Loan Forgiveness Under the Paycheck Protection Plan
As part of the Coronavirus Aid, Relief, and Economic Security (CARES) Act, signed into law March 27, many small business owners were able to apply for – and receive – a loan of up to $10 million under the Paycheck Protection Program (PPP). Businesses – including nonprofits, veterans’ organizations, Tribal entities, self-employed individuals, sole proprietorships, and independent contractors – that were in operation on February 15 and that have 500 or fewer employees are eligible for the PPP loans. The deadline for applying for a PPP loan is June 30, 2020. If the loan proceeds are used as specified, business owners may apply to have the loan forgiven.
Here’s what you need to know about loan forgiveness under the PPP:
The loan covers eight weeks (56 days) of payroll, rent, mortgage interest and utility expenses; however, the Paycheck Protection Program Flexibility Act of 2020 (PPPFA) allows PPP loan borrowers the option to extend the covered period to 24 weeks. The original June 30 deadline for rehiring workers and spending the PPP funds has also been extended to December 31 to allow for the 24-week period.
Generally, the first day of the covered period is the same day as the loan disbursement. For example, if the loan proceeds were received on Wednesday, April 22, that is the first day of the covered period. The last day of the covered eight-week period, for example, would then be Tuesday, June 16.
Alternate Payroll Covered Period. If you pay your employees weekly or bi-weekly, you may elect to have the eight-week (56-day) period – or 24-week period – begin on the first day of the first pay period following the PPP loan disbursement date. In the case of an eight-week period, if the loan proceeds were received on Wednesday, April 22, and the first day of the first pay period following the loan disbursement is Monday, April 27, the first day of the Alternative Payroll Covered Period is April 27 and the last day of the Alternative Payroll Covered Period is Sunday, June 21.
PPP loans cover both payroll costs and nonpayroll costs; however, to be eligible for loan forgiveness, 60 percent of the PPP loan proceeds must go toward payroll costs (previously 75 percent), with the remaining 40 percent to be used toward nonpayroll costs.
If your business does not meet the 60 percent requirement, there will be a proportionate reduction in loan forgiveness – not a complete loss.
Here’s an example using the eight-week covered period: A business owner that received loan proceeds of $250,000 must use $150,000 of that amount on payroll costs to be eligible for loan forgiveness. The remaining $100,500 can be used to pay nonpayroll costs as specified below.
Under the PPPFA, businesses that received PPP loan funds are now able to delay payment of their payroll taxes. This was previously prohibited under the CARES Act.
Eligible payroll costs. Payroll costs include costs for employee vacation, parental, family, medical, and sick leave. The total amount of cash compensation – payroll costs paid and payroll costs incurred – for each individual employee may not exceed $15,385 for the covered period of eight weeks (56 days) based on an annualized salary of $100,000. Similar calculations are made if the borrower chooses a covered period of 24 weeks in that each individual employee may not exceed $46,153 for the covered period of 24 weeks based on an annualized salary of $100,000.
Bonuses can be included as long as this threshold amount is not exceeded. Self-employed individuals and owner-employees can use PPP loan funds to cover owner compensation costs for eight weeks only (8/52) – and presumably, 24/52 if the 24-week covered period is chosen – of 2019 net profit from Form 1040 Schedule C).
To count toward eligible payroll expenses, employer contributions for retirement plans as well as health insurance must be paid during the covered period.
Loan forgiveness is based on full-time equivalent (FTE) workers and a standard 40-hour work week. A simplified method allows 1.0 FTE for 40 hour work weeks and 0.5 FTE for less than 40 hour work weeks. Calculations can be done using either method to determine which one is most advantageous to the employer. Special rules apply for workers whose salary has been reduced by 25 percent or more. Please call if you have any questions about this.
Businesses that received PPP loans can exclude laid-off employees from loan forgiveness reduction calculations if the employees turn down a written offer to be rehired.
