to dispose of appreciated real property without being taxed on the gain by exchanging it rather than selling it. You can defer tax on your gain through a “like-kind” or Section 1031 exchange.
A like-kind exchange is a swap of real property held for investment or for productive use in your trade or business for like-kind investment real property or business real property. For these purposes, “like-kind” is very broadly defined, and most real property is considered to be like-kind with other real property. However, neither the relinquished property nor the replacement property can be real property held primarily for sale. If you’re unsure whether the property involved in your exchange is eligible for a like-kind exchange, contact us to discuss the matter.
Here’s how the tax rules work
If it’s a straight asset-for-asset exchange, you won’t have to recognize any gain from the exchange. You’ll take the same “basis” (your cost for tax purposes) in the replacement property that you had in the relinquished property. Even if you don’t have to recognize any gain on the exchange, you still have to report the exchange on a form that is attached to your tax return.
However, the properties often aren’t equal in value, so some cash or other (non-like-kind) property is thrown into the deal. This cash or other property is known as “boot.” If boot is involved, you’ll have to recognize your gain, but only up to the amount of boot you receive in the exchange. In these situations, the basis you get in the like-kind replacement property you receive is equal to the basis you had in the relinquished property you gave up reduced by the amount of boot you received but increased by the amount of any gain recognized.
Here’s an example
Let’s say you exchange land (investment property) with a basis of $100,000 for a building (investment property) valued at $120,000 plus $15,000 in cash. Your realized gain on the exchange is $35,000: You received $135,000 in value for an asset with a basis of $100,000. However, since it’s a like-kind exchange, you only have to recognize $15,000 of your gain: the amount of cash (boot) you received. Your basis in the new building (the replacement property) will be $100,000, which is your original basis in the relinquished property you gave up ($100,000) plus the $15,000 gain recognized, minus the $15,000 boot received.
Note: No matter how much boot is received, you’ll never recognize more than your actual (“realized”) gain on the exchange.
If the property you’re exchanging is subject to debt from which you’re being relieved, the amount of the debt is treated as boot. The theory is that if someone takes over your debt, it’s equivalent to him or her giving you cash. Of course, if the replacement property is also subject to debt, then you’re only treated as receiving boot to the extent of your “net debt relief” (the amount by which the debt you become free of exceeds the debt you pick up).
Like-kind exchanges can be complex, but they’re a good tax-deferred way to dispose of investment or trade or business assets. We can answer any additional questions you have or assist with the transaction.
Sadly, many businesses have been forced to shut down recently due to the pandemic and the economy. If this is your situation, we can assist you, including taking care of the various tax responsibilities that must be met.
Of course, a business must file a final income tax return and some other related forms for the year it closes its doors. The type of return to be filed depends on the type of business you have. Here’s a rundown of the basic requirements.
Sole proprietorships. You’ll need to file the usual Schedule C, “Profit or Loss from Business,” with your individual return for the year you close the business. You may also need to report self-employment tax.
Partnerships. A partnership must file Form 1065, “U.S. Return of Partnership Income,” for the year it closes. You also must report capital gains and losses on Schedule D. Indicate that this is the final return and do the same on Schedule K-1, “Partner’s Share of Income, Deductions, Credits, etc.”
All corporations. Form 966, “Corporate Dissolution or Liquidation,” must be filed if you adopt a resolution or plan to dissolve a corporation or liquidate any of its stock.
C corporations. File Form 1120, “U.S. Corporation Income Tax Return,” for the year you close. Report capital gains and losses on Schedule D. Indicate this is the final return.
S corporations. File Form 1120-S, “U.S. Income Tax Return for an S Corporation,” for the year of closing. Report capital gains and losses on Schedule D. The “final return” box must be checked on Schedule K-1.
All businesses. Other forms may need to be filed to report sales of business property and asset acquisitions if you sell your business.
Employees and contract workers
If you have employees, you must pay them final wages and compensation owed, make final federal tax deposits and report employment taxes. Failure to withhold or deposit employee income, Social Security, and Medicare taxes can result in full personal liability for what’s known as the Trust Fund Recovery Penalty.
If you’ve paid any contractors at least $600 during the calendar year in which you close your business, you must report those payments on Form 1099-NEC, “Nonemployee Compensation.”
Other tax issues
If your business has a retirement plan for employees, you’ll want to terminate the plan and distribute benefits to participants. There are detailed notice, funding, timing, and filing requirements that must be met by a terminating plan. There are also complex requirements related to flexible spending accounts, Health Savings Accounts, and other programs for your employees.
We can assist you with many other complicated tax issues related to closing your business, including debt cancellation, use of net operating losses, freeing up any remaining passive activity losses, depreciation recapture, and possible bankruptcy issues.
We can advise you on the length of time you need to keep business records. You also must cancel your Employer Identification Number (EIN) and close your IRS business account.
If your business is unable to pay all the taxes it owes, we can explain the available payment options to you. Contact us to discuss these issues and get answers to any questions.
Here are some of the key tax-related deadlines affecting businesses and other employers during the third quarter of 2022. Keep in mind that this list isn’t all-inclusive, so there may be additional deadlines that apply to you. Contact us to ensure you’re meeting all applicable deadlines and to learn more about the filing requirements.
Creating a budget is a crucial task for any business. It helps owners, executives, and managers estimate revenues and expenses, set goals, and closely monitor costs throughout the year.
Of course, budgets are just that — estimates. The final amounts for revenues and expenses at the end of the month, quarter, or year will almost certainly differ from budget projections. Those differences are called variances and analyzing those variances can give leaders a deeper understanding of a company’s financial well-being.
What is variance analysis?
Variance analysis investigates the differences between budgeted and actual results.
For example, if you budget for $1 million in sales and actual sales are $800,000, your variance is $200,000. Comparing your budget to actual results is a helpful first step but investigating the reason for the difference is essential.
These factors and others can contribute to variances, so taking the time to understand why fluctuations occur can help management know what they need to do to change the situation.
What causes budget variances?
Variances can occur for various reasons. Some of the most common include:
How is a variance analysis created?
Modern accounting software makes creating a variance analysis relatively straightforward. Most solutions include a budget-to-actual report that compares actual results to the budget and finds the difference between the two values as a number and a percentage.
You can then export this report to an Excel or Google spreadsheet, adding a column for explanations for any budget deviations.
The following best practices can make this process more manageable.
How often should you prepare variance reports?
The cadence with which you prepare variance reports will depend on the size of your company and management needs. A small business might only go through the process quarterly or annually.
On the other hand, a larger company or one that is experiencing rapid growth might perform the analysis every month.
At a minimum, you should review your budget to actual numbers every month, looking for unexpected discrepancies. This high-level review can help you quickly spot errors or identify trends so you can take action to keep the business on track.
Do you need help analyzing or setting up your variance reports? Give our team a call today to set up a strategy!
After the U.S. Supreme Court’s 2017 decision in South Dakota vs. Wayfair, many states quickly enacted laws resembling South Dakota’s to collect sales tax on remote purchases.
While physical nexus remains the first consideration in whether businesses are legally bound to collect and remit sales taxes on online sales, most states have adopted “economic nexus” rules, stating a business’ tax obligations kick in after it crosses a set level of sales in terms of quantity, dollar amounts, or both.
Receiving an audit notice from a state tax authority is one of the worst feelings a small business can have. Unfortunately, as states pursue tax collection, sales and use tax audits have become a standard part of doing business.
If your business is undergoing a sales tax audit or is worried about dealing with one in the future, here are four tips to navigate, prepare for, and avoid a sales tax audit.
How to reduce the risk of a sales tax audit
Several factors can trigger a sales tax audit. Many states use systematic methods and data analytics to identify businesses at risk for underreporting or underpaying their sales taxes. According to Thomson Reuters, some of the most common triggers for a sales tax audit include:
Your business also might be randomly selected for audit, so there’s no sure-fire way to avoid facing a sales tax audit. However, familiarizing yourself with the sales and use tax laws in the states where you do business, analyzing your nexus exposure, and registering and paying taxes in the proper jurisdictions is a good first step.
How to prepare for a sales tax audit
Time is of the essence once you receive notice you’ve been selected for an audit. Gathering and preparing the appropriate records takes time, so you want to start the process immediately.
Documents requested in the IDR typically include:
If any requested items aren’t available or you don’t believe they apply to the audit, be prepared to explain your reasons for not providing them.
In addition to looking for potential underpayments, look for overpayments, such as using a higher sales tax rate or charging tax on non-taxable items. These can potentially offset any underpayments uncovered during the audit.
