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Employers can now defer payroll tax withholding on employee compensation for the last four months of 2020 and then withhold the deferred amounts in the first four months of 2021, confirms a recent update from the IRS. President Trump’memorandum on Aug. 8 gave employers the ability to defer payroll taxes for employees affected by the COVID-19 pandemic in an effort to provide financial relief  

The guidance directs that employers can defer the withholding, deposit, and payment of the employee portion of the old-age, survivors, and disability insurance (OASDI) tax under Sec. 3102(a) and Railroad Retirement Act Tier 1 under Sec. 3201 from employee wages from Sept. 1 to Dec. 31, 2020.  

Employers must then withhold and pay the deferred taxes from wages and compensation during the period from Jan. 1, 2021, and April 30, 2021, with interest, penalties, and additions to tax to begin accruing starting May 1, 2021. Included in the notice is a line that indicates, if necessary, employers can “make arrangements to otherwise collect the total Applicable Taxes from the employee,” such as if an employee leaves the company before the end of April 2021, but does not provide details on what that entails.  

Employees with pretax wages or compensation during any biweekly pay period totally less than $4,000 qualify for the deferral. Amounts normally excluded from wages or compensation under Secs. 3121(a) or 3231(e) are not included in calculating the applicable wages. The determination of applicable wages should be made on a period-by-period basis.  

Companies may choose whether or not to enact the payroll tax deferral. We are closely monitoring updates related this and other presidential executive orders and will communicate if more information becomes available. For questions or assistance with this payroll tax deferral, contact us.  

On Aug. 24, the Small Business Administration (SBA) and Treasury issued the latest interim final rule update to the Paycheck Protection Program (PPP) that seeks to clarify guidance related to owner-employee compensation and non-payroll costs. This guidance has been long-awaited and clears up several questions borrowers have had about forgiveness. Here are the main points: 

1. Owner-employees of C or S corporations are exempt from the PPP owner-employee compensation rule for loan forgiveness if they have a less than 5% stake in the business. The intent is to provide forgiveness for compensation of owner-employees who do not have a considerable or meaningful ability to influence decisions over loan allocations. This clarifies earlier guidance that capped the owner-employee compensation regardless of what stake they have in the business.  

2. Loan forgiveness for non-payroll costs may not include amounts attributable to the business operation of a tenant or subtenant of the PPP borrower. The SBA provides a few examples of what this means: 

3. To achieve loan forgiveness on rent or lease payments to a related thirdparty, borrowers must ensure that (1) the amount of loan forgiveness requested does not exceed the amount of mortgage interest owed on the property attributable to the business’s rented space during the covered period, and (2) the lease and mortgage meet the Feb. 15, 2020, requirement for establishment. Earlier guidance had not addressed related third-party leases. 

It’s important to note that mortgage interest payments to a related party are not eligible for forgiveness as PPP loans are not intended to cover payments to a business’s owner because of how the business is structured – they are intended to help businesses cover non-payroll costs owed to third parties. 

For questions on any of these rules or assistance with your PPP loan forgiveness application, contact us today. 

On August 8, 2020, President Trump signed an executive order extending certain aspects of COVID-19 relief in the absence of a new bill from Congress. The executive order includes several measures to protect individuals as provisions of the CARES Act expire or have expired.

Here’s what was in the order:

Payroll tax delay – The order authorizes the Treasury to consider methods to defer the employee share of Social Security taxes (IRC section 3101(a) and Railroad Retirement Act taxes under section 3201(a)) for employees earning up to $104,000 per year ($4,000 biweekly) for a period beginning Sept. 1, 2020, through Dec. 31, 2020. No interest, penalty, or additional assessment would be charged on the deferred amount. At this point, this is not effective. It means the Treasury can exercise authority and explore ways to achieve forgiveness on the deferred amounts, such as legislation. While nothing will be done until the Treasury issues guidance, employers will need to be mindful of this as the liability of this payment could fall on them depending on the final rule.

Unemployment benefits – The $600 per week unemployment benefit authorized by the CARES Act expired on July 31. The executive order retroactively authorizes $400 per week from Aug. 1; however, states must contribute $100 and the remaining $300 would come from the federal government. The funding for the federal portion would come from the FEMA Disaster Relief Funds and would continue until the earlier of Dec. 6, 2020, or a drop in the Fund balance to below $25 billion. The state portion is to come from federal funds already distributed to the states. Questions of whether the FEMA funds can be used for this purpose are still outstanding.

