Ten Cybersecurity Steps We All Need to Follow

During the pandemic, given the increase in remote work, the importance of cybersecurity has only increased. Dealing with cybersecurity issues can seem daunting for both individuals and businesses, but we wanted to make you aware of some easy steps you can take to help keep your computers and devices secure.

  1. Load antivirus on your computers and devices (including tablets and phones) and keep the virus definitions up to date.
  2. Use a firewall to help keep malicious actors off your computer. Some firewalls can also block geographically, so you can block entire countries from access.
  3. Do not reuse passwords, and change them with regularity. Hackers know some people use the same password in multiple places. If you’ve ordered something off a website and that site is hacked with the hackers collecting passwords, email addresses, and usernames, the hackers will typically try to use those credentials on other sites such as banking websites, social media websites, email sites such as Gmail or Yahoo, and corporate networks, because they know some people use the same password in multiple places.
  4. Use two factor authentication (2FA) when possible. Factors are something you know, something you have, or something you are, and 2FA requires two of those things. Something you know could be your password. Something you have could be your cell phone. Something you are would be your physical characteristics (biometrics) such as your fingerprint or voice. For example, you could configure 2FA on your bank account where you would first enter your password, which would then trigger a phone call to your cell phone with a code you would enter to complete the login process. That way, if someone gains access to your password, they will also need your cell phone to access your account.
  5. Keep your operating system patched. As security vulnerabilities are discovered, patches are created and released to the public in the form of operating system updates. Most operating systems allow automatic installation of updates, so it is an easy way to keep your operating system patched.
  6. Have a process so that employees who leave the company have their network login rights disabled and are removed from your computer systems promptly. Do not forget to remove them from any portals, or cloud-based software packages that operate outside your network.
  7. Watch those email links! Bad actors are known for making malicious links look legitimate by giving them a familiar title, such as a banking website, but the underlying hyperlink goes someplace you would rather not be. Hovering your mouse over a link will show you the underlying hyperlink, but DO NOT CLICK unless you are confident the link is where you want to go.
  8. Just because an email says it is from a certain person does not make it so. When looking at an email, do not only look at the name of the sender but also look at their email address. The odds of your attorney Michael using an email address that starts with “Helen” and ends with a .edu extension are probably slim.
  9. If you receive an unexpected email attachment from a person, there is nothing wrong with picking up the phone and calling the person to ask if they sent it, BEFORE downloading and opening it. Attachments can have malicious payloads. Also, do not call the person using the phone number in the email. If a malicious person sent you the email, that phone number could go to them.
  10. Secure your devices. Crimes of opportunity happen in a flash. Leaving your laptop unattended on the seat of your car, or your phone on the table at Starbucks while you pick up your order invites crimes of opportunity.

Hacking is big business, so it will not be disappearing anytime soon. However, by being vigilant, and taking the steps we can, we can help reduce the odds of being one of their victims.

Ask Captain Codehead – Tax advice for people who think outside the box — and possibly the law

Dear Captain Codehead,

I’m confused about the tax deadlines this year. It used to always be April 15, but then last year it was July 15, and now I’m hearing different things from different people. My brother-in-law told me that it was moved to May 17, but he also told me that the Earth is flat. Is he right?

–Timely Wannabe

Dear TW,

No. The Earth is an oblate spheroid, which basically means round. Glad I could clear that up for you.

My editor insists that I answer the part of your question that’s actually tax related. As of the time I’m writing this, the due date for 2020 federal individual income tax returns has been moved to May 17, 2021. But your first quarter estimates for 2021 are still due on April 15. Some other due dates have also been moved, but many haven’t. Also, each state gets to make its own decisions about whether and how far they want to move their own deadlines. The changes and inconsistencies would be enough to make me curl into the fetal position and refuse to leave the house, but I can’t do that. Mostly because I already did that a year ago and haven’t moved since. (I guess that means I should say that the Earth was round the last time I checked.)

