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Member of Russell Bedford International, a global network of independent professional service firms.
Please note that this blog is based on laws effective on September, 3 2020 and may not contain later amendments. Please contact Cray Kaiser for the most recent information.
This year we have seen the CARES Act, the FFCR Act, the TRACE Act, the SBA providing EIDL Advances along with the most popular PPP loans, and even the IRS pitching in with the EIP money (economic impact payments). So beyond running and leading your business, you are required to have a bowl of alphabet soup, almost daily, to try to stay afloat in understanding how all of this impacts you as a business owner. In this blog, we focus on how business owners are compensated and how they fit into the Paycheck Protection Program (PPP) loan forgiveness computation.
The PPP loan continues to be on the radar of many business owners and the loan forgiveness piece provided under these loans sparks many conversations. There continues to be some uncertainty as to the computations surrounding loan forgiveness, but recently the Small Business Administration (SBA) in concert with the Department of Treasury addressed some of these uncertainties through frequently asked questions (FAQs) to assist borrowers and lenders as they begin to maneuver through the application process.
From the FAQs, it was evident that payroll costs for owners can vary significantly in comparison to employee payroll costs, and even more so when you consider the business entity who is paying the owner’s compensation.
In general, payroll costs include cash compensation such as gross wages, bonuses, tips, commissions, and hazard pay paid during covered period. For sole proprietors or general partners, the cash compensation is based upon net profits or net earnings subject to self-employment and generally reported on Schedule C (Form 1040) or Schedule K-1 (Form 1065). Cash compensation for corporate shareholders is reported on Form W-2. Owner compensation eligible for loan forgiveness will be based upon the amount recognized in 2019 either from the W-2, Schedule C or Schedule K-1 using a factor of 2.5/12. To put it simply: if the 2019 compensation were $80,000; the loan forgiveness piece would be $16,667 ($80,000/12 multiplied by 2.5). So, even though the compensation cap is $20,833, owners are limited to the 2019 reported amounts.
In addition to an owner’s cash compensation, certain other payroll costs paid during the covered period may be included for additional loan forgiveness. These additional payroll costs vary by business entity and are summarized below.
Employer-provided benefits for health insurance, retirement, and state and local taxes assessed on compensation can be included as payroll costs for purposes of additional loan forgiveness. Please note any contributions the owner makes, such as through payroll withholdings, would need to be excluded from the eligible amount.
Retirement contributions paid during the covered period are eligible for loan forgiveness but are prorated using a factor of 2.5/12 of the 2019 amount reported for each owner. Health insurance and state and local taxes assessed on compensation are based upon the amounts paid during the covered period and do not appear to be prorated based upon 2019.
Employer-provided benefits for retirement and state and local taxes assessed on compensation can be included as payroll costs for purposes of additional loan forgiveness. Keep in mind that any portion the owner made directly or through payroll withholdings would need to be excluded. Any 2% or greater owner cannot include health insurance payments paid for by the employer as additional loan forgiveness. This appears to also carry through to family members who are paid as an employee of the S corporation related to 2% greater owners.
The same calculation of 2.5/12 of the 2019 employer contribution for retirement would need to be considered similar to a C corporation.
No additional amounts for health insurance, retirement contributions, or state and local taxes assessed on compensation are eligible for additional loan forgiveness.
As a reminder, loan forgiveness for an employee’s (non-owner) cash compensation is capped at $46,154, assuming you utilize the full 24-week covered period and pay employees $100,000 or greater. Additional amounts may be eligible for loan forgiveness for employer contributions for health insurance, retirement, and state and local taxes assessed on compensation.
The loan forgiveness guidance continues to evolve, and we are committed to assisting you throughout the process. If you have any questions about PPP loan forgiveness for owner compensation, please contact Cray Kaiser today. We’re here to help!
Please note that this blog and the 24-week PPP loan forgiveness templates are based on laws effective in August 2020 and may not contain later amendments. Please contact Cray Kaiser for most recent information.
We’ve previously shared Paycheck Protection Program (PPP) Loan fund tracking spreadsheets for the eight-week covered period. Now, we have created templates for the 24-week covered period. You can click below to download weekly, bi-weekly, monthly, and semi-monthly workbooks. Each workbook contains instructions, the loan forgiveness calculator, determination of your FTE (full time equivalent), actual tracking of costs template, a certification template and two examples so you can “see the math” in action.
Should any questions arise as you complete the calculations in the 24-week PPP loan forgiveness templates, please contact Cray Kaiser at 630-953-4900.
