Business Taxes

Traveling for Business and Pleasure: What’s Deductible?

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Business owners who travel out of town on business may choose to extend their trips and take a little time to relax and see the sights. When a trip is partly for business and partly for pleasure, various expenses may still be deductible.

Domestic travel

A self-employed individual whose trip is primarily for business may deduct the full cost of the travel itself (such as airfare or train fare) even though some of the trip is devoted to personal activities. Additionally, various other expenses allocable to business, such as lodging and 50% of meal costs incurred on the business days, may also be deductible.

If a trip is primarily for personal reasons, the entire cost of the travel is a nondeductible personal expense. However, expenses incurred while at the destination that are directly related to the taxpayer’s business may be deducted.

Foreign travel

The deductibility rules for combined business/pleasure trips outside of the U.S. are a little more complicated in some respects. Even if the primary purpose of the trip is business, the cost of the travel itself generally has to be allocated, and only the business portion is deductible. However, no allocation has to be made — and the full travel cost is deductible — if:

  • The trip lasts for no more than seven consecutive days (excluding the day of departure but including the day of return); or
  • Personal days total less than 25% of the total days spent on the trip (including both the day of departure and the day of return); or
  • The taxpayer can establish that the opportunity to take a personal vacation was not a major consideration for the trip. For these purposes, business days include days when business is conducted for only part of the day, days spent traveling to and from a business destination, and weekend days or holidays that fall between two business days.

With smart planning, self-employed business owners can maximize their write-offs for combined business/pleasure travel.

Navigating the new business normal

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No business sector has been spared the fear and uncertainty we’re all currently mired in.

As a firm, Magone & Company has been busy on several fronts — helping business clients seeking financing from the Small Business Administration (SBA) in the form of Economic Injury Disaster Loans (EIDL), applying for the Paycheck Protection Plan (PPP), and getting ahead of the continued business challenges to come.

If this is the new normal for the foreseeable future, here are some tips to help navigate it:

  • Cash is king. If you haven’t already done so, negotiate with landlords and vendors for some accommodation on your payment terms.
  • If you received a PPP loan, bring back your workforce and pay them within 8 weeks of receipt to ensure loan forgiveness. If you have not already done so, establish a separate account for these funds and transfer them into your operating account when paying payroll and related expenses. Keep in mind to reduce the payroll for the fund transfer for any employee making more than $100,000 annually, or $8,333 monthly/$4,166 semi-monthly. If the funds are used to pay payroll in excess of $100,000 they will not be forgiven.
  • If you have an existing credit facility, make certain you are diligent with loan covenants. Making certain to communicate immediately with lenders if you will not be meeting the various covenants — especially reporting covenants for annual financial statements.
  • Update your budgets and cash flow projections. If you don’t usually prepare them, prepare them now! You can’t go by the seat of your pants when negotiating vendor terms, rent and/or mortgage deferral.
  • Stay in touch with your banker. Let them know what changes you have made in your business, how business has been in the last six weeks, and your projections for the remainder of the year.
  • Make informed decisions. As difficult as it is to consider pay reductions, furloughs or terminations, be realistic when reviewing updated budget and cash flow numbers to determine if your business can support your previous headcount.
  • During this period, communicate with customers and vendors. More is better. Let your customers know you’re open for business, and your vendors know you’re still in business and paying their invoices.

The government has stated its desire to replenish the PPP in the amount of $250 billion, so if you missed out on the first round of funding be ready to submit your application for the next round of funding.

Of course, this is general information. Be sure to check with your accountant or financial advisor for guidance specific to your situation. Don’t have anyone to help? We invite you to check in with our team for assistance with any aspect of your business operation or future strategy.

 

3 tax resolution strategies from the IRS

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Whew, tax time has passed! Or has it? While taxes are a fact of life, tax problems shouldn’t be. If you find yourself in hot water with the IRS, they’ll come to collect what you owe by any means possible — from garnishing your wages to putting a lien on your property. Luckily, there are valuable tax relief options out there to help resolve your tax debt and get you back in good standing with Uncle Sam.