Is May 17th the IRS’ final answer for this year? Maybe. My sources tell me that on May 1st, Commissioner Rettig will emerge from his bunker, and if he sees his shadow, we get six more weeks of tax season. So I guess you could pray for sun, but keep in mind that if he’s struck by lightning, we all get the rest of the year off, so…

Dear Captain Codehead,

If I have a reaction to my COVID vaccine, do I still have to file my tax return on time? If I were faking it (allegedly), how would the IRS know?

–Achoo

Dear Achoo,

Gezundheit. Now go wash your hands! (And file your return: the IRS knows everything.)

Your question, or some variation of it, is one of the most common questions we1 get here at ACC. So let’s run through what works or doesn’t work to let you file your return after May 17.

Works: I filed an extension and paid all tax due on or before May 17.

Doesn’t work: I didn’t file my return or an extension, but I totally meant to. The IRS wants you to know that they totally believe you. But they don’t care.

Works: I live in another country. Taxpayers who live abroad have until June 15 to both file and pay their taxes.

Doesn’t work: I was traveling abroad, and I got stuck in quarantine. The IRS wants you to know that they have the utmost sympathy for your situation. But they don’t care.

Works: I live in a federally declared disaster area. You will note that this one is tough to plan for. On the other hand, real estate in disaster areas is often dirt cheap (or cheap dirt), so there’s no reason why you can’t have a house in a flood plain, another on a fault line, and still another next to an active volcano. Captain Codehead would be remiss if he didn’t point out that moving to a federally declared disaster area is potentially more work than just getting your tax information to your accountant, but you do you.

Doesn’t work: I have teenagers, and my home could reasonably be considered a disaster area. The IRS wants you to know: this too shall pass. Also: they don’t care.

Works: Death. Technically, this doesn’t really work: your return is still due on May 17. But it’s somebody else’s problem, right?

Doesn’t work: The dog ate my tax return. The IRS would like to remind you to e-file.
Doesn’t work: The dog ate my computer. The IRS would like to remind you to back up your data frequently.
Doesn’t work: The dog ate my computer and all my thumb drives2. The IRS would like to offer its sympathy — to your dog. Also, it’s notifying the ASPCA, and your return is still due.

Dear Captain Codehead,

You’re my favorite superhero, so I was wondering whether you could give me your deets: origin story, alter ego, nemeses, weakness? What about super powers: is it true you can leap tall stacks of Treasury regulations in a single bound? Also, when is there going to be a movie, and who’s going to play you?

–Curious

Dear Curious,

Gosh, it’s nice to have fans; I can’t tell you how many emails I get from people who want me to be their kid’s godfather or who dressed up as me for Halloween3. Obviously, for reasons of security, I can’t reveal my alter ego, but your other questions are all answered in the film, which is coming October 15th to a theater near you. I will say that I got my dream cast: the early, nerdy, non-superhero version of me is played by Patton Oswalt, and the later, studly, superhero version of me is played by Zack Galifianakis! Or I might have that reversed: I wanted to attend an early screening, but my attorney advised me against violating the restraining order. Lawyers, what a bunch of killjoys, amirite?

HAPPY APRIL FOOLS’ DAY!!!!!

1And by “we,” I mean I.
2No animals (or thumb drives) were harmed in the writing of this column.
3Frankly, this is an extremely low-effort costume (especially during the pandemic: basically, you just put on sweatpants and forget to shave), but I appreciate the thought.

 

by Greg Yoder

2021 Employee Retention Credit – As We Come to the End of the First Quarter

In the dynamic world of taxes, few areas have been more unpredictable in the last year than the Employee Retention Credit (“Credit” or “ERC”). One of the mechanisms created by Congress to help businesses and employees during the pandemic, the ERC underwent multiple changes since its introduction under the CARES Act in March of 2020. As we come to the end of the first quarter of 2021, it is important to understand how the Credit can benefit your business this year.

Eligibility for the Credit in 2021

To be eligible for the ERC in 2021, a business, which includes exempt organizations, will need to show either that (1) the business was subject to governmental orders that resulted in full or partial suspension of operations, or (2) the business experienced a 20% decrease in gross receipts during a calendar quarter compared to the same calendar quarter of 2019. Alternatively, a business can meet the gross receipts reduction by looking at 4th quarter 2020 compared to 4th quarter 2019.