Being under the microscope of a sales tax audit is stressful and can take up a lot of time. A professional who is well versed in sales and use taxes and knows how to deal with auditors can be an invaluable member of your team. By crafting a game plan for the audit and managing auditor expectations, they can potentially save your business thousands of dollars in taxes and penalties.
These professionals typically know how to answer the auditor’s questions truthfully without volunteering extra information that can invite additional scrutiny.
Have you received notice that you’re a target for a sale tax audit, or are you worried you may be on the radar? Contact us today to help you prepare for and navigate the process!
There’s a valuable tax deduction available to a C corporation when it receives dividends. The “dividends-received deduction” is designed to reduce or eliminate an extra level of tax on dividends received by a corporation. As a result, a corporation will typically be taxed at a lower rate on dividends than on capital gains.
Ordinarily, the deduction is 50% of the dividend, with the result that only 50% of the dividend received is effectively subject to tax. For example, if your corporation receives a $1,000 dividend, it includes $1,000 in income, but after the $500 dividends-received deduction, its taxable income from the dividend is only $500.
The deductible percentage of a dividend will increase to 65% of the dividend if your corporation owns 20% or more (by vote and value) of the payor’s stock. If the payor is a member of an affiliated group (based on an 80% ownership test), dividends from another group member are 100% deductible. (If one or more members of the group is subject to foreign taxes, a special rule requiring consistency of the treatment of foreign taxes applies.) In applying the 20% and 80% ownership percentages, preferred stock isn’t counted if it’s limited and preferred as to dividends, doesn’t participate in corporate growth to a significant extent, isn’t convertible, and has limited redemption and liquidation rights.
If a dividend on stock that hasn’t been held for more than two years is an “extraordinary dividend,” the basis of the stock on which the dividend is paid is reduced by the amount that effectively goes untaxed because of the dividends-received deduction. If the reduction exceeds the basis of the stock, gain is recognized. (A dividend paid on common stock will be an extraordinary dividend if it exceeds 10% of the stock’s basis, treating dividends with ex-dividend dates within the same 85-day period as one.)
Holding period requirement
The dividends-received deduction is only available if the recipient satisfies a minimum holding period requirement. In general, this requires the recipient to own the stock for at least 46 days during the 91-day period beginning 45 days before the ex-dividend date. For dividends on preferred stock attributable to a period of more than 366 days, the required holding period is extended to 91 days during the 181-day period beginning 90 days before the ex-dividend date. Under certain circumstances, periods during which the taxpayer has hedged its risk of loss on the stock are not counted.
Taxable income limitation
The dividends-received deduction is limited to a certain percentage of income. If your corporation owns less than 20% of the paying corporation, the deduction is limited to 50% of your corporation’s taxable income (modified to exclude certain items). However, if allowing the full (50%) dividends-received deduction without the taxable income limitation would result in (or increase) a net operating loss deduction for the year, the limitation doesn’t apply.
Let’s say your corporation receives $50,000 in dividends from a less-than-20% owned corporation and has a $10,000 loss from its regular operations. If there were no loss, the dividends-received deduction would be $25,000 (50% of $50,000). However, since taxable income used in computing the dividends-received deduction is $40,000, the deduction is limited to $20,000 (50% of $40,000).
Other rules apply if the dividend payor is a foreign corporation. Contact us if you’d like to discuss how to take advantage of this deduction.
Technology has long made accounting easier, from the first adding machines to electronic spreadsheets to today’s cloud computing ecosystem. While recent advancements have allowed business owners and their accountants to collaborate efficiently from any location, they also created a growing cybersecurity risk that cyber insurance can help manage.
Cyberattacks Threaten All Organizations
According to a 2022 survey commissioned by CyberCatch, 75% of small and medium-sized businesses (SMBs) could only survive three to seven days if they suffered a cyberattack.
Big businesses are frequent targets, and their security breaches tend to make headlines. But smaller businesses are easier prey for cybercriminals because they lack the complicated security infrastructure that larger businesses maintain.
The cost of a data breach can be devastating for small businesses. A data breach costs SMBs, on average, $101,000, according to Kaspersky’s IT Security Economics Report for 2020. That cost includes detecting and shutting down the attack, recovering lost data, notifying third parties, legal expenses related to the breach, and lost business.
Cloud accounting is more secure than having all your business’ accounting data on a desktop or device because providers typically deploy top-of-the-line security features. However, any system — cloud or otherwise — is only as strong as its weakest link. It only takes one user falling victim to a social engineering attack, using a weak password, or opening a malware-inflected attachment to give cybercriminals access to your payroll records, vendor and customer lists, bank account numbers, and more.
Manage the Risk with Cyber Insurance
Cyber insurance has become an increasingly important risk management tool for businesses. This insurance policy provides businesses with various coverage options to help recover from data breaches and other security issues.
While the exact coverages vary from policy to policy, cyber insurance typically covers two broad categories of losses:
Like any insurance policy, cyber insurance policies have exclusions. Typical cyber policy exclusions include lost future profits, the lost value related to intellectual property theft, and the cost of upgrading security after a data breach.
How to Buy Cyber Insurance
Most major commercial insurance carriers offer cyber insurance coverage, so reach out to your agent or broker to get a quote. But keep in mind while cyber insurance is increasingly essential coverage for most small businesses, it can also be difficult — and expensive — to buy. According to Marsh, a New York City-based insurance broker, and advisor, cyber insurance premiums in the U.S. increased by an average of 96% from 2020 to 2021.
Following a few IT security best practices can reduce your risk and improve your chances of getting coverage at an affordable price. Those best practices include:
As technology evolves, so will your exposure to various types of cyber-risks. While cyber insurance coverage can be a critical part of managing those risks, it doesn’t replace security best practices. Take the necessary steps to protect your business to a better chance of minimizing your exposure.
The Internal Revenue Service will raise the optional standard mileage rate for the final six months of 2022 to help offset the rise in gas prices nationwide.
The new rates to calculate the deductible costs of operating an automobile for business and certain other purposes become effective July 1, 2022, and will remain in place through January 1, 2023. Those revised rates are:
Taxpayers should use the following rates for any miles traveled between January 1, 2022, and June 30, 2022:
The 14 cents per mile rate for charitable organizations remains unchanged as it is set by statute.
The IRS, which last made such an increase in 2011, noted it considered depreciation, insurance, and other fixed and variable costs in addition to the rising gas prices when raising the rates mid-year.
Businesses can use the standard mileage rate to calculate the deductible costs of operating qualified automobiles for business, charitable, medical, or moving purposes.
Important reminders and considerations
When reimbursing employees for miles driven, keep in mind the following reminders and considerations:
To review your organization’s mileage reimbursement policy and any alternate methods for calculating appropriate reimbursement amounts, reach out to our team of knowledgeable professionals today.
Here’s an interesting option if your small company or start-up business is planning to claim the research tax credit. Subject to limits, you can elect to apply all or some of any research tax credits that you earn against your payroll taxes instead of your income tax. This payroll tax election may influence some businesses to undertake or increase their research activities. On the other hand, if you’re engaged in or are planning to engage in research activities without regard to tax consequences, be aware that some tax relief could be in your future.
Here are some answers to questions about the option.
Why is the election important?
Many new businesses, even if they have some cash flow, or even net positive cash flow and/or a book profit, pay no income taxes and won’t for some time. Therefore, there’s no amount against which business credits, including the research credit, can be applied. On the other hand, a wage-paying business, even a new one, has payroll tax liabilities. The payroll tax election is thus an opportunity to get immediate use out of the research credits that a business earns. Because every dollar of credit-eligible expenditure can result in as much as a 10-cent tax credit, that’s a big help in the start-up phase of a business — the time when help is most needed.
Which businesses are eligible?
To qualify for the election a taxpayer:
In making these determinations, the only gross receipts that an individual taxpayer takes into account are from his or her businesses. An individual’s salary, investment income or other income aren’t taken into account. Also, note that neither an entity nor an individual can make the election for more than six years in a row.
Are there limits on the election?
Research credits for which a taxpayer makes the payroll tax election can be applied only against the employer’s old-age, survivors, and disability liability — the OASDI or Social Security portion of FICA taxes. So the election can’t be used to lower 1) the employer’s liability for the Medicare portion of FICA taxes or 2) any FICA taxes that the employer withholds and remits to the government on behalf of employees.
The amount of research credit for which the election can be made can’t annually exceed $250,000. Note too that an individual or C corporation can make the election only for those research credits which, in the absence of an election, would have to be carried forward. In other words, a C corporation can’t make the election for research credits that the taxpayer can use to reduce current or past income tax liabilities.
