Business Taxes

Surprise! Improperly Forgiven PPP Loans are Taxable Income

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A new IRS memorandum has confirmed that improperly forgiven Paycheck Protection Program (PPP) loans should be considered taxable income, and recommends affected taxpayers file original (or amended) returns that accurately reflect the status of their loan.

You may recall that PPP loans were established to help small U.S. businesses impacted by the pandemic cover certain critical expenses.

Under the program, loans were forgiven if the borrower met three conditions:

  1. The loan recipient was eligible to receive the PPP loan. An eligible loan recipient is a small business concern, independent contractor, eligible self-employed individual, sole proprietor, business concern, or a certain type of tax-exempt entity; was in business on or before February 15, 2020; and had employees or independent contractors who were paid for their services, or was a self-employed individual, sole proprietor or independent contractor.
  2. The borrower used the loan proceeds to cover eligible expenses such as payroll costs, rent, interest on a business mortgage and utilities.
  3. The borrower applied for loan forgiveness and attested on the application that they were eligible for a PPP loan, they used the loan proceeds for eligible expenses, certain financial information was correct, and they met other legal qualifications.

When all three requirements were met, the loan (or a portion of it) was forgiven. But if they weren’t? The IRS memorandum confirms that any portion of the loan not meeting the requirements for forgiveness must be included in income and any additional income tax must be paid.

Consult with your accountant to determine if you need to file an amended return. Not working with a trusted advisor? Magone & Company can help — call us at (973) 301-2300.

The Verdict is In: NY Bank to Release Crypto Customer Records

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Under a federal judge’s recent ruling, a New York City banking institution must produce records on U.S. customers of a digital asset trading platform who may owe tax on unreported crypto transactions.

On September 21, the U.S. District Court for the Southern District of New York granted the IRS’s petition to summons M.Y. Safra Bank, following an investigation into crypto trading platform SFOX.

The Justice Department described SFOX as “a cryptocurrency prime dealer and trading platform that connects digital currency exchanges, over-the-counter virtual currency brokers and liquidity providers globally.” The platform boasts more than 175,000 users and has facilitated over $12 billion since 2014.

Making a case for reporting of income

In the petition, the IRS explained that taxpayers “must report income, gain or loss from all taxable transactions involving virtual currency on their federal income tax returns for the year of the transactions, regardless of the amount or whether they received a payee statement or information return.”

Judge Paul Gardephe agreed there was a “reasonable basis for believing” at least 10 individuals may have failed to disclose and pay tax on applicable gains from crypto transactions conducted by the taxpayers via SFOX, which uses M.Y. Safra’s banking services. The agency can make this determination by obtaining the bank records.

The IRS, and the federal government overall, have begun cracking down on tax evasion schemes that take advantage of Web 3.0 crypto technologies.

Reports IRS Commissioner Chuck Rettig, “The government’s ability to obtain third-party information on those failing to report their gains from digital assets remains a critical tool in catching tax cheats. The court’s granting of the John Doe summons reinforces our ongoing, significant efforts to ensure that everyone pays their fair share. Taxpayers earning income from digital asset transactions need to come into compliance with their filing and reporting responsibilities.”

For the record on tax liabilities

Although M.Y. Safra had been issued summonses, the Justice Department was clear that there was no allegation that the bank engaged in any unlawful activity. Rather, the summonses issued serve only to identify the unidentified individuals suspected of having tax liabilities.

In response, SFOX said it would review “internally and with external legal counsel around next steps,” and “always adheres to the law.”

Magone & Company specializes in complex tax cases. To sort out your situation, call our office at (973) 301-2300 today or reach out.

Claiming R&D Credits Just Got More Complex

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Research and development (R&D) tax credits have long been regarded as a critical support tool for U.S. small businesses and their innovation efforts, allowing them to deduct the cost of qualified research and innovation from their organization’s taxable income.

But under new guidance from the IRS, they might not be so easy to claim when submitting an amended return.

Companies must now provide the following information to qualify for R&D credits under these circumstances:

  • Total qualified employee wage expenses, contract research expenses and supply costs
  • All business components that support the factual foundation for the credit
  • All research activities performed by business constituents
  • List of individuals who performed each research activity
  • Information each individual looked to discover

This new documentation is in addition to the previous requirements, which include:

  • Payroll information for any employees involved in R&D
  • General ledger reports listing any R&D-related expenses
  • Timekeeping records for anything related to R&D
  • Copies of contracts and invoices paid to any third-party that conducted research
  • Marketing materials, blueprints, etc. and any other documentation that presents the process and the effects of the research

So what does this mean for small businesses?

