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Employee Retention Credit Available for Businesses Affected by COVID-19

The employee retention credit is designed to encourage businesses to keep employees on their payroll. The amount of the credit is 50% of qualified wages paid up to an annual limit of $10,000, which equals a maximum credit amount of $5,000 for each employee for the year. Eligible employers are employers who operate a trade or business and has experienced one of these:    •  Fully or partially suspended operations because of a government order due to COVID-19    •  A significant decline in gross receipts in a calendar quarter when compared to 2019

How is the credit figured?    •  The amount of the credit is half of qualifying wages paid up to $10,000 for all calendar quarters. The maximum credit for any employee is $5,000 for the year.    •  Wages paid between March 12, 2020, and January 1, 2021 are eligible.    •  Wages are not limited to cash payments. They also include a portion of employer-provided health care costs.

Which wages qualify?

Qualified wages are based on the business’s average number of full-time employees in 2019.    •  Small employers, those that had 100 or fewer employees, may receive the credit for wages paid to employees whether or not they are providing services to the employer.    •  Large employers, those that had more than 100 employees, may only receive the credit for wages paid to employees for time the employees are not providing services to the employer. If an employer is eligible due to a full or partial suspension of operations, only wages paid while operations are suspended count as qualified wages.

How do eligible employers get the credit? Employers must report their qualified wages on their federal employment tax returns, usually Form 941, Employer’s Quarterly Federal Tax Return

They can reduce their required deposits of payroll taxes withheld from employees’ wages by the amount of the credit. They can also request an advance of the employee retention credit by submitting Form 7200. Eligible employers may use the employee retention credit with other relief such as, payroll tax deferral which may affect deposits and advances.

Additional Tax Deadlines Extended

As a reminder, taxpayers now have until July 15, 2020, to file and pay federal income taxes originally due on April 15 and no late-filing penalty, late-payment penalty or interest will be due. Due to the coronavirus pandemic, this relief has been expanded to include additional returns, tax payments and other actions:

  • All taxpayers that have a filing or payment deadline falling on or after April 1, 2020, and before July 15, 2020.
  • Individuals, trusts, estates, corporations and other non-corporate tax filers now qualify for the extra time.
  • Americans who live and work abroad, can now wait until July 15 to file their 2019 federal income tax return and pay any tax due.

Extension of time to file beyond July 15

  • Individual taxpayers who need additional time to file beyond the July 15 deadline can request an extension to October 15, 2020, by filing Form 4868, Application for Automatic Extension of Time to File U.S. Individual Income Tax Return.
  • Businesses who need additional time must file Form 7004, Application for Automatic Extension of Time To File Certain Business Income Tax, Information, and Other Returns.

An extension to file is not an extension to pay any taxes owed. Taxpayers requesting additional time to file should estimate their tax liability and pay any taxes owed by the July 15, 2020, deadline to avoid additional interest and penalties.

Estimated Tax Payments

Relief is also extended to estimated tax payments due June 15, 2020. This means that any individual or corporation that has a quarterly estimated tax payment due on or after April 1, 2020, and before July 15, 2020, can wait until July 15 to make that payment, without penalty.

Unclaimed Refunds

There is a three-year window of opportunity to claim a refund from prior years’ tax returns. If taxpayers do not file a return within three years, the money becomes property of the U.S. Treasury. For 2016 tax returns, the normal April 15 deadline to claim a refund has also been extended to July 15, 2020.

If you have any questions regarding the coronavirus pandemic and your taxes, help is just a phone call away.

Early Withdrawals From Retirement Plans Rules Changed Due to COVID-19

Taxpayers affected by the coronavirus are able to withdraw up to $100,000 and will not be subject to the 10 percent penalty for early withdrawals. Distributions can be taken through December 31, 2020. The amount withdrawn is considered income, however, and taxpayers have three years to pay the tax on the additional income and replace the funds in-kind. If you need to withdraw funds from a retirement plan, please call a tax and accounting professional to discuss how it could impact your financial situation.

