The 2020 Coronavirus Aid Relief and Economic Security (CARES) Act

Here’s a highlight of what we perceived as important based on the calls we’ve been getting. 

We have posted the link to the SBA Economic Injury Disaster Loan and attached the application for Payday Protection Program on our resource page.

Coronavirus Covid-19 graphic
  • Recovery Rebates for Individuals – CARES provides direct rebates of up to $1,200 for each qualified adult ($2,400 for married couples) and $500 per child. The full rebate amount is available if you have income at or below $75,000 ($150,000 for married couples), phases out as income increases and is capped with income above $99,000 ($198,000 for married couples). The money should be directly deposited into your account by late April.
  • Pandemic Unemployment Insurance – CARES expands existing state-level unemployment insurance benefits for individuals by the Corona economic downturn. It adds $600 per week to existing state-level benefits through the end of July. For those in need, CARES provides an extra 13 weeks of benefits beyond what states usually permit. Pandemic Unemployment Assistance will even cover many who were typically excluded from a state’s program like independent contractors, free lancers, self-employed individuals, “gig” workers (i.e. Lyft or Uber drivers) and even those laid off from religious institutions. It will not be available to those who are compensated for working remotely or are receiving paid leave.
  • Retirement Plans – CARES waives the normally imposed 10% penalty for premature withdrawals from retirement accounts up to $100,000 and permits 3 years for repayment. If not repaid, income is spread over 3 years. The limit of $50,000 for loans from qualified loans is increased to $100,000. Required Minimum Distributions are suspended for 2020.
  • Student Loans – CARES defers payments on federal student loans through September 30, 2020. Employer payments on employee student loans is a tax-free fringe benefit for 2020 (not to exceed $5,250 decreased by other educational assistance programs).
  • Net Operating Loss Changes – The tax act passed at the end of 2017 eliminated a taxpayer’s ability to carry back an NOL, only to be carried forward (indefinitely) and, even then, limited to 80% of income. For tax years beginning before 1/1/2021, the CARES Act will now allow net operating losses to be carried BACK to offset 100% of income for the prior 5 years (i.e. 2013 thru 2017). YOU SHOULD CONSIDER HAVING US FILE AN AMENDED RETURN FOR BACK TO 2013 TO CLAIM AND RECEIVE A POSSIBLE TAX REFUND. The Act also allows NOLs stemming from tax years beginning after 12/31/2020 to offset 100% of income going forward rather than 80% limitation.
  • Employee Retention Credit – CARES provides employers subject to disruption due to COVID-19 by helping to continue paying employees. Any size employer may be eligible for a 50% refundable tax credit of up to $10,000 of wages plus health insurance paid per eligible employee. Qualified employers will access the funds via a payroll tax credit. The enterprise must have been disrupted by COVID-19 enough to effectively cause a loss of 50% of revenue from the same quarter of the prior year. The retention credit ends when revenue increases to at least 80% of what the business earned in a comparable quarter of the prior year. We found an answer to one question posed – employers are NOT eligible for the credit if they receive a small business loan pursuant to the CARES Act.
  • Payroll Tax Payments – CARES permits employers of any size, even sole proprietors, to delay payment of their 2020 payroll taxes until 2021 and 2022. 50% of the 2020 payments will be due in 2021, and the balance will be due in 2022. Keep in mind, FICA taxes are imposed on both employers and employees’ wages at a rate of 6.2% for the Social Security tax and 1.45% for the Medicare Tax. Self-employed individuals pay a corresponding self-employment tax effectively twice that amount. The CARES Act allows an employer to defer the employer portion of the social security tax.
