From what we know, when lawmakers originally passed the Paycheck Protection Program (PPP), they thought that under its provisions,
Fly in the Ointment
In late April, the IRS issued Notice 2020-32, which asserts that PPP loan recipients may not deduct business expenses paid using the PPP monies that gave rise to forgiveness (defined payroll, rent, utilities, and interest).
In a May 5, 2020, letter to Secretary of the Treasury Steven Mnuchin, Senator Chuck Grassley (chairman of the Committee on Finance), Senator Ron Wyden (ranking member on the Committee on Finance), and Congressman Richard E. Neal (chairman of the Committee on Ways and Means) jointly stated that the IRS got this wrong and that the intent of the CARES Act was for the PPP to be a tax-free grant.
The letter makes sense. You can read it here.
The IRS was unmoved by the lawmakers’ letter. The IRS position was clear: no deduction for the expenses paid with the PPP money. The IRS understood that perhaps lawmakers didn’t mean that to happen, but in the eyes of the IRS, the way that the lawmakers enacted the law created the problem. To fix it, lawmakers simply need to pass a new law.
Frankly, we thought that lawmakers would pass a new law and take care of this problem. But no, that has not happened.
New Nails in the Coffin
On November 18, 2020, the IRS drove two new nails into the coffin regarding deductions for PPP monies that were forgiven and spent on payroll, rent, interest, or utilities.
With the rulings described above, the IRS has clarified its position and clearly stated to lawmakers: if you don’t like the non-deductibility of expenses paid with PPP monies, change the law.
Have you established a 105-HRA, Qualified Small Employer Health Reimbursement Arrangement (QSEHRA), or Individual Coverage Health Reimbursement Arrangement (ICHRA) to reimburse your employees for medical expenses?
If so, congratulations! These HRAs are a great way to pay your employees’ medical expenses and obtain a tax deduction.
But all three types of HRAs come with a pesky IRS filing requirement: Each year, you must pay a Patient-Centered Outcomes Research Institute (PCORI) fee that is used to help support the Patient-Centered Outcomes Research Institute.
The fee is small—currently, $2.54 times the “average number of lives covered” by your HRA during the previous plan year. There are various ways to calculate the number of lives covered.
You must pay the fee by filing Form 720 with the IRS by July 31 of the calendar year following the end of your plan year.
Paying the PCORI fee is a bit of a nuisance. But on the plus side, the fee is tax deductible.
If you need my assistance or would simply like to discuss HRAs, please contact us.
Wow, how time flies. Yes, December 31 is just around the corner.
That’s your last day to find tax deductions available from your existing business and personal (yes, personal) vehicles that you can use to cut your 2020 taxes. But don’t wait. Get on this now!
1. Take Your Child’s or Spouse’s Car and Sell It
We know—this sounds horrible. But stay with us.
What did you do with your old business car? Do you still have it? Is your child driving it? Or perhaps your spouse has it as a personal car.
We ask because that old business vehicle could have a big tax loss embedded in it. If so, your strategy is easy: take the vehicle and sell it to a third party before December 31 so you have a tax-deductible loss this year.
Your loss deduction depends on your percentage of business use. That’s one reason to sell this vehicle now: the longer you let your spouse or teenager use it, the smaller your business percentage becomes and the less tax benefit you receive.
2. Cash In on Past Vehicle Trade-Ins
In the past (before 2018), when you traded vehicles, you pushed your old business basis to the replacement vehicle under the old Section 1031 tax-deferred exchange rules. (But remember, this rule doesn’t apply any longer to Section 1031 exchanges of vehicles or other personal property occurring after December 31, 2017.)
Regardless of whether you used IRS mileage rates or the actual-expense method for deducting your business vehicles, you could find a big deduction here.
Check out how Sam finds a $27,000 tax-loss deduction on his existing business car. Sam has been in business for 11 years, during which he
During the 11 years Sam has been in business, he has owned four cars. Further, he deducted each of his cars using IRS standard mileage rates.
If Sam sells his mileage-rate car today, he realizes a tax loss of $27,000. The loss is the accumulation of 11 years of car activity, during which Sam never cashed out because he always traded cars before he knew anything about gain or loss.
Further, Sam thought his use of IRS mileage rates was the end of it—nothing more to think about (wrong thinking here, too).
Because the trades occurred before 2018, they were Section 1031 exchanges and so deferred the tax results to the next vehicle. IRS mileage rates contain a depreciation component. That’s one possible reason Sam unknowingly accumulated his big deduction.
To get a mental picture of how this one sale produces a cash cow, consider this: when Sam sells car four, he is really selling four cars—because the old Section 1031 exchange rules added the old basis of each vehicle to the replacement vehicle’s basis.
Examine your car for this possible loss deduction. Have you been trading business cars? If so, your tax loss deduction could be big!
3. Put Your Personal Vehicle in Business Service
Lawmakers reinstated 100 percent bonus depreciation, and that creates an effective strategy that costs you nothing but can produce solid deductions.