The above Q&As just cover the basics about the payroll tax election. And, as you may have already experienced, identifying and substantiating expenses eligible for the research credit itself is a complex area. Contact us for more information about the payroll tax election and the research credit.
Business travel is back.
COVID restrictions have eased, and in-person conferences are back on the calendar. And as more people return to offices, companies are warming to sending their employees on work trips.
For many businesses, it’s been a minute since they’ve had to account for employee travel expenses. So it might be time for a refresher on which expenses are tax-deductible, which aren’t, and what pandemic-related tax incentives are available.
When is it business travel?
A trip is considered business travel when you travel outside what’s known as your “tax home.” The location of your tax home is the city or area of your primary place of business, regardless of where you live. For expenses to count as deductible travel costs, they have to be incurred away from your tax home for longer than a typical workday — but no longer than one year. Anything considered an “ordinary and necessary expense” of doing business would qualify.
As long as the expenses are business-related, most, if not all, expenses from a typical work trip can receive a tax deduction. So what is deductible?
Business Meals, Beverages
Perhaps the most significant change for business travel is a temporary tax incentive to encourage restaurant spending during the pandemic. Through the end of 2022, food and beverages from restaurants are 100% tax-deductible versus the usual 50% deduction for businesses. The 100% deduction applies to any restaurant meals and drinks purchased after December 31, 2020, and before January 1, 2023.
The IRS defines a restaurant as “a business that prepares and sells food or beverages to retail customers for immediate consumption, regardless of whether the food or beverages are consumed on the business’s premises.” The deduction includes:
Non-restaurant meals are still eligible for a 50% deduction, but the 100% deduction excludes prepackaged food and drinks from:
That means if you want to purchase a salad to go, buying it from a restaurant would get you a 100% deduction while buying it from a grocery store is only eligible for a 50% deduction.
Other rules for food and beverage deductions include:
Travel and Transportation
You can deduct 100% of the cost of any travel by airplane, train, bus, or car between your home and business destination. That includes car rental expenses. Also deductible is parking fees, tolls, and fares for taxis, shuttles, ferry rides, and other modes of transportation.
Hotels and Lodging
Hotel stays are tax-deductible, as are tips and fees for hotel staff and baggage carriers. Depending on how you schedule your trip, you may even be able to deduct lodging costs for non-workdays.
You can write off costs for shipping baggage or any materials related to business operations.
Business Calls, Communication
Fees for calls, texts, or Wi-Fi usage during business travel are deductible.
Dry Cleaning, Laundry
Costs to launder work clothes on a business trip get a tax break.
Tips for services related to any of these expenses also qualify.
Gifts of up to $25
Gifts for clients or other business associates are included, although you can deduct no more than $25 per gift recipient. So if two clients each receive a $60 fruit basket, for a total of $120 spent on gifts, the company can write off $50 of the expense.
What Isn’t Deductible?
To make the most of your tax deductions, collect receipts and keep detailed records of all travel expenses. Set a standard meal allowance for traveling employees and write off that amount to make meal tracking easier.
Managing business travel expenses and calculating deductions requires attention to detail, and businesses may be out of practice after two years with little to no travel. If you need help figuring out business travel deductions, our team of professionals can assist your business in getting back on track — and ready for takeoff.
The next quarterly estimated tax payment deadline is June 15 for individuals and businesses so it’s a good time to review the rules for computing corporate federal estimated payments. You want your business to pay the minimum amount of estimated taxes without triggering the penalty for underpayment of estimated tax.
The required installment of estimated tax that a corporation must pay to avoid a penalty is the lowest amount determined under each of the following four methods:
Under the current year method, a corporation can avoid the estimated tax underpayment penalty by paying 25% of the tax shown on the current tax year’s return (or, if no return is filed, 25% of the tax for the current year) by each of four installment due dates. The due dates are generally April 15, June 15, September 15, and January 15 of the following year.
Under the preceding year method, a corporation can avoid the estimated tax underpayment penalty by paying 25% of the tax shown on the return for the preceding tax year by each of four installment due dates. (Note, however, that for 2022, certain corporations can only use the preceding year method to determine their first required installment payment. This restriction is placed on a corporation with taxable income of $1 million or more in any of the last three tax years.) In addition, this method isn’t available to corporations with a tax return that was for less than 12 months or a corporation that didn’t file a preceding tax year return that showed some tax liability.
Under the annualized income method, a corporation can avoid the estimated tax underpayment penalty if it pays its “annualized tax” in quarterly installments. The annualized tax is computed on the basis of the corporation’s taxable income for the months in the tax year ending before the due date of the installment and assuming income will be received at the same rate over the full year.
Under the seasonal income method, corporations with recurring seasonal patterns of taxable income can annualize income by assuming income earned in the current year is earned in the same pattern as in preceding years. There’s a somewhat complicated mathematical test that corporations must pass in order to establish that their income is earned seasonally and that they therefore qualify to use this method. If you think your corporation might qualify for this method, don’t hesitate to ask for our assistance in determining if it does.
Also, note that a corporation can switch among the four methods during a given tax year.
We can examine whether your corporation’s estimated tax bill can be reduced. Contact us if you’d like to discuss this matter further.
Are you a partner in a business? You may have come across a situation that’s puzzling. In a given year, you may be taxed on more partnership income than was distributed to you from the partnership in which you’re a partner.
Why does this happen? It’s due to the way partnerships and partners are taxed. Unlike C corporations, partnerships aren’t subject to income tax. Instead, each partner is taxed on the partnership’s earnings — whether or not they’re distributed. Similarly, if a partnership has a loss, the loss is passed through to the partners. (However, various rules may prevent a partner from currently using his or her share of a partnership’s loss to offset other income.)
Pass through your share
While a partnership isn’t subject to income tax, it’s treated as a separate entity for purposes of determining its income, gains, losses, deductions, and credits. This makes it possible to pass through to partners their share of these items.
An information return must be filed by a partnership. On Schedule K of Form 1065, the partnership separately identifies income, deductions, credits, and other items. This is so that each partner can properly treat items that are subject to limits or other rules that could affect their correct treatment at the partner’s level. Examples of such items include capital gains and losses, interest expense on investment debts, and charitable contributions. Each partner gets a Schedule K-1 showing his or her share of partnership items.
Basis and distribution rules ensure that partners aren’t taxed twice. A partner’s initial basis in his or her partnership interest (the determination of which varies depending on how the interest was acquired) is increased by his or her share of partnership taxable income. When that income is paid out to partners in cash, they aren’t taxed on the cash if they have sufficient basis. Instead, partners just reduce their basis by the amount of the distribution. If a cash distribution exceeds a partner’s basis, then the excess is taxed to the partner as a gain, which often is a capital gain.
Two people each contribute $10,000 to form a partnership. The partnership has $80,000 of taxable income in the first year, during which it makes no cash distributions to the two partners. Each of them reports $40,000 of taxable income from the partnership as shown on their K-1s. Each has a starting basis of $10,000, which is increased by $40,000 to $50,000. In the second year, the partnership breaks even (has zero taxable income) and distributes $40,000 to each of the two partners. The cash distributed to them is received tax-free. Each of them, however, must reduce the basis in his or her partnership interest from $50,000 to $10,000.
More rules and limits
The example and details above are an overview and, therefore, don’t cover all the rules. For example, many other events require basis adjustments and there are a host of special rules covering noncash distributions, distributions of securities, liquidating distributions, and other matters. Contact us if you’d like to discuss how a partner is taxed.
The State of California now requires businesses with ﬁve or more employees to either offer an employee retirement plan or participate in the CalSavers Retirement Savings Program by June 30, 2022. CalSavers is a state-based payroll withholding savings program using Roth (post-tax) individual retirement accounts. All employers with ﬁve or more employees must either register with CalSavers or offer a qualifying retirement plan.
The CalSavers program has been rolled out in phases, and the state is already issuing penalty notices to businesses that missed the earlier deadlines or failed to allow eligible employees to participate in the retirement savings program. The penalties are significant:
Eligible employers must register with the program via the program website (employer.CalSavers.com) or by calling 855-650-6916.
Employers have the following options:
We can work with you to determine the best retirement solutions to fit your needs. Please contact us at 858.481.7702 for further assistance.
California enacted Assembly Bill 150 (“AB 150”) in late 2021 as a method for deducting state and local taxes in excess of federal deduction limitations. AB 150 allowed passthrough entities (“PTEs”) to have the tax imposed and paid at the entity level rather than at the individual level, which permitted PTE owners to bypass the deduction limitation. For those owners who have elected to participate in this program, PTEs pay the tax on the qualified net income and their owners receive a corresponding credit against the state income tax liability related to their PTE income. Any unused credit at the owner level may be carried forward for up to five years.
