Due to the COVID-19 pandemic, Congress made changes to the tax law related to retirement account distributions. The changes open up new, time-limited ways for you to save tax dollars.
Congress waived all 2020 RMDs. But if you took your RMD before Congress made this change, you have two ways you can undo it:
Because of the financial downturn, this may be the year to convert your traditional IRA to a Roth IRA. If you are eligible for a coronavirus-related distribution (highly likely), you can convert up to $100,000 of your traditional IRA to a Roth and take advantage of the three-year spread of the taxable income.
If you have a tax year 2020 loss, you may want to include the conversion income in tax year 2020 so that the loss fully or partially offsets your tax-free Roth IRA conversion.
If you want to discuss any of the above, please Contact us.
To help your small business, Congress created a lot of new tax-saving provisions due to the COVID-19 pandemic.
Many of my clients own and operate S corporations and expect the tax law to treat them differently, as it does with their health insurance deduction.
Perhaps you, too, would like us to help clarify which of the COVID-19 tax benefits the S corporation owner can use to put cash in his or her pocket. Here’s a list as of today.
Payroll Tax Deferral
You can defer payment of your S corporation’s employer share of Social Security tax on federal tax deposits you would otherwise have to make during the period beginning on March 27, 2020, and ending December 31, 2020.
Your S corporation’s deferred Social Security taxes are due in two installments. You must pay 50 percent by December 31, 2021, and the other 50 percent by December 31, 2022.
If you are an S corporation owner, the S corporation can defer the employer portion of Social Security tax on your salary just as it can on any other employee.
If your S corporation receives a Paycheck Protection Program (PPP) loan, and it obtains loan forgiveness, it does not qualify for the payroll tax deferral provision.
PPP exception loophole. The PPP loan forgiveness prohibition doesn’t apply until your S corporation receives a decision from your lender on PPP loan forgiveness. Before that date, you can defer payroll taxes even if you apply for and receive a PPP loan.
Example 1. You operate as an S corporation and have three employees, including yourself. Your S corporation’s April payroll is $10,000, including your W-2 salary or wages.
The employer Social Security tax on this payroll is $620. Your S corporation doesn’t have to pay it with its federal tax deposit. Instead, it will pay $310 by December 31, 2021, and the other $310 by December 31, 2022.
Employee Retention Credit
Your S corporation gets a refundable payroll tax credit against the employer share of employment taxes equal to 50 percent of its wages paid to employees after March 12, 2020, and before January 1, 2021.
But the law also states that “rules similar to the rules of sections 51(i)(1) and 280C(a) . . . shall apply.”
Code Section 280C(a) states you can’t deduct wage expenses equal to the employee retention credit you receive—no double dipping.
Code Section 51(i)(1) affects the S corporation shareholder by denying the employee retention credit for wages paid to the following family members of a 50-percent-or-more shareholder:
The provision does not prevent the S corporation owner from taking the employee retention credit on his or her wages, provided that the S corporation otherwise meets one of the following requirements:
PPP Exception. If you receive a PPP loan, then you don’t qualify for the employee retention credit.
Example 2. ABC Corporation is an S corporation with four equal owners who each own 25 percent. It has eight employees: the four owners and four children of the owners. A government order partially suspended the business operations. Because no shareholder has 50 percent or more ownership, the wages of all eight employees qualify for the employee retention credit.
Example 3. DEF Corporation is an S corporation that is 100 percent owned by a married couple. It has four employees: the two owners and two children of the owners. A government order partially suspended the business operations. Only the wages of the two owners qualify for the employee retention credit.
Tax-Free Disaster Payments
Congress allows your S corporation to make tax-deductible disaster-related payments to its employees, and those payments are tax-free to its employees.
But as you likely know, S corporation owners usually can’t take advantage of tax-free fringe benefits, and usually have to include their value as taxable income on their W-2.
We have good news about disaster-related payments: none of the guidance issued about these payments denies their favorable tax treatment to the S corporation shareholder. In addition, the IRS doesn’t mention such payments in Publication 15-B, Employer’s Tax Guide to Fringe Benefits.
But we have some bad news, too—there is no guidance explicitly allowing the S corporation owner to take advantage of the tax-free disaster-related payments.
If you choose to have your S corporation provide tax-free disaster-related payments to you, we recommend you implement a formal, written plan and keep excellent documentation—even though such steps are not required by the law.
Example 4. Your S corporation sets up a plan to give every employee a $500 payment to cover telework supplies and ongoing expenses during the COVID-19 pandemic. Your business is subject to a shutdown order, and all 12 of your employees, including you, must work remotely from home.
The $6,000 in payments your S corporation provides is tax-deductible to the corporation and tax-free to the employees, including the S corporation shareholder.
Many small-business owners, like you, operate out of an S corporation. And as you know, the tax law sometimes isn’t kind to S corporation owners, because the law limits or eliminates tax breaks other business owners can take.
Luckily for you, S corporation owners get to benefit from most of the big COVID-19 tax benefits, including:
If you need help with any of the COVID-19 tax laws, please Email us.
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Get ready for this: “I’m from the government, and I’m here to help.”
Here’s the deal: “I’m going to give you $20,833 today. I want you to give me $5,448 no later than two years from now. You can keep the $15,385 difference, tax-free—no strings.”
It’s true. The lucky recipient could be you. To obtain the full $15,385 tax-free cash result in this deal (one of many COVID-19-related assistance programs), you must
If you are self-employed, you have no employees, and your net profits are
The results above come from the COVID-19 Payroll Protection Program (PPP). When you are a self-employed taxpayer with no employees, the PPP treats you as the one and only employee, and treats your net profits as your payroll.
Under the PPP, you go to your bank or another Small Business Association (SBA) bank or lender and obtain the PPP loan based on your 2019 net profits. It’s a no-doc loan--super easy. No credit report, no nothing.
Do This Now
The SBA runs out of PPP money in a hurry. The second round of funding started a few days ago.
If you snooze, you lose. And then you’ll have to wait until round 3 of funding, should it take place. (We think it will.)
If you are self-employed, with no employees, you absolutely need to qualify for this loan and its forgiveness. Think free money. Think cash help during this crisis.
There are three questions and answers that will help you understand this program during these COVID-19 times.
You need to move quickly. The government’s newest (round 2) PPP funding will be used up in a matter of weeks.
Get in the game now. Even if you miss out on this round 2 of funding, having your application on file for a possible round 3 of funding would give you a head start.
If you need my help, please don’t hesitate to reach out to us. We are your trusted advisors and here to help your business survive this pandemic.
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Spencer Accounting Group, LLC does not provide investment, tax, legal, or retirement advice or recommendations in these blogs. The information presented here is not specific to any individual's personal circumstances.
Keana Spencer is an Accountant, Entrepreneur, and Educator to her clients, with a strong passion. Keana has over 10 years of experience and through her practice, she is a source of knowledge and strategies to her clients.