Credit Amount

Employers with 500 or fewer employees can claim a credit for wages paid to all employees, even if those employees continue to provide services. The credit amount is 70% of the first $10,000 of qualified wages per employee ($7,000 credit per quarter for each eligible employee). Employers with over 500 employees are only able to claim the credit for wages paid to employees who are not working.

Congress Giveth and Congress Taketh Away

As with most tax benefits, there are collateral effects that are not immediately evident. The ERC has more than its share of such consequences. First, tax law abhors double benefits and, as a result, deductible wages (and associated health plan costs) are reduced by the amount of any Credit received.

Second, if the business also took out a PPP loan in 2021 (or still intends to do so) it must allocate the wages between the two benefits as you cannot use the same wages for PPP forgiveness and the ERC. It is important to keep in mind that while wages used to claim the Credit are reduced by the Credit received, those used as a basis for forgiveness of a PPP loan continue to be deductible.

Time to Take the Credit

After the American Rescue Plan Act of 2021 was passed, the ERC was made available for the 1st -4th quarters of 2021. The Credit can be taken on the business’ 941 filed each quarter, or on an amended 941-X if you are applying for the credit after initial 941 was filed. One of the most important features of the Credit is that it is “refundable”, which simply means that if the taxpayer has not paid in, or is not obligated to pay in, as much payroll tax as the amount of the Credit, it may claim a refund for additional Credit. That refund will provide much needed funds to the taxpayer to help cover wages and other business expenses.

Conclusion

This article focuses on the 2021 treatment of the employee retention credit, but please note that in January 2021 the Consolidated Appropriations Act opened up the employee retention credit for 2020 to businesses and nonprofits that had previously received a PPP loan. The 2020 rules for the employee retention credit are different than the rules for 2021, in that the credit is limited to $5,000 annually, per employee.

This is a brief overview of a tremendously complicated area of new tax law. Tax professionals still grapple with unanswered questions and gray areas in the rules. That said, the financial benefit of a proper application of the ERC can be the difference between survival and failure for many businesses and should be considered carefully whenever eligibility is even remotely likely. If you have questions on whether you are eligible for the Employee Retention Credit in 2021, please reach out to Snyder Cohn.

 

By Tim Moore

Qualified Improvement Property: CARES Correction

The term Qualified Improvement Property, commonly known as ‘QIP’, originated with simplification in mind. However, through the years its application has been anything but simple.

Background and Definition

The Qualified Improvement Property classification was created as part of the PATH Act of 2015 as a combination and / or replacement to the old Leasehold Improvement Property, Retail Improvement Property, and Restaurant Property asset classifications. Qualified Improvement Property assets placed in service on or after January 1, 2016 were subject to a 15-year recovery life and eligible for accelerated bonus depreciation.

Qualified Improvement Property is defined as any improvement to an interior portion of a building which is non-residential real property, if such improvement is placed in service after the date such building was placed in service. There is no requirement that the improvement be pursuant to a lease and the improvements can be made to common areas of a building that are used by all tenants. However, Qualified Improvement Property does not include improvements attributable to building enlargements, internal structural framework or elevators / escalators.

Due to a drafting error in the Tax Cuts and Jobs Act of 2017 (‘TCJA’) the 15-year recovery life was not applied to Qualified Improvement Property. As a result, Qualified Improvement Property placed in service after December 31, 2017 became subject to a 39-year recovery life and was no longer eligible for accelerated bonus depreciation. It was widely known this was not the legislative intent of TCJA, but unfortunately that is how the law was written and applied.

CARES Correction

The Coronavirus Aid, Relief, and Economic Security (CARES) Act of 2020 finally issued the technical correction to the Qualified Improvement Property definition that we were all waiting for. This correction retroactively reinstated the 15-year recovery life and eligibility for accelerated bonus depreciation for Qualified Improvement Property placed in service after December 31, 2017.

It is important to note that this taxpayer favorable adjustment to recovery life (from 39 years to 15 years) is not an optional change, it is required. Once the CARES Act was signed into law the 39-year recovery life for Qualified Improvement Property became an improper accounting method.

