Here are some of the key tax-related deadlines affecting businesses and other employers during the fourth quarter of 2020. Keep in mind that this list isn’t all-inclusive, so there may be additional deadlines that apply to you. Contact us to ensure you’re meeting all applicable deadlines and to learn more about the filing requirements.

Thursday, October 15

  • If a calendar-year C corporation that filed an automatic six-month extension:
    • File a 2019 income tax return (Form 1120) and pay any tax, interest and penalties due.
    • Make contributions for 2019 to certain employer-sponsored retirement plans.

Monday, November 2

  • Report income tax withholding and FICA taxes for third quarter 2020 (Form 941) and pay any tax due. (See exception below under “November 10.”)

Tuesday, November 10

  • Report income tax withholding and FICA taxes for third quarter 2020 (Form 941), if you deposited on time (and in full) all of the associated taxes due.

Tuesday, December 15

  • If a calendar-year C corporation, pay the fourth installment of 2020 estimated income taxes.

Thursday, December 31

  • Establish a retirement plan for 2020 (generally other than a SIMPLE, a Safe-Harbor 401(k) or a SEP).

© 2020 Covenant CPA

Prioritize customer service now more than ever

You’d be hard-pressed to find a business that doesn’t value its customers, but tough times put many things into perspective. As companies have adjusted to operating during the COVID-19 pandemic and the resulting economic fallout, prioritizing customer service has become more important than ever.

Without a strong base of loyal buyers, and a concerted effort to win over more market share, your business could very well see diminished profit margins and an escalated risk of being surpassed by competitors. Here are some foundational ways to strengthen customer service during these difficult and uncertain times.

Get management involved

As is the case for many things in business, success starts at the top. Encourage your management team and fellow owners (if any) to regularly interact with customers. Doing so cements customer relationships and communicates to employees that cultivating these contacts is part of your company culture and a foundation of its profitability.

Moving down the organizational chart, cultivate customer-service heroes. Post articles about the latest customer service achievements on your internal website or distribute companywide emails celebrating successes. Champion these heroes in meetings. Public praise turns ordinary employees into stars and encourages future service excellence.

Just be sure to empower employees to make timely decisions. Don’t just talk about catering to customers unless your staff can really take the initiative to act accordingly.

Systemize your responsiveness

Like everyone in today’s data-driven world, customers want immediate information. So, strive to provide instant or at least timely feedback to customers with a highly visible, technologically advanced response system. This will let customers know that their input matters and you’ll reward them for speaking up.

The specifics of this system will depend on the size, shape and specialty of the business itself. It should encompass the right combination of instant, electronic responses to customer inquiries along with phone calls and, where appropriate, face-to-face (or direct virtual) interactions that reinforce how much you value their business.

Continue to adjust

By now, you’ve likely implemented a few adjustments to serving your customers during the COVID-19 pandemic. Many businesses have done so, with common measures including:

  • Explaining what you’re doing to cope with the crisis,
  • Being more flexible with payment plans and deadlines, and
  • Exercising greater patience and empathy.

As the months go on, don’t rest on your laurels. Continually reassess your approach to customer service and make adjustments that suit the changing circumstances of not only the pandemic, but also your industry and local economy. Seize opportunities to help customers and watch out for mistakes that could hurt your company’s reputation and revenue.

Don’t give up

This year has put everyone under unforeseen amounts of stress and, in turn, providing world-class customer services has become even more difficult. Keep at it — your extra efforts now could lay the groundwork for a much stronger customer base in the future. Our firm can help you assess your customer service and calculate its impact on revenue and profitability.

© 2020 Covenant CPA

5 key points about bonus depreciation

You’re probably aware of the 100% bonus depreciation tax break that’s available for a wide range of qualifying property. Here are five important points to be aware of when it comes to this powerful tax-saving tool.

1. Bonus depreciation is scheduled to phase out

Under current law, 100% bonus depreciation will be phased out in steps for property placed in service in calendar years 2023 through 2027. Thus, an 80% rate will apply to property placed in service in 2023, 60% in 2024, 40% in 2025, and 20% in 2026, and a 0% rate will apply in 2027 and later years.

For certain aircraft (generally, company planes) and for the pre-January 1, 2027 costs of certain property with a long production period, the phaseout is scheduled to take place a year later, from 2024 to 2028.