Are you (or your spouse) driving a personal SUV, crossover vehicle, or pickup truck with a gross vehicle weight rating greater than 6,000 pounds? Would you like to increase your tax deductions for this year?
If so, place that personal vehicle in business service this year.
If you see opportunities for deductions that you would like to discuss with me, don’t hesitate to contact us.
Here’s an easy question: Do you need more 2020 tax deductions? If yes, continue on.
Next easy question: Do you need a replacement business vehicle?
If yes, you can simultaneously solve or mitigate both the first problem (needing more deductions) and the second problem (needing a replacement vehicle), but you need to get your vehicle in service on or before December 31, 2020.
To ensure compliance with the “placed in service” rule, drive the vehicle at least one business mile on or before December 31, 2020. In other words, you want to both own and drive the vehicle to ensure that it qualifies for the big deductions.
Now that you have the basics, let’s get to the tax deductions.
1. Buy a New or Used SUV, Crossover Vehicle, or Van
Let’s say that on or before December 31, 2020, you or your corporation buys and places in service a new or used SUV or crossover vehicle that the manufacturer classifies as a truck and that has a gross vehicle weight rating (GVWR) of 6,001 pounds or more. This newly purchased vehicle gives you four big benefits:
Example. On or before December 31, 2020, you buy and place in service a qualifying used $50,000 SUV for which you can claim 90 percent business use. Your business cost is $45,000 (90 percent x $50,000). Your maximum write-off for 2020 is $45,000.
2. Buy a New or Used Pickup
If you or your corporation buys and places in service a qualifying pickup truck (new or used) on or before December 31, 2020, then this newly purchased vehicle gives you four big benefits:
To qualify for full Section 179 expensing, the pickup truck must have
Short bed. If the pickup truck passes the more-than-6,000-pound-GVWR test but fails the bed-length test, tax law classifies it as an SUV. That’s not bad. The vehicle is still eligible for either expensing of up to the $25,900 SUV expensing limit or 100 percent bonus depreciation.
If you would like to discuss the vehicle strategy, please call me on my direct line at xxx-xxx-xxxx.
If you would like to discuss the vehicle strategy, please don't hesitate to contact us.
1. Put Your Children on Your Payroll
2. Get Divorced after December 31
3. Stay Single to Increase Mortgage Deductions
4. Get Married on or before December 31
5. Make Use of the 0 Percent Tax Bracket
I know that taxes can cause confusion. Remember, that’s why you have us and we are always here to be of service. If you want to discuss any of the strategies above, please contact us.
The clock continues to tick. Your retirement is one year closer.
You have time before December 31 to take steps that will help you fund the retirement you desire. Here are four things to consider:
1. Establish Your 2020 Retirement Plan
First, a question: As you read this, do you have your (or your corporation’s) retirement plan in place?
If not, and if you have some cash you can put into a retirement plan, get busy and put that retirement plan in place so you can obtain a tax deduction for 2020.
For most defined contribution plans, such as 401(k) plans, you (the owner-employee) are both an employee and the employer, whether you operate as a corporation or as a proprietorship. And that’s good because you can make both the employer and the employee contributions, allowing you to put a good chunk of money away.
2. Claim the New, Improved Retirement Plan Start-Up Tax Credit of Up to $15,000
By establishing a new qualified retirement plan (such as a profit-sharing plan, 401(k) plan, or defined benefit pension plan), a SIMPLE IRA plan, or a SEP, you can qualify for a non-refundable tax credit that’s the greater of
The credit is based on your “qualified start-up costs,” which means any ordinary and necessary expenses of an eligible employer that are paid or incurred in connection with
3. Claim the New Automatic Enrollment $500 Tax Credit for Each of Three Years ($1,500 Total)
The SECURE Act added a nonrefundable credit of $500 per year for up to three years beginning with the first taxable year beginning in 2020 or later in which you, as an eligible small employer, include an automatic contribution arrangement in a 401(k) or SIMPLE plan.
The new $500 auto contribution tax credit is in addition to the start-up credit and can apply to both newly created and existing retirement plans. Further, you don’t have to spend any money to trigger the credit. You simply need to add the auto-enrollment feature.
4. Convert to a Roth IRA
Consider converting your 401(k) or traditional IRA to a Roth IRA.
If you make good money on your IRA investments and you won’t need your IRA money during the next five years, the Roth IRA over its lifetime can produce financial results far superior to the traditional retirement plan.
You first need to answer this question: How much tax will I have to pay now to convert my existing plan to a Roth IRA? With the answer to this, you know how much cash you need on hand to pay the extra taxes caused by the conversion to a Roth IRA.
Here are four reasons you should consider converting your retirement plan to a Roth IRA:
If you would like my help with any of the above, please don't hesitate to contact us!
All small-business owners with one to 49 employees should have a medical plan in their business.