Evictions – The evictions portion of the executive order asks the secretary of HHS and director of CDC to consider whether halting residential evictions is reasonably necessary to help prevent further spread of COVID-19 and also authorizes the Treasury Secretary and HUD Secretary to consider potential financial assistance for renters. The CARES Act banned evictions through July 25 for properties with federal mortgage programs or HUD funds.

Student loans – The student loan interest deferral enacted by the CARES Act is set to expire Sept. 30, 2020. The executive order would waive student loan interest until Dec. 31, 2020, for loans held by the Department of Education only.

Final guidance is required from the respective agencies before some of these measures can be enacted. Contact us with questions.

The Small Business Administration (SBA) and Treasury released an updated Paycheck Protection Program (PPP) FAQ on Aug. 4 in an effort to address PPP loan forgiveness issues that have arisen as borrowers begin to complete their applications. The 23 FAQs address various aspects of PPP forgiveness including general loan forgiveness, payroll costs, non-payroll costs, and loan forgiveness reductions. Here is a brief overview of some of the most notable clarified guidance. 

General loan forgiveness 

Payroll costs forgiveness 

Non-payroll costs forgiveness 

Forgiveness reductions 

The FAQ document also includes several examples for making calculations related to the above questions. Contact us for questions and assistance with your PPP loan forgiveness application.  

When the Tax Cut and Jobs Act went into effect in January 2018, many taxpayers stopped itemizing their returns. The reality, however, is that unique tax situations require a unique approach, and there may be some room for improvement in yours. Now that 2020 is in full focus, it is a great time to look at your giving strategy. If you are not sure you made the most of your charitable deductions in 2019, consider these incentives when setting your charitable contribution plan in 2020.

Although taxpayers that fall just below the standard threshold no longer need to itemize, those who hover around a higher tax bracket or well-exceed the standard deduction threshold should consider their situation with a professional to determine if they could benefit from a better plan. Consider the following incentives,

Deciding which charity to support in 2020?

The key to making your donations count is ensuring the organization you choose is an eligible charity. The Tax-Exempt Organization Search engine and the Interactive Tax Assistant on IRS.gov can help you choose organizations eligible to receive tax-deductible charitable contributions.

If you’re worried that making a large gift this year will harm your estate after 2025, you can rest assured. In November 2019, the Treasury Department and IRS issued final regulations confirming that taxpayers who make significant contributions between 2018 and 2025 can take advantage of the increased gift and estate tax exclusion amounts without concern over losing the benefit in 2026 and beyond.

The professionals in our office are well-versed in charitable contribution strategies, call us today to discuss how to make sure your donations count in 2020.

Catch Kim Spinardi, CPA, Michael Frost, and Ralph Nelson, JD, CPA discussing the new tax laws and how working with one firm that can handle your tax, financial planning and investing needs may be your greatest asset.

To watch, click here!

Hamilton Tharp, LLP is proud to have been asked to be a part of this discussion on Real Talk San Diego’s “Your Wealth Hour” segment! 

Tax audit. These two simple words are enough to strike fear and loathing into the hearts of many business owners. But, in reality, the Internal Revenue Service (IRS) won’t arbitrarily make your company the subject of an audit investigation. In fact, according to IRS.gov, out of the 196 million returns filed in 2016, only 1.1 million (0.5%) came under examination in 2017.  You are more likely to be summoned for jury duty (1 in 10) this year.

Unless you’re operating below the board or completely ignoring best practices, you have little to fear. However, even the most prudent sometimes miss a step. From managing the filing cabinet to the people who hold the keys, ensuring your business doesn’t catch unnecessary attention from the government comes down to good habits. Here are a few ways you can minimize the likelihood that you’ll be audited or ensure a more positive experience should you be audited.

If the IRS contacts you about an audit, CPAs advise that you don’t panic. Remember, you are not going on trial, you’re simply being asked to verify some of the claims you made on your tax return. It’s best to remain calm and cooperative when dealing with the IRS.

It’s also a good idea to contact your local CPA for advice and assistance in case you are audited. He or she can help you understand the process and work with you to try to achieve the best resolution.