Eligible nonpayroll costs. Specific nonpayroll costs are also eligible for forgiveness; however, they cannot exceed 25 percent of the total forgiveness amount. They must be paid or incurred during the covered period and paid on or before the next regular billing date, even if the billing date is after the covered period and can include costs that were paid and incurred one time.
- Payments of interest on any business mortgage obligation on real or personal property incurred before February 15, 2020. These amounts do not include any prepayment or payment of principal
- Business rent or lease payments (including leases for vehicles and office machinery) entered into force before February 15, 2020; and
- Business utility payments for services begun before February 15, 2020 such as electricity, gas, water, transportation, telephone, or internet access.
- Interest payments on debt obligations incurred before February 15, 2020
- Refinancing an SBA EIDL loan made between January 31, 2020, and April 3, 2020
Self-employed individuals can use PPP loan funds to cover interest, rent and utility payments are also eligible as long as these amounts are deductible on Form 1040 Schedule C.
Loan Amounts not Forgiven
Any amounts that aren’t forgiven must be repaid at an interest rate of 1 percent, which begins to accrue upon loan disbursement. Under the PPPFA borrowers now have five years to repay the loan (previously it was two years). Payments, however, are deferred for six months following the disbursement of the loan.
Business owners need to keep accurate records of how PPP loans are used. Failing to document or falsely claiming eligible expenses could lead to criminal penalties.
Don’t Delay. Start Planning Now to Maximize PPP Loan Forgiveness
If you’ve received a PPP loan and want to make sure your loan is forgiven, help is just a phone call away.
Pass on Wealth to Heirs Using These Strategies
Individuals with significant assets who want to transfer wealth to heirs tax-free, as well as minimize estate taxes, should take advantage of proven tax strategies such as gifting and direct payments to educational institutions; however low interest rates and a volatile stock market are creating additional opportunities. Let’s take a look at some of the strategies available:
The annual gift tax exclusion provides a simple, effective way of cutting estate taxes and shifting income to heirs. For example, in 2020, you can make annual gifts of up to $15,000 ($30,000 for a married couple) to as many donees as you desire. The $15,000 is excluded from the federal gift tax so that you will not incur gift tax liability. Furthermore, each $15,000 you give away during your lifetime reduces your estate for federal estate tax purposes. Any amounts above this limit, however, will reduce an individual’s federal lifetime exemption and require filing a gift tax return.
Direct payments for medical or educational purposes indirectly shift income to heirs; however, it only works if the payments are made directly to the qualifying educational institution or medical provider. This strategy allows you to give more than the annual gifting limit of $15,000 per donee. For example, if you’re a grandparent, you can pay tuition directly to your grandchild’s boarding school, college, or university. Room and board, books, supplies, or other nontuition expenses are not covered. Likewise, in the case of direct payments to a hospital or medical provider. Medical expenses reimbursed by insurance are not covered, however.
Loans to Family Members
This strategy works by loaning cash to family members at low interest rates, which is then invested with the goal of reaping significant profits down the road. With mid and long-term applicable federal rates (AFR) rates for June 2020, as low as 0.43 and 1.01 percent, respectively, heirs can lock in these rates for many years – three to nine years (mid-term) and nine to more than 20 years (long-term).
Grantor Retained Annuity Trust (GRAT)
Another relatively low-risk strategy is the grantor retained annuity trust (GRAT), where the donor transfers assets to an irrevocable trust and receives an annuity payment back from the trust each year. This strategy enables heirs to profit from their investments long-term – as long as returns are higher than the IRS interest rate. This is easier than ever now that IRS interest rates are so low. In June 2020, the interest rate used to value certain charitable interests in trusts such as the GRAT is 0.60 percent.
Roth IRA Conversions
Contributions to a traditional IRA are made pre-tax, which means distributions are considered taxable income; however, with a Roth IRA, the tax is paid up front, and distributions are completely exempt from income tax. It is this feature that makes converting a traditional IRA to Roth IRA and rolling it over to an heir an attractive option, especially during a financial crisis. The conversion is treated as a rollover, and typically would be accomplished via a trustee to trustee transfer where the trustee of the traditional IRA is directed to transfer an amount from the traditional IRA to the trustee of the Roth IRA. The account owner pays income tax on the amount rolled over in the year the account is converted, which allows the account to accumulate assets tax-free and future distributions are tax-free.
