We just wanted to give you all an update as to the taxability of the PPP loan forgiveness (currently a 2020 tax event regardless of when your PPP loan is forgiven). As of today, it is taxable, however, there is some movement in Congress to override the IRS to make the forgiveness of the PPP loan proceeds not taxable.
Here is how our firm is handling our own situation, assuming that we will not have any definitive answers from Congress by the end of the first quarter of 2021:
For 2020 projection purposes, we are assuming that our PPP loan proceeds will be taxable, and we will pay estimated taxes based on that assumption. Or, at least pay in 2020 estimates to meet the estimated tax “safe harbors” (paying in 110% of 2019’s actual tax liability or 90% of the 2020 projected taxes).
We will be putting our firm’s tax returns on extension, to buy some time, with the hope that Congress will finalize this issue prior to September 15 (the extended due date of partnership and S corporation returns) and prior to October 15 (the extended due date of personal tax returns).
If clients choose to have their business returns (partnerships and S corporations) filed by the original due date of March 15, then the PPP loan proceeds will be included in income for those filed returns. If Congress overrides the IRS subsequent to the March return file date, then amended business returns will be required to be filed (and personal returns as well since the income from partnerships and S corporations flow through to the personal returns). This would also hold true for personal returns originally due April 15 for self-employed clients, who would then have to file amended personal returns if Congress were to override the IRS (if applicable).
We have been told that there is a “strong” probability that Congress will act to override the IRS, but we will have to use the laws and the information that exists as of today, in the meantime.
Important tidbit: FTEs are not a requirement for PPP loan forgiveness for businesses that were mandated by any government health agencies as to the number of customers that they could service during the pandemic (and/or for the businesses that were required to be totally shut down for a long period of time during the pandemic). This would include restaurants, gyms and related businesses, retail stores, etc. There is a box to check within the PPP loan forgiveness application that can be checked which would result in the elimination of having to meet the FTE requirement.
Guidance by IRS Limits Deductibility for Expenses from PPP Loans
When business owners first applied for loans from the Paycheck Protection Program (PPP), they did so with the expectation that they could seek forgiveness for some or all of it. In effect, this would make it a “free” loan, allowing businesses to continue functioning despite the economic impact of the coronavirus pandemic. Unfortunately, the IRS has decided to deliver some bad news to PPP recipients right before the holidays, announcing that expenses from a PPP loan that a recipient expects to be forgiven cannot be deducted from their taxes. The latest IRS ruling will most likely make this taxable event occur for 2020.
What does this guidance say?
Normally, many of the expenses that are intended to be paid by PPP loans would be considered tax-deductible under IRS regulations. However, the IRS has ruled that, due to the wording of the CARES Act, the expenses used to claim forgiveness under the PPP program cannot also be claimed for tax deductions. This is because the debt forgiveness from a forgiven PPP loan is not considered “gross income” under the wording of the CARES Act, and thus does not benefit from typical tax deductions.
The IRS also noted that this applies to PPP loans even where a recipient has yet to apply for loan forgiveness. Instead, it applies in all cases where someone has a “reasonable expectation” of forgiveness. In other words, even people who have yet to apply for forgiveness for their PPP loans do not get to benefit from tax deductions for applicable business expenses, so long as they have good reason to believe they will receive loan forgiveness.
How does this impact PPP recipients?
This is potentially a significant financial blow for PPP recipients, who may have expected to be able to deduct these business expenses as normal, in addition to the benefit of receiving loan forgiveness for their PPP loans. As a result, many of these business owners are now potentially facing significantly higher taxes than they may have been expecting when tax season rolls around.
If you have received a PPP loan and have either received forgiveness or believe you will receive forgiveness, you should contact the tax advisers at KVLSM LLP. Our team will work with you to minimize your tax liability, and work with you to protect your financial interests. For more information Download the IRS Guidance or call us (516) 294-0400. As always, should you have any questions or concerns regarding your situation please feel free to call.
The Tax Cuts and Jobs Act was officially signed into law by President Trump on Friday, December 22, 2017, and is said to be the largest tax reform bill to go through since the Regan-era Tax Reform Act of 1986. With it comes some significant changes to the way individuals and businesses will make financial decisions, which will have a broad impact on the American economy.
Here is a brief rundown of the highlights of the law, which includes changes to tax brackets and reduction of income tax rates for corporations.
Changes to Individual Tax Reporting Individual Income Tax Brackets
There will now be seven tax brackets as follows: 10%, 12%, 22%, 24%, 32%, 35%, and 37%. The top tax bracket rate, 37%, will be for those individuals who are earning $500,000 and above (joint filers must be earning at least $600,000). The new tax bracket rates are set to expire in 2026 and will then revert back to the current rate structure.