Sure, the tax law does not require you to have a plan, but you should.
Most of the tax rules that apply to medical plans are straightforward when you have fewer than 50 employees.
Here are the six opportunities for you to consider:
If you need more insights into the above opportunities, please don't hesitate to contact us.
You likely formed an S corporation to save on self-employment taxes.
If so, is your S corporation salary
Getting the S corporation salary right is important. First, if it’s too low and you get caught by the IRS, you will pay not only income taxes and self-employment taxes on the too-low amount, but also both payroll and income tax penalties that can cost plenty.
Second, in most cases, the IRS is going to expand the audit to cover three years and then add the income and penalties for those three years.
Third, after being found out, you likely are now stuck with this higher salary, defeating your original purpose of saving on self-employment taxes.
Getting to the Number
The IRS did you a big favor when it released its “Reasonable Compensation Job Aid for IRS Valuation Professionals.”
The IRS states that the job aid is not an official IRS position and that it does not represent official authority. That said, the document is a huge help because it gives you some clearly defined valuation rules of the road to follow and takes away some of the gray areas.
The two approaches Spencer Accounting Group will likely use based on your business are the:
The S corporation’s payment or reimbursement of health insurance for the shareholder-employee and his or her family goes on the shareholder-employee’s W-2 and counts as compensation, but it’s not subject to payroll taxes, so it fits nicely into the payroll tax savings strategy for the S corporation owner.
The S corporation’s employer contributions on behalf of the owner-employee to a defined benefit plan, simplified employee pension (SEP) plan, or 401(k) count as compensation but don’t trigger payroll taxes. Such contributions further enable the savings on payroll taxes while adding to the dollar amount that’s considered reasonable compensation.
Planning note. Your S corporation compensation determines the amount that your S corporation can contribute to your SEP or 401(k) retirement plan. The defined benefit plan likely allows the corporation to make a larger contribution on your behalf.
Section 199A Deduction
The S corporation’s net income that is passed through to you, the shareholder, can qualify for the 20 percent Section 199A tax deduction on your Form 1040.
Don't hesitate to contact us if you need help determining reasonable compensation.
When you take advantage of the tax code’s offset game, your stock market portfolio can represent a little gold mine of opportunities to reduce your 2020 income taxes.
The tax code contains the basic rules for this game, and once you know the rules, you can apply the correct strategies.
Here’s the basic strategy:
Think of this: you are paying taxes at a 71.4 percent higher rate when you pay at 40.8 percent rather than the tax-favored 23.8 percent.
To avoid the higher rates, here are seven possible tax-planning strategies.
Examine your portfolio for stocks that you want to unload, and make sales where you offset short-term gains subject to a high tax rate such as 40.8 percent with long-term losses (up to 23.8 percent).
In other words, make the high taxes disappear by offsetting them with low-taxed losses, and pocket the difference.
Use long-term losses to create the $3,000 deduction allowed against ordinary income.
Again, you are trying to use the 23.8 percent loss to kill a 40.8 percent rate of tax (or a 0 percent loss to kill a 12 percent tax, if you are in the 12 percent or lower tax bracket).
As an individual investor, avoid the wash-sale loss rule.
Under the wash-sale loss rule, if you sell a stock or other security and purchase substantially identical stock or securities within 30 days before or after the date of sale, you don’t recognize your loss on that sale. Instead, the code makes you add the loss amount to the basis of your new stock.
If you want to use the loss in 2020, then you’ll have to sell the stock and sit on your hands for more than 30 days before repurchasing that stock.
If you have lots of capital losses or capital loss carryovers and the $3,000 allowance is looking extra tiny, sell additional stocks, rental properties, and other assets to create offsetting capital gains.
If you sell stocks to purge the capital losses, you can immediately repurchase the stock after you sell it—there’s no wash-sale “gain” rule.
Do you give money to your parents to assist them with their retirement or living expenses? How about children (specifically, children not subject to the kiddie tax)?
If so, consider giving appreciated stock to your parents and your non-kiddie-tax children. Why? If the parents or children are in lower tax brackets than you are, you get a bigger bang for your buck by
If you are going to make a donation to a charity, consider appreciated stock rather than cash, because a donation of appreciated stock gives you more tax benefit.
It works like this:
Example. You bought a publicly traded stock for $1,000, and it’s now worth $11,000. You give it to a 501(c)(3) charity, and the following happens:
Two rules to know:
If you could sell a publicly traded stock at a loss, do not give that loss-deduction stock to a 501(c)(3) charity. Why? If you sell the stock, you have a tax loss that you can deduct. If you give the stock to a charity, you get no deduction for the loss—in other words, you miss out on that tax-reducing loss.
The stock strategies have a long history in tax planning. If you need our help with any of these strategies, please contact us.
With the COVID-19 pandemic still going on, you may be spending more time working from your home office.
You may have taken some extra rooms for your business use. Is that okay?