Call to Action

As a result, Taxpayers who have 39-year Qualified Improvement Property on their depreciation schedule need to take corrective action for tax years 2018 and 2019. Luckily, the IRS has provided some flexibility to make these corrections through the following options:

  • Filing an amended return(s)
  • Filing a change of accounting method – This would account for the change in the current year, rather than having to amend prior year tax returns.
  • Filing an Administrative Adjustment Request

It is important to note that a change in depreciation expense will likely interplay with other legislative changes under the TCJA and CARES Act, such as (but not limited to) business interest expense deductions, net operating loss rules, and excess business loss limitations. There is no one size fits all choice for Taxpayers. Careful consideration should be given to select a corrective method that will yield the most favorable tax outcome for your situation.

Please contact your Snyder Cohn advisor for more information on how these changes may affect your tax situation!

 

By Dustin Cutlip

To C, or not to C: Choosing the Right Business Entity for your Startup

You have the idea for the “Next Big Thing.” You workshopped the idea with friends and, if you’re very brave, family, and now you are ready to go out and get some investors to make this idea become reality. Not so fast. Along with the seemingly endless amounts of decisions you must now make as a new entrepreneur, one will have a huge impact on the future of your company: What business entity should I choose?

The C-Corporation (C-Corp) is the go-to entity choice for many entrepreneurs. It provides liability protection to its investors, effectively limiting the risk of loss only to those amounts invested. Also, a C-Corp can offer many different types of stock to investors, including preferred shares which will allow these investors to get the first piece of the pie when dividends are paid or a return on investment is made. A C-Corp can also offer various types of compensation, such as stock options, in order to hire and retain top talent when actual liquid cash for higher salaries is not available. The major downfall of the C-Corp is that it does get hit with double taxation. First, any net income is taxed at the entity level and then the shareholders pay tax on the dividends paid out from the company. Double tax? No thanks. So, what is the alternative?

The S-Corporation (S-Corp) swoops in to save the day! It enjoys the same liability protections afforded a C-Corp but avoids double taxation by passing the items of income and loss directly out to the shareholder. Of course, the IRS would not allow this without attaching some strings, and those strings can feel more like anchors. An S-Corp is limited to only 100 unique investors, those investors must be US Citizens and cannot be C-Corps, or pass-through entities, and only one class of stock can be issued. All these factors conspire to make the S-Corp an almost non-starter if you are seeking large investors or venture capitalists. But before we go back to the C-Corp, there is another potential entity choice to consider.

The Limited Liability Company (LLC) is currently the most popular entity choice. They are as flexible as a C-Corp with their ability to offer different classes of membership and incentive-based compensation, while maintaining their liability protection. Also, they offer the pass-thru taxation benefit of an S-Corp without the restrictions on investors. There are a few key differences between an S-Corp and LLC when it comes to taxation. For instance, an S-Corp may pay and deduct salaries to its shareholders if they are reasonable and the income that passes thru is not subject to self-employment tax. Conversely, an LLC cannot pay salaries to its members and the income passed out is subject to self-employment taxes. So, maybe the LLC is the choice for you? Yet again, a venture capitalist will have something to say.

Venture capitalists (VCs) will almost exclusively require the companies they invest in to be formed as a C-Corp, for all the reasons noted above. Even though an LLC can provide many of the same benefits, the fact that the income is passed through to the owners is actually a detriment, as many VC’s are interested in investing in companies that will have some sort of liquidity event in the future. One option to help get your company off the ground is to form an LLC and then to convert to a C-Corp down the road when you start seeking larger investors or venture capitalists. This allows you to utilize the benefits of pass-thru taxation in the early stages of your business, and this conversion can be as easy as checking a box on your tax return (it is a separate form) to elect to be taxed as a C-Corp with the upside being that this conversion will most likely not be a taxable event as long as your assets exceed liabilities at the time of election.

We have only scratched the surface on entity choice. While we provided some basic reasoning and strategies, it’s important to understand that everyone’s situation is unique. Contact a Snyder Cohn associate to see how we can help you during this exciting and important time in your business’s life.