Surprising but true, small and mid-sized businesses are more susceptible to and crippled by fraud when compared to larger organizations that have more resources to invest in anti-fraud initiatives. The Association of Certified Fraud Examiners recently published its 10th annual report to the nations. The largest global study on occupational fraud, the publication highlights 2,690 real cases of occupational fraud and includes data collected from 125 countries. The 80-page report explores the costs, schemes, victims, and perpetrators of fraud. According to the 2018 report, organizations with fewer than 100 employees experienced the greatest percentage of fraud cases and suffered the largest median loss.

Unfortunately, most small to mid-sized companies are ill-prepared to detect, prevent, and react to instances of fraud in their businesses. In this article, we will provide information that business owners can use to identify gaps in their fraud prevention processes and provide recommendations on ways to better protect your business from internal fraud.

The Association of Certified Fraud Examiners identifies and defines three primary categories of occupational fraud that are most the common:

(1) Financial Statement Fraud – a scheme in which an employee intentionally causes a misstatement or omission of material information in the organization’s financial reports.

(2) Asset Misappropriation – a scheme in which an employee steals or misuses the employing organization’s resources.

(3) Corruption – a scheme in which an employee abuses his or her influence in a business transaction in a way that violates his or her duty to the employer in order to gain a direct or indirect benefit.

The following strategies can help deter and detect payroll fraud from occurring in your organization.

Deterrents
As business advisors, we stress the importance of internal controls to deter and prevent fraud and to ensure the accuracy of accounting data. Small to mid-sized businesses often fail to establish adequate internal control systems for a number of reasons. The most common reasons are often a lack of resources or putting too much trust in employees and vendors.

One of the most effective strategies in deterring fraud is having a system in place that regularly checks for schemes. As a business owner, you have enough on your plate. Consider automating your internal controls by leveraging software that can detect red flags such as duplicate social security numbers, addresses or direct-deposit accounts.

Other recommendations for deterring fraud include increasing overall transparency and generating awareness that you will be conducting fraud audits. When you communicate the importance of internal fraud-prevention initiatives, transactions and systems will be better monitored, and any suspected scams can be quickly identified and investigated.

Finally, avoid delegating accounting and bookkeeping functions to one person. Concentrating these duties to one person makes it too easy for fraud to go unnoticed. Separating functions is the best way to increase accountability. We suggest having at least two people handle these functions or outsourcing a virtual CFO.

Detecting
According to the ACFE’s 2018 report, understanding and recognizing behavioral red flags can help organizations detect fraud. The ACFE has identified six red flags that have consistently been displayed by fraud perpetrators in every one of its studies since 2008. They include living beyond means, financial difficulties, unusually close association with vendors or customers, control issues and unwillingness to share duties, divorce or family problems, and a “wheeler-dealer” attitude.

While also remind business owners that a fraud perpetrator may not exhibit any behavioral red flags. In these circumstances, be on the lookout for concealment methods. According to the ACFE’s 2018 report, the top three concealment methods used by fraudsters include creating fraudulent physical documents, altering physical documents, and creating fraudulent transitions in the accounting system.

Reacting
Generally, developing strong controls and maintaining a close watch over your accounts can help you both prevent and catch fraud. If you discover fraud, do not confront the presumed perpetrator directly. Contact your organization’s attorney. While one may believe to have caught an individual “red-handed,” this version may not pass muster in court. Once an attorney assures it is a valid case, notify your insurance carrier.

The ACFE’s 2018 report identifies the most common actions organizations take to penalize fraud perpetrators. They include termination, settlement agreements, required resignation, and probation or suspension.

The professionals in our office can assess your fraud risk and provide you with a comprehensive and personalized plan to mitigate that risk. Contact one of our professionals today for more information.

Today’s workforce is a gig economy. According to a study by intuit, by 2020 40% of American workers will be independent contractors.

Independent contracts can save businesses from the cost of benefits, office space, taxes and many other perks given to employees. Becoming an independent contractor can be very attractive to the individual performing those services as well because of the flexibility over their schedule and the choice in the work they will perform.

Today’s gig economy doesn’t come without implications. Many businesses still employ people and will continue to do so. It’s important to understand the effect of classifying individuals as employees or independent contractors. Many business owners fail to recognize the effect of classifying an individual as an employee or independent contractor. If you have misclassified the individual, you could expose yourself to significant tax liabilities.