Please note that this blog is based on laws effective in August 2020 and may not contain later amendments. Please contact Cray Kaiser for most recent information.
With jobs at a premium during the COVID-19 pandemic, you might consider hiring your children to help out in your business. Rather than helping to support your children with your after-tax dollars, you can instead hire them and pay them with tax-deductible dollars. Of course, the employment must be legitimate and the pay commensurate with the hours and the job worked.
If this is something you’re considering, we encourage you to read the following situations that are typically encountered when choosing to hire your child:
A reasonable salary paid to a child reduces the self-employment income and tax of the parents (business owners) by shifting income to the child. When a child under the age of 19 or a student under the age of 24 is claimed as a dependent of the parents, the child is generally subject to the kiddie tax rules, if their investment income is upward of $2,200. Under these rules, the child’s investment income is taxed at the same rate as the parent’s top marginal rate using a lower $1,100 standard deduction.
However, earned income (income from working) is taxed at the child’s marginal rate, and the earned income is reduced by the lesser of the earned income plus $350, or the regular standard deduction for the year, which is $12,400 for 2020. Assuming that a child has no other income, the child could be paid $12,400 and incur no federal income tax. If the child is paid more, the next $9,875 he or she earns is taxed at 10%.
Example: Let’s say you are in the 24% tax bracket and own an unincorporated business. You hire your child (who has no investment income) and pay the child $16,000 for the year. You reduce your income by $16,000, which saves you $3,840 of federal income tax (24% of $16,000), and your child has taxable income of $3,600, $16,000 less $12,400 standard deduction, on which the federal tax is $360 (10% of $3,600).
If the business is unincorporated and the wages are paid to a child under age 18, he or she will not be subject to FICA – Social Security and Hospital Insurance (HI, aka Medicare) – taxes since employment for FICA tax purposes doesn’t include services performed by a child under the age of 18 while employed in an unincorporated business owned by the parent. Thus, the child will not be required to pay the employee’s share of the FICA taxes, and the business won’t have to pay its half of these payroll taxes either. In addition, by paying the child and thus reducing the business’s net income, the parent’s self-employment tax payable on net self-employment income is also reduced.
Example: Continuing the same parameters as above, assume your business profits are $130,000, by paying your child $16,000, you not only reduce your self-employment income for income tax purposes, but you also reduce your self-employment tax (HI portion) by $429 (2.9% of $16,000 times the SE factor of 92.35%). And since your net profits for the year are less than the maximum SE income ($137,700 for 2020) that is subject to Social Security tax, then the savings would include the 12.4% Social Security portion in addition to the 2.9% HI portion. Thus, your total SE tax savings would be $2,261.
A similar but more liberal exemption applies for FUTA, which exempts from federal unemployment tax the earnings paid to a child under age 21 while employed by his or her parent. The FICA and FUTA exemptions also apply if a child is employed by a partnership consisting solely of his parents. However, the exemptions do not apply to businesses that are incorporated or a partnership that includes non-parent partners. Even so, there’s no extra cost to your business if you’re paying a child for work that you would pay someone else to do anyway.
Additional savings are possible if the child is paid more (or works part-time past the summer) and deposits the extra earnings into a traditional IRA. For 2020, the child can make a tax-deductible contribution of up to $6,000 to his or her own IRA. The business also may be able to provide the child with retirement plan benefits, depending on the type of plan it uses and its terms, the child’s age, and the number of hours worked. By combining the standard deduction ($12,400) and the maximum deductible IRA contribution ($6,000) for 2020, a child could earn $18,400 of wages and pay no federal income tax.
Example: Referring back to the original example, the child’s federal tax to be saved by making a $6,000 traditional IRA contribution is only $360 (tax rate of 10% of $6,000 would be $600, but the savings is limited to the actual tax of $360). So, it might be appropriate to make a Roth IRA contribution instead, especially since the child has so many years before retirement and the future tax-free retirement benefits will far outweigh the current $360 savings.
The above only considers federal income tax savings. As every state has its own rules on tax rates and dependency exemptions, it’s important to speak with your tax advisor about potential state implications of the above federal tax planning.
If you have questions about the implications of hiring your children or other possible tax benefits, please contact Cray Kaiser.
Note: Wages paid to children and other relatives aren’t eligible for the Employee Retention Credit created by Congress in 2020 as part of the COVID-19 emergency relief measures for employers.
Please note that this blog is based on laws effective in August 2020 and may not contain later amendments. Please contact Cray Kaiser for the most recent information.
