The SBA Made 6 Monthly Loan Payments on Your Behalf. Is That Taxable Income?Posted on November 4th, 2020
Are you one of the millions of businesses that have an outstanding non-disaster Small Business Administration (SBA) loan?
- 7(a) loans: general small business loans of up to $5 million,
- 504 loans: loans of up to $5.5 million to provide financing for major fixed assets such as equipment or real estate, and
- microloans: short-term loans of up to $50,000 for small businesses.
If so, you have already benefited, or soon will benefit, from a little-known provision included in the $2 trillion Coronavirus Aid, Relief, and Economic Security (CARES) Act.
Congress appropriated $17 billion so that the SBA could provide a temporary loan payment subsidy to businesses with these non-disaster SBA loans. Under this provision, the SBA automatically makes six monthly loan payments on behalf of borrowers. There is no need to file an application.
Are the SBA loan subsidies taxable income to you?
Unfortunately, the CARES Act is silent on this subject and the IRS has yet to issue any guidance on this particular loan subsidy program. In the past, the IRS advised that similar loan payments were includible in income by the taxpayer-borrower.
It’s unclear whether the IRS will follow this prior guidance.
The IRS could instead conclude that these loan subsidies are not taxable under the general welfare exclusion. The general welfare exclusion has often been used to exempt from tax SBA disaster payments made to individual taxpayers. The exclusion ordinarily does not apply to payments to business. But the IRS could make an exception due to the extraordinary nature of the COVID-19 pandemic.
It’s also possible that Congress will act to make the SBA loan payments tax-free. This could be done in a future stimulus bill.
Right now, the prudent course is to assume that the SBA loan subsidies are taxable income and plan accordingly.
If you have any further questions or need my assistance, please call me on my direct line at 203-767-7197.
2020 Last-Minute Year End Business Tax DeductionsPosted on November 3rd, 2020
Here are seven powerful business tax deduction strategies that you can easily understand and implement before the end of 2020. These work great if you are actually in need of more deductions for 2020. If your business did very poorly this year due to Covid-19, your 2020 tax bracket might be so low that you’ll actually want to avoid these altogether. But, assuming you have more 2020 taxable profit than you are ready to pay tax on, here are some deductions for you to consider.
- Prepay Expenses Using the IRS Safe Harbor
You just have to thank the IRS for its tax-deduction safe harbors.
IRS regulations contain a safe-harbor rule that allows cash-basis taxpayers to prepay and deduct qualifying expenses up to 12 months in advance without challenge, adjustment, or change by the IRS.
Under this safe harbor, your 2020 prepayments cannot go into 2022. This makes sense, because you can prepay only 12 months of qualifying expenses under the safe-harbor rule.
For a cash-basis taxpayer, qualifying expenses include lease payments on business vehicles, rent payments on offices and machinery, and business and malpractice insurance premiums.
Example. You pay $3,000 a month in rent and would like a $36,000 deduction this year. So on Thursday, December 31, 2020, you mail a rent check for $36,000 to cover all of your 2021 rent. Your landlord does not receive the payment in the mail until Tuesday, January 5, 2021. Here are the results:
- You deduct $36,000 in 2020 (the year you paid the money).
- The landlord reports taxable income of $36,000 in 2021 (the year he received the money).
You get what you want—the deduction this year.
The landlord gets what he wants—next year’s entire rent in advance, eliminating any collection problems while keeping the rent taxable in the year he expects it to be taxable.
Don’t surprise your landlord: if he had received the $36,000 of rent paid in advance in 2020, he would have had to pay taxes on the rent money in tax year 2020.
- Stop Billing Customers, Clients, and Patients
Here is one rock-solid, time-tested, easy strategy to reduce your taxable income for this year: stop billing your customers, clients, and patients until after December 31, 2020. (We assume here that you or your corporation is on a cash basis and operates on the calendar year.)
Customers, clients, patients, and insurance companies generally don’t pay until billed (unless they too are exercising strategy #1 listed above!). Not billing customers and patients is a time-tested tax-planning strategy that business owners have used successfully for years.
Example. Jim, a dentist, usually bills his patients and the insurance companies at the end of each week; however, in December, he sends no bills. Instead, he gathers up those bills and mails them the first week of January. Presto! He just postponed paying taxes on his December 2020 income by moving that income to 2021.