As described by the IRS, an employee is anyone who performs services for you where you can control what will be done and how it will be done. Classifying workers as employees requires that a company withhold applicable Federal, state and local income taxes, pay Social Security, Medicare taxes, state unemployment insurance tax and pay any workers compensation fees. Employee status also requires filing a number of returns during the year with various taxing authorities and providing W-2’s to all employees by January 31. Not to mention, employees may also have rights to benefits such as vacation, holidays, health insurance or retirement plans.

Over the years, we have come to learn that there are a number of common myths that you should avoid in classifying your workers. The more frequent inappropriate decisions to classify an employee as an independent contractor include:

The IRS notes that simply because a worker does assignments for many companies does not necessarily suggest independent contractor status. The determination of whether a worker is an employee or an independent contractor rests primarily upon the extent that the employer has to direct and control the individual with regard to what and how an activity is to be accomplished. Generally, the employer controls how an employee performs a service. On the other hand, independent contractors determine for themselves how a given assignment is to be completed.

To aid business owners, the IRS has developed tests to be used as guiding points to indicate the extent and direction of control present in any employer/employee/independent contractor situation. The degree of importance of each factor varies depending on the occupation and the facts of the particular situation.

IRS Control Test
1. Behavioral Control 

Employee status is determined when the business can direct and control the work performed by the worker. Consider:

2. Financial Control

If the business can direct or control the financial and business aspects of the worker’s job, it may suggest employee status. Consider:

3. Relationship

The type of relationship is dependent upon how the worker and business perceive their interaction with one another. Consider:

In addition, the Voluntary Classification Settlement Program (VCSP) offers certain eligible businesses the option to reclassify their workers as employees with partial relief from federal employment taxes.

The new tax reform legislation that was signed into law today was the largest change to the tax system in over 3 decades. The last time the U.S. tax code saw significant reforms was under President Reagan in 1986. Those reforms sought to simplify income tax, broaden the tax base and eliminate many tax shelters.

Under this new legislation, substantial changes have been made to both individual and corporate tax rates. While most of the corporate provisions are permanent, individual provisions technically expire by the end of 2025. This expiration date is causing speculation on whether a future Congress will uphold the Individual provisions.

The new tax code contains many provisions that will affect individual, estate, and corporate taxpayers. To help you prepare, we have highlighted a few of the most pertinent details below. Please keep in mind, the purpose of this article is to summarize the key provisions.

Much more detail can be found here

What’s Changing?

Tax Bracket Rates. While taxpayers will still fall into one of seven tax brackets based on their income, the rates have changed. Some of the brackets have been lowered. The new rates are: 10%, 12%, 22%, 24%, 32%, 35% and 37%.

Standard Deduction. The standard deduction has nearly doubled. For single filers, it has increased from $6,350 to $12,000; for married couples filing jointly, it’s increased from $12,700 to $24,000.

Personal Exemption. Under the prior tax code, a taxpayer could claim a $4,050 personal exemption for themselves, their spouse and each of their dependents, thus lowering their taxable income. Under the new tax code, the personal exemption has been eliminated. For some families, this will reduce or counter the tax relief they receive from other parts of the reform package.

State and Local Tax Deduction. The state and local tax deduction, or SALT, now has a cap. While it remains in place for those who itemize their taxes, it now has a $10,000 limit. This is a significant change, as filers could previously deduct an unlimited amount for state and local property taxes, plus income or sales taxes.

The Child Tax Credit. The child tax credit has been expanded, doubling to $2,000 for children under 17. It’s also available to more people. Single parents who make up to $200,000 and married couples who make up to $400,000 can claim the entire credit, in full.

Non-Child Dependents. A new tax credit is available for non-child dependents. Taxpayers, such as elderly parents, can claim a $500 temporary credit for non-child dependents. This can apply to a number of people adults support, such as children over age 17, elderly parents or adult children with a disability.

Alternative Minimum Tax. Fewer taxpayers will be affected by the alternative minimum tax. The purpose of the AMT is to ensure those who receive a lot of tax breaks are still paying some level of federal income taxes. The exemption will rise to $70,300 for singles, and to $109,400 for married couples.

Mortgage Interest Deduction. Going forward, anyone purchasing a home will only be able to deduct the first $750,000 of their mortgage debt. Down from $1 million, this will likely only affect people buying homes in more expensive regions. Current homeowners will likely be unaffected.

529 Savings Accounts. In the past, 529 savings accounts were untaxed and could only be applied towards college expenses.  Under the new tax code, up to $10,000 can be distributed annually to cover the cost of sending a child to a public, private or religious elementary or secondary school.