  • Increased Incentives for Charitable Contributions – The CARES Act attempts to get funds to charitable organizations quickly by allowing both individuals and businesses to claim increased deductions for all cash contributions. Since we’ve so many people now taking the standard deduction, the Act permits an “above the line” deduction of up to $300 during 2020. Limitations for 2020 are relaxed so that individuals can take an itemized deduction for cash contributions of up to 100% of their gross income while corporations can deduct up to 25% of its taxable income. We understand donor advised funds or private foundations do not qualify for these laxed limitations for 2020. Perhaps limited applicability but a pretty neat item for our restaurant/food related clients is that the Act increases the allowable deduction for contribution of food inventory by business made during 2020.
  • Paycheck Protection Program – CARES enable employers (including self-employed individuals) with less than 500 employees to participate in an 8-week loan program for up to 250% of the monthly payroll brought about by the economic uncertainty as long as they maintain their payroll during this COVID-19 emergency. These loans will be made available through Commercial Banks that are authorized SBA lenders on April 3, 2020. No personal guaranties or collateral are required on these non-recourse loans. As long as the employer maintains payroll, there is forgiveness available for the portion of the loans used for covered payroll costs, interest (not principal) on mortgage loans, utilities and interest on any other debt obligations incurred before the covered period. The maximum payroll is $10,000,000 while the loan amount is limited to $100,000 annualized per employee, including wages, vacation, parental, medical, family or sick leave, retirement benefits, tips, health care benefits, etc. Seasonal businesses should calculate the 2.5 months’ payroll using the 12-week period beginning Feb. 15, 2019. Alternatively, the business may choose the period beginning March 1, 2019, and ending June 30, 2019. Seasonal businesses will multiply this average by 2.5. Employers cannot cut employees’ pay by more than 25%. In order to bring back on payroll employees that may have already been furloughed, this loan program is retroactive back to February 15, 2020. The program removes the “Credit Elsewhere Test,” which usually required an extensive analysis to determine whether the borrower had the ability to obtain some or all of the requested loan funds from alternative sources, without causing undue hardship.  That test could also have required them to utilize those alternative sources first before trying to obtain the SBA loan.
  • While the CARES Act includes loan forgiveness, please take note of how much of any such loan will be eligible for forgiveness.  The law refers to the “covered period” meaning the 8-week period starting at the date of the origination of the loan. Loan recipients are eligible for a certain amount of forgiveness but the forgiveness is reduced if the employer reduces its workforce during the 8-week covered period when compared to other periods in 2019 and 2020, or reduces employee salaries by more than 25% during the covered period. These reductions can be avoided when an employer rehires employees and increases pay during the given time period.
  • The loans have a maximum maturity of 10 years with interest rates for any portion of the loan that is not forgiven not to exceed 4%. Lenders are required to give borrowers a complete payment deferral on all principal, interest and fees of not less than 6 months and not more than 1 year on all loans under CARES.
  • Economic Injury Disaster Loan –  Small business owners in all U.S. states, Washington D.C., and territories are eligible to apply for an Economic Injury Disaster Loan advance of up to $10,000. This advance will provide economic relief to businesses that are currently experiencing a temporary loss of revenue. Funds will be made available following a successful application. This loan advance will not have to be repaid.  A link to apply for the loan online is on our website resource page.
  • Please note that any business that receives an Economic Injury Disaster Loan under Section 7(b) of the Small Business Act must reduce the amount received from CARES’ Payroll Protection Program loan.