- Buy Office Equipment
With bonus depreciation now at 100 percent along with increased limits for Section 179 expensing, buy your equipment or machinery and place it in service before December 31, and get a deduction for 100 percent of the cost in 2020.
Qualifying bonus depreciation and Section 179 purchases include new and used personal property such as machinery, equipment, computers, desks, chairs, and other furniture (and certain qualifying vehicles).
- Use Your Credit Cards
If you are a single-member LLC or sole proprietor filing Schedule C for your business, the day you charge a purchase to your business or personal credit card is the day you deduct the expense. Therefore, as a Schedule C taxpayer, you should consider using your credit card for last-minute purchases of office supplies and other business necessities.
If you operate your business as a corporation, and if the corporation has a credit card in the corporate name, the same rule applies: the date of charge is the date of deduction for the corporation.
But if you operate your business as a corporation and you are the personal owner of the credit card, the corporation must reimburse you if you want the corporation to realize the tax deduction, and that happens on the date of reimbursement. Thus, submit your expense report and have your corporation make its reimbursements to you before midnight on December 31.
- Don’t Assume You Are Taking Too Many Deductions
If your business deductions exceed your business income, you have a tax loss for the year. With a few modifications to the loss, tax law calls this a “net operating loss,” or NOL.
If you are just starting your business, you could very possibly have an NOL. You could have a loss year even with an ongoing, successful business.
You used to be able to carry back your NOL two years and get immediate tax refunds from prior years; however, the Tax Cuts and Jobs Act (TCJA) eliminated this provision. Now, you can only carry your NOL forward, and it can only offset up to 80 percent of your taxable income in any one future year.
What does this all mean? You should never stop documenting your deductions, and you should always claim all your rightful deductions. We have spoken with far too many business owners, especially new owners, who don’t claim all their deductions when those deductions would produce a tax loss.
- Thank COVID-19
Let’s be real: there’s little to be grateful for with COVID-19, with one of the several exceptions being the potential opportunities to turn NOLs into cash for your business.
Two NOL opportunities come from the Coronavirus Aid, Relief, and Economic Security (CARES) Act:
- The CARES Act allows NOLs arising in tax years beginning in 2018, 2019, and 2020 to be carried back five years for refunds against prior taxes.
- The CARES Act allows application of 100 percent of the NOL to the carryback years.
Before the CARES Act, you could not carry back your 2018, 2019, or 2020 losses, and your NOL could offset only up to 80 percent of taxable income before your Section 199A deduction.
- Deal with Your Qualified Improvement Property (QIP)
In the CARES Act, Congress finally fixed the qualified improvement property (QIP) error that it made in the TCJA.
QIP is any improvement made by the taxpayer to the interior portion of a building that is non-residential real property (think office buildings, retail stores, and shopping centers) if you place the improvement in service after the date you place the building in service.
If you have such property on an already filed 2018 or 2019 return, it’s on that return as 39-year property. You now have to change it to 15-year property, eligible for both bonus depreciation and Section 179 expensing.
I trust that you found the seven ideas above worthwhile. If you would like to discuss any of them, please call me at 203-767-7197.
Biden’s Tax Plan Proposals – A SummaryPosted on August 21st, 2020
- The current corporate income tax rate is 21%
- It was lowered from 35% to 21% as part of the Tax Cuts and Jobs Act (TCJA) two years ago
- Proposal is to raise the rate back up to 28%
- This creates an alternative minimum tax again for corporations
- Would apply only to companies with more than $100M in gross revenues
- Existing tax is called the Global Intangible Low-Taxed Income (GILTI) Tax
- Aims to generate US revenue for patent, trademark, and copyright income shifted to foreign countries
- Currently, individuals earning over $207K, and married couples earning over $415K, pay a marginal tax rate of 35%
- Currently, individuals earnings over $518K, and married couples earnings over $622K, pay a marginal tax rate of 37%
- Both above rates expire at the end of 2025 under current law, and those taxpayers will return to paying a top rate of 39.6%.
- Biden proposes the top rate of 39.6% kicks in now, rather than wait until 2026
- Taxpayers in the lower tax brackets will continue to have same tax rates, until those expire as scheduled, and in 2026 would go back to paying the same pre-TCJA rates also.