Additionally, the below tax brackets are also being changed:
• Estates & Trust Taxes: Will now be subject to four rates, the top rate being 37% and taking effect at $12,500
• “Kiddie Tax”: This applies to children under the age of 19 or any full-time students under the age of 24. This tax will no longer be tied to the income of the parents or siblings, instead, unearned income of children will now be subject to tax at the same rates of estates and trusts.
Standard Deductions The standard deduction will now be doubled. For example, a single filer’s deduction will increase from $6,350 to $12,000, with married and joint filers increasing from $12,700 to $24,000. The elderly and blind deductions will go unchanged. Beginning after December 31, 2025, the increased amount of the standard deduction will expire.
Personal Exemptions
Personal exemptions will be temporarily repealed for tax years starting in 2018 and until after December 31, 2025.
Alternative Minimum Tax (“AMT”)
The new AMT will be applied to the taxable years beginning after December 31, 2017, and before January 1, 2026. The AMT exemption will now be $109,400 for married taxpayers filing jointly with a phase-out threshold at $1,000,000. The AMT exemption for married individuals filing separately will be $54,700 for and all others at $70,300 with a phase-out threshold of $500,000.
Child Tax Credit
The Act will now increase the child tax credit from $1,000 to $2,000 with up to $1,400 of it being refundable. It will also increase the income level for married tax filers from $110,000 to $400,000, all others at $200,000. Additionally, it allows for a $500 credit for each non-child dependent (i.e., elderly).
Section 529 Plans
Parents can use up to $10,000 per year for tuition and qualified expenses for public, private or religious elementary and secondary schools.
Property Taxes Deductions
A taxpayer may not deduct up to $10,000 in state and local taxes, but they must choose between property taxes and income or sales taxes. Additional property taxes can be deducted for business assets, such as residential business property.
Home Mortgage Interest Deductions
Current mortgage holders remain unaffected. New mortgages entered into between December 15, 2017, and December 31, 2025, will be reduced to a limit of $750,000 or $375,000 for married taxpayers filing separately. Additionally, beginning after December 31, 2017, and before January 1, 2026, the deduction for home equity interest will be suspended.
Charitable Contribution Deductions
The income-based percentage limit for charitable contributions of cash to public charities and other organizations is increased from 50% to 60% of adjusted gross income. This will be effective for taxable years beginning December 31, 2017, and before January 1, 2026.
Medical Expense Deduction
Changed to include costs that are 7.5% or more of adjusted gross income (compared to previous 10%) for 2017 and 2018.
Alimony Payments
Can no longer be deducted from or included in income, effective for any divorce or separation instrument executed after December 31, 2018.
Moving Expenses
Suspension of any deduction for taxable years 2018 through 2025. However, the rules allow for amounts attributable to in-kind moving and storage expenses for members of the armed forces, and their spouse and dependents, on active duty that must move due to a military order.
Personal Casualty and Theft Losses
Must be attributable to a disaster declared by the President under section 401 of the Robert T. Stafford Disaster Relief and Emergency Assistance Act. Can no longer be deducted, save for cases of federally declared disasters. All other losses will not be accepted.
Wagering Losses
Will now be expanded to include expenses incurred in connection with an individual’s wagering activity. This is aimed to limit a professional gambler’s net loss to zero. This will be effective for taxable years beginning after December 31, 2017.
Under 2% Itemized Deductions and 3% Limitations
Are now repealed for taxable years beginning after December 31, 2017, and before January 1, 2026.
Affordable Care Act
The penalty for failure to maintain health care coverage has been eliminated for those without health insurance beginning after December 31, 2018.
Estate and Gift Tax Exemption
The exemption has been doubled to $10 million per individual (indexed for inflation). This is effective for decedents dying, generation-skipping transfers and gifts made after December 31, 2017. The increased exclusion is set to expire for decedents dying and gifts made after December 31, 2025.
Changes to Business Tax Reporting
Corporate Tax Rate
Reduced to a flat 21% which also applies to personal service corporations.
Dividend Received Deductions
The original 80% dividends received is reduced to 65% and the 70% dividends received is reduced to 50%.
Corporate Alternative Minimum Tax (AMT)
The corporate AMT has been eliminated. Any taxpayer that has an AMT credit carryforward may use them against their regular tax liability. They may also claim a refundable credit equal to 50% of the remaining AMT credit carryforward for years beginning in 2018-2020 changing to 100% for years beginning in 2021.