#1 First time Penalty Abatement policy
The IRS doesn’t like being ignored, and if you don’t respond to their initial notices, pricey penalties will keep accruing. But under its First-time Penalty Abatement policy, the IRS may provide administrative relief from a penalty that would otherwise be applicable.

#2 Offer in Compromise (OIC)
You’ve probably seen or heard advertisements from tax relief firms that claim they can settle your tax debt for less than the full amount. An Offer in Compromise can help get your debt down to a manageable payment. To even be considered, you must ensure you’re in compliance and file any unfiled tax returns.

#3 Structured payment plan
Can’t pay the lump sum you owe in full? Your specific tax situation will determine which payment options are available to you, including a short-term payment plan (120 days or less) or a long-term payment plan (an installment agreement that’s longer than 120 days).

Ready for a fresh start?
Effective since 2011, the IRS’s Fresh Start Initiative aims to help more individuals and small businesses take advantage of the flexible programs available to settle tax debt. For details, contact Magone & Company at (973) 301-2300 to schedule a no-obligation consultation and learn more about your options.

PPP update: Application delays & foreign-owned businesses

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The Treasury Department recently released a revised PPP application on its website. With the exception of Bank of America, we’re not aware of other banks accepting applications today. It’s likely there will be a 2- or 3-day delay with other banks. We urge you to continue to prepare the necessary underlying documentation to facilitate the computations of the 2.5x monthly average payroll. This new application also removes troubling language related to companies that are more than 20% foreign-owned and/or are not permanent residents of the U.S. The recently released regulations may make the following non-immigrant categories eligible for SBA financial assistance

  • B-1 Business Visitor
  • F-1/OPT Optional Practical Training
  • H-1B Specialty Occupation
  • O-1A Extraordinary Ability and Achievement
  • E-2 Treaty Investor; or
  • L-1 Intracompany Transferee

In addition, businesses owned by Foreign Nationals or Foreign Entities may be eligible. The Lender and Development Company Loan Programs Guidelines issued April 1, 2020 states businesses listed in Appendix 1 are not eligible.

If you are an eligible business, there are additional requirements for businesses owned by non-citizens other than Legal Permanent Residents (LPRs), including foreign-owned businesses:

  • The application must contain assurance that management is expected to continue in place indefinitely and have U.S. citizenship or verified LPR status.
  • Management must have operated the business for at least 1 year prior to the application date. This requirement prevents financial assistance to “start-up” businesses owned by aliens who do not have LPR status.

Lender must require the personal guaranty from management
The Applicant must pledge collateral within the jurisdiction of the U.S. with a liquidation value equal to no less than the approved loan amount at the time of first disbursement and, to the extent that the value of collateral declines during the life of the loan, the Lender must require the Borrower to pledge additional collateral to ensure a sufficient collateral coverage amount. If the Applicant owned by foreign nationals, foreign entities or non-immigrant aliens residing in the U.S. does not have sufficient collateral, the Applicant IS NOT eligible for an SBA-guaranteed loan.

In order for a business not to be subject to these additional requirements, it must be at least 51% owned by individuals who are U.S. citizens and/or who have LPR Status from United States Citizenship and Immigration Services (USCIS) and control the management and daily operations of the business. This can only be waived by the Director of the Office of Financial Assistance (D/FA) or designee.

Development of the regulations is fluid and there may be additional modifications. It’s best to immediately contact your bank or banker for further clarification, but be prepared — they may not have all the answers as these guidelines were released late last evening April 2, 2020.

As always, if we can be of assistance please call (973) 301-2300 or contact us via email.

Interpreting the new CARES Act: What it means for your business

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The much-needed support for small businesses and non-profit organizations has been realized by the passage and signing on Friday March 27, 2020 by the President of The Coronavirus Aid, Relief, and Economic Security (CARES) Act, which introduces the Paycheck Protection Program as a key provision in Title I — the Keeping American Workers Paid and Employed Act. In an effort to get our clients and friends information quickly, there may be revisions to the below as we take a deeper look into the law.