Eligible taxpayer. Anyone who has been diagnosed with SARS-CoV-2 virus or COVID-19 disease or whose spouse or dependent has been diagnosed with the same. In addition, any taxpayer experiencing financial hardship from any of the following situations:

  • Quarantined
  • Furloughed
  • Laid off
  • Work hours reduced
  • Unable to work due to lack of child care

SMALL BUSINESS PAYCHECK PROTECTION PROGRAM

The Paycheck Protection Program provides small businesses with funds to pay up to 8 weeks of payroll costs including benefits. Funds can also be used to pay interest on mortgages, rent, and utilities.

Fully Forgiven

Funds are provided in the form of loans that will be fully forgiven when used for payroll costs, interest on mortgages, rent, and utilities (due to likely high subscription, at least 75% of the forgiven amount must have been used for payroll). Loan payments will also be deferred for six months. No collateral or personal guarantees are required. Neither the government nor lenders will charge small businesses any fees.

Must Keep Employees on the Payroll—or Rehire Quickly

Forgiveness is based on the employer maintaining or quickly rehiring employees and maintaining salary levels. Forgiveness will be reduced if full-time headcount declines, or if salaries and wages decrease.

All Small Businesses Eligible

Small businesses with 500 or fewer employees—including nonprofits, veterans organizations, tribal concerns, self-employed individuals, sole proprietorships, and independent contractors— are eligible. Businesses with more than 500 employees are eligible in certain industries.

When to Apply

Starting April 3, 2020, small businesses and sole proprietorships can apply. Starting April 10, 2020, independent contractors and self-employed individuals can apply. We encourage you to apply as quickly as you can because there is a funding cap.

How to Apply

You can apply through any existing SBA 7(a) lender or through any federally insured depository institution, federally insured credit union, and Farm Credit System institution that is participating. Other regulated lenders will be available to make these loans once they are approved and enrolled in the program. You should consult with your local lender as to whether it is participating. All loans will have the same terms regardless of lender or borrower. A list of participating lenders as well as additional information and full terms can be found at www.sba.gov.

The Paycheck Protection Program is implemented by the Small Business Administration with support from the Department of the Treasury. Lenders should also visit www.sba.gov or www.coronavirus.govfor more information.

KEEPING AMERICA WORKING FOR 8 WEEKS

Many small businesses suffering from the effects of social distancing and stay at home orders due to the coronavirus and considering whether or not to lay off employees.  Hopefully the provisions of the stimulus act will make it easy to keep your workers.  

The Keeping America Workers Paid and Employed Act allots $367 billion for small business loans. Those eligible for the loans are: 

  • businesses with up to 500 employees, 
  • sole proprietors, 
  • independent contractors 
  • other self-employed individuals 

The maximum amount of the loan is $10 million and follows a formula tied to payroll costs to determine the actual size of the loan, beginning Feb 15, 2020 and ending June 30, 2020.  

Loans will be forgiven for costs associated with:

  • Payroll Costs for an 8 week period* **
  • Interest payments on mortgages in effect before Feb 15, 2020
  • Rent obligation in effect before Feb 15, 2020
  • Utility payments in effect before Feb 15, 2020
  • Additional wages for tipped workers

*Payroll costs will be equal to the sum of these costs compared to the same 8 week period from last year, proportionate to maintaining employees or wages.

**Eligible payroll costs do not include compensation above $100,000 in wages.

To encourage employers to rehire any employees who have already been laid off due to the COVID-19 crisis, borrowers that re-hire workers previously laid off will not be penalized for having a reduced payroll at the beginning of the period.

NEW RULES FOR DEPRECIATION AND EXPENSING

As part of final guidance issued that pertains to the Tax Cuts and Jobs Act of 2017, new rules and limitations are in effect for taxpayers who deduct depreciation for qualified property acquired and placed in service after September 27, 2017, and, as a business owner, they could affect your tax situation. Let’s take a closer look:

BUSINESSES CAN IMMEDIATELY EXPENSE MORE UNDER THE NEW LAW

A taxpayer may elect to expense the cost of any section 179 property and deduct it in the year the property is placed in service. These changes apply to property placed in service in taxable years beginning after December 31, 2017.