Alimony Payment Tax Deduction. The tax deduction for alimony payments will be eliminated for couples who sign divorce or separation paperwork after December 31, 2018.

Moving Expenses Deduction. The tax deduction for moving expenses is also gone, but there may be exceptions for members of the military.

Tax Preparation Deduction. Taxpayers can no longer deduct the cost of having their taxes prepared by a professional or the money they may have spent on tax preparation software.

Disaster Deduction.  Under the prior tax code, losses sustained due to a fire, storm, shipwreck or theft that insurance did not cover and exceeded 10% of their adjusted gross income, were deductible. Effective under the new tax code, taxpayers can only claim the disaster deduction if they are affected by an official national disaster.

Estate Tax. Prior to the tax reform, a limited number of estates were subject to the estate tax, a tax which applies to the transfer of property after someone dies. Now, even fewer taxpayers will be affected. The amount of money exempt from the tax — previously set at $5.49 million for individuals, and at $10.98 million for married couples — has been doubled.

Health Insurance Mandate. The failure to repeal Obamacare earlier this year afforded the Republicans the opportunity to eliminate one of the health law’s key provisions with tax reform. Effective in 2019, the individual mandate, which penalized people who did not have health care coverage, was eliminated.

Corporate Tax Rate. Beginning in 2018, the corporate tax rate will be cut from 35% to 21%.

Pass-through Entities. The owners, partners, and shareholders of S-corporations, LLCs and partnerships will receive a tax break. Those who pay their share of the business’ taxes through their individual tax returns will have a 20% deduction.

To ensure business owners do not abuse the provision, the legislation has included additional terms to this provision.

Multinational Corporations. The new tax bill is a shift towards globalization, changing the way multinational corporations are taxed. Companies will no longer pay federal taxes on income they make overseas. These companies will be required to pay a one-time fee, 15.5% on cash assets and 8% on non-cash assets, on any existing offshore profits.

Nonprofit Organizations. There is a new 21% excise tax on nonprofit employers for salaries they pay out above $1 million.

Sexual Harassment Settlements. Companies can no longer deduct any settlements, payouts or attorney’s fees related to sexual harassment if the payments are subject to non-disclosure agreements.

Bonus Depreciation. The Bonus depreciation will increase from 50% to 100% for property placed in service after September 27, 2017, and before January 1, 2023, when a 20% phase-down schedule will begin. The previous rule that made bonus depreciation available only for new properties was also removed.

Vehicle Depreciation. The new tax bill raises the cap placed on depreciation write-offs of business-use vehicles. $10,000 for the first year a vehicle is placed in service; $16,000 for the second year; $9,600 for the third year; and $5,760 for each subsequent year until costs are fully recovered. The new limits only apply to vehicles placed in service after December 31, 2017.

 

What’s Staying the Same?

Student Loan Interest. You can still deduct Student Loan Interest – the deduction for this will remain max $2,500.

Medical Expenses. The deduction for medical expense was untouched. Rather, it was expanded by two years. Filers can deduct medical expenses that exceed 7.5% of their adjusted gross income.

Teachers. Teachers will continue to deduct up to $250 to offset what they spend on resources for the classroom.

Electric Car Credit. If you drive a plug-in electric vehicle, you can still claim a credit of up to $7,500.

Home Sellers. Homeowners that sell their house and make a profit can exclude up to $500,000 (or $250,000 for single filers) from capital gains. This still requires that it is their primary home and they have lived there for at least two of the past five years.

Tuition Waivers. Tuition Waivers, typically awarded to teaching and research assistants will remain tax free.

 

What Does All This Mean?

Although doubling the standard deduction will arguably simplify the process of filing taxes for individuals, it’s not true for all cases. There are still deductions and credits to consider. More so, filing for small businesses can potentially become more complicated. Each client scenario will be different and this has to be taken into account. The purpose of this article is to summarize the key provisions, much more detail can be found here. Depending on your situation, it may be beneficial to review your filing status as part of an overall tax planning strategy.

Again, please keep in mind that most of the items are effective January 1, 2018. The professionals in our office can answer questions you may have regarding the individual, estate and corporate tax provisions outlined in the Republican’s tax reform bill, contact your tax professional at Hamilton Tharp with any questions or email us at info@ht2cpa.com.