 

By Jacob Osburn

Financial Reporting Considerations in Light of COVID-19

As we are all aware by now, the COVID-19 pandemic has had countless effects on businesses and individuals everywhere. Much focus has understandably, and rightfully, been placed on how to navigate through the provisions of the CARES Act, Paycheck Protection Program, Consolidated Appropriations Act and the tax consequences of these initiatives.

For those businesses that have financial reporting requirements to meet, it is also important to understand how their audited or reviewed financial statements will be affected by the current environment. While each and every business will certainly have unique factors to consider, the three matters outlined below will be of significant importance to most small and medium-sized businesses.

Accounting for Paycheck Protection Program (“PPP”) Loans

In June 2020, the AICPA issued guidance on how to account for PPP loans under Generally Accepted Accounting Principles (“GAAP”). Most businesses, aside from governmental entities, are given two options. The first option is to account for the PPP loan as regular debt, meaning that the funds received would be recorded as a liability on the balance sheet (notes payable), and interest would be accrued at the rate and over the term provided for in the loan. If and when all or part of the loan is forgiven, the liability would be reduced by the amount forgiven, and a “gain on extinguishment” would be recorded. The gain on extinguishment would be presented as an item of Other Income on the entity’s income statement or statement of operations, below Operating Income.

The second option is to account for the PPP loan as though it were a government grant. Under this method, the funds received would initially be recorded as a deferred income liability on the balance sheet. Then, the entity would evaluate whether there is reasonable assurance of the following:

  • Any conditions attached to the loan will be met
  • Forgiveness will be obtained

If the entity believes that reasonable assurance exists for both criteria, then the funds can be recognized (reclassified from deferred income to income) on a systematic basis as the entity incurs qualified expenses, as defined by the PPP. As is the case under the first option, any income recognized would be presented as an item of Other Income on the entity’s income statement or statement of operations.

A not-for-profit entity may also follow a model similar to the second option, in which the PPP loan would initially be recorded as a deferred income liability on the balance sheet, and then systematically recognized as a contribution as the conditions of the loan are met (as the entity incurs qualified expenses).

Deferral of new Revenue Recognition and Lease Accounting Standards

Financial statement issuers have likely heard about a couple of major standards updates that have been in the pipeline over the past few years. First, the new revenue recognition standards, which represents a complete overhaul of the previous standards and will be relevant to virtually all revenue-generating entities, were set to become effective for fiscal years beginning after December 15, 2018 (meaning that implementation would have been required for all 2019 financial statements). Second, the new lease accounting standards, a highly complex set of standards that will affect any entity that leases real or personal property, were set to become effective for fiscal years beginning after December 15, 2020 (implementation required for all 2021 financial statements).

In June 2020, the FASB issued Accounting Standards Update (ASU) 2020-05, which defers the effective date of both standards updates for one additional year, but only for nonpublic entities that have yet to issue financial statements reflecting these updates. Therefore, such entities may elect to push back the implementation of the new revenue recognition guidance until the time comes to prepare their 2020 financial statements. Similarly, the new lease accounting standards may be pushed back until the time comes to prepare 2022 financial statements.

The FASB issued this update in recognition of the fact that, in light of the current environment, many businesses likely do not have the time or resources to study and apply these changes. That being said, it is important to note that the new revenue recognition standards will apply to revenues earned during the current year. It may be worthwhile for businesses to consider now the effects that the new standards will have on their financial statements.

Going Concern Considerations

When undergoing a financial statement audit or review, businesses are required to assess their ability to continue operating as a going concern for at least one year after those financial statements are issued. In light of the pandemic, this question takes on a greater significance, and potentially gives rise to additional reporting and disclosure requirements if the assessment is uncertain. Needless to say, business owners and key managers should always keep track of and document the financial well-being of the business, and its prospects moving forward. However, they may now find their outside accountants or auditors asking for documentation to substantiate their going concern assessment. Such documentation might include cash flow forecasts or operating budgets, minutes of board of directors meetings, and agreements related to financing obtained subsequent to the balance sheet date. Having this documentation complete and ready can go a long way toward having an audit or review run more smoothly.

We are always available to help our clients with each of the above matters and much more, so please feel free to contact us with any questions.