As a reminder, the new law increased the maximum deduction from $500,000 to $1 million. It also increased the phase-out threshold from $2 million to $2.5 million. For taxable years beginning after 2018, these amounts of $1 million and $2.5 million will be adjusted for inflation. As such, for tax year 2019, the Section 179 expense deduction increases to a maximum deduction of $1,020,000 of the first $2,550,000 of qualifying equipment placed in service during the current tax year. For 2020, the maximum deduction is $1,040,000 and $2,590,000, respectively.

The new law also expands the definition of section 179 property to allow the taxpayer to elect to include the following improvements made to nonresidential real property after the date when the property was first placed in service:

  • Qualified improvement property, which means any improvement to a building’s interior.

Improvements do not qualify if they are attributable to the enlargement of the building, any elevator or escalator or the internal structural framework of the building.

  • Roofs, HVAC, fire protection systems, alarm systems and security systems.

TEMPORARY 100 PERCENT EXPENSING FOR CERTAIN BUSINESS ASSETS

The new law increases the bonus depreciation percentage from 50 percent to 100 percent for qualified property acquired and placed in service after September 27, 2017, and before January 1, 2023, and is sometimes referred to as the first-year bonus depreciation.

As a reminder, the bonus depreciation percentage for qualified property that a taxpayer acquired before September 28, 2017, and placed in service before January 1, 2018, remains at 50 percent. Special rules apply for longer production period property and certain aircraft.

The definition of property eligible for 100 percent bonus depreciation was expanded to include used qualified property acquired and placed in service after September 27, 2017, if all the following factors apply:

  • The taxpayer or its predecessor didn’t use the property at any time before acquiring it.
  • The taxpayer didn’t acquire the property from a related party.
  • The taxpayer didn’t acquire the property from a component member of a controlled group of corporations.
  • The taxpayer’s basis of the used property is not figured in whole or in part by reference to the adjusted basis of the property in the hands of the seller or transferor.
  • The taxpayer’s basis of the used property is not figured under the provision for deciding basis of property acquired from a decedent.
  • Also, the cost of the used property eligible for bonus depreciation doesn’t include the basis of property determined by reference to the basis of other property held at any time by the taxpayer (for example, in a like-kind exchange or involuntary conversion).

Furthermore, qualified film, television, and live theatrical productions also qualify as qualified property that may be eligible for 100 percent bonus depreciation. This provision applies to property acquired and placed in service after September 27, 2017.

Certain types of property, however, are not eligible for bonus depreciation in any taxable year beginning after December 31, 2017. One such exclusion from qualified property is for property primarily used in the trade or business of the furnishing or sale of the following:

  • Electrical energy, water or sewage disposal services,
  • Gas or steam through a local distribution system or
  • Transportation of gas or steam by pipeline.

This exclusion applies if the rates for the furnishing or sale have to be approved by a federal, state or local government agency, a public service or public utility commission, or an electric cooperative.

The new law also adds an exclusion for any property used in a trade or business that has had floor-plan financing indebtedness if the floor-plan financing interest was taken into account under section 163(j)(1)(C). Floor-plan financing indebtedness is secured by motor vehicle inventory that in a business that sells or leases motor vehicles to retail customers.

The new law eliminated qualified improvement property acquired and placed in service after December 31, 2017, as a specific category of qualified property.

DEPRECIATION LIMITATIONS ON LUXURY AUTOMOBILES AND PERSONAL USE PROPERTY

Depreciation limits for passenger vehicles placed in service after December 31, 2017, have also changed. If the taxpayer doesn’t claim bonus depreciation, the greatest allowable depreciation deduction is:

  • $10,000 for the first year,
  • $16,000 for the second year,
  • $9,600 for the third year, and
  • $5,760 for each later taxable year in the recovery period.

If a taxpayer claims 100 percent bonus depreciation, the greatest allowable depreciation deduction is:

  • $18,000 for the first year,
  • $16,000 for the second year,
  • $9,600 for the third year, and
  • $5,760 for each later taxable year in the recovery period.

Computers or peripheral equipment have been removed from the definition of listed property. This change applies to property placed in service after December 31, 2017.