- QBI allows a deduction of up to 20% of business profits for owners of pass through entities
- There are currently income limitations on this deduction, but only for those in “specified service trades or businesses” (SSTB) – think doctors, lawyers, accountants, athletes, entertainers, etc
- Biden proposes to limit the deduction for all business owners earning over $400K, regardless of business type
- This would impact trades, insurance brokers, engineers, manufacturing, real estate investors and realtors, etc, any business owners that don’t currently fall under the “SSTB” umbrella.
- Under current law, long term capital gains are taxed at a max rate of 20% (plus a 3.8% net investment tax surcharge)
- Proposal is for taxpayers earning more than $1M, to be taxed on long term capital gains at ordinary tax rates, which can be as high as 39.6%
- Proposal would also eliminate stepped-up basis at death for capital gains. So dying with highly appreciated assets would become expensive for your estate and/or your heirs.
- Proposes a maximum itemized deduction amount, and a phase-out scale based on income and tax rate
- Also proposes to re-instate the “Pease Limitation” which is currently suspended but scheduled to come back in 2026. Proposal is to restart this limitation now, which reduces itemized deductions for earners over $400K on a phase-out schedule
- Currently, we all pay 6.2% social security tax on wages up to $137,700 (for 2020). Your employer kicks in another 6.2% to make the total tax 12.4%.
- Proposal is for the social security tax to kick back in when your wages exceed $400K, with no ceiling
- Proposal is to offer a permanent $15,000 first time homebuyer credit (not repayable like the 2008 loan version of this credit from a while ago)
- Proposes a rent credit to limit low-income taxpayer’s rent to no more than 30% of monthly income. Annual credit cap of $5B.
- Current child care credit is based on first $3,000 spent (or $6,000 if you have 2 or more children) and most taxpayers get a 20% credit, so is worth $600 or $1200.
- Proposal is to increase expense limit to $8,000 (or $16,000 if you have 2 or more children), and increase the credit to 35% for most people, so the new credit would be worth something like $2,800 or $5,600.
Help Lawmakers Make PPP Expenses Tax DeductiblePosted on August 14th, 2020
As I’ve alerted you before, there is still one huge unknown related to the PPP Program, which would have major ramifications on your 2020 tax bill. Now that the unusually long tax filing season has ended, I thought I’d take some time fully explain what this issue is all about.
To explain, in the CARES Act, Congress said:
For purposes of the Internal Revenue Code of 1986, any amount which (but for this subsection) would be includible in gross income of the eligible recipient by reason of forgiveness described in subsection (b) shall be excluded from gross income.
From what we know, lawmakers thought this meant that the PPP loan forgiveness was tax-free for you. You probably thought that too. We did.
But then in late April, the IRS issued Notice 2020-32 that prevents PPP loan recipients from deducting business expenses that were paid using the PPP monies that gave rise to forgiveness (defined payroll, rent, utilities, and interest).
Two things to know here:
- The PPP loan and forgiveness is a good deal even if the expenses are not deductible.
- When the CARES Act was passed, it appears that lawmakers thought the PPP monies were tax-free and had not considered that the expenses paid with the loan proceeds would not be deductible.
ABC Inc., an S corporation, receives a $100,000 PPP loan, spends it all on defined payroll, and the lender forgives the $100,000.
On its 2020 tax return, ABC reports no PPP income (remember, it was tax-free), but it may not deduct $100,000 of payroll expenses. The non-deduction creates $100,000 of net taxable income that ABC, the S corporation, passes on to its sole shareholder, Bob.
Let’s say Bob is in the 45 percent tax bracket when you consider both his federal and state income taxes. Bob pays taxes of $45,000 on this income.
And let’s say that ABC passes to Bob the $100,000 of tax-exempt income. This puts Bob ahead by $55,000 ($100,000 – $45,000).
A good deal—sure!
But with passage of the CARES Act, Congress was not just trying to make this a good deal—it was providing ABC with money for it to remain afloat and continue paying its employees during the COVID-19 pandemic.
What If It’s Like We Thought It Was?
If the payroll were deductible, ABC would be ahead by both the $100,000 and the tax benefit of the payroll being deductible—giving the company a better chance of continuing to pay its employees after the PPP loan and its forgiveness.