If you have any questions please call Gregory J. Spadea at 610-521-0604.

Understanding The Tax Rules Relating to Personal Use of Vacation Homes

Understanding the Tax Rules Relating to Personal Use of Vacation Homes

There are three basic rules for treating expenses and income in connection with vacation homes. It all depends on the number of days the home is rented versus the days that it is used for personal purposes.

1) When the personal use of the vacation home exceeds the greater of 14 days or 10% of the days it is actually rented all the expenses are only deductible to the extent of rental income. For example repairs, utilities, insurance, depreciation, and so on are deductible only to the extent of gross income less mortgage interest and property taxes attributable to rental use. However, you cannot claim a loss on the rental, while net income in excess of expenses is taxable.

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2) When the vacation home is rented out for less than 15 days during the year, there are no tax ramifications. In other words, you don’t recognize rental income or deduct rental expenses.

For example, say you rent a beach house in Ocean City. You and your family use the beach house most of the summer. Then you rent out the place the two weeks after Labor Day. In effect, all of the rental income is tax-free.

Note: You still can claim those itemized deductions you would be entitled to if you did not receive any rental income. This includes mortgage interest limited to all mortgages up to $1,000,000, used to buy, construct, or improve your first home and second home for tax years prior to 2018. Beginning in 2018, this mortgage limit is lowered to $750,000. In addition, for tax years beginning in 2018 there is a $10,000 deduction limit for state and local income taxes and real property taxes.

3) When your personal use of the home does not exceed the greater of 14 days or 10% of the days the vacation home is rented out, the above limits do not apply. All expenses attributable to the rental are deductible – even if you show a loss. However the amount of the loss may be limited by the passive loss rules.

What constitutes a “personal use day” for these purposes? Any day that the home is used by an owner of the family (or family member), someone who pays less than a fair market rental or someone who uses the home under a barter or exchange agreement-even if a fair rental is paid. The amount of time spent at the vacation home doesn’t matter. For instance, if you use the home for just one hour, the whole day is considered a personal use day.

However, a day will not count as a personal day if you spend the time cleaning up or fixing up the place. And that’s true if even if the rest of the family comes along just for the ride.

How do the passive loss rules affect things? In general, losses from so-called passive activities can only be used to offset income from passive activities. The rental activity of your vacation home, by its very nature, will be considered a passive activity.

But there’s still a way to get around the rules. If you “actively participate” in the rental activity, you can use up to $25,000 of loss to offset non-passive income, such as wages and portfolio income. The $25,000 offset is available in full if your adjusted gross income (AGI) is below $100,000. It is phased out until it completely disappears for an AGI above $150,000.

What constitutes active participation? The requirement can be satisfied by regular, continuous and substantial involvement in the rental activity. Examples: participation in management decisions such as approving new tenants, scheduling or supervising repairs, deciding on rental terms, etc. In order to qualify under this exception, you must own at least a 10% interest in the property. Please refer to my blog Understanding What A Real Estate Professional is Under the Passive Activity Loss Rules.

Remember the passive activity loss rules do not come into play at all if your personal use exceeds the 14 days or 10% of the days rented because you cannot deduct the rental loss. If you have any questions contact Gregory J. Spadea at 610-521-0604.

What Records You need to Deduct Business Meals, Travel and Lodging on Your Federal Tax Return

Many of my clients ask me what documentary evidence is adequate to deduct travel and lodging.  I tell them to get a receipt or credit card statement that shows the amount, date, place, and essential character (business purpose) of the expense. I recommend they use the same credit card or business debit card to pay all the business expenses to keep things simple and organized.  I also recommend clients record their travel in their day timer or google or outlook calendar that can be cross referenced with the travel or lodging receipts.

Adequate evidence for Lodging requires a hotel receipt if it has all the following information:

  • The name and location of the hotel.
  • The dates you stayed there.
  • Separate amounts for charges such as lodging, meals, and telephone calls.

Adequate evidence for Travel will include the airline, train or bus ticket that has all the following information:

  • The name of the passenger.
  • The name of your destination.
  • The date and cost of the ticket.

Adequate evidence for Meals requires a restaurant receipt if it has all of the following information:

  • The name and location of the restaurant.
  • The number of people served.
  • The date and amount of the expense.

There is an exception when you do not needdocumentary evidence if any of the following conditions apply.

  • You have meals or lodging expenses while traveling away from home for which you report to your employer under an accountable plan, and you use a per diem allowance method that includes meals and lodging. 
  • Your expense, other than lodging, is less than $75 such as for cab fare or breakfast.

Keep in mind if your spouse is an employee of your company, you can deduct travel and meals for both you and your spouse as long as you discuss business.  

 If you need help setting up an accountable plan or have any tax questions call Gregory J. Spadea at 610-521-0604.  The Law Offices of Spadea & Associates, LLC is located in Ridley Park, PA and prepares tax returns year-round.  