Governor Newsom signed Senate Bill 113 (“SB 113”) on February 9, 2022, which modified and expanded the passthrough entity elective tax benefits previously established under AB 150. The goal of SB 113 was to add clarity and conformity to the state’s original objectives for establishing the PTE credit.
The PTE election is made annually on the original filed return, including extensions. For tax years 2022 through 2025, the first PTE installment payment is due June 15th of each year, and is equal to the greater of:
The second PTE elective tax installment is due by the entity’s tax return due date (without extensions), which for most partnerships, LLCs, and S corps will be March 15, 2023.
If a payment is not made by June 15th, the election may not be made and the pass-through entity and owners may not participate in the program for that corresponding tax year.
There are many unanswered questions surrounding the PTE program. For example, since many 2021 returns will not be filed by June 15th, taxpayers may not know what 50% of the 2021 tax will actually be. If a good faith estimate is paid on June 15 but ends up being short of the 50% when the 2021 return is filed, the 2022 PTE election is invalid.
Hamilton Tharp is recommending that taxpayers add more funds to ensure that they do not underpay the tax. If the PTE did not participate in the program for 2021, but the owners of the PTE are fairly certain they will want to participate in the PTE program for 2022, we are recommending the payment be made with all available financial information or the $1,000.
If you have any questions, please contact us. In most cases, if you or your firm qualify to participate in this program, we have already reached out and discussed the payments.
As a business owner, your company’s financial statements play a significant role in monitoring your company’s performance and financial standing. However, the information presented in financial statements is susceptible to distortion when certain economic factors come into play — notably inflation.
The cumulative impact of a global pandemic, labor shortages, and supply chain disruptions have merged to create the highest inflation rates the United States has seen this century. In fact, the Consumer Price Index (CPI) rose 7.9% between February 2021 and February 2022, representing the most significant annualized growth in CPI inflation since 1982.
While the tangible effects of inflation vary by company and industry, the national and global implications are widespread and generally impact at least some aspects of every business. Even if the obvious effects feel minimal, it’s essential to understand inflation often trickles down to affect the most basic accounting and financial reporting information.
Here are some common ways inflation can affect financial statements and paint a misleading picture of your business.
Inflation can most heavily affect companies’ reported profits with considerable inventories when it comes to financial reporting. Imagine, for example; a widget company reported $100,000 in sales last year with $75,000 in cost of goods sold and a gross profit of $25,000. Since widgets do not expire, the company keeps and sells unsold inventory year after year.
The company sells the same number of widgets the following year, but because of a rising inflation rate, it decides to raise its prices by 5% to offset a 5% increase in its costs of goods. Half of its sales this year were taken from the prior year’s inventory, and the other half comprised the new inventory carrying the 5% production increase.
Because of its 5% increase in both cost of goods sold and widget sales price, the company reports $105,000 in sales and $76,875 in cost of goods sold, totaling $3,750 in gross profits. When you factor in half of the previous year’s inventory, the company still reports an increase of $1,875 in gross profits (because of selling last year’s inventory) even though it sold the same number of widgets as the previous year.
This is called “inflation profit,” meaning the increased profit results from inflation rather than an actual improvement in business performance.
For businesses looking to impress investors or potential purchasers, this is just one example of how inflation could distort financial planning efforts if not properly recognized and considered.
Supply Chain Disruptions
Many businesses rely on a complex network of supply chains to manufacture and deliver goods. These systems become particularly volatile when one or more parts of that supply chain begin raising prices because of factors such as labor shortages, freight costs, increased employee wages, and material costs.
When companies have existing long-term revenue contracts with customers, it may be difficult (or even impossible) to break those contracts and raise prices enough to offset any increase in production costs.
Therefore, companies should consider the monthly implications caused by reduced or negative profitability and the period in which to record the loss, if applicable. Business owners should also be conscientious of the repercussions lost contracts and unstable profits may have on monthly planning and forecasting.
Despite its increased prevalence this past year, inflation always impacts reporting and accounting. Although generally accepted accounting principles (GAAP) largely combat the most glaring discrepancies among financial statements, some variations may still occur based on how your particular business accounts for inflation.
Contact our team today if you need help accommodating inflation into your financial statement preparation, reporting, and analysis.
As U.S. companies struggle to recruit, hire, and retain talent, more businesses are turning to independent contractors instead of full-time employees. But understanding the difference between an employee and an independent contractor can be complex.
Getting it right is critical because misclassifying workers – intentionally or not – can result in penalties including, but not limited to, fines and back taxes. If the IRS believes a misclassification was intentional, there’s also the possibility of criminal and civil penalties.
There’s no single test at the federal level to determine a worker’s classification. Studies show that 10% to 20% of employers misclassify at least one employee. At its most basic level, the question boils down to this: Is the worker an employee or an independent contractor?
What the IRS Says
The IRS defines an independent contractor as someone who performs work for someone else while controlling how the work is done. The Internal Revenue Code defines an employee for employment tax purposes as “any individual who, under the usual common-law rules, applicable in determining the employer-employee relationship, has the status of an employee.”
Under this test, an individual is classified in one of the two buckets after examining relevant facts and circumstances and an application of common law principles. The IRS analyzes the evidence of the degree of control and independence through three overarching categories:
No one factor stands alone in making this determination and the relevant factors will vary depending on the facts and circumstances.
If it is still unclear whether a worker is an employee or an independent contractor after reviewing the three categories of evidence, file Form SS-8, Determination of Worker Status for Purposes of Federal Employment Taxes and Income Tax Withholding, with the IRS. The form may be filed by either the business or the worker, and the IRS will review the facts and circumstances and officially determine the worker’s status.
The IRS cautions it can take at least six months to get a determination.
Penalties for Misclassifying
If the misclassification was unintentional, the employer faces, at a minimum, the following penalties:
If the IRS suspects fraud or intentional misconduct, it can impose additional fines and penalties. The employer could be subject to criminal penalties of up to $10,000 per misclassified worker and one year in prison. In addition, the person responsible for withholding taxes could also be held personally liable for any uncollected tax.
Tips for Employers
Take pre-emptive steps to avoid worker misclassification issues by:
Remember, a worker’s classification may be different under the Fair Labor Standards Act than under various state laws, the National Labor Relations Act, and/or the Internal Revenue Code. Workers who are properly classified as independent contractors under one state’s test may not be properly classified under another’s.
Employers should ensure proper classification of their workers and remain cognizant of and comply with applicable state and local laws, which may be different from federal law.
Does your organization need help classifying or ensuring your workers are classified correctly? Contact our team today!
Operating as an S corporation may help reduce federal employment taxes for small businesses in the right circumstances. Although S corporations may provide tax advantages over C corporations, there are some potentially costly tax issues that you should assess before making a decision to switch.
Here’s a quick rundown of the most important issues to consider when converting from a C corporation to an S corporation:
Built-in gains tax
Although S corporations generally aren’t subject to tax, those that were formerly C corporations are taxed on built-in gains (such as appreciated property) that the C corporation has when the S election becomes effective if those gains are recognized within 5 years after the corporation becomes an S corporation. This is generally unfavorable, although there are situations where the S election still can produce a better tax result despite the built-in gains tax.
S corporations that were formerly C corporations are subject to a special tax if their passive investment income (such as dividends, interest, rents, royalties, and stock sale gains) exceeds 25% of their gross receipts, and the S corporation has accumulated earnings and profits carried over from its C corporation years. If that tax is owed for three consecutive years, the corporation’s election to be an S corporation terminates. You can avoid the tax by distributing the accumulated earnings and profits, which would be taxable to shareholders. Or you might want to avoid the tax by limiting the amount of passive income.
C corporations that use LIFO inventories have to pay tax on the benefits they derived by using LIFO if they convert to S corporations. The tax can be spread over four years. This cost must be weighed against the potential tax gains from converting to S status.
If your C corporation has unused net operating losses, the losses can’t be used to offset its income as an S corporation and can’t be passed through to shareholders. If the losses can’t be carried back to an earlier C corporation year, it will be necessary to weigh the cost of giving up the losses against the tax savings expected to be generated by the switch to S status.
There are other factors to consider in switching from C to S status. Shareholder-employees of S corporations can’t get the full range of tax-free fringe benefits that are available with a C corporation. And there may be complications for shareholders who have outstanding loans from their qualified plans. All of these factors have to be considered to understand the full effect of converting from C to S status.
