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Didn’t Receive PPP funds? Additional Assistance Programs Exist…

Before you file your 2nd Quarter Payroll Tax Reports, check out the Employee Retention Credit!

Businesses that have been impacted financially by COVID-19 may be able to take advantage of a new, refundable tax credit called the Employee Retention Credit. The credit is designed to encourage businesses to keep employees on their payroll and is worth 50 percent of qualifying wages up to $10,000 that are paid by an eligible employer.

Does my business qualify for the Employee Retention Credit?

  • The credit is available to all qualified employers regardless of size, including tax-exempt organizations.
  • The credit is not available to small businesses who take small business loans or state and local governments and their instrumentalities.

What is a qualifying employer?

There are two categories of qualified employers:

  • The employer’s business is fully or partially suspended by government order due to COVID-19 during a calendar quarter.
  • The employer’s gross receipts are below 50 percent of the comparable quarter in 2019. Once the employer’s gross receipts go above 80 percent of a comparable quarter in 2019, they no longer qualify after the end of that quarter.

How is the credit calculated?

The amount of the credit is 50 percent of qualifying wages paid up to $10,000 in total. Wages taken into account are not limited to cash payments, but also include a portion of the cost of employer-provided health care. Qualified health plan expenses generally include both the portion of the cost paid by the employer and the portion of the cost paid by the employee with pretax salary reduction contributions. Amounts paid by the employee with after-tax contributions are not included.

What is a qualifying wage?

Qualifying wages are wages that are based on the average number of a business’s employees in 2019. There are two different measures for business, depending on size:

  • Employers with less than 100 employees. If the employer had 100 or fewer employees on average in 2019, the credit is based on wages paid to all employees, regardless if they worked or not. If the employees worked full time and were paid for full-time work, the employer still receives the credit.
  • Employers with more than 100 employees. If the employer had more than 100 employees on average in 2019, then the credit is allowed only for wages paid to employees who did not work during the calendar quarter.

How do I receive the credit?

While many tax credits are available when filing a tax return, the employee retention credit works differently in that employers can be reimbursed immediately by reducing their required payroll tax deposits. Payroll taxes, which include federal income tax withheld as well as taxable social security wages and tips, taxable Medicare wages and tips, and additional Medicare tax withholding, are taxes that have been withheld from employees’ wages. Generally, these payroll tax deposits are filed quarterly on Form 941, Employer’s Quarterly Federal Tax Return.

When can I start reporting qualified wages?

Eligible employers should report their total qualified wages and the related health insurance costs for each quarter on Form 941 beginning with the second quarter (March 12, 2020).
Wages paid through December 31, 2020, are also eligible for the credit.

What if my payroll tax deposits are less than the credit?

If the employer’s employment tax deposits are not sufficient to cover the credit, the employer may receive an advance payment from the IRS by submitting Form 7200, Advance Payment of Employer Credits Due to COVID-19

Help is just a phone call away.

Please contact the office if you need more information on the Employer Retention Credit and other COVID-19 economic relief efforts.

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Latest News on the COVID-19 PPP Loan Forgivness

The details of the PPP loan program are, currently, ever changing. Here is the latest news on the COVID-19 PPP loan forgiveness program:

 

As part of the Coronavirus Aid, Relief, and Economic Security (CARES) Act, signed into law March 27, many small business owners were able to apply for – and receive – a loan of up to $10 million under the Paycheck Protection Program (PPP). Businesses – including nonprofits, veterans’ organizations, Tribal entities, self-employed individuals, sole proprietorships, and independent contractors – that were in operation on February 15 and that have 500 or fewer employees are eligible for the PPP loans. The deadline for applying for a PPP loan is June 30, 2020. If the loan proceeds are used as specified, business owners may apply to have the loan forgiven.

Here’s what you need to know about loan forgiveness under the PPP:

Covered Period

The loan covers eight weeks (56 days) of payroll, rent, mortgage interest and utility expenses; however, the Paycheck Protection Program Flexibility Act of 2020 (PPPFA) allows PPP loan borrowers that received loans before June 5th the option to extend the covered period to 24 weeks. The original June 30 deadline for rehiring workers and spending the PPP funds has also been extended to December 31 to allow for the 24-week period.

Generally, the first day of the covered period is the same day as the loan disbursement. For example, if the loan proceeds were received on Wednesday, April 22, that is the first day of the covered period. The last day of the covered eight-week period, for example, would then be Tuesday, June 16.

