Finances

PPP News: Stimulus Package Approved by Congress

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On December 20, 2020, Congress agreed on a $900 billion stimulus package. The President is expected to sign this legislation into law before Christmas.

What does this mean for you?
The uncertainty has finally been resolved! Businesses that received a Paycheck Protection Program (PPP) loan and had it forgiven would now be entitled to a tax deduction for costs covered by the loan. The COVID-19 relief bill clarifies that “no deduction shall be denied, no tax attribute shall be reduced, and no basis increase shall be denied, by reason of the exclusion from gross income provided” by Section 1106 of the CARES Act (which has been redesignated as Section 7A of the Small Business Act). This provision applies to loans under both the original PPP and subsequent PPP loans.

The COVID-19 relief bill creates a simplified forgiveness application process for loans of $150,000 or less.  Specifically, borrowers who received less than $150K would now be eligible to submit a simplified, one-page forgiveness application.

There will also be a new round of PPP loans available to businesses that are determined to be “eligible entities.” Businesses would need to demonstrate that the loan would be “necessary to support the on-going operations of the business.”

It appears that an “eligible entity” would be one with fewer than 300 employees that experienced at least a 25% reduction in revenue compared with the prior year or compared with the first quarter of 2020 for new businesses.

Stay tuned…

 

Paycheck Protection Program Forgiveness: Is it Taxable Even if Not Forgiven? An Analysis of Current Guidance

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The only certainty in 2020 seems to be whatever you think you know about the Paycheck Protection Program (PPP) changes like the wind.

Established by the CARES Act (signed into law in March 2020), the PPP provided loans to eligible small businesses. If the borrower used the loan proceeds to pay certain eligible expenses, an amount of the loan up to such eligible expenses would be forgiven under the law, and such forgiveness would not be treated as taxable income to the borrower.

In April 2020, the IRS issued Notice 2020-32 explaining a deduction is not allowed for expenses where proceeds are effectively tax exempt, as is the case with the loan forgiveness. This would mean the loan proceeds received by businesses will be taxable since the expenses paid with those proceeds would be disallowed in determining taxable income.

This is a consistent position of the IRS, as expenses associated with tax-exempt investment income are not deductible.

Alternatively, the other argument in Notice 2020-32 is that the expenses are not tax deductible, because prior case law and published rulings essentially deny deductions for otherwise deductible expenses for which “the taxpayer receives a reimbursement.”

A second issue relates to economic performance. Economic performance states that a taxpayer is able to deduct expenses associated with a liability such as a loan, whereby the amount of the liability is unconditionally fixed. Upon review of the PPP loan document language, one finds the note to include language such as “The Note is subject to partial or full forgiveness, the terms of which are dictated by the SBA, Interim Final Rule RIN 3245-AH34, subsequent SBA guidance, the Code of Federal Regulations, the PPP, and all related rules, laws, regulations, and guidance, as may be amended from time to time (the “Forgiveness”).”

The fact the loan is subject to partial or full forgiveness is enough to question whether or not it is unconditionally fixed. It is our belief it is not unconditionally fixed and therefore, the expenses will be disallowed based on Notice 2020-32.

Finally, there is possible reliance on the Bliss Dairy case, which for the sake of brevity draws the following conclusion, “until a taxpayer obtains forgiveness there is no tax exempt income” and IRS Notice 2020-32 does not apply until there is tax-exempt income. The problem with this court case is the American Institute of Certified Public Accountants (AICPA) made an inquiry in regard to forgiveness occurring after year-end and the impact on the expenses paid with PPP monies. According to Mr. Edward S. Karl of the AICPA, “Treasury officials generally stated that if a borrower has a reasonable expectation of loan forgiveness, the expenses can’t be deducted to the extent paid by the loan. That’s true regardless of when the loan is forgiven.”

So what’s a business to do? Here are the options:

  1. Pay the tax on the disallowed expense (not optimal).
  2. Defer the tax on the basis of the Bliss Dairy case (not certain it will withstand an audit challenge).
  3. Place your business tax return on extension and await more guidance.

Congress may act on this issue with the relief being granted retroactively, as bills have been proposed by chairs of both tax committees and have bipartisan support. If this occurs, the entire discussion above for most businesses is moot.

Given the environment in Washington, we are not hopeful there will be a bill in time for the filing of most business tax returns. If Congress does not act, many businesses may find the relief of the PPP funding will be met by the possible nightmare of having to find the funds to pay the taxes.

Need help navigating Paycheck Protection Program loan forgiveness? Call us at (973) 301-2300 or reach out — we’re here to help.

What is a Levy? IRS and Other Asset Levies Explained

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Falling behind on your debts is never a fun position to be in. It’s less fun when a levy is placed on your assets. In this article, we take a look at what an IRS levy is, why it happens, and what you can do about it.

What is an IRS levy?
Simply put, if you owe back taxes and you ignore the IRS, they can seize your property, take money from your bank accounts, or sell your assets in order to satisfy the balance due.

The IRS will give you plenty of notices via mail before they take this step. If you do not satisfy the debt or make payment arrangements by the specified date, the IRS will attempt to take the amount of the levy directly out of your bank account.

Other types of levies
Private creditors may issue a levy against your bank account with a court order. Court orders are not required for levies by government agencies. The creditor must notify you of the upcoming levy at least 21 days before removing any funds from your account. You may not withdraw money or close the account during this waiting period.