There are strategies for eliminating or minimizing some of these tax problems and for avoiding unnecessary pitfalls related to them. But a lot depends upon your company’s particular circumstances. Contact us to discuss the effect of these and other potential problems, along with possible strategies for dealing with them.
The federal government is helping to pick up the tab for certain business meals. Under a provision that’s part of one of the COVID-19 relief laws, the usual deduction for 50% of the cost of business meals is doubled to 100% for food and beverages provided by restaurants in 2022 (and 2021).
So, you can take a customer out for a business meal or order take-out for your team and temporarily write off the entire cost — including the tip, sales tax and any delivery charges.
Despite eliminating deductions for business entertainment expenses in the Tax Cuts and Jobs Act (TCJA), a business taxpayer could still deduct 50% of the cost of qualified business meals, including meals incurred while traveling away from home on business. (The TCJA generally eliminated the 50% deduction for business entertainment expenses incurred after 2017 on a permanent basis.)
To help struggling restaurants during the pandemic, the Consolidated Appropriations Act doubled the business meal deduction temporarily for 2021 and 2022. Unless Congress acts to extend this tax break, it will expire on December 31, 2022.
Currently, the deduction for business meals is allowed if the following requirements are met:
In the event that food and beverages are provided during an entertainment activity, the food and beverages must be purchased separately from the entertainment. Alternatively, the cost can be stated separately from the cost of the entertainment on one or more bills.
So, if you treat a client to a meal and the expense is properly substantiated, you may qualify for a business meal deduction as long as there’s a business purpose to the meal or a reasonable expectation that a benefit to the business will result.
Provided by a restaurant
IRS Notice 2021-25 explains the main rules for qualifying for the 100% deduction for food and beverages provided by a restaurant. Under this guidance, the deduction is available if the restaurant prepares and sells food or beverages to retail customers for immediate consumption on or off the premises. As a result, it applies to both on-site dining and take-out and delivery meals.
However, a “restaurant” doesn’t include a business that mainly sells pre-packaged goods not intended for immediate consumption. So, food and beverage sales are excluded from businesses including:
The restriction also applies to an eating facility located on the employer’s business premises that provides meals excluded from an employee’s taxable income. Business meals purchased from such facilities are limited to a 50% deduction. It doesn’t matter if a third party is operating the facility under a contract with the business.
Keep good records
It’s important to keep track of expenses to maximize tax benefits for business meal expenses.
You should record the:
In addition, ask establishments to divvy up the tab between any entertainment costs and food/ beverages. For additional information, contact your tax advisor.
Here are some of the key tax-related deadlines that apply to businesses and other employers during the second quarter of 2022. Keep in mind that this list isn’t all-inclusive, so there may be additional deadlines that apply to you. Contact us to ensure you’re meeting all applicable deadlines and to learn more about the filing requirements.
The start of a new tax filing season often brings with it longer hold times with the IRS, as taxpayers and their tax preparers inundate phone lines with questions and concerns. But the 2022 filing season promises to be particularly challenging.
The IRS continues to work through a backlog of millions of paper-filed returns and correspondence from the 2021 tax filing season. Add staffing challenges and congressional underfunding to the issue and trying to track down a missing refund or deal with an unexpected tax notice is bound to be frustrating.
Roots, Results of the IRS Backlog
As of December 2021, the IRS had a backlog of 6 million unprocessed individual income tax returns, 2.3 million amended returns, and more than 2 million quarterly payroll tax returns, according to a statement from the Taxpayer Advocate Service (TAS).
That backlog stems from a combination of COVID-related shutdowns at many of the agency’s processing centers, budget cuts that forced reduced staff sizes, and the IRS overseeing new initiatives, such as stimulus payments and the expanded Child Tax Credit.
Reaching the IRS via phone hasn’t been easy in recent years, and the problem likely will worsen. According to the TAS report, there was a record 282 million taxpayer calls to the IRS in 2021, but the agency answered just 11% of those calls and those who did get through endured long wait times and frequent disconnects.
Understanding what’s going on behind the scenes isn’t much help when you’re facing missing tax refunds, incorrect notices, and other tax troubles. The following tips can help you navigate the IRS backlog and get the answers you need.
Send a complete copy of the correspondence and any other essential documents to your advisor as soon as you receive the notice. Tax professionals have access to a unique IRS customer service line reserved for practitioners, but delays are common there as well, so don’t wait until the last minute to loop them in.
Finally, have patience. The good news is the IRS is working to catch up by fast-tracking hiring, reassigning workers, and scrapping plans to close a tax processing center in Austin, Texas. In the meantime, stay in touch with your tax advisor to be as proactive as possible.
In today’s economy, many small businesses are strapped for cash. They may find it beneficial to barter or trade for goods and services instead of paying cash for them. Bartering is the oldest form of trade and the internet has made it easier to engage with other businesses. But if your business gets involved in bartering, be aware that the fair market value of goods that you receive in bartering is taxable income. And if you exchange services with another business, the transaction results in taxable income for both parties.
How it works
Here are some examples:
In these cases, both parties are taxed on the fair market value of the services received. This is the amount they would normally charge for the same services. If the parties agree to the value of the services in advance, that will be considered the fair market value unless there’s contrary evidence.
In addition, if services are exchanged for property, income is realized. For example,
Many businesses join barter clubs that facilitate barter exchanges. These clubs generally use a system of “credit units,” which are awarded to members who provide goods and services. The credits can be redeemed for goods and services from other members.
In general, bartering is taxable in the year it occurs. But if you participate in a barter club, you may be taxed on the value of credit units at the time they’re added to your account, even if you don’t redeem them for actual goods and services until a later year. For example, let’s say that you earn 2,500 credit units one year and that each unit is redeemable for $2 in goods and services. In that year, you’ll have $5,000 of income. You won’t pay additional tax if you redeem the units the next year, since you’ve already been taxed once on that income.
If you join a barter club, you’ll be asked to provide your Social Security number or Employer Identification Number. You’ll also be asked to certify that you aren’t subject to backup withholding. Unless you make this certification, the club is required to withhold tax from your bartering income at a 24% rate.
Reporting to the IRS
By January 31 of each year, a barter club will send participants a Form 1099-B, “Proceeds from Broker and Barter Exchange Transactions,” which shows the value of cash, property, services and credits that you received from exchanges during the previous year. This information will also be reported to the IRS.
Conserve cash, reap benefits
By bartering, you can trade away excess inventory or provide services during slow times, all while hanging onto your cash. You may also find yourself bartering when a customer doesn’t have the money on hand to complete a transaction. As long as you’re aware of the federal and state tax consequences, these transactions can benefit all parties. If you need assistance or would like more information, contact us.
The credit for increasing research activities, often referred to as the research and development (R&D) credit, is a valuable tax break available to eligible businesses. Claiming the credit involves complex calculations, which we can take care of for you. But in addition to the credit itself, be aware that the credit also has two features that are especially favorable to small businesses:
1. Eligible small businesses ($50 million or less in gross receipts) may claim the credit against alternative minimum tax (AMT) liability.
2. The credit can be used by certain even smaller startup businesses against the employer’s Social Security payroll tax liability.
Let’s take a look at the second feature. Subject to limits, you can elect to apply all or some of any research tax credit that you earn against your payroll taxes instead of your income tax. This payroll tax election may influence you to undertake or increase your research activities. On the other hand, if you’re engaged in — or are planning to undertake — research activities without regard to tax consequences, be aware that you could receive some tax relief.
Why the election is important
Many new businesses, even if they have some cash flow, or even net positive cash flow and/or a book profit, pay no income taxes and won’t for some time. Thus, there’s no amount against which business credits, including the research credit, can be applied. On the other hand, any wage-paying business, even a new one, has payroll tax liabilities. Therefore, the payroll tax election is an opportunity to get immediate use out of the research credits that you earn. Because every dollar of credit-eligible expenditure can result in as much as a 10-cent tax credit, that’s a big help in the start-up phase of a business — the time when help is most needed.
To qualify for the election a taxpayer must:
In making these determinations, the only gross receipts that an individual taxpayer takes into account are from the individual’s businesses. An individual’s salary, investment income or other income aren’t taken into account. Also, note that an entity or individual can’t make the election for more than six years in a row.
Limits on the election
The research credit for which the taxpayer makes the payroll tax election can be applied only against the Social Security portion of FICA taxes. It can’t be used to lower the employer’s liability for the “Medicare” portion of FICA taxes or any FICA taxes that the employer withholds and remits to the government on behalf of employees.