Understanding What Car & Truck Expenses are Deductible For Business

I have a lot of business owners and self-employed clients who ask what records to keep in order to deduct their car or truck expenses incurred in their business. I first remind them to keep track of the total miles they drive during the year as well as the total miles driven for business. The reason is if the business owner uses their car for both business and personal purposes, the expenses must be split. Therefore, they will need to know the total miles and total business miles to calculate deduction based on the portion of mileage used for business.
There are two methods for figuring car expenses:

Using actual expenses which include:
o Depreciation or Lease payments
o Gas and oil
o Tires
o Repairs and tune-ups
o Insurance
o Registration fees

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Using the standard mileage rate. Under this method business owners will keep track of the business miles driven during the year and multiply that total by the current standard mileage rate in effect. However, the business owner must choose to use this method in the first year the car is available for use in their business. In addition, business owners who want to use the standard mileage rate for a car they lease must use it for the entire lease period. The standard mileage rate for 2019, is 58 cents.

No matter which option you select you must keep adequate records. You should keep a diary, travel log or trip sheets documenting where you went, who you met and the mileage and date. You should also keep documentary evidence such as gas receipts, credit card statements and cancelled checks or repair bills to support your expenses. I always recommend paying all the car and truck expenses with the same credit or debit card.

If you have any questions about deducting car expenses call Gregory J. Spadea at 610-521-0604. The Law Office of Spadea & Associates provides estate and tax planning services to business and individual clients including tax return preparation services year-round.

When Can I Deduct Alimony on my Federal Tax Return Ordered Prior to December 31, 2018

When divorce occurs, one ex-spouse is often obligated to make continuing payments to the other spouse. However, for the payments to be deducted by the payer, they must meet the tax-law definition of alimony. For any particular payment to qualify as deductible alimony for federal income tax purposes and meet the tax law definition of alimony, all the following requirements must be met:

  1. The payment must be made pursuant to a written divorce decree or separation agreement such as a temporary support order. Note that payments made in advance of signing a written divorce or separation agreement or before the effective date of a court order or decree cannot be deductible alimony. Such payments are considered voluntary and are therefore nondeductible. The same is true for payment of amounts in excess of what is required under a written divorce decree or separation agreement.
  2. The payment must be to or on behalf of a spouse or ex-spouse. Therefore, payments to third parties, such as attorneys and mortgage companies, are okay if made on behalf of a spouse or ex-spouse and pursuant to a divorce decree or separation agreement.
  3. The divorce decree or separation agreement must state the payments are alimony.
  4. After divorce or legal separation (meaning the couple is considered divorced for federal income tax purposes), the ex-spouses cannot live in the same household or file a joint return for the year they separated or thereafter.
  5. The payment must be made in cash or cash equivalent such as check or money order.
  6. The payment cannot be fixed or deemed child support in the divorce decree.
    Fixed child support simply refers to amounts designated as such in the divorce or separation agreement, so it’s easy to identify. Payments are considered to be deemed child support if they are terminated or reduced by any of the following so-called contingencies relating to a child: a. Attaining the age 18, or the local age of majority.
    b. Death.
    c. Marriage.
    d. Completion of schooling.
    e. Leaving the ex-spouse’s household.
    f. Attaining a specified income level.
  7. The payer’s return is required to include the recipient’s social security number.
  8. The obligation to make payments (other than payment of delinquent amounts) must cease if the recipient party dies. If the divorce decree is unclear about whether or not payments must continue, state law controls. If under state law, the payer must continue to make payments after the recipient’s death, the payments cannot be alimony. Therefore, to avoid problems, the divorce decree should always explicitly stipulate whether a payment obligation continues to exist after the death of the recipient party. Failing this test is probably the most common cause for lost alimony deductions.
  9. There is also an IRS rule that states if alimony payments decrease by more than
    $15,000 per year between years 1 and 2, or years 2 and 3, then part of the payments will not qualify for a tax deduction to the payor (and hence will not be taxable to the payee.) In other words, if alimony payments total more than $15,000 per year then they must last more than one year and cannot be reduced too quickly. The reason for this is because the IRS sees this as a property settlement, not alimony. Because of this rule replacing all monthly payments with a lump sum “alimony” payment that is paid all in one year will often cause a trigger of this recapture rule, since alimony will go down to $0 in year

Keep in mind the Tax Cuts Jobs Act repealed the deduction for alimony paid and the corresponding inclusion of alimony in income by the recipient. The provision is effective for any divorce or separation agreement executed after December 31, 2018, or for any divorce or separation agreement executed on or before December 31, 2018, and modified after that date, if the modification expressly provides that the amendments made by this provision apply to such modification. Thus, alimony paid under a separation agreement entered into prior to the effective date is generally grandfathered.