Section 280A(c) states that you may claim a home office based on the portion of the dwelling that you use exclusively and regularly for business. Thus, the law dictates no specific number of rooms or particulars regarding the size of the office.
The courts make this rule clear, as you can see in the Mills (less than one room) and Hefti (lots of rooms) cases described below.
The Mills Case
Albert Victor Mills maintained an office in his apartment from which he conducted his rental property management business. The apartment was small, totaling only 422 square feet. In the office area of the apartment where Mr. Mills had his desk, he also kept tools, equipment, paint supplies, and a filing cabinet.
The court agreed with Mr. Mills’s allocations and awarded the home-office deduction based on his claimed 23 percent business use of the 422-square-foot apartment.
Planning note. Mr. Mills did not have a single room dedicated to a home office. He had only an area of the apartment where he grouped his office furnishings, equipment, and supplies. If you have a similar situation, make sure your business assets are located in a group.
The Hefti Case
Charles R. Hefti lived in a big house, totaling 9,142 square feet. He claimed that more than 90 percent of his home was used regularly and exclusively for business.
Based on its review of the rooms, the court concluded that 13 rooms, totaling 19 percent of the home, were used exclusively and regularly for business.
The deductible portion of your home for an office includes the area used exclusively and regularly for business.
Let’s say you have an office in one room and your files in a second room, and you never use these rooms for personal purposes. Further, let’s say you use the office area on a daily basis and the files area in connection with that daily work.
Both rooms would meet the exclusive and regular use requirements, just as Mr. Mills’s and Mr. Hefti’s offices met these rules.
But Not This
“Exclusive use” means that you must use a specific portion of the home only for business purposes. You must make no other use of the space.
Exception. One exception to the exclusive use rule is storage of inventory or product samples if the home is the sole fixed location of a trade or business selling products at retail or wholesale.
Example 1. Your home is the only fixed location of your business, which involves selling mechanics’ tools at retail. You regularly use half of your basement for storage of inventory and product samples. You sometimes use the area for personal purposes. The expenses for the storage space are deductible even though you do not use this part of your basement exclusively for business.
Example 2. In Pearson, Dr. Pearson practiced orthodontics in a downtown medical building but retained the dental records of more than 3,000 patients in 36 file drawers (each measuring 26 inches by 14 inches by 12 inches) and had 1,461 boxes containing orthodontic models (each box measuring 10 inches by 6 inches by 2 1/2 inches).
He stored the records in the attic and basement of his home. The areas used for such storage were not separate rooms, and the remaining portions of the attic and basement were used by Dr. Pearson and his family for personal purposes.
The court ruled that Dr. Pearson may not treat the storage areas as home-office expenses because the records were not inventory or samples and Dr. Pearson did not operate a wholesale or retail trade or business from his home.
Remember to consider your Section 199A deduction in your year-end tax planning.
If you don’t, you could end up with a big fat $0 for your deduction amount. We’ll review three year-end moves that (a) reduce your income taxes and (b) boost your Section 199A deduction at the same time
Strategy 1: Harvest Capital Losses
Strategy 2: Make Charitable Contributions
Strategy 3: Buy Business Assets
This can get confusing. If you would like our help, please contact us.
Your goal should be to get the IRS to owe you money. Of course, the IRS is not likely to cut you a check for this money (although in the right circumstances, that will happen), but you’ll realize the cash when you pay less in taxes.
Here are seven powerful business tax-deduction strategies that you can easily understand and implement before the end of 2020.
1. Prepay Expenses Using the IRS Safe Harbor
2. Stop Billing Customers, Clients, and Patients
3. Buy Office Equipment
4. Use Your Credit Cards
5. Don’t Assume You Are Taking Too Many Deductions
6. Utilize COVID-19 Opportunities
7. Deal with Your Qualified Improvement Property
We trust that you will find these seven ideas worthwhile. If you would like to discuss any of them, please contact us.
If you have employees, you must withhold their 6.2 percent share of the Social Security tax from their wages up to an annual wage ceiling ($137,700 for 2020). You must pay the money to the IRS along with your matching 6.2 percent employer share of the tax.
But under the Coronavirus Aid, Relief, and Economic Security (CARES) Act, as you likely know, employers are allowed to defer paying their 6.2 percent share of the Social Security tax on wages paid to employees through the end of 2020. Fifty percent of these deferred taxes will have to be paid during 2021 and the remainder in 2022.
Both the Trump administration and the IRS have issued orders permitting employers to defer withholding and paying the employee portion of the Social Security tax for a limited time. But the executive order on employee deferral is much more limited in scope than the CARES Act employer deferral, and it’s beset with practical problems for employers.
Which Taxes Can Be Deferred?
The deferral applies only to the employee portion of the Social Security tax due on wages paid from September 1, 2020, through December 31, 2020. No other payroll taxes can be deferred.
Which Employees Qualify for the Deferral?