The amount of research credit for which the election can be made can’t annually exceed $250,000. Note, too, that an individual or C corporation can make the election only for those research credits which, in the absence of an election, would have to be carried forward. In other words, a C corporation can’t make the election for the research credit that the taxpayer can use to reduce current or past income tax liabilities.
The above are just the basics of the payroll tax election. Keep in mind that identifying and substantiating expenses eligible for the research credit itself is a complex area. Contact us about whether you can benefit from the payroll tax election and the research tax credit.
The IRS recently released the 2022 mileage rates for businesses to use as guidance when reimbursing workers for applicable miles driven within the year. The rates tend to increase every year to account for rising fuel and vehicle and maintenance costs and insurance rate increases.
Businesses can use the standard mileage rate to calculate the deductible costs of operating qualified automobiles for business, charitable, medical, or moving purposes. Keep reading for the updated mileage rates, as well as some reminders for mileage reimbursements and deductions.
Standard mileage rates for cars, vans, pickups and panel trucks are as follows:
|Use Category||Mileage rate
(as of Jan. 1, 2022)
|Change from previous year|
|Business miles driven||$0.585 per mile||$0.025 increase from 2021|
|Medical or moving miles driven*||$0.18 per mile||$0.02 increase from 2021|
|Miles driven for charitable organizations||$0.14 per mile||Note: Only congress may adjust the mileage rate for service to a charitable organization by a Congress-passed statute.|
*Moving miles reimbursement for qualified active-duty members of the Armed Forces
Important reminders and considerations
When reimbursing employees for miles driven, keep in mind the following reminders and considerations:
To review your organization’s mileage reimbursement policy and any alternate methods for calculating appropriate reimbursement amounts, reach out to our team of knowledgeable professionals today.
As a business owner, increasing sales can be a great mood lifter. But what happens if you get a large order and have no way to pay for the supplies? Sales don’t always equal immediate cash in hand, which can put a strain on your business accounts and your ability to deliver on time.
Below, we’ll share what the difference between revenue (sales) and cash flow is, and how it can affect your business.
More revenue, more problems
While the thought of increased revenue causing more problems for a business owner can seem counterintuitive, there are challenges that increased sales can bring forth. But first, let’s talk about what revenue is.
Revenue is the total income generated by business’s sales before expenses are deducted. This is also known as cash inflow. Most often, this is income from your primary operations. Your business may also have non-operating income, which is generated from interest bearing accounts and investments.
When you have sales come in on credit, or terms, it can be weeks or months before you receive the full payment for the order. Additionally, credit card processors can take up to three days to deposit monies from sales, depending on your merchant services provider. Meanwhile, your business still must cover any expenses like building materials, new inventory, or payroll.
That’s where managing your cash flow comes in.
The ins and outs of cash flow
Cash flow is simply how money moves in and out of a business or bank account. Just like you have to budget your paychecks, bills, and expenses in your personal accounts, you have to manage the cash flow for your business.
As stated above, cash inflow is your revenue and your non-operating income. Cash outflow, then, is comprised of anything your business has to pay for (i.e., rent, inventory, supplies, payroll, refunds, and merchant chargebacks).
Creating a forecast for expected expenses and payments, plus when they’re expected to take place, can help you see where any shortages could be expected throughout the month. Keep in mind, the forecast can be affected by delayed sales payments and unexpected expenses.
To create a buffer and give yourself some breathing room in your cash flow, consider:
Managing your cash flow is an essential part of business ownership and can keep your company moving forward while minimizing growing pains. Our team can help you review your cash flow system and identify areas of strength or for improvement; or we can assist you in setting up your cash flow system from scratch. Give us a call to get started today.
Are you wondering whether alternative energy technologies can help you manage energy costs in your business? If so, there’s a valuable federal income tax benefit (the business energy credit) that applies to the acquisition of many types of alternative energy property.
The credit is intended primarily for business users of alternative energy (other energy tax breaks apply if you use alternative energy in your home or produce energy for sale).
The business energy credit equals 30% of the basis of the following:
The credit equals 10% of the basis of the following:
Pluses and minuses
However, there are several restrictions. For example, the credit isn’t available for property acquired with certain non-recourse financing. Additionally, if the credit is allowable for property, the “basis” is reduced by 50% of the allowable credit.
On the other hand, a favorable aspect is that, for the same property, the credit can sometimes be used in combination with other benefits — for example, federal income tax expensing, state tax credits or utility rebates.
There are business considerations unrelated to the tax and non-tax benefits that may influence your decision to use alternative energy. And even if you choose to use it, you might do so without owning the equipment, which would mean forgoing the business energy credit.
As you can see, there are many issues to consider. We can help you address these alternative energy considerations.
The U.S. Senate and House of Representatives have both unanimously agreed to extend the Paycheck Protection Program (PPP) by five weeks in an effort to continue providing relief for small businesses hit hard by the pandemic. Applications officially closed for the program on June 30 when the Senate voted for a last-minute extension. President Trump is expected to sign the bill.
This extension would give small businesses until Aug. 8 to apply for a share of the approximately $129 billion in remaining PPP funding through the Small Business Administration (SBA). Thanks to the PPP Flexibility Act passed on June 5, recipients have 24 weeks to use loan funds for payroll and other essential expenses like rent/mortgage and utilities. The Flexibility Act also lowered the threshold for payroll expenses to 60% to achieve full forgiveness with a few safe harbor considerations. Over 4.9 million loans have been approved by the SBA so far, worth more than $520 billion.
Contact us for assistance in compiling information for your PPP forgiveness application to present to your lender.
On June 22, 2020, the U.S. Small Business Administration (SBA) released the: Paycheck Protection Program (PPP) Revisions to Loan Forgiveness Interim Final Rule
This guidance details two noteworthy changes impacting PPP loan borrowers, including:
The updated regulations also make minor updates to existing guidance addressing the extension of the covered period derived from the June 5, 2020 enactment of the Paycheck Protection Program Flexibility Act (H. R. 7010).
Read our blog summary of changes from H.R. 7010 here.
When Can a Borrower Apply for Loan Forgiveness?
A borrower can apply for forgiveness at any time on or before the loan maturity date. However, if the borrower applies for forgiveness before the end of the covered period and has reduced any employee’s salaries or wages by more than 25 percent, the borrower must account for the excess salary reduction for the full 8-week or 24-week covered period.
Expanded Limitations on Owner Compensation
The release of Revisions to the Third and Sixth Interim Final Rules on June 17, 2020, increased the maximum compensation for all employees and owners, which was summarized in our blog here. The new interim rules added that the employer portion of retirement plan funding for owner-employees of S-Corporations and C-Corporations is now capped at 2.5 months’ worth of the 2019 contribution amount. Furthermore, healthcare costs paid on behalf of owner-employees of S-Corporations are not eligible for forgiveness.
HT2 has established a dedicated PPP loan forgiveness team that is constantly monitoring new guidance from the SBA, as well as the Treasury, Congress, and the IRS, to ensure we have the latest information when advising our clients.
On June 16, 2020, the U.S. Small Business Administration (SBA) released the updated Paycheck Protection Program (PPP) Loan Forgiveness Application (see link below) which supersedes the application previously released on May 15, 2020. The new application incorporates changes to the PPP per the Paycheck Protection Program Flexibility Act (H. R. 7010), which was signed into law on June 5, 2020. The latest PPP loan forgiveness application, in conjunction with the June 17, 2020 release of the Revisions to the Third and Sixth Interim Final Rules, addresses some of the previously unanswered questions, including:
The SBA also released the PPP Loan Forgiveness Application Form 3508EZ (Form EZ) on June 16, 2020. The Form EZ is a simplified version of the loan forgiveness application and is applicable to PPP loan borrowers who are willing to certify they have met one of the following conditions:
Further guidance and instructions are anticipated, especially as they relate to the PPP Loan Forgiveness Application. The HT2 COVID-19 Task Force is hard at work deciphering new regulations as they are published! Stay tuned for updates and contact us for assistance with your loan forgiveness application.
On June 10, 2020, the Small Business Administration (SBA) issued an updated interim final rule for the Paycheck Protection Program (PPP) in response to the PPP Flexibility Act passed on June 5, 2020. The updated guidance accounts for revisions made to the covered period, usage of funds changes, extended safe harbors, and more.
Here is a quick rundown of the changes made by the PPP Flexibility Act.
Also of note:
Further guidance and instructions are anticipated, especially as they relate to the PPP Loan Forgiveness Application. The HT2 COVID-19 Task Force is hard at work deciphering new regulations as they are published! Stay tuned for updates and contact us for assistance with your loan forgiveness application.