Since the S corporation doesn’t pay income taxes, let’s look at Bob. He would have the $100,000 plus the tax benefit of the payroll deduction ($45,000).
Here’s the comparison:
- $145,000 if the PPP is as we thought it was
- $55,000 as the IRS has it now
Unfair—Schedule C Taxpayer Suffers No Tax Bite
To add one more reason to why the business expenses paid from PPP loan forgiveness monies should be tax deductible, consider this: the self-employed taxpayer with no employees has his or her loan forgiven based on his or her 2019 net income.
There’s no spend on payroll.
The self-employed person does not have to spend any PPP monies on interest, rent, or utilities. He or she can achieve full forgiveness in 2.5 months based solely on the 2019 tax return.
In its “you can’t deduct it” notice (IRS Notice 2020-32), the IRS invokes IRC Section 265, but Section 265 does not consider how the PPP treats forgiveness for the self-employed. It applies to expenses incurred for the purpose of earning or otherwise producing tax-exempt income.
For the Schedule C taxpayer, no such expenses to produce tax-exempt income need to be paid to achieve 100 percent forgiveness.
Lawmakers Upset with the IRS
Let’s start with the fact that the IRS has a tough job. In many cases, the IRS is nothing more than a referee. If lawmakers fumble the tax law, the IRS has to call it. No choice.
In a letter to Secretary of the Treasury Mnuchin, Senator Chuck Grassley, chairman of the committee on finance; Senator Ron Wyden, ranking member on the committee on finance; and 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 IRS has held firm. That puts the ball back into lawmakers’ hands, and now it’s their turn. This is where you come in.
Give Them a Nudge
Congress is working on additional COVID-19 legislation, though talks have now completely stalled, and they’ve all gone on vacation until Labor Day.
While they’re working on their tan, the least we can do is flood their email, voicemail, and fax machines to let them know we support the PPP deductibility bills.
Here is how to do that:
- S. 3612 is the Senate bill to make the PPP forgiveness money used to pay business expenses tax deductible. To express your yea or nay on S. 3612, contact your senators. You can find them at this link: https://www.senate.gov/senators/contact
- H.R. 6821 is the House bill to make the PPP forgiveness money used to pay business expenses tax deductible. To express your yea or nay on H.R. 6821, contact your representative. You can find him or her at this link: https://www.house.gov/representatives
You don’t need to be big and formal about your yea or nay. You can fax, email, or phone and simply say you support or oppose the bill. It’s that easy—and it’s effective.
I’ll keep you posted if either of these bills makes any progress, though it could be a while. In the meantime, I’ll be assuming no PPP expense deductions in the estimated tax calculations that I provide to you.
All my best,
Covid-19 Economic Relief Talks Have StalledPosted on August 12th, 2020
- No 2nd round of stimulus checks
- No extension of the $600/week Federal unemployment benefits
- No 2nd round of PPP Forgivable Loans
- No ability to apply for “missed” PPP round one dollars, for those who borrowed less than they ended up qualifying for
- No extension of PPP Round 1 applications from Aug 8 to Dec 31, so $130B of approved funds went un-lent
- No automatic forgiveness of PPP Loans under $150K
- No expanded Employee Retention Credit (ERTC)
- No tax credit for purchases of protective equipment and cleaning costs
- Federal weekly benefit reduced from $600/week to $300/week.
- If your calculated state benefit is less than $100/week, your Federal weekly benefit is reduced from $600/week to $0/week.
- This requires a new program to be setup in each state in order to administer, so it can be weeks or months before payments re-start.
- Extension of weekly payments runs through Dec 6, 2020, or when the $45B of re-allocated FEMA money for this program runs out, whichever occurs first.
- Please remember that unemployment compensation is taxable income, and remember to withhold Federal and State income taxes accordingly.
- Applies to W-2 employees earning less than $4,000 bi-weekly. This would equate to anyone earning a salary of $104,000 per year.
- Deferral period starts Sept 1, and runs through Dec 31, 2020.
- Employee portion of Social Security tax will be deferred (6.2% of their paycheck).
- Deferred amount must be repaid in January 2021, or possibly on the employee’s tax year 2020 Form 1040 tax return. No idea yet on how this will be administered.
