It has been a challenging year, but smart actions in December can mitigate pain in April. Taxpayers with PPP loans will want to work on their loan forgiveness applications, and businesses with losses in either 2018 or 2019 should consider taking advantage of new opportunities to carry those losses back. Severely hit qualified businesses should reserve a piece of a new California credit, and individuals should look at potential new planning opportunities.
THE HOLIDAY THAT GUARANTEES A HANGOVER
In August, the President signed an executive order allowing a payroll tax holiday. Employers who chose to participate in the program were able to increase their employees’ take home pay by postponing the withholding of the employees’ share of social security and Medicare taxes. Even though the taxes were not withheld, they are still owed and will come due in 2021. Make sure you know whether or not your employer chose to participate in the program and, if so, be prepared for double withholding or similar adjustment starting January 1, 2021.
BE PREPARED TO PAY FEDERAL TAXES ON UNEMPLOYMENT
Unemployment insurance benefits, including the extra $600 pandemic payment, are taxable income on your federal return. Note that even if you elected to have tax withheld on your payments, no tax was withheld on the extra $600, and withholding that did occur may not have been at your marginal tax rate. As a result, if you received unemployment, you may owe additional federal tax in April.
California unemployment benefits are not taxable on your California return.
BEWARE OF THE NANNY TAX WHEN HIRING A TUTOR
Some families are forming education pods and hiring full or part time tutors. Note that these tutors may qualify as employees subject to nanny tax reporting.
IRS guide: https://www.irs.gov/publications/p926
CA FTB guide: https://www.edd.ca.gov/pdf_pub_ctr/de8829.pdf
THE STATE OF CALIFORNIA WANTS TO GIVE YOUR BUSINESS CREDIT
California has enacted a tentative small business hiring credit for small California business that have suffered a large (50% +) decrease in gross receipts. In order to receive the credit, the business must make a reservation through the state’s online system between December 1 and January 15. Credits are first come, first serve, so if your business meets the criteria, you should act quickly.
Get details, information to decide if you qualify, and a link to reserve credits at the CA.gov website:
https://cdtfa.ca.gov/taxes-and-fees/SB1447-tax-credit.htm
CALIFORNIA WANTS TO GRANT RELIEF TO UNDERSERVED MICRO & SMALL BUSINESSES
Grants of up to $25,000 will be available to underserved micro and small businesses. While the program is being created, interested businesses are encouraged to sign up for updates:
https://business.ca.gov/osba-signup/
CALIFORNIA SEEKS TO PROVIDE MORE RELIEF
A variety of recently added state relief measures, including extensions for sales tax payments, are highlighted in a recent news release from the state. The news release also discusses the Small Business Relief Grants and the hiring credit:
TAX COMPLICATIONS WHEN REMOTE WORK MOVES OUT OF STATE OR COUNTRY
For many, the switch to working from home opened up the opportunity to live, at least temporarily, in a new location. Unfortunately, when employees set up even a temporary base in a new state or country, the change can create new tax filing obligations for either or both the employee or employer. The rules vary substantially state by state, as well as by dollars or industry. Employers need to know who is working where and for how long in order to make informed decisions.
SOME LOSSES CAN NOW BE CARRIED BACK FOR REFUNDS
2020 law changes allow net operating losses created in 2018, 2019 or 2020 to be carried back for 5 years. If the combined business activities on your return generated a net operating loss in 2018 or 2019 and you paid tax in any of the five previous years, you may be able to use a carryback return to receive a refund.
ENDING SOON: USE YOUR RETIREMENT ACCOUNT TO EASE CASH FLOW STRAIN
If you have experienced specifically defined coronavirus hardships, you have until December 31 to take taxable withdraws of up to $100,000 from your IRA or retirement account without incurring a penalty. You will still be taxed on the income, but can divide the income (and, thus, the tax) among 3 years. You will also have 3 years to change your mind, recontribute the funds, and file amended returns to get back the tax you paid.
If you have experienced specifically defined coronavirus hardships, another option might be to borrow from your non-IRA retirement account. The maximum amount is increased from $50,000 to $100,000 – but only until December 31. In addition, loan repayments may be delayed for up to one year.
IRS FAQs (including definition of coronavirus related hardships):
NOTE: If your retirement account holds stock in your employer’s corporation, there may be additional planning opportunities available.
ENDING SOON: REQUIRED MINIMUM DISTRIBUTION (RMD) SUSPENSION
Retirees were not required to take out required minimum distributions (RMDs) from their retirement plans in 2020. This suspension is currently scheduled to end December 31, 2020. Taxpayers should be prepared to resume making RMDs from their retirement plans in 2021.