On May 23, the Small Business Administration (SBA) issued an interim final rule for the Paycheck Protection Program (PPP) that included the loan forgiveness application guidance released May 15, as well as other updated guidance.
The rule, Paycheck Protection Program – Requirements – Loan Forgiveness, is the formal guidance that accompanies the forgiveness application and should be used by borrowers and their advisors, as well as lenders, to ensure accurate completion and review of the forgiveness application. Since the passage of the CARES Act on March 25 and the opening of PPP loan applications on April 3, questions, concerns, and clarifications have abounded regarding loan forgiveness on all sides. The release of the interim final rule clarifies many questions, but guidance is still expected for borrowers and lenders.
Clarifications on borrower responsibility
Alternative payroll period – Until the application was released on May 15, the 8-week rule was strict for payroll. The interim rule now allows borrowers to establish the forgiveness period with the start of the first payroll period following loan disbursement, rather than the date of loan disbursement. This allows for greater flexibility for employers with less frequent pay periods and should make meeting forgiveness requirements for some businesses a little easier.
Eligible payroll costs – Payroll costs must make up a hefty 75% of the loan to qualify for forgiveness, but borrowers have questioned what qualifies because employee compensation can be paid in a multitude of ways. The rule clarified that eligible payroll costs include salary, wages, commission, bonuses, hazard pay, cash tips or equivalent, PTO/sick/family/medical leave, separation or dismissals, employee benefits related to group health care coverage and retirement, state and local taxes assessed on payroll, and independent contractor/sole proprietor wages/commissions/income paid by employers to contractors up to the pro-rated amount of a $100,000 annual salary.
Caps on eligible costs for self-employed/owner-employees – For these individuals, guidance on forgiveness was somewhat incomplete and unclear. The rule clarifies that forgiveness is capped at 8/52 of 2019 compensation up to $15,385 across all businesses and that retirement and health insurance contributions are not eligible for forgiveness for self-employed individuals (benefit contributions do qualify for owner-employees) which had been in question prior to guidance issuance.
Costs paid vs costs incurred – The 8-week-from-disbursement rule in the original PPP documentation created some unforeseen restrictions on claiming eligible non-payroll costs for businesses operating on a schedule that did not align with the 8 weeks. The May 15 guidance and the most recent interim rule clarified that non-payroll costs may be paid during the 8-week period or simply incurred as long as they are paid on or before the next billing date. These costs include interest payments on business mortgage on real or personal property, business rent on real or personal property under a lease, and business utility payments, including electricity, gas, water, transportation, telephone, or internet, all incurred, in force, or in service before Feb 15., 2020. The rule also clarified that advance payments on interest are not eligible for forgiveness.
Clarification on calculating FTE employees
The interim rule included much-needed clarification on calculating FTE employees considering the many possible changes and circumstances as a result of the crisis, which was a looming question for borrowers, including when and how safe harbors apply.
First, it is important to note that the FTE calculation for PPP forgiveness differs from previous legislation in that 40 hours is considered FTE status rather than 32 hours, like for the Affordable Care Act. FTEs are calculated by the average number of hours paid per week per employee / 40, rounded to nearest tenth. FTEs can be calculated using the formula available on the forgiveness application or contact us for assistance.
Wage reductions must be analyzed on a per employee annualized basis – Employers may reduce wages and still qualify for forgiveness as long as they follow certain restrictions. Salary or hourly calculations should be done on an average annualized basis compared to period of Jan. 1, 2020, to March 31, 2020. If the average for the 8-week period is 25% less than first quarter of 2020, loan forgiveness will be reduced, unless the reduction is restored at equal to or greater levels by June 30, 2020, then forgiveness will not be reduced.
Rehiring employees – Similar to the above, borrowers who rehire employees and/or reverse reductions to salary and wages by June 30 are still eligible for forgiveness. The guidance also clarified that, for hours and wage reductions on the same employee, loan forgiveness will not be reduced.
Employees who reject return – What happens if employees refuse to return to work for reasons such as personal or familial high-risk health concerns or other reasons? The guidance states that employers will not be beholden to employees who reject returning to work in their total FTE count. Key here is that borrowers will be required to demonstrate they made a good faith effort to rehire the employee with a written offer and must receive a written rejection. Employers must also notify the state unemployment office within 30 days following an employee’s rejection to return to work.
Cause or voluntary employee changes – Concessions have also been granted for employers whose reduction in FTE account was out of their control. The rule clarifies that borrowers who fired employees for cause, employees who voluntarily resigned, or voluntarily requested and received reduction in hours will not be counted against forgiveness. All these procedures should be documented in writing.
Clarification on loan forgiveness procedures
When working with lenders and the SBA, borrowers should be aware of additional guidance and clarification on the procedures for loan forgiveness. Most notably, all forgiveness applications must be submitted to the lender, not the SBA or other entity, and your lender will notify you of your forgiveness amount. Other points to note include:
Understanding non-forgiveness – Borrowers concerned about unforgiveable expenses received clarification that they will have 2 years at 1% interest to repay portions of the loans not forgiven by the maturity date. These terms are more generous that most SBA loans.
Factoring in EIDL – Some borrowers also qualified for, applied, and received Economic Injury Disaster Loan (EIDL) grants from the SBA. How this impacts PPP forgiveness has been a hot topic among borrowers and their advisors, but the guidance has clarified that EIDL grants will be factored into forgiveness calculations. If you want to avoid EIDL grants impacting your PPP forgiveness, they may be paid back prior to forgiveness, if applicable to your circumstances.
SBA may review any loan – While earlier guidance indicated that loans under $2 million will not be audited for economic need, the rule clarified that the SBA still has the right to review any loan, regardless of size, to ensure it meets eligibility requirements and is calculated correctly and funds are used properly. A separate ruling is expected on these procedures. Proper documentation will be essential here. Contact us for assistance.
Borrowers may appeal – Even if you feel you have all your ducks in a row, the SBA may still think differently. Fortunately, the interim rule allows borrowers 30 days to appeal SBA determinations. More guidance is expected on this.
Lenders have a deadline – The interim rule also issued clear guidance and deadlines for lenders and the SBA to handle the forgiveness applications. Lenders have 60 days to decide on loan forgiveness from receipt of application (and to notify the borrower of forgiveness amount), followed by 90 days for the SBA to review the application. Borrowers may be asked questions by the lenders and the SBA during these reviews, so they should be prepared with accurate documentation.
The first PPP loans were disbursed on April 3, so early borrowers are closing in the final weeks of the 8-week period. More guidance is expected in the coming days and weeks, but borrowers should begin preparing their documentation now. Contact us for assistance with your loan forgiveness application.
The Small Business Administration (SBA) has released its long-awaited Paycheck Protection Program (PPP) forgiveness form for borrowers. The release on May 15 brought with it significant changes to the interpretation of some components of forgiveness that were not previously known.
Clarity is still needed on many of the components of forgiveness. Changes were made to the following components of the program based on the release of the form.
Covered payroll periods – Until this release, the guidance indicated the covered payroll period began immediately after loan disbursement and lasted eight weeks. For those with payroll schedules that did not align with the disbursement and covered period, this generated many questions and concerns. However, this latest guidance indicates that the eight-week period may begin starting with the borrower’s first payroll following disbursement, not necessarily on the day of disbursement. This alternative period only covers payroll costs, not other allowable expenses, although adjustments do exist for other allowable expenses.
Incurred and/or paid expenses – The CARES Act originally indicated that, for costs to be covered under PPP, they would need to be incurred and paid during the eight-week period. The latest guidance, however, forgives costs that are incurred, but not paid, as long as they are paid on or before the regular billing date. This expansion applies to costs such as mortgage interest, rent, utilities, and payroll incurred during the loan period. Payroll costs incurred during the last payroll period but not paid during the covered or alternative periods (mentioned above) may be forgiven if those payroll costs are paid on or before the next regular payroll date.
Full-time equivalent (FTE) employee counts and wages – The guidance also included several clarifications to the FTE employee count and wage calculations necessary for forgiveness including:
Amounts paid to owners (owner-employees, a self-employed individual, or general partners), capped at the lower of:
1) $15,385 (the eight-week equivalent of $100,000 per year) for each individual; or
2) the eight-week equivalent of their applicable compensation in 2019
We expect further guidance to be issued from the SBA on PPP forgiveness beyond the changes outlined above. Borrowers will be required to submit the information in the forgiveness form through their lender, but your CPA can help with calculating and completing your form. Contact us for assistance.
In an update to the Small Business Administration’s (SBA) Paycheck Protection Program (PPP) FAQs, the SBA and Treasury have announced that borrowers with an original principal amount less than $2 million “will be deemed to have made the required certification concerning the necessity of the loan request in good faith.”