Alternate Payroll Covered Period. If you pay your employees weekly or bi-weekly, you may elect to have the eight-week (56-day) period – or 24-week period – begin on the first day of the first pay period following the PPP loan disbursement date. In the case of an eight-week period, if the loan proceeds were received on Wednesday, April 22, and the first day of the first pay period following the loan disbursement is Monday, April 27, the first day of the Alternative Payroll Covered Period is April 27 and the last day of the Alternative Payroll Covered Period is Sunday, June 21.

Eligible Expenses

PPP loans cover both payroll costs and nonpayroll costs; however, to be eligible for loan forgiveness, 60 percent of the PPP loan proceeds must go toward payroll costs (previously 75 percent), with the remaining 40 percent to be used toward nonpayroll costs.

If your business does not meet the 60 percent requirement, there will be a proportionate reduction in loan forgiveness – not a complete loss.

Here’s an example using the eight-week covered period: A business owner that received loan proceeds of $250,000 must use $150,000 of that amount on payroll costs to be eligible for loan forgiveness. The remaining $100,000 can be used to pay nonpayroll costs as specified below.

Under the PPPFA, businesses that received PPP loan funds are now able to delay payment of their payroll taxes. This was previously prohibited under the CARES Act.

Eligible payroll costs. Payroll costs include costs for employee vacation, parental, family, medical, and sick leave. The total amount of cash compensation – payroll costs paid and payroll costs incurred – for each individual employee may not exceed $15,385 for the covered period of eight weeks (56 days) based on an annualized salary of $100,000. If the borrower chooses a covered period of 24 weeks, then each individual employee may not exceed $46,154 for the covered period of 24 weeks based on an annualized salary of $100,000. Bonuses can be included as long as this threshold amount is not exceeded.

Payroll expenses for independent contractors or sole proprietors only include wages, commissions, income, or net earnings from self-employment, or similar compensation. PPP loan funds can be used to cover the owner compensation costs for eight weeks (8/52) of 2019 profit only – up to a maximum of $15,385. However, if the 24-week covered period is chosen, it is limited to 2.5 months (2.5/12) of 2019 net profit from Form 1040 Schedule C – up to a maximum of $20,833.

To count toward eligible payroll expenses, employer contributions for retirement plans as well as health insurance must be paid during the covered period.

Loan forgiveness is based on full-time equivalent (FTE) workers and a standard 40-hour work week. A simplified method allows 1.0 FTE for 40 hour work weeks and 0.5 FTE for less than 40 hour work weeks. Calculations can be done using either method to determine which one is most advantageous to the employer. Special rules apply for workers whose salary has been reduced by 25 percent or more. Please call if you have any questions about this.

Businesses that received PPP loans can exclude laid-off employees from loan forgiveness reduction calculations if the employees turn down a written offer to be rehired.

Eligible nonpayroll costs. Specific nonpayroll costs are also eligible for forgiveness; however, they cannot exceed 40 percent of the total forgiveness amount. They must be paid or incurred during the covered period and paid on or before the next regular billing date, even if the billing date is after the covered period and can include costs that were paid and incurred one time.

  • Payments of interest on any business mortgage obligation on real or personal property incurred before February 15, 2020. These amounts do not include any prepayment or payment of principal
  • Business rent or lease payments (including leases for vehicles and office machinery) entered into force before February 15, 2020; and
  • Business utility payments for services begun before February 15, 2020 such as electricity, gas, water, transportation, telephone, or internet access.
  • Interest payments on debt obligations incurred before February 15, 2020
  • Refinancing an SBA EIDL loan made between January 31, 2020, and April 3, 2020

Self-employed individuals can use PPP loan funds to cover interest, rent and utility payments are also eligible as long as these amounts are deductible on Form 1040 Schedule C.

Loan Amounts not Forgiven

Any amounts that aren’t forgiven must be repaid at an interest rate of 1 percent, which begins to accrue upon loan disbursement. Payments, however, are deferred for six months once the SBA makes a determination of forgiveness. Under the PPPFA borrowers now have five years to repay new loans approved on or after June 5, 2020 (previously it was two years). Borrowers with loans disbursed prior to June 5, will still need to abide by the two-year loan period unless the lender agrees to extend it to five years.

Tracking Expenses

Business owners need to keep accurate records of how PPP loans are used. Failing to document or falsely claiming eligible expenses could lead to criminal penalties.

Don’t Delay. Start Planning Now to Maximize PPP Loan Forgiveness

Applications for forgiveness must be submitted within 10 months of the date of receiving the loan or it won’t be forgiven. If you’ve received a PPP loan and want to make sure your loan is forgiven, help is just a phone call away.