A Tax Professional is Here to Help
To learn more about these and other tax strategies related to wealth management, please call the office and speak to a tax professional who an assist you.
Preparing an Effective Business Plan
A business plan is a valuable tool whether you’re seeking additional financing for an existing business, starting a new company, or analyzing a new market. Think of it as your blueprint for success. Not only will it clarify your business vision and goals, but it will also force you to gain a thorough understanding of how resources (financial and human) will be used to carry out that vision and goals.
Before you begin preparing your business plan, take the time to carefully evaluate your business and personal goals as this may give you valuable insight into your specific goals and what you want to accomplish. Think about the reasons why you need additional financing or want to start a new business. Whatever the reason it is important to determine the “why.”
Next, you need to figure out what type of business or new business direction you are interested in pursuing. Chances are you already have a specific business in mind but if not you might want to think about your business in terms of what technical skills and experience you have, whether you have any marketable hobbies or interests, what competition you might have, how you might market your products or services, and how much time you have to run a successful business (it may take more time than you think).
Finally, if you are starting new business, you’ll need to figure out how you want to get started. Most people choose one of three options: starting a business from scratch, purchasing an existing business, or operating a franchise. Each has pros and cons, and only you can decide which business fits.
The final step before developing your plan is developing a pre-business checklist which might include:
- Business legal structure
- Accounting or bookkeeping system
- Insurance coverage
- Equipment or supplies
- Financing (if any)
- Business location
- Business name
Based on your initial answers to the items listed above, your next step is to formulate a focused, well-researched business plan that outlines your business mission and goals, how you intend to achieve your mission and goals, products or services to be provided, and a detailed analysis of your market. Last, but not least, it should include a formal financial plan.
Preparing an Effective Business Plan
Now, let’s take a look at the components of an effective business plan. Keep in mind that this is a general guideline, and any plan you prepare should be adapted to your specific business with the help of a financial professional.
Introduction and Mission Statement
In the introductory section of your business plan, you should make sure you write a detailed description of your business and its goals, as well as ownership. You can also list skills and experience that you or your business partners bring to the business. And finally, include a discussion of what advantages you and your business have over your competition.
Products, Services, and Markets
In this section, you will need to describe the location and size of your business, as well as your products and/or services. You should identify your target market and customer demand for your product or service and develop a marketing plan is. You should also discuss why your product or service is unique and what type of pricing strategy you will be using.
This section is where you should discuss the financial aspects of your business–and where the advice of a financial professional is vital. The following financial aspects of your business should be discussed in detail:
- Source and amount of initial equity capital.
- Monthly operating budget for the first year.
- Expected return on investment (ROI) and a monthly cash flow for the first year.
- Projected income statements and balance sheets for a two-year period.
- A discussion of your break-even point.
- Explanation of your personal balance sheet and method of compensation.
- Who will maintain your accounting records and how they will be kept.
- Provide “what if” statements that address alternative approaches to any problem that may develop.
The Business Operations section generally includes an explanation of how the business will be managed on a day-to-day basis and discusses hiring and personnel procedures (HR), insurance and lease or rent agreements, and any other pertinent issues that could affect your business operations. In this section, you should also specify any equipment necessary to produce your product or services as well as how the product or service will be produced and delivered.
The concluding statement should summarize your business goals and objectives and express your commitment to the success of your business.
Help is Just a Phone Call Away
Please contact the office if you have any questions about business plans or need assistance creating one.
Avoid These Common Errors When Filing a Tax Return
When filing a tax return, mistakes such as the common errors listed below can result in a processing delay – and increase the amount of time it takes to receive a tax refund. Using a reputable tax preparer such as a certified public accountant, enrolled agent or another knowledgeable tax professional is usually the best way to avoid this. With this in mind, here are eight of the most common errors taxpayers make when filing their returns:
1. Missing or inaccurate Social Security numbers. Each SSN on a tax return should appear exactly as printed on the Social Security card.