- The Treasury Dept has been tasked with issuing guidance on how to implement the program. Based on the magnitude of questions from tax experts, payroll companies, and employers, this guidance will need to be quite lengthy.
- Many employers, and/or employees, prefer not to participate (ok, almost all), so we are trying to determine if participation will be optional or mandatory, and at the employee level, or at the company level. Stay tuned. Not many people want a big tax bill later, for the temporary use of the deferred money.
- There is a possibility the deferred amount will be forgiven! That would require an act of Congress. The forgiveness was presented as being contingent on re-election, in which case a promise was made to forgive the repayment of the deferred amount, as well as make this temporary payroll tax deferral, a permanent payroll tax cut, which I believe would essentially cancel the Social Security program. Obviously, there is a lot of speculation and concern about this particular point right now.
Announcement: 2 New Staff Hires and an Office “Move”Posted on October 21st, 2019
Q&A: Do Triple-Net Leases Qualify for a 199A Deduction?Posted on September 13th, 2019
If you use triple-net leases for your rental properties, you may wonder whether you’ll get your Section 199A deduction.
We don’t have a clear answer for you, so we are going to go with “maybe.” As you’ll see, we need more information.
A triple-net lease requires the lessee to pay the landlord rent as well as take care of real estate taxes, building insurance, and property maintenance costs. Therefore, in a triple-net lease, the lessee bears all the burdens of ownership, and the landlord usually has little to no involvement in the property management.
A rental property qualifies for the Section 199A deduction if
- the rental property qualifies as a trade or business under tax code Section 162, or
- you rent the property to a commonly controlled trade or business.
Assuming you can’t use the commonly controlled route, your rental properties need to rise to the level of a trade or business to get your Section 199A deduction.
To meet that requirement, you’ll generally need to have regular and continuous involvement with your rental activities. And the proposed regulations require you to look at each rental activity separately when determining whether it is a trade or business—aggregation doesn’t help you with this.
Many triple-net lease rental activities likely fail the regular and continuous activity test and won’t qualify for the Section 199A deduction. For example, in Neill, the Board of Tax Appeals (the precursor to the Tax Court) held that a single property leased on a triple-net basis is not a Code Section 162 trade or business.
In the preamble to the Code Section 1411 regulations, the IRS gives you other factors to consider when determining whether your rental activity is a trade or business:
- Type of property (commercial vs. residential vs. personal property)
- Number of properties rented
- Day-to-day involvement of the owner or its agent
- Type of lease (net vs. traditional, short-term vs. long-term)
Depending on the particular circumstances of your triple-net lease rental activities, they may rise to the level of a trade or business, even if your involvement with each lease individually is minimal.
You can see why we are in “maybe” land and hoping for more information from the IRS.
The CT DRS Has Published the 2018 Estimated Tax Recharacterization FormsPosted on October 4th, 2018
- Our office is already preparing the “RRS” Summary Sheets for each of our CT partnership and S Corporation tax return clients.
- Our office will also start preparing the Individual Owner “RR” forms, which highlights the $ amount of your previously-paid 2018 personal CT estimated tax payments that each of you should recharacterize.
- If you can help us by doing the following, we’d have ironclad backup for the $ amount that we are requesting to be recharacterized:
- Please go to the CT Taxpayer Service Center website at the link below:
- If you already have an account there, login and printout your Tax Year 2018 estimated tax payment history
- If you do not have an account there, please create one for yourself, and access your 2018 tax year payment history. (This might take a week or more if they need to mail you a PIN letter).
- The report you want is located at: View Processed Payments/Credits, and do a search on “Filing Date” of “01/01/2018 to 12/31/2018”. If you can send us a printout of that page, we’ll have the official and correct $ amounts to consider for recharacterization, and we will base our calculations off of that.
The IRS Issues Long-Awaited Guidance on Business Meals and Entertainment DeductionsPosted on October 4th, 2018
Bravo! The Internal Revenue Service released initial guidance Wednesday on the business expense deduction for meals and entertainment in the wake of the Tax Cuts and Jobs Act, which was supposed to eliminate deductions for expenses pertaining to activities generally considered entertainment, amusement or recreation. The guidance rescues the meals deduction, and confirms that entertainment is no longer deductible at all.