Business Income for Individuals and Trusts & Estates
Allows a non-corporate taxpayer who has a qualified business income (QBI) from either a partnership, S corporation or sole proprietorship to deduct the lesser of:
• The taxpayers combined QBI amount
• 20% of any of the excess of the taxpayer’s taxable income for the tax year
Excess Business Losses of Taxpayers Other Than Corporations
Are not allowable in the current taxable year, but are instead to be carried over and treated as part of the corporation’s net operating loss in subsequent tax years.
Bonus Depreciation Write-offs
Corporations are allowed to write off a percentage of depreciable assets from September 28, 2017, to December 31, 2026. The write-off percentages will decrease each year accordingly:
• 9/28/17 to 12/31/22: 100%
• 2023: 80%
• 2024: 60%
• 2025: 40%
• 2026: 20%
Section 179 Expensing
Expensing limitation is increased to $1 million, with a phase-out threshold of $2.5 million.
Luxury Vehicle and Personal Property Depreciation
Is increased to a maximum of $10,000 for the first year the vehicle is placed in service, $16,000 for the second and $9,600 for the third. All years thereafter are $5,760. This applies only to vehicles placed in service after 2018.
Qualified Leasehold Recovery Period
Now includes a 15-year period for improvement property (including qualified leasehold, qualified restaurant, and qualified retail) and a 20-year alternative depreciation system (ADS) period. The ADS recovery period is reduced from 40 to 30 years.
Peripheral Equipment Deductions
Are no longer subject to heightened substantiation requirements.
Small Businesses
Applicable for businesses with less than $25 million in average annual gross receipts. They can now take advantage of several accounting simplifications, such as cash method of accounting, accounting for inventories, capitalization and inclusion of inventory expenses, and long-term contract accounting.
Interest Expense Deductions
For taxable years beginning after December 31, 2017, the interest expense deductions are limited to the sum of business interest income, floor plan financing interest, and 30% of the “adjusted taxable income” of the taxpayer for that taxable year. Exemptions include businesses with an average gross receipts amount of $25 million or less, regulated public utility companies, electing real property trade or business, and electing farming businesses.
Net Operating Loss (NOL) Deductions
NOL deduction is limited to 80% of taxable income.
Like-Kind Property Exchanges
Like-kind property exchanges apply only to real property not held mainly for sale.
S Corp to C Corp Conversions
Adjustments are taken into account for a six-year period from the time the S corporation status turns to a C corporation status.
Contributions to Capital
Contributions to the capital which may be an aid of construction or any other contribution as a customer or potential customer and any contribution by any governmental or civic group are no longer exempt.
Capital Gains Rollovers
For sales after 2017, for Special Small Business Investment Companies, gain rollovers are no longer permitted.
Business Expense Deductions
Expense deductions are now largely repealed – including for IRC Sec. 199, entertainment expenses other than meals and FDIC Premiums
Local Lobbying Deductions
Lobbying expenses or deductions are disallowed.
Self-Created Intangibles
Self-created intangibles, such as musical compositions, can no longer be treated as a capital asset.
Partnership Losses
Partner losses are only applicable to the specified partner’s distributive share of charitable contributions and foreign taxes.
Partnership Transfer
The transferee of a partnership must withhold 10% of the sale amount of a partnership interest.
Partnership Termination
The rule is now repealed, a partnership is treated as continuing even if more than 50% of the total capital and profit interests of the partnership are sold. There need not be any new elections.
Carried Interest
Transfers of applicable partnership interests for businesses held for less than three years are treated as a short-term capital gain.
Research and Experimental Expenditures
Are capitalized over a five-year period for tax years after 2021.
Orphan Drug Credit
Includes a 25% credit for clinical test expenses for drugs related to rare diseases.
Rehabilitation Credit
Includes a 20% credit for updates and maintenance of historical structures. The credit must be claimed ratably within a five-year period beginning with the taxable year the structure is placed in service.
Family and Medical Leave Credit
Employers may claim 12.5% of wages paid to employees during any time in which they are on family or medical leave if the rate of payment under the program was 50% of the wages normally paid to an employee.
Employee Compensation
A covered employee is now defined to include the principal executive officer, the principal financial officer, and the three other highest paid employees in order to repeal the exception for the $1 million deduction limitation for commissions and performance-based compensation.
Excise Tax
A 21% tax will now be imposed for compensation in excess of $1 million paid to a tax-exempt organization’s five highest-paid earners.
Qualified Equity Grants
Allows employees who are given stock options or restricted stock units to defer the income recognition for up to five years.
Sexual Harassment and Abuse Deductions
Deductions are not allowed for any settlement or payment related to a case if such settlement or payment is subject to a nondisclosure agreement or attorney’s fees related to such settlement or payment.
Fines and Penalties for Federal Income Taxes
No deduction will be allowed for any amount paid or incurred to a government or governmental entity in relation to a violation of any law (or any investigation or inquiry by that government or entity).