It is very important to consult a tax attorney like Gregory J. Spadea before signing the marital settlement agreement. You can reach him at the Law Offices of Spadea & Associates, LLC in Ridley Park at 610-521-0604.

Understanding the Accumulated Earnings Tax Before Switching To a C Corporation in 2019

The June 2018 Penn Wharton Budget Model survey indicated that over 235,000 business owners are projected to convert their pass-through businesses to C corporations.  Their primary motivation is to take advantage of the new 21% corporate tax rate under the 2018 Tax Cuts and Jobs Act.  This is particularly important for business owners who can’t fully benefit from the new Qualified Business Income deduction. In fact, the biggest switchers are owners of specified service businesses whose taxable income exceeds $415,000 for married filing jointly filers.

Although the new 21% rate is tempting, C corporations are subject to double taxation. Corporate income is taxed once at the entity level and again when it is distributed to shareholders as dividends. This can be avoided if the corporation retains all of it’s profits to finance growth.  However, this opens the door to the Accumulated Earnings Tax (AET) if profits accumulate beyond the reasonable needs of the business.

The AET is a penalty tax imposed on corporations for unreasonably accumulating earnings. The tax rate on accumulated earnings is 20%, the maximum rate at which they would be taxed if distributed.  The tax is in addition to the regular corporate income tax and is assessed by the IRS, typically during an IRS audit. There is no IRS form for reporting the AET. If imposed, the earnings are subject to triple taxation when eventually distributed to the shareholders. Once at the entity level, then when the AET is imposed and finally when the accumulated earnings are distributed to shareholders.

The AET applies when there is intent to avoid income tax at the shareholder level by accumulating earnings in the corporation. The AET applies even when tax avoidance is not the main reason for the accumulation of income but is only one of several reasons.  Keep in mind the IRS allows for an accumulated earnings credit of $250.000 or $150,000 if you are taxed as a Personal Service Corporation. Therefore, once your retained earnings exceed those limits you need to be concerned about the AET and document why your corporation needs accumulated earnings exceeding that amount.

The fact that a corporation is a holding or investment company is automatically considered evidence of the existence of a tax avoidance purpose unless the corporation can establish it wasn’t formed to avoid tax. A holding company is a corporation in which there is practically no activity other than the holding of investment property. An investment company is one that buys and sells stock, securities, real estate, and other investment property, in addition to holding investment property. If the corporation is not a holding or investment company, a tax avoidance motive is considered present if the corporation has accumulated earnings and profits in excess of the reasonable needs of the business unless it can prove otherwise by a preponderance of the evidence. The IRS regulations identify the following situations that may indicate accumulations beyond the reasonable needs of the business exist:

  1. Loans to shareholders or related parties.
  2. Payments by the corporation that personally benefit the shareholders.
  3. Investments in assets having no reasonable relationship to the corporation’s business.
  4. A weak dividend history.
  5. Retention of earnings to provide against unrealistic hazards.
  6. Working capital levels that appear high in relation to the needs of the business.

7. Salaries paid to shareholder/employees that are either extremely high (avoiding corporate  

     income tax) or extremely low (avoiding shareholder income and employment tax).

The AET is not assessed if accumulated earnings are reasonable in light of business needs. This subjective test can be satisfied by a variety of business reasons including retaining earnings to satisfy the reasonably anticipated future needs of the business.  The IRS regulations provide some broad criteria that can be used to justify that earnings are being accumulated for reasonable business needs. These include:

  1. Providing for a business expansion or plant replacement.
  2. Acquiring a business enterprise through purchasing stock or assets.
  3. Facilitating the retirement of company debt created in connection with its trade or business.
  4. Providing necessary working capital for the business.
  5. Providing for investments in suppliers, or loans to customers or suppliers to maintain the business of the corporation.