Funds earned from child support, social security, unemployment, workers’ compensation settlements and certain other types of government agency payments are exempt from levy. You must request the exemption and offer proof of the source of the funds.

Wage garnishments
Government agencies may also garnish an employee’s wages for back taxes, child support and other delinquent payments required by law.

The IRS has the authority to levy up to 85 percent of your paycheck. The levy notice will be sent to your company’s payroll or human resources department, which will then withhold the appropriate amount of money from each paycheck and send it to the IRS or state tax board. You must provide a wage garnishment release if you’re able to work out a payment arrangement.

If you are behind on your taxes, the IRS may levy most payments from federal agencies. This includes railroad retirement benefits, Medicare supplier and provider payments and federal retirement annuities, among others.

Seizing your assets
The IRS may also seize your real estate and personal property such as a car or boat. You will receive a 30-day notice indicating that seizures will follow if you do not pay your outstanding taxes or contact the IRS to make payment arrangements. This authority also extends to property and money you own that’s being held by another party, such as the cash value accrued from a life insurance policy. The government sells its seized property at auction to recover some of the funds owed by delinquent taxpayers.

What to do if you have an IRS levy
Back taxes don’t just disappear if you ignore them long enough. Putting your head in the sand will cause the problem to get worse. The IRS knows if you’ve paid or not. They might even be willing to compromise.

If you have back tax debt, we highly recommend you reach out to our firm first, particularly if you owe more than $10k in federal or state taxes and can’t pay in full. Our clients never have to talk to the IRS, and tax resolution through our firm can save you money and time in the long run. You might also be eligible for other IRS relief programs or get your penalties reduced or removed. Reach out today for a consultation.

Charitable Donations: Recouping Tax Savings for Your Time and Services

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Donating to charities is a noble way to support causes that are close to your heart. But if your contributions begin and end with writing a check, you may be missing out on some satisfying volunteer opportunities — and a few tax deductions. IRS rules allow you a number of tax breaks for contributions other than cash that you can make to qualified organizations.

Going the extra mile…literally

Did you know that you can deduct the costs of going to and from a location where you volunteer your services? You can also deduct the costs of driving on behalf of the organization — for example, to pick up or deliver items. To compute your deduction for charitable driving, use the standard mileage rate of 14 cents per mile for 2020, per the IRS, or deduct the actual cost of your gas and oil. Either way, parking fees and tolls are also deductible.

Recouping your expenses

If you’re not reimbursed by the organization, the out-of-pocket expenses you pay in giving services may count as a charitable donation. While you can’t deduct your personal expenses, such as childcare costs accrued while volunteering, you can deduct the costs of buying and cleaning a uniform you’re required to wear while volunteering.

No time to volunteer?

Many charities accept non-cash donations. And giving investments that have increased in value can be a smart tax move. Instead of selling an investment and paying capital gains tax, donate it to a qualified organization. If you held the investment for more than one year, you can generally deduct its fair market value at the time of the donation. Remember, you’ll need a receipt from the organization to claim a tax deduction, and other records also may be required.

Contributions must be made to qualified organizations that meet IRS guidelines. Not sure? Let the NJ CPAs at Magone & Company help. Give us a call today at (973) 301-2300.

How to Keep Family Loans Strictly Business

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Obtaining the funds to start or expand a small business doesn’t always come easy. If your family member can’t secure a loan from a commercial lender, you may be willing to help out by lending them the money yourself — but should you? Before handing over the cash, here are some best practices to consider:

Have a written agreement

Start by putting the loan agreement in writing. This may seem like an unnecessary formality, but without a written loan document, the IRS could argue that the transaction was a gift instead of a loan, potentially creating gift tax issues. Written documentation is also important if the borrower fails to repay all or part of the loan. In that situation, you want to be able to show you’re entitled to write off the unpaid amount as a non-business debt.

Charge adequate interest

The second step is setting an interest rate. While there’s no rule against interest-free loans or loans that have below-market interest rates, in a family context they can lead to tax complications. If you don’t charge sufficient interest, the difference between the amount of interest you actually receive (if any) and the amount you should have received — referred to as “imputed” interest — is taxable to you.

You can avoid the imputed interest rules by charging interest at the appropriate “applicable federal rate” (AFR). The IRS publishes AFRs monthly for loans of different maturities. These rates have been relatively low recently, reflecting the current market interest rate environment. For example, in November 2019, the annual AFR (using a monthly compounding assumption) was:

  • 1.68% for a short-term loan (three or fewer years)
  • 1.59% for a mid-term loan (more than three but no more than nine years)
  • 1.94% for a long-term loan (more than nine years)

For a term loan, the rate can remain fixed for the life of the loan. For a demand loan (one that gives you the right to demand full repayment at any time), you have to charge a floating AFR to avoid imputed interest issues.

What are the exceptions?

When you lend a family member no more than $100,000, the amount that can be added to your taxable interest income under the below-market interest rate rules generally can’t exceed the borrower’s net investment income. Even better, you won’t have to report any imputed interest if the borrower’s net investment income amounts to $1,000 or less. You can also side-step imputed interest on small loans of no more than $10,000, provided the borrowed funds aren’t used to buy or carry income-producing assets.

For more insight on family loans, and whether they’re a good idea for you, contact the NJ CPAs at Magone and Company at (973) 301-2300.

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.