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New PPP Loan Forgiveness Guidelines and Applications Released (06-17-20)

A revised PPP loan forgiveness application and guidelines, and a new “EZ” loan forgiveness application, have been released to incorporate the changes made by the Paycheck Protection Program Flexibility Act and provide additional guidance. PRESS RELEASE – SBA and Treasury Announce New EZ and Revised Full Forgiveness Applications for the Paycheck Protection Program

The application and revised interim rules clarify that, for borrowers using the new 24-week loan forgiveness covered period, the maximum compensation eligible for loan forgiveness:

  • Per employee is increased to $46,154 (24 ÷ 52 × $100,000) plus covered benefits such as health care, retirement contributions, and state payroll taxes; and
  • For owners, is capped at 2.5 months of 2019 compensation, with a maximum of $20,833 (2.5 ÷ 12 × $100,000). Note: The application specifically lists self-employed individuals, general partners, and owner-employees, so it appears corporation owner-employees are included in this cap.

The new application instructions also clarify that:

  • Eligible payroll costs do not include any employer health insurance contributions made on behalf of self-employed individuals, general partners, or S corporation owner-employees;
  • Employer retirement contributions made on behalf of a self-employed individual or general partner are also excluded from payroll costs; and
  • Employer retirement contributions on behalf of owner-employees are capped at 2.5 months’ worth of the 2019 contribution amount. This limit is included on the EZ application but is not included on the full forgiveness application or in the updated interim final rule, but it is possible it will be added in the future.

The new simplified EZ application is available to be used by borrowers who:

  • Are self-employed and did not list any employees on their original loan application; or
  • Have employees, but are not subject to any loan forgiveness reduction due to salary or full-time equivalent employee reductions.

The revised interim rules and loan applications and instructions are available at:
https://home.treasury.gov/system/files/136/PPP-IFR–Revisions-to-the-Third-and-Sixth-Interim-Final-Rules.pdf

https://home.treasury.gov/system/files/136/3245-0407-SBA-Form-3508-PPP-Forgiveness-Application.pdf
https://home.treasury.gov/system/files/136/PPP-Loan-Forgiveness-Application-Instructions_1_0.pdf

https://home.treasury.gov/system/files/136/PPP-Forgiveness-Application-3508EZ.pdf
https://home.treasury.gov/system/files/136/PPP-Loan-Forgiveness-Application-Form-EZ-Instructions.pdf

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PPP Loan Forgiveness Extension Bill Sent to President (06-04-20)

The Paycheck Protection Program Flexibility Act of 2020 (H.R. 7010) was passed by the House and Senate and is now on its way to the President. The President has indicated that he will sign the bill.

Key provisions of the bill include:

  • Extending the loan forgiveness covered period from eight weeks to 24 weeks from the loan origination date, as long as the covered period does not extend beyond December 31, 2020. This means that borrowers will now be able to have all PPP loan amounts paid during this extended covered period forgiven as long as the amounts are expended for qualified purposes (payroll, rent/mortgage interest, and utilities). Borrowers who received the loan prior to the bill’s date of enactment may still elect to use either the original eight-week loan forgiveness period or the new 24-week period;
  • Only allowing loan forgiveness if at least 60% of the total loan proceeds are used for payroll costs. Currently, forgiveness is limited so that at least 75% of the forgiveness amount is for payroll costs;
  • Eliminating the full-time employee equivalent employee reduction provision if the business can document that the reduction was due to the business’s inability to:
    • Rehire individuals who were employees on February 15, 2020, and hire similarly qualified employees for unfilled positions by December 31, 2020; or
    • Return to the same level of business activity as the business was operating at before February 15, 2020, due to compliance with sanitation, social distancing, or any other worker or customer safety requirement related to COVID-19 imposed by specified federal agencies during the period beginning on March 1, 2020, and ending December 31, 2020;
  • Allowing for a five-year rather than a two-year maturity date for:
    • All loans made on or after the bill’s date of enactment; and
    • Loans made earlier than that date, if both the lender and borrower mutually agree;
  • Deferring payments of principal, interest, and fees on any PPP loan until the SBA remits the borrower’s loan forgiveness amount to the bank (previously, this period was six months to one year from the loan origination date); and
  • Allowing taxpayers to qualify for payroll tax deferral even if they’ve received PPP loan forgiveness.
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FAQ: Did the new law change capital gains taxation?

How did the new tax law, TCJA, changed the Capital Gains Rates and the Kiddie Tax? New Brackets!

 

The Tax Cuts and Jobs Act did not directly change the tax rate on capital gains: they remain at 0, 10, 15 and 20 percent, respectively (with the 25- and 28-percent rates also reserved for the same special situations). However, changes within the new law impact both when the favorable rates are applied and the level to which to may be enjoyed.