TREATMENT OF CERTAIN FARM PROPERTY

The new law shortens the recovery period for machinery and equipment used in a farming business from seven to five years. This shorter recovery period, however, doesn’t apply to grain bins, cotton ginning assets, fences or other land improvements. The original use of the property must occur after December 31, 2017. This recovery period is effective for eligible property placed in service after December 31, 2017.

Also, property used in a farming business and placed in service after December 31, 2017, is not required to use the 150 percent declining balance method. However, if the property is 15-year or 20-year property, the taxpayer should continue to use the 150 percent declining balance method.

APPLICABLE RECOVERY PERIOD FOR REAL PROPERTY

The new law keeps the general recovery periods of 39 years for nonresidential real property and 27.5 years for residential rental property. The new law changes the alternative depreciation system recovery period for residential rental property from 40 years to 30 years.

Qualified leasehold improvement property, qualified restaurant property and qualified retail improvement property are no longer separately defined and no longer have a 15-year recovery period under the new law. These changes affect property placed in service after December 31, 2017.

Under the new law, a real property trade or business electing out of the interest deduction limit must use the alternative depreciation system to depreciate any of its nonresidential real property, residential rental property, and qualified improvement property. This change applies to taxable years beginning after December 31, 2017.

ALTERNATIVE DEPRECIATION SYSTEM FOR FARMING BUSINESSES

Farming businesses that elect out of the interest deduction limit must use the alternative depreciation system to depreciate any property with a recovery period of 10 years or more, such as single-purpose agricultural or horticultural structures, trees or vines bearing fruit or nuts, farm buildings, and certain land improvements. This provision applies to taxable years beginning after December 31, 2017.

QUESTIONS?

Tax law can be confusing. If you’re a small to medium-sized business owner with questions about depreciation and expensing, we’re only a phone call away! SANDER & ASSOCIATES, CPA (352) 561 1040 

New Major Changes to RMD’s

Congress has recently has made major changes to required minimum distributions (“RMD’s”) effective January 1, 2020.

A new law, mainly intended to expand opportunities for individuals to increase their retirement savings was signed in December and went into effect January 1, 2020.  Called, the Setting Every Community Up for Retirement Enhancement Act (SECURE Act), it makes major changes to RMD’s (required minimum distributions, and includes some changes that will affect many taxpayers.

For 401(k) plans RMD’s are calculated by taking the account balance of each of your retirement plans as of December 31 of each year and dividing this by life expectancy factors that are available from the IRS website. IRAs are treated differently because you can aggregate all .of your accounts and do one computation. Failure to take the required RMD results in a 50% penalty tax on it in addition to the ordinary tax you already owe.

Two major areas are impacted; the age that you are required to take RMD’s and the amount of time your beneficiaries have to take RMD’s  from funds they inherit.

Age – RMD‘s were previously required to be taken at age 70 ½.  That has been pushed back to age 72. This has both positive and negative potential impact. While this has the positive effect of decreasing taxable income for that short period of time, on the negative side, it will increase taxable income for the remaining years because the life expectancy tables have not been changed.

If you are still working past the age of 72 you can delay the required beginning date of your 401(k) RMD until April 1in the year after you retire. However the RMD of an IRA still must begin at age 72. One way around this would be to roll over your IRA to your 401(k) plan.

Distribution Period – The amount of time that beneficiaries can use to take RMD‘s from inherited assets has been reduced dramatically. In the past,  Inherited  IRA’s and 401(k)s could be stretched out and taken over the lifetime of the beneficiary. This has been reduced  to a ten year period after the death of the owner.  The federal government will see a huge tax revenue increase from this as they originally intended these accounts to be retirement accounts and not tax shelters.

There are exceptions to the ten-year rule which include:

  1. Surviving spouses.
  2. Heirs that are less than 10 years younger than the decedent.
  3. Chronically ill individuals.
  4. Disabled individuals.
  5. Minors – once they hit the age of majority in their state the ten year period then becomes applicable.

There are additional things that must be taken into consideration for Tax Planning. Different situations call for the use of three different IRS tables in order to determine RMD’s. It is crucial that you consult your tax advisor about the following:

  1. If the account owner died before or after the required beginning date of their RMD.
  2. The beneficiaries relationship to the account owner.
  3. The age of the beneficiary.
  4. The type of tax advantaged account..