Only employees who earn less than $4,000 biweekly qualify for the deferral. Employees who are not paid on a biweekly basis qualify if their pay is equivalent to less than $4,000 biweekly. This would include employees who are paid less than
Each pay period is tested separately. An employee who earns too much during one pay period can still qualify for the deferral if he or she earns less than the ceiling amount in a later pay period.
Is the Deferral Mandatory?
IRS officials have stated that the deferral is not mandatory. Employers are not obligated to offer the deferral to their employees. This is so even if an employee requests it.
What Happens When the Deferral Period Ends?
The employee Social Security tax deferral ends on December 31, 2020. IRS guidance provides that the deferred taxes must then be paid “ratably” from wages paid from January 1, 2021, through April 30, 2021. Employers must withhold and pay the deferred taxes from employee wages paid during this period.
Thus, from January 1, 2021, through April 30, 2021, most employees will have to pay a 12.4 percent Social Security tax instead of the normal 6.2 percent. This amounts to a 6.2 percent pay cut for affected employees for four months.
What If Employees Quit or Get Fired?
If an employee quits or is fired during the four-month repayment period, there may not be enough wages paid to cover the deferred Social Security taxes. The IRS says that in this event employers can “make arrangements to otherwise collect” the deferred taxes. What form such “arrangements” could take is unclear.
Interest, penalties, and additions to taxes will begin to accrue on any unpaid deferred Social Security taxes starting May 1, 2021. Thus, if you (the employer) fail to remit the deferred monies because employees were not employed during the collection period, you are on the hook.
Due to the uncertainty involved, many employers have reportedly elected not to participate in the employee Social Security tax deferral.
If you’re considering moving to a different state, taxes in the new state may be the deciding factor—especially if you expect them to be lower.
Consider All Applicable State and Local Taxes
If your objective is to move to a lower-tax state, it may seem like a no-brainer to move to one that has no personal income tax. But that’s not a no-brainer!
You must consider all the taxes that can potentially apply to local residents—including property taxes and death taxes.
If you die without clearly establishing domicile in just one state, both the old and new states may claim that state death taxes are owed. Not good!
If you are thinking of moving to another state, please don’t hesitate to ask us for help. Contact us here.
What is the ultimate sin in an IRS audit?
Suppose you just received that lovely letter from the IRS telling you that you are the subject of an IRS audit.
What one record receives special attention? What one record can create a nightmare for you? What one record makes the IRS suspect that you are the keeper of lousy records?
Think of the record people most hate keeping. That’s the one we are talking about. You have probably guessed what that record might be. You might even know because you had a recent audit and didn't have this record..... think about it!
Red-Flag Record for the IRS Examiner
Once your audit examination begins, the examiner likes to see this record. If the record is missing or lacking, the IRS examiner knows that your other records probably are lacking, too.
This record—the one you probably hate keeping—is the mileage log on your vehicle or vehicles.
The IRS notes that a taxpayer’s failure to keep a mileage log on vehicles indicates that the activity under examination is not being conducted in a businesslike manner.
Small Business Administration (SBA) Economic Injury Disaster Loans (EIDLs) can be a great source of low-interest funding for businesses struggling with the economic impact of the COVID-19 pandemic.
Unlike Payroll Protection Program (PPP) loans, EIDLs are not forgivable—borrowers have to pay them back. But they have a low 3.75 percent interest rate and a long 30-year repayment period. Borrowers can repay them at any time without penalty.
To obtain an EIDL, borrowers must sign a loan authorization and agreement, a note, and a security agreement filled with fine print. Many of these provisions could have a significant impact on the borrower’s business for the life of the loan—up to 30 years.
It is vital to understand the terms and conditions before taking out any loan, including an EIDL. Here are seven key provisions borrowers should be aware of.
If you need our assistance determining what these rules are.. please contact us. We will get you started.
Did you take advantage of Section 179 expensing deduction on your vehicle.
Do you know the you could lose it?
Do you know how to keep it?
You might wonder: What do we mean by “keep it”?
In tax law, there’s no free lunch. The Section 179 deduction comes with “recapture strings” attached.
When you claim your Section 179 deduction, you make a deal with the government to keep your business use above 50 percent during the “designated” depreciation periods (five years for vehicles).
One Sad Story
In 2018, If you claimed a $53,000 Section 179 deduction on a qualifying pickup truck. In 2020, Your spouse, drives the truck and your business use drops to zero.
You have just violated the 50 percent business-use agreement with the government. Now you have phantom income to report (called “recapture”), and you will be required to pay the price for breaking his tax promise on the Section 179 deal.
You need to consider recapture when doing your tax planning. If you would like my help with this, please don’t hesitate to contact us..
Boy do we have some goods news for you!
New IRS guidance expands the possibilities for what is an adverse COVID-19 impact on you for purposes of taking up to $100,000 out of your retirement accounts and repaying it without penalties.
First, let’s look at the rules as they existed before this new IRS guidance. The CARES Act created the first set of favorable rules, and those rules are still in play.