 

Capital gains rates

The maximum rates on net capital gain and qualified dividends are generally retained after 2017 and are 0 percent, 15 percent, and 20 percent. The breakpoints between the zero- and 15-percent rates (“15-percent breakpoint”) and the 15- and 20-percent rates (“20-percent breakpoint”) are generally the same amounts as the breakpoints under prior law, except the breakpoints are indexed using the new C-CPI-U factor in tax years beginning after 2018. For 2018:

  • the 15-percent breakpoint is $77,200 for joint returns and surviving spouses (one-half of this amount ($38,600) for married taxpayers filing separately), $51,700 for heads of household, $2,600 for estates and trusts, and $38,600 for other unmarried individuals; and
  • The 20-percent breakpoint is $479,000 for joint returns and surviving spouses (one-half of this amount for married taxpayers filing separately), $452,400 for heads of household, $12,700 for estates and trusts, and $425,800 for other unmarried individuals.

“Zero” rate. In the case of an individual (including an estate or trust) with adjusted net capital gain, to the extent the gain would not result in taxable income exceeding the 15-percent breakpoint, such gain is not taxed.

Comment. The breakpoints are not aligned with the new general income tax rate brackets. For example, alignment for joint filers would have the 15-percent breakpoint at $77,400 rather than $77,200; and, more significantly, 20 percent at $600,000 rather than at $479,000. Instead, they continue the alignment themselves more closely to the prior-law rate brackets.

Comment. As under prior law, unrecaptured section 1250 gain generally is taxed at a maximum rate of 25 percent, and 28-percent rate gain is taxed at a maximum rate of 28 percent. In addition, an individual, estate, or trust also remains subject to the 3.8 percent tax on net investment income (NII tax).

 

Kiddie tax

Effective for tax years beginning after December 31, 2017, and before January 1, 2026, the “kiddie tax” is simplified by effectively applying ordinary and capital gains rates applicable to trusts and estates to the net unearned income of a child. A child’s “kiddie tax” is no longer affected by the tax situation of his or her parent or the unearned income of any siblings.

Taxable income attributable to net unearned income is taxed according to the brackets applicable to trusts and estates, with respect to both ordinary income and income taxed at preferential rates. For 2018, that means that the 15-percent capital gain rate starts at $2,600 and rising to 20 percent when $12,700 is reached.

 

Carried interest

Capital gain passed through to fund managers via a partnership profits interest (carried interest) in exchange for investment management services must meet an extended three-year holding period to qualify for long-term capital gain treatment. Under new Code 1061(a), if a taxpayer holds an applicable partnership interest at any time during the tax year, this rule treats carried interest as short-term capital gain—taxed at ordinary income rates— based on a three-year holding period instead of the usual one-year period.

 

SSBIC rollovers

For sales after 2017, the new law repeals the election to defer recognition of capital gain realized on the sale of publicly traded securities if the taxpayer used the sale proceeds to purchase common stock or a partnership interest in a specialized small business investment company (SSBIC). Prior to 2018 under former Code Sec. 1044, C corporations and individuals could elect to defer recognition of capital gain realized on the sale of publicly traded securities if the taxpayer used the sales proceeds within 60 days to purchase common stock or a partnership interest in a specialized small business investment company (SSBIC).

 

Like-kind exchanges

Like-kind exchanges have often been used to defer taxable gains. Going forward, like-kind exchanges are allowed only for real property after 2017 (Code Sec. 1031(a)(1)). Like-kind exchanges are no longer available for depreciable tangible personal property, and intangible and nondepreciable personal property after 2017. Gain on those assets will no longer be allowed to be deferred.

 

Code Sec. 199A deduction

The concept of capital gain is intertwined within the new passthrough deduction for partnerships, S corporations and sole proprietorships under Code Sec. 199A in several ways. A noncorporate taxpayer can claim a Code Sec. 199A deduction for a tax year for the sum of—

(1)

the lesser of —

(a) the taxpayer’s “combined qualified business income amount”; or

(b) 20 percent of the excess of the taxpayer’s taxable income over the sum of (i) the taxpayer’s net capital gain under Code Sec. 1(h) and (ii) the taxpayer’s aggregate qualified cooperative dividends; plus

(2)

the lesser of —

(a) 20 percent of the taxpayer’s aggregate qualified cooperative dividends; or

(b) the taxpayer’s taxable income minus the taxpayer’s net capital gain (Code Sec. 199A(a), as added by the 2017 Tax Cuts Act).

Comment. As a result, the Code Sec. 199A deduction cannot be more than the taxpayer’s taxable income reduced by net capital gain for the tax year, making monitoring of capital gains a “must” for some taxpayers.

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