On August 28, the Treasury Department issued guidance regarding the deferral of payroll taxes going into effect on September 1, 2020. The guidance was a result of President Trump’s Executive Order issued on August 8.
For the period between September 1 and December 31, 2020, employers can opt out of withholding the 6.2% payroll tax that is the employee’s share of Social Security taxes. The deferral is only available to employees that earn less than the equivalent of an annual salary of $104,000. If the employer chooses to defer collection, the taxes would then be due no later than April 30, 2021.
Mechanically, this would mean that if an employer opts in to the deferral program, employees would see an increased paycheck for the remainder of 2020. However, because the taxes are due in early 2021, employees would need to repay the deferred taxes to make the government whole. The net effect of this provision is a short-term, interest-free loan to employees.
The guidance does not speak to the effect of an employee leaving the company after having deferred taxes other than to indicate that if necessary, an employer can make “arrangements” to collect the taxes from the employee.
Complicating matters further, President Trump has indicated that if re-elected, he will forgive the deferred taxes. Forgiveness was not addressed in the guidance, as only Congress can take action to allow for forgiveness.
If you would like to discuss whether your company should opt in to the payroll tax deferral program, please call Cray Kaiser today at 630-953-4900.
Please note that this blog is based on laws effective in August 2020 and may not contain later amendments. Please contact Cray Kaiser for most recent information.
With many nonprofits beginning a new fiscal year on July 1, it’s a great time to stay up to date with the ever-changing nonprofit landscape. This year in particular has presented many challenges amidst the COVID-19 pandemic, including the administrative extension and delays for government agencies. Although deadlines in 2020 continue to be moving targets, we’d like to provide you with the most current provisions and timelines to keep you updated and allow you to be proactive in your tax preparations.
As you may already know, the IRS extended all returns with due dates falling in the April to June window to July 15, 2020. This included all 2019 calendar year nonprofits. Any extensions that were filed only extended the returns to the original extension due dates. For calendar year 990s, the extension deadline is still November 15, 2020 unless Congress makes further adjustments.
Although many organizations are already electronically filing their returns, the IRS has made it mandatory to e-file for tax years beginning July 1, 2019. This applies to all Form 990 and 990-PFs, unless you’re one of the few covered by an exception. Form 990-EZ filers have an additional year to meet the e-file mandate.
The IRS and treasury department announced proposed regulations, 85 FR 23172, under the Tax Cuts and Jobs Act (TJCA). These regulations provide guidance for tax-exempt organizations with more than one unrelated trade or business on how to calculate unrelated business taxable income (UBTI). They also provide guidance on identifying separate trades or businesses, including investment activities, as well as certain other amounts included in UBTI.
The CARES Act increased limitations on charitable contributions by individuals and corporations. Individuals were increased from 60% of AGI to 100% and corporations were increased from 10% to 25% of taxable income. For those that do not itemize, the CARES Act provided a permanent deduction which allows qualified contributions of up to $300 for individuals that normally use the standard deduction. For these purposes, donations to supporting organizations and donor advised funds are not considered qualified charitable contributions.
Unfortunately, the Illinois Attorney General’s office has been nearly dormant during the COVID-19 pandemic. Their offices remain closed to walk-ins and there are limited employees working. Therefore, process delays and response turnaround times are expected to be delayed, especially if correspondence is in paper format.
Illinois did not extend the filing deadline related to COVID-19, therefore Annual Reports are still due six months after the close of the organization’s tax year. The first 60-day extension was due by June 30, 2020 for calendar year filers. The second extension is due by August 30, 2020 and requires additional support materials, including copies of the original federal extension, draft financial statements, and a draft copy of the AG990-IL. The additional requirements encourage organizations to get their AG990 returns completed before the second extension deadline.
If you have any questions about these updates and how they impact your nonprofit organization, please don’t hesitate to contact Cray Kaiser. Our nonprofit team is ready to assist you.
Please note that this blog is based on laws effective in August 2020 and may not contain later amendments. Please contact Cray Kaiser for most recent information.
The rules surrounding the sale of one’s principal residence have changed over the years. It used to be that you could simply rollover your gain on a tax-free basis as long as you reinvested the proceeds into a new principal residence. However, those gain on home sale rules have since been eliminated and replaced with a principal residence exclusion. Here’s how it works:
Individuals who use and own their home as a principal residence for at least 2 out of the last 5 years before sale can exclude a portion of the gain from tax. This rule is regardless of prior sale gains that have been rolled over. Those who meet the 2-out-of-5-year use and ownership tests can exclude up to $250,000 ($500,000 if both filer and spouse qualify) of gain from the sale of their home, and generally don’t need to keep a record of improvements made to the home.