A tougher road to qualification

For small and medium-sized businesses, these credits are a form of vital capital to propel growth and increase their competitiveness. But the challenge lies in having the resources to organize, compile and submit the necessary documentation. Missing just one piece of information could result in an invalid claim.

The IRS hopes these new requirements will help weed out businesses that aren’t eligible for the credit. All businesses, however, will be granted 45 days to complete a credit refund claim during this one-year transition period. Going forward, we may see these changes apply to all R&D credits — not just on amended returns.

 Claiming what is rightfully yours

Don’t miss out on an opportunity to collect valuable funds for your small business. Contact Magone & Company today at (973) 301-2300 for guidance and support regarding this matter

Payroll Taxes Increase, But Tax Credit Relief May be Coming

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New Jersey business owners face a projected $200 million increase in unemployment insurance (UI) taxes scheduled to take effect in July.

However, a bill now being considered by the New Jersey Assembly Appropriations Committee would help minimize the impact on the state’s small businesses in the form of tax credits.

Assemblyman Roy Freiman, D-District 16, says while the UI tax increases may have a negative impact, it will be countered by the positive tax credits. Small businesses would be able to use the credits to offset their corporation business taxes and their gross income taxes.

If enacted, Senate Bill 2378 would adopt the U.S. Small Business Administration’s (SBA) parameters for a small business. According to the SBA, size standards are mainly based on yearly business receipts or an average number of employees. The SBA also indicates that its definition of “small” varies by industry.

Tax credits provided by the bill would be available for calendar years beginning in 2023 and the following year. Credits would be based on expected increases to unemployment insurance taxes in fiscal years 2023 and 2024.

The bill would also allow the tax credits to carry forward for seven years, and they are non-refundable.

If a small business uses government funds, including grants or subsidies, to minimize its contribution to UI, the business would be prohibited from using the tax credits.

Goal is lower UI taxes

Senate Bill 2378 has the long-range goal of reducing employer UI taxes. The bill’s sponsors are asking for the establishment of a supplemental unemployment compensation fund and $375 million to go along with it.

According to the bill, the fund would be used to pay off federal loans made to NJ’s UI fund. Once the loans are paid-in-full, sponsors say that will also eliminate federal charges for the debt, allowing the fund to regenerate quickly. With the reserves in the UI fund, sponsors hope that will lead the way for reductions in UI taxes for employers.

Opponents of the bill say the $375 million could be better spent elsewhere. They argue the current state of the economy doesn’t allow for diverting resources that could be used by people who are still out of work.

Finally, the bill calls for the Department of Labor and Workforce Development to notify individual employers, 30 days in advance, of any changes to their UI tax rates.

The bill is now before the New Jersey Assembly Appropriations Committee for consideration. We’ll keep you posted.

Don’t miss the credit if it applies to you

How will the new tax credit impact your payroll? Don’t miss a beat – the CPAs at Magone & Company have years of experience assisting businesses and individuals with our strategic Tax Planning Services. Give us a call today at (973) 301-2300 to learn more.

Executive Pay and Fringe Benefits: Is Your Compensation Plan Triggering an Audit?

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Executive compensation has evolved dramatically in recent years, in terms of creativity, complexity and dollar value. For example, stock options, deferred compensation, fringe benefits and other “non-cash” alternative forms of payment are becoming increasingly popular at business types of all sizes, making up a larger portion of executives’ overall compensation packages.

But creativity isn’t fooling Uncle Sam. The IRS is well aware that executives often receive extraordinary (and potentially taxable) fringe benefits that are not provided to other employees.  And executive perks that are not properly reported can land both you and your company in hot water.