What the CARES Act Says
What if My Business Is Incorporated?
What if I Hire a Family Member over the of Age 21?
Tax Advantages for Your Business
- If you operate the business as a sole proprietorship, a single-member LLC that’s treated as a sole proprietorship for tax purposes, a husband-wife partnership, an LLC that’s treated as a husband-wife partnership for tax purposes, or an S corporation, the wage expense deduction reduces (a) your individual federal taxable income, (b) your individual net self-employment income, and (c) your individual state taxable income (if applicable).
- If you operate the business as a C corporation, the corporation deducts the wages paid to a child or other family member. The deductions reduce the corporation’s federal taxable income and probably the corporation’s state taxable income (if applicable).
- If your business will be unprofitable this year due to the COVID-19 fallout, deductions for wages paid to a child or other family member can create or increase a net operating loss (NOL) for 2020. If so, you can carry back the 2020 NOL for up to five tax years—back to 2015. The NOL carryback can trigger a refund of income taxes paid for the carryback year. That can really help. An NOL carried back to a pre-2018 tax year can be especially helpful because tax rates were generally higher in those days.
Keep payroll records just like you would for any other employee to document hours worked and duties performed (e.g., timesheets and job descriptions). Issue W-2s just like you would for any other employee.
As we write this, current law says the Payroll Protection Program (PPP) cash infusion is going to expire on August 8, 2020.
Approval takes time. For example, when June 30, 2020, was the deadline, lenders stopped taking applications on or before June 28 so they would have time to submit applications and obtain approval on or before June 30.
Many small business owners have not applied for the PPP cash infusion because there’s a four-letter word associated with it.
That word? Loan!
Yep. That four-letter word (loan) has caused many business owners to say I don’t want to play the PPP game.
That’s wrongheaded. The PPP deal is not really a loan. It’s a cash infusion to help you through COVID-19.
Works Like This
For the self-employed and owner-employees of S and C corporations who have SBA-defined earnings of $100,000 or more, here’s the deal:
- I’m going to give you $20,833 today.
- I’m going to call it a loan.
- Sometime after the first 10.8 weeks or so, you will send me some paperwork.
- When I receive the paperwork, I’ll forgive your loan.
- You walk away with the $20,833, no strings attached.
What if your defined earnings are less than $100,000? Then you will receive less. For example, let’s say you are a Form 1040 Schedule C taxpayer with net profits of
- $75,000: you pocket $15,625, tax-free.
- $50,000: you pocket $10,417, tax-free.
- $25,000: you pocket $5,208, tax-free.
The results above come from the COVID-19 PPP. When you are a self-employed taxpayer with no employees, the PPP treats you as the one and only employee and treats your 2019 net profits as your payroll.
Has your portfolio's asset allocation drifted off course? Learn how to rebalance.
Prepared by Broadridge Advisor Solutions, Inc. Copyright 2020.
The rules that apply to you do not apply to the rank-and-file employee group. The government puts you, the owner-worker, in a separate “owner-employee” category to limit your business’s PPP benefits.
There are four types of owner-employees:
- General partners in partnerships
- S corporation shareholder-employees
- C corporation shareholder-employees
- Form 1040, Schedule C filers (e.g., the self-employed, sole proprietors, 1099 recipients, single-member LLCs, and husband and wife LLCs treated as single-member LLCs)
If you own all or part of your business and work in the business, you fall into one of the four categories.
The maximum loan attributable to and forgiveness available for the “compensation paid” to any owner-employee across all businesses is
- $15,385 for borrowers who received a PPP loan before June 5, 2020, and elected to use an eight-week covered period, or
- $20,833 for borrowers under the 24-week covered period.
If you have ownership interests in more than one business, you need to consider that the owner-employee loan maximums apply to all your businesses.
The new interim final rule puts the $15,385 or $20,833 deemed compensation cap on the loan forgiveness for the defined owner-employee, but contains no guidance on how to allocate or otherwise deal with the caps when you have ownership interests in multiple businesses.
Example. You operate an S corporation and a proprietorship. You receive your PPP loan on June 17. The cap on your combined S corporation and proprietorship loan forgiveness attributable to (a) your employment in the S corporation and (b) your profits from the proprietorship is $20,833.
We know you can obtain loan forgiveness for up to $20,833, but we have no guidance on how you would allocate the forgiveness between the S corporation and proprietorship. Perhaps by the time you apply for PPP loan forgiveness, we will have some directions.
The PPP loan forgiveness begins for general partners at the amount of their 2019 net earnings from self-employment (reduced by claimed Section 179 expense deductions, unreimbursed partnership expenses, and depletion from oil and gas properties) multiplied by 0.9235.
You then take the lesser of the amount determined above or $100,000, divide by 12, and multiply by 2.5 to find the loan amount. With this calculation, the maximum loan is $20,833.