2. Misspelled names. Likewise, a name listed on a tax return should match the name on that person’s Social Security card. This applies to spouses and dependents as well.
3. Incorrect filing status. Some taxpayers choose the wrong filing status. A tax professional can help taxpayers choose the correct status, especially if more than one filing status applies.
4. Math mistakes. Math errors are one of the most common mistakes. They range from simple addition and subtraction to more complex calculations. Using a professional tax preparer ensures an accurate return.
5. Figuring credits or deductions. Taxpayers can make mistakes figuring things like their earned income tax credit, child and dependent care credit, and the standard deduction. Taxpayers should always follow the instructions carefully. For example, a taxpayer who’s 65 or older, or blind, should claim the correct, higher standard deduction if they’re not itemizing. Also, remember to attach any required forms and schedules.
6. Incorrect bank account numbers. Taxpayers who are due a refund should choose direct deposit because it is the fastest way to get their money. They should remember, however, to include the correct routing and account numbers on the tax return. No bank account number means no direct deposit.
7. Unsigned forms. An unsigned tax return isn’t valid under any circumstance. Also, keep in mind that when filing a joint return, in most cases, both spouses must sign. Exceptions may apply, however, for members of the armed forces or other taxpayers who have a valid power of attorney. Taxpayers can avoid this error by filing their return electronically and digitally signing it before sending it to the IRS.
8. Filing with an expired individual tax identification number. If a taxpayer’s ITIN is expired, a tax return should be filed using the expired number. The IRS will process that return and treat it as a return filed on time; however, be aware that the IRS won’t allow any exemptions or credits to a return filed with an expired ITIN. Taxpayers will receive a notice telling the taxpayer to renew their number. Once the taxpayer renews the ITIN, the IRS will process a return normally.
If you haven’t filed your tax return yet, a tax professional can help expedite the process and ensure you file an accurate tax return. If you need help with your tax return, don’t hesitate to call.
Cash Management Tips for Small Businesses
Cash is the lifeblood of any small business. Here are some tips to help your business maintain a sufficient cash flow to meet its financial goals and run efficiently:
1. Toughen up your credit policies. Review the payment terms you offer to customers and tighten them up if slow payment is a problem area for your business. For instance, how long are customers given to pay? What action will be taken if a payment is missed? Be sure your credit terms are communicated effectively to customers before transactions are entered into.
2. Routine Credit Check. For many businesses, a routine credit check should be performed before a sales or service transaction is entered into with a new customer. Consider requiring advance payments – at least in part – for new customers.
3. Create a Budget. A budget can be extremely effective in helping you keep track of whether cost and revenue-related goals are being met, but surprisingly, many small businesses do not engage in the budgeting process. Depending on the size and complexity of the business, the budget process might be informal or formal, lengthy, or simple. Projected revenues and expenses should be broken down by months. Budget for next year’s revenues and expenses near the end of each year and review budgeted to actual results monthly.
4. Tighten up billing. If collecting bills has become a problem for your business, you might want to consider increasing the intervals at which customers are billed, e.g., from three months to one month, or from one month to two weeks. Review your accounts receivable weekly or even daily to make sure slow payers are not allowed to slide.
Please call the office if you need help creating a budget or have any questions regarding your company’s cash flow and credit or collection policies.
Estates and Trusts: Guidance for Itemizing Deductions
The Tax Cuts and Jobs Act (TCJA) prohibits individual taxpayers from claiming miscellaneous itemized deductions for any taxable year beginning after December 31, 2017, and before January 1, 2026. However, proposed guidance has recently been issued clarifying that certain deductions of estates and non-grantor trusts are not miscellaneous itemized deductions and are allowable in figuring adjusted gross income, specifically:
- Costs paid or incurred in connection with the administration of the estate or trust which would not have been incurred otherwise.