Under the IRS’s watchful eye

If your organization does get audited, here’s what you might expect as the IRS examines your executive compensation and fringe benefits:

  • Assessment of corporate executives and officers to identify the highly compensated employees and determine who is responsible for approving and processing their payments.
  • Review of meeting minutes concerning executive compensation. In this case, auditors are looking for decisions and instructions about the treatment of fringe benefits.
  • Inspection of employment contracts and severance agreements to identify salaries and benefits.
  • Examination of loan agreements between the corporation and executives and officers. 
  • Evaluation of monthly expense reports submitted by executives.
  • A search of accounts payable records for the names, titles and Social Security numbers of executives to establish if payments made to them were included on their Forms W-2 or 1099.
  • Examination of any documents filed with the Securities and Exchange Commission, such as Form 10-K, to identify compensation issues.
  • Scrutinizing of payroll codes or other accounting codes which might be used for executive expenses to detect payments which may be taxable.
  • Analysis of certain items on tax returns to see if fringe benefits have been claimed.

Getting ahead of an audit

When it comes to executive compensation, getting the details right and staying in compliance can be a daunting task. Reach out to the CPAs at Magone & Company to ensure your company’s executive compensation plans are in line with IRS regulations.

Hiring Your Spouse in Your Small Business: 6 Tax Reasons to Say “I Do”

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Many businesses are having trouble recruiting and retaining qualified workers. According to a recent report conducted by the Society for Human Resource Management (SHRM), nearly 90% of employers reported difficulty filling open positions; 73% have seen a decrease in applications for hard-to-fill positions, and only 6% expect labor shortages to diminish any time soon.

If your small business is understaffed with no strong prospects in sight, have you considered hiring your spouse?

If he or she is already familiar with the job, hiring your spouse as an official employee can have many benefits — including various tax-savings opportunities. Here are six ways hiring a spouse may help chip in to lower your taxes.

1. Retirement savings. If certain requirements are met, an employer can deduct contributions made to a qualified retirement plan on behalf of its employees, including your spouse.

For example, if your company has a 401(k) plan in place, your spouse can elect to defer up to $20,500 ($27,000 if age 50 or older) for the year, in addition to any matching contributions by the company. This is a great way for your spouse to save for retirement independently.

2. Business travel expenses. Normally, you can’t deduct travel expenses attributable to a spouse when he or she accompanies you on a business trip. It’s considered a nondeductible personal expense.

But the tax outcome changes if your spouse is a bona fide employee of the company and travels with you for business reasons. As a result, your company may be able to write off your spouse’s business-related travel expenses, such as airfare or other transportation, lodging and 50% of the cost of meals. Plus, the benefit is tax-free to your spouse. The same basic rules apply if your spouse goes on a business trip alone.

3. Health insurance premiums. If you’re currently paying to cover your spouse under the company’s health insurance plan, you may be able to shift more of the cost to the company if your spouse is an employee.

The company can deduct all the health insurance premiums it pays on behalf of your spouse — just like it can for other employees. Similarly, you can deduct 100% of the cost if you operate a self-employed business.

4. Additional health-related breaks. If you operate a C corporation or you’re self-employed, a Health Reimbursement Arrangement (HRA) for your employees can offer even more tax savings if your spouse participates. If certain requirements are met, the company may reimburse your spouse for out-of-pocket medical expenses and health insurance premiums, while the costs are deductible by the company. This is a win-win situation.

Likewise, if your spouse is covered by a qualified high-deductible health plan, he or she can contribute pretax income to an employer-sponsored Health Savings Account (HSA) or make deductible contributions above the line to the HSA. Your business can also contribute to your spouse’s HSA. Alternatively, your spouse can redirect pretax income to an employer-sponsored Flexible Spending Account (FSA).

5. Vehicles. Although you may derive tax benefits for your vehicle’s business use, your spouse’s expenses are purely personal and nondeductible. But as an employee, he or she may be entitled to business deductions under a complex set of rules, including limits on so-called “luxury car” write-offs.

6. Group-term life insurance. An owner’s spouse is entitled to the same group-term life insurance coverage as other company employees (typically, equal to three or four times the individual’s salary).

Under long-standing tax rules, the first $50,000 of employer-paid group-term life insurance coverage is tax-free to the employee. Plus, any additional coverage is taxable at relatively low rates. Thus, having your spouse work for the company provides more insurance protection for your family.

A match made in heaven?

Before you hire your spouse, meet with a professional tax advisor to discuss whether this strategy would be beneficial for your business and your tax circumstances. The CPAs at Magone & Company can help you make the most tax-efficient decisions. Give us a call today at (973) 301-2300 to learn more.

 The above information is provided for general education purposes and should not be considered financial or tax advice. Please consult your accountant or financial advisor for advice specific to your business or tax situation.