The maximum forgiveness attributable due to the partner’s self-employment income is
- $15,385 if the partnership obtained its loan before June 5, 2020, and elected the eight-week regime, or
- $20,833 if the partnership is under the 24-week program.
Planning note. Under the 24-week program, the partnership with no employees does not need to spend any amounts on interest, rent, or utilities to obtain full forgiveness. It can obtain full forgiveness in 11 weeks using the calculated self-employment income of up to $20,833 for each partner.
As with any owner-employee, the PPP loan and its forgiveness for “compensation” is capped at $15,385 under the eight-week covered period and $20,833 under the 24-week covered period.
Reminder. The $20,833 cap is based on the maximum defined compensation of $100,000 divided by 12 and then multiplied by 2.5.
Under the 24-week program, the S corporation whose only employee is an owner-employee obtains full loan forgiveness after 11 weeks when using the 24-week covered period without spending anything for interest, rent, or utilities.
If the S corporation with no employees other than the owner-employee elects the eight-week covered period, the corporation has to spend money on interest, rent, and utilities to rise above the compensation cap and create full forgiveness.
The Paycheck Protection Program Flexibility Act of 2020 created a new statutory 60 percent payroll rule that can make it easier to qualify for full forgiveness with payments for interest, rent, and utilities when electing the eight-week covered period.
S corporation owner-employees are capped by the amount of their 2019 employee cash compensation and employer retirement contributions made on their behalf, but employer health insurance contributions made on their behalf cannot be separately added because those payments are already included in their employee cash compensation.
Example. You operate your solo busines as an S corporation. Your 2019 W-2 compensation of $68,000 included $18,000 for medical insurance. Your payroll cost for the PPP loan and its forgiveness includes the full $68,000 plus what the S corporation paid into your retirement plan and to the state for unemployment insurance. The total of these amounts is capped at $100,000, which creates the $20,833 maximum loan amount as explained above.
C corporation owner-employees are capped by the amount of their 2019 employee cash compensation and employer retirement and health insurance contributions made on their behalf.
Example. You operate your business as a C corporation where you are the only employee. In 2019, the corporation paid you a salary of $60,000, contributed $12,000 to your retirement plan, paid $20,000 for your family’s medical insurance, and paid $350 to the state for unemployment insurance.
Your corporation has $92,350 in qualifying payroll costs. Your loan and forgiveness are capped at $19,240 ($92,350 ÷ 12 x 2.5).
Form 1040 Schedule C Businesses
Your PPP loan and its forgiveness for “compensation” are capped at $15,385 under the eight-week covered period or at $20,833 under the 24-week covered period. The cap amounts are computed using your net profit from line 31 of your 2019 Schedule C.
Your easy-peasy road to 100 percent loan forgiveness is the 11-week program. With 11 weeks of taking the loan amount out of the business, you obtain full forgiveness without paying any rent, utilities, or interest.
When Can the Owner-Employee’s Business Apply for Forgiveness?
According to SBA guidance issued on June 22, 2020, you may submit your loan forgiveness application anytime on or before the maturity date of the loan—including before the end of the covered period—if you used all the loan proceeds for which you requested forgiveness.
Example. You receive a $20,833 PPP loan on May 19, 2020. During the 11 weeks beginning with May 19, 2020, your corporation pays qualified payroll costs that total $20,833. You can apply for $20,833 of loan forgiveness anytime beginning with week 11.
New Easy Road to 100 Percent Forgiveness
Say thanks to the Paycheck Protection Program Flexibility Act of 2020. This new law creates a 24-week period for you to spend your PPP loan proceeds. If you obtained your loan proceeds before June 5, you can elect to use the eight-week period to spend your PPP loan proceeds.
Here’s the big difference:
- If the 24-week covered period applies, your loan forgiveness for your deemed payroll is capped at 2.5 months of your 2019 Schedule C net profit, not to exceed $20,833.
- If you elect the eight-week covered period, your loan forgiveness for your deemed payroll is capped at eight weeks, not to exceed $15,385.
Why Is This Important?
When you file as a Schedule C taxpayer and have no employees, your PPP loan is based on 2.5 times your 2019 Schedule C, line 31, net profit, limited to $20,833.
You may have your loan proceeds either in hand or in play at this point.
(If you have not yet applied for your PPP loan, do so now. Lawmakers recently reopened the program with an eye on using the remaining funds. Under this new law, the extension of the PPP loan program will last until the earlier of August 8, 2020, or the day the funds are exhausted.)
Let’s keep our eyes on the “easy road” to forgiveness. Under the new 24-month rule, you achieve 100 percent forgiveness when you pay yourself the total loan amount within 10.8 weeks of the date you received your loan proceeds. Let’s round the 10.8 to 11 weeks.
Yes, you are reading this correctly. By simply using the loan proceeds on yourself during the first 11 weeks, you achieve total forgiveness.
Note this. By using the 11 weeks, you achieve total PPP loan forgiveness without having to spend any money on rent, utilities, or interest.