 

By Joe Bishop

How the Recent Stimulus Package Impacts You and Your Business

Following a period of uncertainty and considerable publicity leading up to a potential government shutdown last week, President Trump signed the combined stimulus and appropriations bill (“Consolidated Appropriations Act, 2021”, “Bill”) into law.

The combined Bill provides funding to keep the government operating while delivering a wide range of benefits to individuals and businesses hit hard by the Coronavirus pandemic.  Of importance here, there are not so widely reported provisions that are tax related and that will provide a measure of relief to taxpayers, both individual and business.

Individuals

More Recovery Rebates – The Bill provides for a credit/payment of $600 per person, which will be sent to eligible taxpayers in the form of a cash payment. It represents a refundable tax credit against 2020 tax. The initial payment will be based on the income of the taxpayer(s) from 2019, but the final amount of the credit on the tax return will be based on the income the taxpayer(s) report on their 2020 income tax return.  The credit phases out for single taxpayers starting at $75,000 of modified Adjusted Gross Income ($112,500 for Head of Household and $150,000 for Married Filing Jointly) with a $5 reduction for each additional $100 of income.  If an advance payment exceeds the credit as finally determined, the recipient will not be required to repay the difference, but if the payment is less than the final credit, the taxpayer(s) will be given the difference as a reduction of their tax bill.

Flexible Spending Arrangement (FSA) Temporary Rules – The Bill relaxes rules regarding carryover of unused benefits from 2020 to 2021 and 2021 to 2022 for both health and dependent care, generally, up to the full annual amount.  Plans must specifically adopt these changes in order for participants to benefit.

Charitable Contributions – There are various provisions that affect the deductions for charitable contributions.  For taxpayers who do not itemize their deductions, the $300 deduction for charitable cash contributions has been increased to $600 for joint filers in 2021.  For taxpayers who itemize, the CARES Act had suspended the 60% of AGI limitation for one year, 2020, and eliminated the percentage limitation for contributions made for efforts in qualified disaster areas. The Bill extends these changes to 2021.

Medical Expense Itemized Deductions –The law reduces/restores the 7.5% floor for deduction of medical expenses for all taxpayers, regardless of age, retroactively and prospectively to 2019 and 2020.

Educator Expense Deduction – For educators accustomed to a deduction for out-of-pocket costs associated with supplies for their work, the Bill clarifies that supplies, like PPE, provided to reduce the spread of the Coronavirus, are eligible for the deduction.

Tuition Deduction to Tax Credit – The former deduction for qualified tuition and related expenses, after 2020, will be replaced by increased phase-outs of the Lifetime Learning Credit.  In most cases, this change should not make much difference, but the alteration is worthy of note if the deduction has been taken in the past and would otherwise have still applied beyond 2020.

Businesses 

PPP Loans – We previously reported on the deductibility of expenses paid with PPP loans as well as the implementation of PPP2. This is great news and you can read more about it here.

100% Deduction for Business Meals – If you were in business prior to the 1986 Tax Act, you may reminisce about the ability to deduct 100% of business-related meals.  The good ole days are back…for two years – 2021 and 2022.  Ostensibly, this is an offering to help re-invigorate the restaurant industry hard hit by the pandemic.

Employee Retention Credit A credit under the CARES Act provided a benefit for employers subject to suspension of operation or significant decline in gross receipts.  The benefit consists of a refundable credit, immediately accessible against payroll tax deposits, based on wages paid to retained employees between March 13, 2020 and January 1, 2021.  The Bill extends the credit to June 30, 2021 while increasing the credit rate, broadening the definition of a significant decline in gross receipts, increasing the wage base and providing a wealth of other clarifications/expansions of its applicability.  Notably, there is clarification that recipients of PPP loans may qualify for the credit, so long as those same wages were not funded with PPP loan proceeds that are forgiven.

Sick and Family Leave Tax Credit (FFCRA leave credits) – This refundable credit against payroll taxes that helps subsidize COVID related sick and family leave was extended until March 31, 2021.  Prior to January 1, 2021, most employers were required to provide the leave, but it is made voluntary effective in 2021.  For employers that wish to provide the leave in 2021, the refundable credit is still available. To read our previous article on this topic click here.