LOW INCOME YEARS PROVIDE A RETIREMENT PLANNING OPPORTUNITY
If your income this year was extremely low, it may be a good opportunity to convert retirement funds into ROTH plans. You would pick up the balance as taxable income this year so that future retirement draws will be tax free.
CHARITABLE DONATIONS MADE IN 2020 TAX YEARS HAVE INCREASED BENEFITS
If you do not itemize deductions, you will still be able to deduct up to $300 of charitable donations on your 2020 tax return.
If you do itemize deductions, the amount of charitable cash donations you can deduct on your 2020 return will generally not be limited to a percentage of your adjusted gross income.
For corporations, the limitation increase is to 25% of taxable income.
IRS News Release on the enhanced donation benefits:
https://www.irs.gov/newsroom/how-the-cares-act-changes-deducting-charitable-contributions
Taxpayers aged 70 ½ or older also have the option of making charitable donations directly from their IRA accounts and reducing the amount of taxable distribution. NOTE, however, that the donations will NOT show on the retirement plan distribution reporting form (1099-R). You will have to tell us about the donations so we can properly claim the benefit.
CALIFORNIA VOTERS PASS PROPOSITION 19
Effective April 1, 2021, it will be easier for seniors and disaster victims to transfer their property tax base to a replacement property. Effective February 16, 2021, it will be more difficult for heirs to keep the property tax base of property they have inherited or have received from parents or grandparents.
A summary of the changes is available on the Board of Equalization website:
https://www.boe.ca.gov/prop19/
CALIFORNIA VOTERS PASS PROPOSITION 22
Proposition 22 impacts a narrow base of businesses and the labor they use, classifying the workers as independent contractors instead of as employees under California law. The language of the law is specific to app-based drivers for rideshare and delivery network companies such as Uber, Lyft, and Door Dash. The passage of the proposition does not change the status of workers in other businesses, which are still subject to AB 5’s expansion of who must be treated as an employee.
A copy of the new law is available at the CA.gov website:
https://vig.cdn.sos.ca.gov/2020/general/pdf/topl-prop22.pdf
THE PRICE OF FORGIVENESS
While congress intended that no taxable income would be created when PPP loans were forgiven, a pre-existing code section disallows the expenses used to qualify for the loan forgiveness. The net effect is that businesses can expect their taxable income to go up by the amount of their loan forgiveness. Year-end planning and estimated tax payments should be adjusted accordingly.
While it remains possible congress will cure this defect, no such action has been taken to date.
The rules work a little differently for schedule C owners and partners whose loans were based on their allocated share of profits (for partners, K-1 lines 1-3 but not line 4). Since those profits are not deducted by the business, there is no expense to adjust.
ASKING FOR FORGIVENESS
Lenders are in charge of processing and making decisions with respect to PPP loan forgiveness applications. Be sure to check your lender’s website and your loan documents for information on how to get your forgiveness application started. Be prepared to provide extensive documentation to back up the qualified expenses you claim.
- Your application can be submitted any time after the end of your 8 or 24 week covered period.
- To be timely, your application must be submitted within ten months from the end of your 8 or 24 week covered period.
FAQs released by the Treasury Department:
https://home.treasury.gov/system/files/136/PPP–Loan-Forgiveness-FAQs.pdf
Workbooks are available to help you gather and organize your data
The AICPA, CPA.com, and Biz2Credit teamed up to create an on-line workbook tool:
https://www.pppforgivenesstool.com/
Two east coast regional CPA firms teamed up to create an excel workbook that is available to the public:
https://www.cpabr.com/covid_19_news/ppp-loan-forgiveness-workbook/
Forgiveness application forms are available from the SBA (3 Versions)
While your lender may have their own variation of the form(s) or require on-line submission, reviewing the SBA forms will help you prepare for the process.
Form 3508S (PPP loans of $50,000 or less)
Form 3508S Instructions (including who can use this version)
Form 3508EZ (Businesses with no salary or staff reductions)
Form 3508EZ Instructions (including who can use this version)
Form 3508 (full version)
Form 3508 Instructions
LOOKING FORWARD
While the hope is that a new relief package will become available, and rumors abound about potential tax law changes, the reality is that law change proposals undergo numerous negotiations, revisions, and approval steps before becoming law. When it comes to taxes, the best prediction anyone can make is that yes, you will have to pay them.
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DISCLAIMER
While we hope the contents of these alerts are helpful to our clients, these alerts are not intended to be advice upon which you should rely. Tax advice contained in these alerts is not intended to be used for, and cannot be used for, the purpose of avoiding penalties under the US federal tax laws. Inclusion of topics outside the scope of our normal service areas is intended to serve solely as a general starting point and should not replace consultation with experts in the related fields.