But what happens when you don’t meet the exclusion rules? Here are some situations that could lead to a taxable gain on the sale of your home:
In these cases, it is important to keep home improvement records in order to substantiate a reduced gain. We understand that keeping records can sometimes feel like a burden. But, consider the alternative. For every dollar of improvements that you cannot substantiate, you will recognize a higher capital gain on the sale of your home. As a result, you will be subject to the capital gains tax. Additionally, there is a good chance your overall tax rate will be higher than normal simply because the gain pushed you into a higher tax bracket. Before deciding not to keep records, carefully consider the potential of having a gain in excess of the exclusion amount.
You’re likely wondering which records to keep. We don’t recommend keeping the receipt for every can of paint purchased or ripped screen replaced, as these wouldn’t be eligible as improvements. However, you should file away receipts, invoices, contracts, etc., and cancelled checks, credit card receipts or bank records to prove payments when you make improvements such as adding a room, putting on a new roof, or remodeling the bathroom.
If you have questions related to the gain on home sale rules or questions about how keeping home improvement records might directly affect you, please contact Cray Kaiser today.
Please note that this blog is based on laws effective on July 29, 2020 and may not contain later amendments. Please contact Cray Kaiser for most recent information.
Many companies use alternative fuels in their operations, such as utilizing propane for their forklifts, but they may not be aware of the Biodiesel and Alternative Fuels tax credit. Prior to 2018, Congress allowed a credit of $0.50 per gasoline-gallon-equivalent used during the year on the company’s annual income tax return. For propane, this credit is calculated to about $0.37 per gallon used during the year. While this credit expired in 2017, Congress resurrected it in December 2019 and made it retroactive for 2018 in Notice 2020-8. The current legislation has this tax credit set to expire after 12/31/2020, unless Congress extends the date again.
What’s even more beneficial about the Biodiesel and Alternative Fuels tax credit is that the IRS simplified the reporting for the expired credit. Taxpayers are able to claim both 2018 and 2019 on a single form outside of the tax return, thereby avoiding the preparation of amended returns. However, it’s important to note two things:
1) Form 8849 “Refund of Excise Taxes” is due August 11, 2020
2) To complete the claim, you will need to have a registration number from the IRS which can be obtained using Form 637.
If you are unable to complete Form 8849 by August 11, 2020, or if you need to apply for a registration number, then the credit can be claimed with Form 4136 “Credit for Federal Tax Paid on Fuels”. This form needs to be filed with your annual tax return and would require amending 2018 and 2019 returns, if already filed. At the very least, if you do not want to amend prior year returns, you can still claim alternative fuel used in 2020 on your 2020 tax return.
Cray Kaiser is here to help if you have further questions about the Biodiesel and Alternative Fuels tax credit. Please contact us today at 630-953-4900.
Please note that this blog is based on laws effective on June 22, 2020 and may not contain later amendments. Please contact Cray Kaiser for most recent information.
When businesses hear about the research tax credit, they typically imagine that it’s for scientists in white lab coats. But that is not the case! The credit is actually much broader and more valuable than you might think.
The tax credit of up to 20% of qualified expenditures encourages businesses to develop, design or improve products, processes, techniques, formulas or software and similar activities. In the past, this credit—called the Credit for Increasing Research Activities—had to be reauthorized by Congress annually, but as part of the 2015 PATH Act, this credit was made permanent.
Calculated on the basis of increases in research activities and expenditures, the purpose of the research tax credit is to reward businesses that pursue innovation by continually increasing investment in research activities. Even so, an alternative simplified method allows taxpayers to claim research credits if research costs remain the same or even decline compared with prior years.
There are two methods used to compute the credit: the regular method that provides for a 20% research credit or the simplified method which is easier to document but results in a reduced credit of 14% of eligible expenses.
• Regular Method – Under the regular research credit method, the credit equals 20% of qualified research expenditures for a tax year over a base amount established by the business entity in 1984–1988, or a later period for companies that started subsequent to that period of time. This method may be the best choice for companies that can document a low base amount.
• Simplified Method – Under the alternative simplified method, the credit equals 14% of qualified research expenses over 50% of the average annual qualified research expenses in the three preceding tax years. If the taxpayer has no qualified research expenses in any of the three preceding tax years, the alternative simplified method credit may be 6% of the tax year’s qualified research expenses. This method may be the best choice for taxpayers with incomplete records from the mid-1980s, those complicated by mergers and acquisitions, taxpayers with a high base amount from that period or smaller business entities.