Extenders (both Individual and Business)

The Bill put in place several so-called Extenders that increase the life of previously enacted tax breaks, most of which were not related to the pandemic provisions.  Generally, they include:

  • Exclusion from income of qualified principal residence debt forgiveness – through 2025
  • Employer tax credit for paid family and medical leave – through 2025
  • Tax-free employer payment of student loans – through 2025
  • Mortgage insurance premiums deductible as qualified residence interest – through 2021
  • Nonbusiness energy property credit (10% for window, doors and the like) – through 2021
  • Energy efficient homes credit (up to $2,000) for qualified new homes – through 2021
  • Residential energy-efficient property/biomass fuel property credit – generally through 2022

These are but a few of the numerous tax provisions in the Bill.  There are others that relate more specifically to real estate, venue operators, the brewing/distilling industry, farming, motorsports and other industries.  There are also provisions that provide for enforcement, compliance and ministerial rules associated with benefits granted under this Bill and the previous relief bills.

For more information on how the Consolidated Appropriations Act impacts you or your business, please contact Snyder Cohn.

Disclaimer: Please note this article is based on the information that is currently available and is subject to change.

 

By Tim Moore

Congress Passes Coronavirus Relief Bill

Earlier this week, Congress passed a major new COVID-19 relief bill (Consolidated Appropriations Act, 2021). The bill’s headline provisions include another round of stimulus payments and extended unemployment benefits for individuals, as well as funding for vaccine distribution. There are also major tax and financial provisions to help businesses hit hard by COVID-19.

The new bill is massive and complex, and as of this writing, its enactment into law remains uncertain. But it does contain some good news.

Deductions for PPP-related expenditures

The Paycheck Protection Program was a centerpiece of the original CARES Act. While the loans provided invaluable assistance for business, one problem that arose had to do with the deductibility and timing of expenditures made with PPP funds. Earlier in 2020, the IRS ruled that if a business had a reasonable expectation that its PPP loans would be forgiven, expenditures made with PPP proceeds were non-deductible. This treatment caused problems for some businesses (especially those with a fiscal year-end) because the disallowed deductions and the excluded income (from the PPP loan forgiveness) didn’t happen in the same tax year.

The new legislation overrides the initial guidance from IRS and explicitly states that expenditures funded with PPP proceeds will be deductible. So even though the loan proceeds will not have to be paid back and even though the forgiveness of debt income is not taxable, businesses will still be allowed to take deductions for expenditures they make with the proceeds. This provision is a major win for taxpayers.

The legislation also clarifies that when a PPP loan is forgiven, the non-taxable income will nonetheless increase an owner’s basis in their pass-through entity, which means that losses are more likely to be fully deductible by the owners.

Round Two of the Paycheck Protection Program

While many businesses are still waiting to apply (or waiting for approval of their applications) for forgiveness of their PPP loans from earlier in 2020, the new law provides a second round of PPP loans for some businesses and expands the types of entities that can apply for an initial PPP loan.

The new PPP provisions (as with the original) are complicated, but in general terms, a business that has used or will soon use all of its initial loan can qualify for a second loan. In order to qualify, a business must have 300 or fewer employees and must demonstrate a 25% decline in revenue in any quarter in 2020 when compared to the same quarter in 2019.

As with the first round of PPP loans, the amount of the loan is based on an employer’s past payroll costs. The loan amount is up to 2.5 times an employer’s average monthly payroll costs over a specified period, with a maximum loan of $2 million. (The loan amount for hotels and restaurants is 3.5 times average monthly payroll costs, with the same $2 million limit.) As with the first round of PPP loans, there are special rules allowing separate locations to be treated as separate businesses, as well as special provisions for businesses that weren’t in existence for the entire measurement period.

Some businesses that didn’t qualify or didn’t apply for the first PPP wave can also apply under the new provisions. The expanded eligibility list includes 501(c)(6) organizations and entities that were previously barred because they received other types of assistance from SBA or other government programs.

Once again, the uses of the PPP loan are restricted to certain types of expenditures, with at least 60% of the proceeds required to be used for payroll costs. Borrowers who don’t meet these criteria will face a reduction in the amount of loan forgiveness. Many of the other requirements from the first round of PPP have also been carried over to the second round.