The IRS said taxpayers can still deduct 50 percent of the cost of business meals if the taxpayer (or an employee of the business) is present at the meal, and the food or beverages aren’t considered to be “lavish or extravagant.” The meals can involve a current or potential business customer, client, consultant or a similar business contact. Food and beverages provided during entertainment events won’t be considered entertainment if they’re bought separately from the event.
Before 2018, a business was able to deduct up to 50 percent of entertainment expenses directly related to the active conduct of a trade or business or, if they’re incurred immediately before or after a bona fide business discussion, associated with the active conduct of a trade or business. That changed, however, with the passage of the tax code overhaul last December. Section 274 of the tax code now generally disallows a deduction for expenses with respect to entertainment, amusement or recreation after passage of the new tax law.
The Treasury Department and the IRS plan to publish proposed regulations that will clarify exactly when business meal expenses are deductible and what constitutes entertainment. Until those proposed regulations take effect, taxpayers can rely on guidance in Notice 2018-76, which the IRS issued Wednesday in conjunction with the announcement.
Go out and celebrate with a deductible meal!
An Update On The New CT Pass Through Entity TaxPosted on September 26th, 2018
- IRS has issued no guidance indicating whether the CT PET payments will be recognized as a deductible business expense for Federal tax purposes.
- We should plan on not taking a Federal tax deduction for the amount of CT Pass Through Entity Tax, at this point in time. Though there is still a chance we will get the tax benefit, we aren’t ready to reduce our Federal quarterly estimated tax calculations for clients just yet.
- CT’s online payment system is now available. Here is a link to instructions on how to use it:
- You can also use the CT PET tax payment vouchers at the link below, to make your estimated tax payments by check:
- What Amount To Pay? The tax is 6.99% of your total year to date profits. If this is your first estimated tax payment for the year, you’d want to make this a 9-month catch-up payment equal to 6.99% of your Jan-Aug 2018 profits. If you’ve already made CT estimated tax payments in April and June for 2018, you would take 6.99% of your last 3 months’ profit, and remit that amount.
- Jan 15, 2019 Estimates. If you want to keep the door open, in case the IRS later allows the Federal deduction, then you’d want to make your Q4 estimated tax payment before Dec 31. Otherwise the deduction would fall into the following tax year.
- CT will allow you to re-characterize all or a portion of your 2018 personal CT estimated tax payments, including those you have already made, to move those dollars over to your business EIN. You will have until December 31 to do that, and CT will issue a new form by September 30, 2018, which will need to be prepared, signed, and mailed to CT Dept of Revenue Services before December 31 in order to have them process your recharacterization.
- If you carried forward a 2017 CT refund and applied that towards your 2018CT taxes, you’ll be able to recharacterize those amounts as well.
- This all needs to be done at the individual level, so for an entity with 4 partners, each of the 4 individual partners would need to submit a form on their own.
- CT recognizes that passing the new law this late in the year, retroactive to Jan 1, 2018, will cause all taxpayers to immediately be late on paying the 1st and 2nd quarter CT PET tax. For some reason, they decided NOT to give an automatic penalty waiver on this, so in the event you receive an underpayment penalty notice in 2019, you will be able to submit a written explanation as to why you were late in making the required PET payments, and as long as your reply is submitted by December 31, 2019, they will grant a penalty waiver. Our office will generate a template letter for this.
- It is very important for you to understand that late payments of the CT PET tax will be subject to interest and penalties. While CT touts this new tax as “revenue neutral” to taxpayers, they do stand to collect a lot of interest and penalties from pass through business owners who are not able to pay their quarterly taxes on time.
- Please continue to pay the full amount of your quarterly Federal estimated tax payments, excluding any impact from the CT PET deduction. We’ll continue the waiting (hoping) game for IRS guidance that will tell us one way or another as to whether there will be a Federal deduction for the CT PET tax, but we aren’t going to hold our breath in the meantime. We’ll take the conservative expectation that there will be no Federal deduction.
- If we discover later that the CT PET tax payments will be deductible at the Federal level, we can always just adjust your Q4 Federal estimated tax payment, or simply claim a refund of the overpayment when we file the tax return in tax season.