Released just ahead of the May 14 repayment deadline, the SBA indicated in FAQ #46 that this safe harbor was introduced because borrowers who requested less than $2 million were less likely to have access to alternative funding options. The access to other capital was the sticking point in FAQ #31, which requested businesses that could not certify in good faith their need for funds to repay them by May 14.
Borrowers with a principal amount greater than $2 million can still meet the good faith certification. Still, the SBA continues to emphasize that they will be reviewing those larger loan applications for compliance with program requirements. See question 47 for update source .
Contact us for assistance with your PPP loan obligations.
For those of our clients who have received their PPP loan and endured the painful application process, we have just one word to share – Congratulations!!!! Now what?
Now, you are on the clock! You have 8-weeks to determine how much of that loan will have to be returned and how much of that loan may be forgiven.
In our opinion, we think most of our clients will be left with some amount of loan. We hope that this article will provide some guidance that can be used to help you through this 8-week time period and to maximize what your loan forgiveness will be. With that said, we must qualify our comments in that there remains many unanswered questions and the SBA still must provide guidance to those answers. Accordingly, some of our comments and observations could be incorrect based on our present interpretations.
Based on our experience with the application process, the banking industry had developed their own due diligence rules and the documents required varied from bank to bank and how they interpreted what was includible costs. Be prepared for potential conflicts once the 8-week time period ends and you enter the “loan forgiveness” stage.
The SBA guidance provides that the PPP loan must be used only for qualified expenditures and if not used properly, the fine print of the loan document has a very heavy statement. “If you knowingly use the funds for unauthorized purposes, you will be subject to additional liability such as charges for fraud”. We know that our clients would never knowingly misuse the funds, but we would be negligent if we did not share that statement with you.
The good news is that the categories of what you can use the loan proceeds for are limited. They are made up of “Payroll Costs” and “Non-Payroll Costs” which are defined as follows:
PAYROLL COSTS- At least 75% of PPP Loan
NON-PAYROLL COSTS – Remaining 25% of PPP Loan
As mentioned above, you have 8-weeks starting from the time your loan hits your bank account. Unlike a tax return, no extensions are allowed.
With respect to documentation, go overboard with organization and expect that you will have to provide your banker with copies of everything. Here are some of the steps we are recommending to our clients:
The computations for purposes of the loan forgiveness creates some traps and could result in a significant portion of the PPP loan not being forgiven. In the mad rush to apply for the PPP Loan, many businesses did not spend a lot of time on the loan forgiveness computations. The following are some of the traps that will limit the forgiveness amount and we will spend time doing a deeper dive into each of the traps.
If you maximized your PPP loan by using your “average monthly payroll” costs from 2019 and then multiplied that by 2.5 to determine your loan it will be difficult to achieve 100% of forgiveness unless everything aligns in your favor. With that said, let us address each of the above items that may limit your forgiveness.
“Full-time Equivalents (FTE)” CALCULATION IS IMPORTANT:
FINALLY, AND MAYBE THE MOST IMPORTANT STEP, IS TO TRACK WHERE YOU ARE AT WITH THE LOAN FORGIVENESS. HERE ARE THE STEPS WE WOULD RECOMMEND:
We understand the PPP Loan Forgiveness step is confusing and we are here to help you and answer any questions you may have. We anticipate additional guidance from the SBA to be released in mid- May and will keep updating the information as it becomes available. As always, visit our dedicated COVID-19 Resource Page for continued updates and alerts.
Over the last several days, there have been some developments and clarifications related to the Paycheck Protection Program (PPP).
The PPP program loan funds were increased by $310 billion to a total of $659 billion on Friday, April 24, 2020, when the President signed the Paycheck Protection and Healthcare Enhancement Act (PPHE). The PPP program has faced an immense amount of scrutiny and has been wrought with delays, changes, and a lack of clarity. Most small businesses did not receive funding in the initial round. While we have diligently supported our clients in their efforts, the Lenders have generally struggled with the massive amount of applications being submitted. While the law extends the funds, realistically, it will not be enough to fund every small business. Below, we outline some critical provisions from the most recent Act and changes as well as suggestions on what else you could do if you don’t anticipate receiving the PPP or have not applied yet.
For many businesses that have or will receive PPP funds, the forgiveness part of the loan program creates a lot of questions. There are still more questions than answers, and we anticipate the coming days will provide some clarity. The treasury published additional guidance on Thursday related to who qualifies after many large businesses with access to liquidity received PPP funds.
Do businesses owned by large companies with adequate sources of liquidity to support the business’s ongoing operations qualify for a PPP loan?
Answer: All borrowers must assess their economic need for a PPP loan under the standard established by the CARES Act and the PPP regulations at the time of the loan application. Although the CARES Act suspends the ordinary requirement that borrowers must be unable to obtain credit elsewhere (as defined in section 3(h) of the Small Business Act), borrowers still must certify in good faith that their PPP loan request is necessary. Specifically, before submitting a PPP application, all borrowers should review the required certification carefully that “current economic uncertainty makes this loan request necessary to support the ongoing operations of the Applicant.” Borrowers must make this certification in good faith, taking into account their current business activity and their ability to access other sources of liquidity sufficient to support their ongoing operations in a manner that is not significantly detrimental to the business. For example, it is unlikely that a public company with substantial market value and access to capital markets will be able to make the required certification in good faith, and such a company should be prepared to demonstrate to SBA, upon request, the basis for its certification. Lenders may rely on a borrower’s certification regarding the necessity of the loan request. Any borrower that applied for a PPP loan prior to the issuance of this guidance and repays the loan in full by May 7, 2020, will be deemed by SBA to have made the required certification in good faith.
There is still a lot of unknown about how exactly the lenders will evaluate loan forgiveness around the forgiven uses versus approved uses.
Start by evaluating whether you meet the conditions that certify you for the PPP loan in light of the additional guidance issued. This is a decision each business will need to make based on your facts and circumstances. If you don’t feel like you meet the conditions, you should return any funds received by May 7, 2020. If you have already submitted your PPP application, you may contact your lender to rescind your application.
For anyone that has received their PPP loan funds and plans on keeping those funds, you should be focused on documenting your use of funds based on guidance provided by your lender.
For those that don’t qualify for the PPP, there are other options for creating liquidity available. The
PPHE act also increased the SBA Economic Injury Disaster Loans (EIDL) funding by $10 billion and also added am additional $50 billion in funding for EIDL loans related to COVID-19.
There are also many other considerations companies can explore, such as tax credits, small business loans, and other local grants.
We continue to monitor the PPP and EIDL. All information contained in this article is based on information currently available and is subject to change. Please contact our firm with any questions about the PPP loan as well as other alternatives.
Tina Tharp, Judy Hamilton, Kim Spinardi and Jessica Jordan
Our Team is diligently working to keep abreast of all the changes and assisting clients!
Small businesses are now eligible for up to $2 million in Economic Injury Disaster Loans from the Small Business Administration (SBA) after President Trump called for an additional $50 billion in funding to the SBA’s lending program from Congress in response to COVID-19. While the $50 billion has not yet been approved, the SBA is able to issue an Economic Injury Disaster Loan declaration thanks to the Coronavirus Preparedness and Response Supplemental Appropriations Act recently signed by the president.
These low-interest loans may be used to pay fixed debts, payroll, and accounts payable that cannot be paid as a result of the virus outbreak at an interest rate of 3.75% for small businesses without available alternate credit, and 2.75% for nonprofits. Businesses with available credit are not eligible. While up to $2 million is available per business, the SBA will determine the amount based on “your actual economic injury and your company’s financial needs, regardless of whether the business suffered any property damage.”
Businesses must be located in designated states and territories where ‘substantial economic injury’ has occurred or is occurring as a result of the Coronavirus. The state or territory’s governor must submit a request for the SBA to issue an Economic Injury Disaster Loan declaration for their area. Currently, 29 states and the District of Columbia have been declared SBA disaster areas due to COVID-19.
Small business owners are reminded that applications will be processed in the order received, so it is best practice to submit as soon as possible as relief will not be immediate. The SBA’s goal is to make decisions on applications within 2 to 3 weeks and, upon approval, issue $25,000 within 5 days. With high demand, however, processing times will likely increase.
To find out if your state is an SBA-declared disaster area and to get a loan application, visit https://disasterloan.sba.gov/ela. You must be located in an SBA-declared disaster area to be eligible for the SBA disaster loan.
We are available to provide guidance and assistance with your SBA loan application. Call us today.