If you would like to discuss this PPP forgiveness rule with me, please don’t hesitate to call us at -833-438-2937.
Next Blog: When Can I Apply for Forgiveness?
According to SBA guidance issued on June 22, 2020, you may submit your loan forgiveness application anytime on or before the maturity date of the loan—including before the end of the covered period—if you used all the loan proceeds for which you requested forgiveness.
Example. You receive your $20,833 PPP loan on May 15, 2020. You put the money in your business checking account. During the 11 weeks beginning with May 15, 2020, you write checks to yourself that total $20,833. You can apply for $20,833 of loan forgiveness anytime beginning week 11 or later.
Is It Really This Easy?
What About Interest, Rent, and Utilities?
With the 11-week program described above, you don’t have to consider interest, rent, or utilities to achieve 100 percent forgiveness. In fact, why bother? By simply using the 11 weeks, you have less paperwork and worry.
Of course, you might want to consider interest, rent, and utilities if this takes you to earlier forgiveness. To obtain full forgiveness, you could spend as little as 60 percent on payroll and the balance on interest, rent, and utilities.
Example. You file a Schedule C and have no employees, and on June 1, 2020, you obtain a PPP loan of $20,000. During the first eight weeks, you spend $12,000 on yourself and $8,000 on qualified Schedule C deductible business interest, rent, and utilities. You can elect the eight-week period and qualify for 100 percent forgiveness.
Here are the basic PPP forgiveness requirements that apply to your 2020 Schedule C business deduction payments for interest, rent, and utilities:
- Interest payments on any business mortgage obligation on real or personal property where such obligation was in place before February 15, 2020 (but not any prepayment or payment of principal)
- Payments on business rent obligations on real or personal property under lease agreements in force before February 15, 2020
- Business utility payments for the distribution of electricity, gas, water, transportation, telephone, or internet access for which service began before February 15, 2020
Meet the Paid Rule
On page 2 of the 3508EZ instructions, you find this:
Enter any amounts paid to a self-employed individual. For a 24-week Covered Period, this amount is capped at $20,833 (the 2.5-month equivalent of $100,000 per year) for each individual or the 2.5-month equivalent of their applicable compensation in 2019, whichever is lower.
We may suffer from unfounded paranoia because we find the word “paid” a word to be reckoned with. So, in our opinion, you should have your Schedule C business write you checks from its business account. If there’s no separate business account, make sure the business writes checks that pay your personal expenses in the amount of the deemed compensation.
What if you already took out your annual RMD before Congress changed the law?
The IRS just granted you brand-new mercy to fix the issue, but you need to take action before August 31, 2020.
2020 RMD Waiver
The CARES Act waived all 2020 RMDs for IRAs and defined contribution plans. This waiver applies to your RMD if you
- turned age 70.5 during tax year 2019 and had to take your first RMD by April 1, 2020, and waited until 2020 to take it;
- turn age 72 during tax year 2020 and have to take your first RMD by April 1, 2021; or
- inherited an IRA or retirement account and have to take an RMD for tax year 2020.
Let’s say you did not know about the waiver and you took your RMD. You want to put it back and avoid paying taxes on it. You have two ways to undo your 2020 RMD:
- Do an indirect rollover to another account, or
- Repay the funds to the same account.
Indirect rollover. You generally have 60 days from the distribution date to complete an indirect rollover. But in Notice 2020-51, the IRS extends this indirect rollover deadline so that you have until August 31, 2020, for RMD distributions you took earlier in tax year 2020.
As a reminder, you can’t do an indirect rollover from an inherited non-spousal IRA. Instead, to avoid being taxed on your RMD, you have to use the repayment method.
Repayment. You can repay the RMD to the original account by August 31, 2020, and pay no tax on it. And when you make this repayment under Notice 2020-51, it doesn’t count as the “one” indirect rollover per year that you can use.
Important note. These rules apply only to RMD amounts distributed (taken out of the IRA). Any amounts you took out exceeding your RMD amount aren’t eligible for relief.
Example. Ann had a $4,000 RMD requirement for her traditional IRA for tax year 2020 and took out $5,000 on January 15, 2020.
Jo-Ann has two options, However, Ann must pay tax on the $1,000 she took above and beyond her RMD amount.
The August 31 date is coming soon. If you would like my help with your RMD, please don't hesitate to contact us.
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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.
To the extent that this material concerns tax matters, it is not intended or written to be used, and cannot be used, by a taxpayer for the purpose of avoiding penalties that may be imposed by law. Each taxpayer should seek independent advice from a tax professional based on his or her individual circumstances.
These materials are provided for general information and educational purposes based upon publicly available information from sources believed to be reliable — we cannot assure the accuracy or completeness of these materials. The information in these materials may change at any time and without notice.
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.
Keana founded this website and decided and created this blog page to offer a space for those seeking knowledge to understand, however not to be confused with advice or planning strategies.