The term “qualified research” means research undertaken for the purpose of discovering information that is technological in nature, the application of which is intended to be useful in the development of a new or improved business component of the taxpayer, and relates to:
However, certain purposes that are not qualified include style, taste, cosmetic or seasonal design factors. The definition is relatively broad and encompasses such activities as:
The research tax credit is considered part of a taxpayer’s general business credit. A general business credit may typically be carried back one year by filing a refund claim for that earlier year, and if not used in that prior year, it is carried forward for a maximum of 20 years. This credit will not normally offset the alternative minimum tax. However, eligible small businesses with $50 million or less in gross receipts may claim the credit against their alternative minimum tax liability.
The business expense that created the credit must be reduced by the amount of the credit.
In the case of a qualified small business (one with gross receipts of less than $5 million) the business may elect to claim a portion of its research credit, not to exceed $250,000, against the employer’s share of the employees’ FICA withholding requirement (the 6.2% payroll tax). To be eligible for the payroll tax credit, the business may not have had gross receipts in any tax year preceding the five-tax-year period that ends with the tax year of the election.
If you would like to further discuss the research tax credit and how it might benefit your business, please contact Cray Kaiser today.
Please note that this blog is based on laws effective on June 5, 2020 and may not contain later amendments. Please contact Cray Kaiser for most recent information.
Congress has continued to legislate for the small business community, specifically targeting the Paycheck Protection Program (PPP) loans. On June 3, 2020, the Senate approved House Bill 7010 which is commonly referred to as the Paycheck Protection Program Flexibility Act of 2020. This bill provides some flexibility to small businesses in complying with the terms of the PPP loan. A few key features of this bill are summarized below.
Exemptions Based on Employee Availability
During the period of February 15, 2020 through December 31, 2020 a borrower may exempt a reduction in the full-time equivalent calculation if the borrower is able to document one of the following:
Repayment Requirement
There was an added provision requiring a borrower failing to apply for loan forgiveness within 10 months after the last day of the covered period to make payments of principal, interest and fees beginning on this date.
The bill is awaiting final approval by President Trump. Soon after his approval, formal guidance will become available. As further information develops, we will update our blog accordingly. Until then, please don’t hesitate to contact Cray Kaiser with any questions regarding the Paycheck Protection Program Flexibility Act of 2020.
These are certainly trying times and we want to reiterate that Cray Kaiser is here for you. As things continue to evolve in light of the COVID-19 pandemic, we at CK are taking additional precautions for the benefit of our team members and our clients.
Effective immediately:
We want to remind our clients of our portal access and your ability to safely and securely share your information with our team. We ask that you email efile@craykaiser.com to request your portal access. This will eliminate the need for you to drop off your tax information at our office.
Thank you for your patience and understanding during this challenging time. We wish you, your family, and your business health and safety. We will continue to support you as best as we can while keeping each other’s health a priority. If any changes occur during the course of the next few days, we will update our website.
When was the last time you or your attorney reviewed or made an update to your will or trust? If it was before the passage of the 2017 Tax Cuts and Jobs Act (TCJA), your documents may be out of date.
Among the many changes in that law was a more than doubling of the estate tax exemption. Prior to the TCJA, if the value of an individual’s estate at his or her death was about $5.5 million or more, it was subject to the estate tax. For deaths in 2020, and based on the TCJA inflation-adjusted amounts, just over $11.5 million is exempted from estate tax. So, if your will or trust was premised on the lower value, it may need to be revised so that it provides the appropriate estate tax results for your situation.
No doubt your will or trust was prepared with not just estate taxes in mind but so that your assets will be distributed after your death according to your wishes. However, certain events besides the tax laws being revised can cause these documents to become outdated.
Life’s ever-changing circumstances make estate planning an ongoing process. If you don’t keep your will or trust up to date, your money and assets could end up in the wrong hands. That’s why a periodic review of your will or trust is an essential part of estate planning. Here is a partial list of occurrences that could cause your will or trust to be outdated:
Are your named beneficiaries up to date on your life insurance policies, IRA accounts, and pension plans? For example, did you forget to remove your ex-spouse or a deceased relative as your beneficiary?
You should never overlook or put off these issues because once you pass on, it will be too late to make changes. If you have questions about how your changed circumstances may impact your estate taxes or if you’d like to update your will or trust, please contact Cray Kaiser at 630-953-4900.