Additionally, the bill includes provisions for streamlined forgiveness application procedures and reduced recordkeeping requirements for smaller businesses. These provisions should help ease the backlog in processing loan forgiveness applications.

New Maryland Pass-through Entity Tax Provides a Year-end Tax Savings Opportunity

In 2020, Maryland enacted an optional tax on pass-through entities that allows them to, in effect, pay some state income taxes on behalf of their resident members. This law – along with a recent notice from the IRS — may give an important federal tax benefit to members of Maryland pass-through entities. There are, however, some important complications to know about, and taxpayers who want to benefit should act before the end of 2020.

Background

As you know, back at the very end of 2017, the Tax Cuts and Jobs Act was rushed into law, and one of its revenue-raising provisions was to limit the itemized deduction for income and property taxes to $10,000 per year. For higher-income taxpayers – particularly those living in states with higher state income tax rates – this change caused a substantial limit on their itemized deductions. Many of our clients pay property taxes in excess of $10,000 per year; consequently, they effectively get no deduction for their state income taxes. Between this limitation and the increase in the standard deduction, many taxpayers who had itemized their deductions for decades suddenly found themselves using the standard deduction.

States whose residents had suddenly lost the ability to deduct their state income taxes have tried various ways to help their residents get around this problem. For example, some states tried to have state income taxes recast as charitable contributions. The IRS has quashed most of these efforts.

A more recent attempt to accomplish the same goal, however, has met with success. Midway through 2020, Maryland passed a law that allowed pass-through entities (S corporations, partnerships, and LLCs) to elect to pay tax on the income allocable to resident owners. The owners will then get a credit on their Maryland individual returns for their share of taxes paid at the entity level. Last month, Treasury released a notice effectively giving its blessing to this treatment. The notice (Notice 2020-75) says that if a state imposes an entity level tax on a pass-through entity, subject to certain restrictions, the entity may take the tax as a deduction in calculating its ordinary income.

The effect of the new state laws and the IRS notice is that taxes that previously were “wasted” as a disallowed itemized deduction will now reduce ordinary income from a pass-through entity. Put another way, taxes that were non-deductible have now effectively become an above-the-line deduction. Notice 2020-75 applies to taxes paid to other states as well as MD. Certain taxes paid to DC will qualify for the same treatment, and other states have enacted similar measures.

There are a couple of intricacies that you need to be aware of. First, there may be some problems for pass-through entities that have both resident and non-resident owners. Second, there was a drafting error in the Maryland law that makes its efficacy questionable; however, it appears that there will be a retroactive technical amendment early next year to fix this problem. Additionally, the tax will only be deductible at the entity level in the year it’s paid, so pass-through entity owners who want to take advantage of the new law in 2020 have to make sure the entity pays the taxes before the end of the year.

The IRS notice tells us what Treasury intends to put in regulations, but the regulations themselves have not been issued. Because we don’t have final regulations and because we don’t have the Maryland technical corrections yet, we can’t say with certainty that all pass-through entity owners can benefit. What we can say:

  1. Pass-through entities that have only Maryland resident owners can get a benefit. In some cases, this benefit will be quite large, and the entities should begin planning immediately so that they can make deductible payments by the end of the year.
  2. Pass-through entities that have both resident and non-resident owners may get a similar benefit, but they may have to take additional steps to do so. Partnerships and LLCs may have to make changes to their operating agreements. S corporations with both resident and non-resident shareholders may not have certainty before the end of the year, but there may also be a work-around for some S corporations.

As is the case with all new tax developments, we haven’t included all of the details, and there are a number of them. Pass-through entities (and their owners) who might benefit from the new legislation should contact us so that we can help them get the largest tax benefit possible.

 

By Greg Yoder

Steve Braunstein – CEO You Should Know by M&T Bank

iHeartMedia Washington DC’s “CEO’s You Should Know” weekly program presented by M&T Bank features the most influential CEOs who lead businesses that drive our regional economy. This week, the #CEOYouShouldKnow is Snyder Cohn’s Steve Braunstein.

Learn more about Steve and hear his interview.