What is it?
The Paycheck Protection Program provides $349 billion in 100% federally guaranteed loans to small businesses and 501(c)(3) nonprofit organizations. Because many businesses have already laid off workers as a response to the pandemic, the program can be retroactive, with the covered loan period running from Feb. 15 to June 30, 2020, which allows previously laid off or furloughed employees to be returned to payrolls.

Who is eligible?
Any business or non-profit organization with not more than 500 employees is eligible, or otherwise qualifies as a “small business” under SBA size standards published in 13 part 121 of the CFR. More importantly, small business includes within its definition sole proprietorships, independent contractors and self-employed individuals.

How are the number of employees determined?
Generally speaking, the normal rules of attribution apply. Meaning any business that is controlled through voting, managerial, economic or influence would be counted toward the 500-employee cut-off for this program. The only exception is for hotels and restaurants as long as the number of employees is less than 500 per physical location.

How is the loan amount determined?
The loan amount is determined by reference to monthly payroll costs for the one year period prior to the loan. Payroll costs include:
1. Salaries, wages, commissions or similar compensation, up to $100,000 per employee
2. Cash tips
3. Payment for vacation, parental, family, medical or sick leave
4. Healthcare and retirement benefits
5. State and local taxes on wages
6. Payments of any compensation to or income of a sole proprietor or independent contractor that is wage, commission, income, net earnings from self-employment or similar that is not more than $100,000 in 1 year, as prorated for the covered period

Any compensation paid to employees outside the U.S. is excluded.

Once the monthly average of the above is determined, it is multiplied by 2.5. The business receives the lesser of 2.5x the monthly average payroll or $10,000,000.

I’m self-employed or an independent contractor and have no employees. How do I compute the loan amount?
If you are self-employed, or an independent contractor the rules above apply to you, except you will use your first $100,000 of self-employed income to determine the average monthly payroll. The law specifically states “the sum of payments to of any compensation to or income of a sole proprietor or independent contractor that is a wage, commission, income, net earnings from self-employment, or similar compensation and that is in an amount that is not more than $100,000 in 1 year, as pro-rated for the covered period.”

Although not clear, we imagine your self-employed health insurance can also be included in the computation. In addition, self-employed and independent contractors will be required to submit documentation substantiating such classification such as payroll tax filings, 1099-MISC and other information.

What expenses can I pay?
The money received can be used to pay the following:
1. Payroll costs
2. Payments for the continuation of group health care benefits, which includes paid sick, medical and family leave and insurance premiums
3. Employee salaries, commissions or similar compensations
4. Payments of interest on any mortgage obligation. However, the payment cannot be used for prepayment of or payments for principal.
5. Rent
6. Utilities
7. Interest on any other debt obligations that were incurred before the covered period.

How do I apply and what are terms?
Application for the loan will be made with your local banker who is an authorized SBA lender. The federal government is pushing for rapid adoption and expects to have numerous additional lenders in place in the weeks to come. We still don’t have clarity as to how the application process will work or when an application can be submitted. However, the normal requirements of the SBA will not be enforced such as personal guarantees, collateral, and unable to obtain credit elsewhere. Normal fees of the SBA will also be waived.

What we do know is there is a loan forgiveness provision, provided the funds are used as follows:
1. Payroll costs
2. Interest on certain mortgage obligations
3. Rent and utilities
In addition to using the funds on the costs above, there are provisions to maintain the ratio of employees during February 15, 2020 through June 30, 2020 to the number of employees for the same period in 2019, or for the period January 1, 2020 to February 29, 2020. The amount of forgiveness is also reduced by the amount that total salary or wages of any employee is reduced by more than 25 percent. However, anyone who makes more than $100,000 is not subject to this limitation as the wages above $100,000 were not included in the computation.