- Deductions concerning the personal exemption of an estate or non-grantor trust.
- Deductions for trusts distributing current income.
- Deductions for trusts accumulating income
The proposed guidance also clarifies how to determine the character, amount and manner for allocating excess deductions that beneficiaries succeeding to the property of a terminated estate or non-grantor trust may claim on their individual income tax returns.
Please contact the office with any questions.
Facts About Capital Gains and Losses
When you sell a capital asset such as a home, household furnishings, and stocks and bonds held in a personal account, the difference between the amount you paid for the asset and its sales price is known as a capital gain or capital loss. Here are ten facts you should know about how gains and losses can affect your federal income tax return.
1. Capital Assets. Almost everything you own and use for personal purposes, pleasure or investment is a capital asset including property such as your home or car, as well as investment property, such as stocks and bonds.
2. Gains and Losses. A capital gain or loss is the difference between your basis and the amount you get when you sell an asset. Your basis is usually what you paid for the asset. You must report all capital gains on your tax return.
3. Net Investment Income Tax. You may be subject to the Net Investment Income Tax (NIIT) on your capital gains if your income is above certain amounts. The rate of this tax is 3.8 percent. For additional information about the NIIT, please call the office.
4. Deductible Losses. You can deduct capital losses on the sale of investment property. You cannot deduct losses on the sale of property that you hold for personal use.
5. Limit on Losses. If your capital losses are more than your capital gains, you can deduct the difference as a loss on your tax return to reduce other income, such as wages. This loss is limited to $3,000 per year or $1,500 if you are married and file a separate return.
6. Carryover Losses. If your total net capital loss is more than the limit you can deduct, you can carry it over to next year’s tax return.
7. Long and Short Term. Capital gains and losses are treated as either long-term or short-term, depending on how long you held the property. If you hold the property for more than one year, your capital gain or loss is long-term. If you hold it one year or less, the gain or loss is short-term.
8. Net Capital Gain. If your long-term gains are more than your long-term losses, the difference between the two is a net long-term capital gain. If your net long-term capital gain is more than your net short-term capital loss, you have a net capital gain. Subtract any short-term losses from the net capital gain to calculate the net capital gain you must report.
9. Tax Rate. The tax rates that apply to net capital gain depend on your income but are generally lower than the tax rates that apply to other income. The maximum tax rate on a net capital gain is 20 percent. However, for most taxpayers, a zero or 15 percent rate will apply. A 25 or 28 percent tax rate can also apply to certain types of net capital gain such as unrecaptured Sec. 1250 gains (25 percent) and collectibles (28 percent).
10. Forms to File. You often will need to file Form 8949, Sales and Other Dispositions of Capital Assets, with your federal tax return to report your gains and losses. You also need to file Schedule D, Capital Gains and Losses, with your tax return.
Questions about reporting capital gains and losses? Help is just a phone call away.
Flexibility for Taxpayer Elections in Cafeteria Plans
Temporary changes to Section 125 cafeteria plans due to the coronavirus pandemic allow flexibility for taxpayers participating in cafeteria plans. These changes include extending the claims period for health flexible spending arrangements (FSAs) and dependent care assistance programs and allow taxpayers to make mid-year changes.
Specifically, these temporary changes for taxpayers include:
- extending claims periods for taxpayers to apply unused amounts remaining in a health FSA or dependent care assistance program for expenses incurred for those same qualified benefits through December 31, 2020.
- expanding the ability of taxpayers to make mid-year elections for health coverage, health FSAs, and dependent care assistance programs, allowing them to respond to changes in needs as a result of the COVID-19 pandemic.
- applying earlier relief for high deductible health plans to cover expenses related to COVID-19, and a temporary exemption for telehealth services retroactively to January 1, 2020.
Furthermore, temporary relief for high deductible health plans may be applied retroactively to January 1, 2020 and the $500 permitted carryover amount for health FSAs increases to $550. This amount is adjusted annually for inflation.
Please contact the office if you have any questions.