6. Providing for contingencies such as the payment of reasonably anticipated losses such as an

    actual or potential lawsuit, loss of a major customer, or self-insurance.

The accumulated amount does not have to be used immediately or within a short period after the close of the tax year, so long as it will be used within a reasonable time depending on all the facts and circumstances relating to the future needs of the business.   

To avoid the AET which is 20% of “accumulated taxable income”, a corporation must be able to demonstrate to the IRS that its accumulations are necessary to meet its business needs. The corporation must have sufficient facts and documentation to substantiate that the plans for present and future business needs require additional funds. A determination of whether the accumulation of earnings and profits is a reasonable business need is based on the facts and circumstances of each case. 

The dramatic reduction in the corporate tax rate from 35% to 21% has sparked renewed interest in the AET. Although it remains to be seen whether flow-through entities will rush to covert to C corporations, those that do will need to pay attention to this tax.  Conversion may be the way to go if owners have no need for distributions and the corporation avoids the AET by proving its accumulations are for the reasonable needs of the business.

If you have any questions, please call Gregory J. Spadea at 610-521-0604.

Seven Year-End Tax Tips for 2018

Seven Year-End Tax Tips for 2018

 

Here are 7 tax moves for you to consider before the end of the year.

  1. Defer income to next year. Consider opportunities to defer income to 2019, particularly if you think you may be in a lower tax bracket then. For example, you may be able to defer a year-end bonus or delay the collection of business debts, rents, and payments for services. Doing so may enable you to postpone payment of tax on the income until next year.

 

  1. Accelerate deductions and take capital losses. You might also look for opportunities to accelerate deductions into the current tax year. If you itemize deductions, paying  medical expenses, mortgage interest, and charitable deductions before the end of the year, instead of paying them in early 2019, could make a difference on your 2018 return.

 

  1. Harvest Capital Gains and Losses. Any appreciated stocks that you have held for a year and a day you can lock in the lower capital gains rate by selling at year end.   You should also consider selling any stocks that can generate capital losses which you can deduct up to $3,000 after netting all your capital losses against all your capital gains.  Keep in mind after you sell a stock you can buy it back after 31 days to avoid the wash sale rules.

 

  1. Maximize retirement contributions. Deductible contributions to a traditional IRA, SIMPLE IRA or SEP IRA or pre-tax contributions to an employer-sponsored retirement plan such as a 401(k), can reduce your 2018 taxable income. If you haven’t already contributed up to the maximum amount allowed, consider doing so by year-end.

 

  1. Take any required minimum distributions. Once you reach age 70½, you generally must

start taking required minimum distributions (RMDs) from traditional IRAs and employer-sponsored retirement plans. However an exception may apply if you’re still working for the employer sponsoring the plan). Take any distributions by the date required — the end of

the year for most individuals. The penalty for failing to do so is substantial: 50% of any

amount that you failed to distribute as required.

 

  1. Beware of the 3.8% net investment income tax. This additional tax may apply to some or all of your net investment income if your modified adjusted gross income (AGI) exceeds $200,000 ($250,000 if married filing jointly, $125,000 if married filing separately, $200,000 if head of household).

 

  1. Bump up withholding if you expect to owe tax. If it looks as though you’re going to owe federal income tax for the year, especially if you think you may be subject to an estimated tax penalty, consider asking your employer to increase your withholding for the remainder

of the year to cover the shortfall.  The biggest advantage in doing so is that withholding is

considered as having been paid evenly through the year instead of when the dollars are actually

taken from your paycheck. This strategy can also be used to make up for low or missing

quarterly estimated tax payments. With all the recent tax changes, it may be especially

important to review your withholding for 2018.

 

If you have any questions or need any help preparing your taxes please call Gregory J. Spadea at 610-521-0604.  The Law Offices of Spadea & Associates, LLC prepares tax returns and advises business and individual clients on estate and tax planning year round. 

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