Inheriting a large sum of money can be a blessing or a curse, depending on how you approach it. When your net worth takes a significant leap overnight, that creates new opportunities, financially speaking. If you’ve recently inherited a windfall or you’re set to in the near future, here are the most important things to keep in mind when you have your eye on a comfortable retirement. Read More
The New York State Governor Andrew Cuomo reached a deal with the State legislature to increase the State minimum wage over a gradual process, which is outlined as follows:
For workers in Nassau, Suffolk and Westchester Counties, the minimum wage will increase to $10 at the end of 2016. It will then increase by $1 each subsequent year, ultimately reaching $15 on December 31, 2021.
For workers in New York City employed by large businesses (those with at least 11 employees), the minimum wage will increase to $11 at the end of 2016. It will then increase by $2 each subsequent year, ultimately reaching $15 on December 31, 2018.
For workers in New York City employed by small businesses (those with 10 employees or fewer), the minimum wage will increase to $10.50 at the end of 2016. It will then increase by $1.50 each subsequent year, ultimately reaching $15 on December 31, 2019.
For workers in greater New York, the minimum wage will increase to $9.70 at the end of 2016. It will then increase by $0.70 each subsequent year, ultimately reaching $12.50 on December 31, 2020. After that time, the statewide minimum will continue to increase on an indexed schedule to be set by the Director of the Division of Budget in consultation with the Department of Labor, before it ultimately reaches $15 per hour.
In all areas, the minimum wage for restaurant employees has increased to $7.50 per hour.
The Bipartisan Budget Act of 2015 was passed by Congress in October of 2015 and the modifications it proposes will officially take effect on May 1. These latest changes were put in place to prevent people from taking advantage of many of the optimization strategies.
This new law will eliminate the “file and suspend” strategy and will alter many beneficiary benefits. These revisions were put into place in order to stop higher earners from using certain strategies, but it also affects lower-income people. With the new law, lower-earning spouses may be forced to take reduced spousal benefits. The sooner a spousal benefit is claimed before full retirement age, the smaller the benefit will be.
Another change to the Social Security laws is that a beneficiary will no longer be able to restrict an application. Beneficiaries will be required to take the highest benefit to which he or she is entitled. Someone who earns more money than their spouse and applies for Social Security at full retirement age will no longer be entitled to receive the spousal benefit if their own benefit is higher.
Additionally, as part of these revisions, the Social Security Administration will automatically award the beneficiary the highest benefit. They will have to receive their own retirement benefit or opt to hold off on the benefits. In order to use the restricted application strategy, a person must be at least 62 or older as of January 1, 2016 and only those who are between 62 and 66 over the next four years will be able to use the strategy.
Changes have also be implemented to prevent people from suspending benefits, then later reversing that decision and ultimately claiming retroactive benefits back to the day of the original application.
These revisions were put into place in order to stop higher earners from using certain strategies, but it also affects lower-income people. With the new law, lower-earning spouses may be forced to take reduced spousal benefits. The sooner a spousal benefit is claimed before full retirement age, the smaller the benefit will be. If you think about it, women who were not part of the workforce because they chose to care for their families instead, would now be penalized with a smaller benefit.
Singles are also affected as they will no longer be able to use the ‘file and suspend’ strategy in order to receive a larger retroactive amount. Beneficiaries cannot file for dependent benefits for a child while putting off their own benefits and divorced couples cannot use the restricted application strategy to take spousal benefits while they let their own benefits increase. But, a person divorced for more than two years will be able to claim a spousal benefit if the ex-spouse files and suspends or delays his or her benefit.
Unchanged is the survivor benefit, whereas a survivor is eligible for 100% of the deceased spouse’s benefit. Beneficiaries will still able to claim a survivor benefit first while letting his or her own benefit increase until 70 years old. Or, he or she is allowed to claim their own benefit early and then later on claim a survivor benefit at full retirement age.
Two big strategies are eliminated but beneficiaries can still receive delayed retirement credits up until the age of 70. Plus, whether it be full retirement age or later, a beneficiary is still allowed to end his or her own retirement benefit.
If you have any questions or issues, Katz Viola Lebenhart & Mauro has a team of professionals available to help. For more information, call (516) 938-5219.
The federal government has permanently approved a wide range of tax breaks for businesses, rather than continuing to extend them for one or more years, giving companies the benefit of certainty as well as tax cuts. Read More
516-294-0400
The standard deduction will now be doubled. For example, a single filer’s deduction will increase from $6,350 to $12,000, with married and joint filers increasing from $12,700 to $24,000. The elderly and blind deductions will go unchanged. Beginning after December 31, 2025, the increased amount of the standard deduction will expire.