Using QuickBooks’ Reminders and Calendar
In just a few short months, COVID-19 has transformed the entire U.S. small business landscape. Companies are struggling to stay afloat and everyone is eager to get back to “normal.” Unfortunately, it’s unclear when that will happen and during these uncertain times, you may need as much help as you can get.
One of the ways that is possible is by providing support as you keep a close watch on your income and expenses. QuickBooks is the best go-to tool for that purpose, and now, more than ever it’s time to make the best possible use of this software.
There are steps you can take to ensure that QuickBooks is working quickly and well for you and that you’re attending to the work you must do every day. For example, the software’s Reminders and Calendar can help you stay current with your accounting.
Setting Up Reminders
While you don’t want to let anything slip through the cracks right now, it’s nearly impossible to keep up with your QuickBooks tasks without using the software’s Reminders feature. Before you start using this, you’ll have to set up its structure. Open the Edit menu and select Preferences | Reminders. This window will open:
Figure 1: You can tell QuickBooks which situations should trigger Reminders.
This window should open to the My Preferences screen. Click the box in front of Show Reminders List when opening a Company file to create a checkmark. Then click Company Preferences. You’ll see a list of QuickBooks “events,” like Checks to Print. You can tell QuickBooks how many days in advance you’d like to be warned about this pending activity by entering a number in the box in front of days before check date. You can also request that this appear in either Summary or List form. If you don’t want to be notified about any of them, click the button below Don’t Remind Me. When you’re done here, click OK.
The next time you open QuickBooks, your reminders will appear in a window on top of your home page. When you double-click on one, the transaction or other item will open. Two icons in the upper right of the Reminders screen open your Preferences and a blank To Do form. Here, you can schedule a call, task, appointment, etc. and associate it with a customer, vendor, or employee if desired. This item will then appear in your Reminders list.
Figure 2: The Reminders window appears when you open the related Company file; you can add To Do’s manually.
A Graphical View
QuickBooks’ Reminders are not the only way you can ensure that you’re meeting your accounting obligations. You can use the Calendar to see what you’ve scheduled and accomplished every day.
As you did with Reminders, though, you should visit this tool’s Preferences page (Edit | Preferences | Calendar) . Here, you’ll only need to work with the options under the My Preferences tab. You can choose from among a Daily, Weekly, or Monthly view, or just have QuickBooks Remember last view. Your calendar can display your choice of a Weekly view: a Fixed view of 5 or 7 days or a Variable view of 5/7 days. And, you can show All Transactions, To Do, Transactions Due, or choose one type of transaction (Invoice, Sales Receipt, Bill, etc.).
Figure 3: How would you like your Calendar displayed? QuickBooks lets you choose from among options.
You can also define Upcoming and Past Due Settings. You can Hide or Show these, Show only if data exists, or remember the last settings. QuickBooks allows you to choose the number of days’ worth of data that will be displayed for both Upcoming data and Past due data.
You can open the Calendar itself from the Company menu and by clicking a link in the Toolbar or on the Home Page. You’ll see a graphical calendar in the View you selected. Every day where there’s been – or is scheduled to be – activity will say either Due or Entered, with the corresponding number of transactions in parentheses. Below that is a list of Transactions Entered; you can double-click on any of them to see the actual transaction form.
A list of upcoming and past due transactions appears in the right vertical pane. Fields and buttons at the top of the screen allow you to change the View and limit the list to a specified type of transaction. You can also add To Do’s from this page.
These tools should help you navigate through today’s choppy financial waters and keep your business going as best you can until we get to the other side of the ongoing crisis. If you need additional assistance in managing your company’s critical accounting tasks, don’t hesitate to call.
Tax Due Dates for June 2020
Employees who work for tips – If you received $20 or more in tips during May, report them to your employer. You can use Form 4070.
Employers – Nonpayroll withholding. If the monthly deposit rule applies, deposit the tax for payments in May.
Employers – Social Security, Medicare, and withheld income tax. If the monthly deposit rule applies, deposit the tax for payments in May.
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