The amounts forgiven are excluded from gross income for federal income tax purposes.

To the extent the funds remain or are not used for the expenses above, the funds are required to be repaid over a maximum maturity of 10 years with an interest rate not to exceed 4%.

Other considerations
We have received many calls from our clients and colleagues regarding paying employees who are paid by person seen (in the case of non-profit organizations in behavior health) or commission. The question is how is the rate of pay determined? Our recommendation is to set the rate of pay based on a historical average of commission or persons usually seen based on prior year records for the employee. Remember, the funding is to allow a business or non-profit organization to retain their employees.

We understand these are uncertain times and we are committed to keeping our clients and friends informed as information becomes available.

Paycheck Protection Program just passed by Congress

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The Paycheck Protection Program (PPP) is now awaiting sign-off by President Trump. Below are some key provisions in anticipation of its signing. All details need to be vetted and changes can occur. We’re watching this closely. Here’s what we currently anticipate:

A completely new, temporary lending program to aid small business. The bill will provide roughly $350 billion to support loans through the new “Paycheck Protection Program,” which Congress designed to keep employees on the payroll and save small businesses. The Small Business Administration (SBA) will stand up a completely new program that will only nominally be part of the existing SBA Section 7(a) loan program. To expedite the funding of the new loans, the Treasury Department and SBA will expand the number of participating banks and credit unions; captive finance companies may also be included.

Minimal eligibility requirements. Any business operational on February 15, 2020, that paid salaries and payroll taxes will be eligible, but there is a limit of no more than 500 employees. Fortunately, the bill includes provisions to waive normal affiliation rules which should be applicable to many dealers. For dealers, there will be no test for total revenue.

Borrower certification to obtain loan. Borrowers will be required to make a good-faith certification that the loan is necessary due to economic conditions caused by COVID-19 and that it will use the funds to retain workers and maintain payroll, lease and utility payments.

Loans with terms NOT found in traditional bank loans. Lenders will not require application fees, closing costs, collateral or personal guarantees. The maximum interest rate will be 4%, and the first six months’ payments (principal and interest) will be automatically deferred. Finally, the lenders are not expected to perform credit analysis, because the loans will be 100% guaranteed by the SBA.

Maximum loan amount. The maximum amount will be 250% of an employer’s average monthly payroll (based on a 12-month look back from the date of the loan), but NOT MORE than $10 million.

Permitted uses of the loan. The loan can be used for “payroll costs,” which include salary, commission, or similar compensation (up to an annual rate of pay of $100,000 per employee); employee group health care benefits, including insurance premiums; retirement contributions; and covered leave from February 15, 2020, to June 30, 2020. Permitted uses also include payments of interest on mortgages, rent, utilities and interest on any other debt obligations that were incurred before February 15, 2020.

Loans may be forgiven. In general, borrowers will be eligible for loan forgiveness equal to the amount of certain expenses spent during an eight-week period after the origination date of the loan. These expenses are payroll costs, interest payments on any secured debt incurred prior to February 15, 2020, payment of rent on any lease in force prior to February 15, 2020, and payment on any utility for which service began before February 15, 2020.

Percentage of employee retention related to amount of loan forgiveness. The amount forgiven will be reduced proportionally by any reduction in employees retained compared to the prior year, and by the reduction in pay of any employee in excess of 25% of the employee’s prior-year compensation. However, to encourage employers to rehire any employees who have already been laid off due to the COVID-19 crisis, borrowers that rehire previously laid-off workers by June 30, 2020, will still qualify and not be penalized for having a reduced payroll during the loan period.

No effect on Federal Income tax. Canceled indebtedness under this program will not be included in the borrower’s taxable income.

Loan amounts not forgiven. Any loan amounts not forgiven at the end of one year will be carried forward as an ongoing loan with terms of a maximum of 10 years at 4% interest or less.

We hope you’re finding these posts of value, and will keep you informed as new information becomes available.