Of course, Congress could pass legislation to extend or revise the above rules.

2. Bonus depreciation is available for new and most used property

In the past, used property didn’t qualify. It currently qualifies unless: 

  • The taxpayer previously used the property and
  • The property was acquired in certain forbidden transactions (generally acquisitions that are tax free or from a related person or entity).

3. Taxpayers should sometimes make the election to turn down bonus depreciation 

Taxpayers can elect to reject bonus depreciation for one or more classes of property. The election out may be useful for sole proprietorships, and business entities taxed under the rules for partnerships and S corporations, that want to prevent “wasting” depreciation deductions by applying them against lower-bracket income in the year property was placed in service — instead of against anticipated higher bracket income in later years.

Note that business entities taxed as “regular” corporations (in other words, non-S corporations) are taxed at a flat rate.

4. Bonus depreciation is available for certain building improvements

Before the 2017 Tax Cuts and Jobs Act (TCJA), bonus depreciation was available for two types of real property: 

  • Land improvements other than buildings, for example fencing and parking lots, and
  • “Qualified improvement property,” a broad category of internal improvements made to non-residential buildings after the buildings are placed in service.

The TCJA inadvertently eliminated bonus depreciation for qualified improvement property.

However, the 2020 Coronavirus Aid, Relief and Economic Security Act (CARES Act) made a retroactive technical correction to the TCJA. The correction makes qualified improvement property placed in service after December 31, 2017, eligible for bonus depreciation.

5. 100% bonus depreciation has reduced the importance of “Section 179 expensing”

If you own a smaller business, you&rsqu;ve likely benefited from Sec. 179 expensing. This is an elective benefit that — subject to dollar limits — allows an immediate deduction of the cost of equipment, machinery, off-the-shelf computer software and some building improvements. Sec. 179 has been enhanced by the TCJA, but the availability of 100% bonus depreciation is economically equivalent and has greatly reduced the cases in which Sec. 179 expensing is useful.

We can help

The above discussion touches only on some major aspects of bonus depreciation. This is a complex area with tax implications for transactions other than simple asset acquisitions. Contact us if you have any questions about how to proceed in your situation.

© 2020 Covenant CPA

The Coronavirus Aid, Relief and Economic Security (CARES) Act made changes to excess business losses. This includes some changes that are retroactive and there may be opportunities for some businesses to file amended tax returns.

If you hold an interest in a business, or may do so in the future, here is more information about the changes.

Deferral of the excess business loss limits

The Tax Cuts and Jobs Act (TCJA) provided that net tax losses from active businesses in excess of an inflation-adjusted $500,000 for joint filers, or an inflation-adjusted $250,000 for other covered taxpayers, are to be treated as net operating loss (NOL) carryforwards in the following tax year. The covered taxpayers are individuals, estates and trusts that own businesses directly or as partners in a partnership or shareholders in an S corporation.

The $500,000 and $250,000 limits, which are adjusted for inflation for tax years beginning after calendar year 2018, were scheduled under the TCJA to apply to tax years beginning in calendar years 2018 through 2025. But the CARES Act has retroactively postponed the limits so that they now apply to tax years beginning in calendar years 2021 through 2025.

The postponement means that you may be able to amend:

  1. Any filed 2018 tax returns that reflected a disallowed excess business loss (to allow the loss in 2018) and
  2. Any filed 2019 tax returns that reflect a disallowed 2019 loss and/or a carryover of a disallowed 2018 loss (to allow the 2019 loss and/or eliminate the carryover).

Note that the excess business loss limits also don’t apply to tax years that begin in 2020. Thus, such a 2020 year can be a window to start a business with large up-front-deductible items (for example capital items that can be 100% deducted under bonus depreciation or other provisions) and be able to offset the resulting net losses from the business against investment income or income from employment (see below).

Changes to the excess business loss limits 

The CARES Act made several retroactive corrections to the excess business loss rules as they were originally stated in the 2017 TCJA.

Most importantly, the CARES Act clarified that deductions, gross income or gain attributable to employment aren’t taken into account in calculating an excess business loss. This means that excess business losses can’t shelter either net taxable investment income or net taxable employment income. Be aware of that if you’re planning a start-up that will begin to generate, or will still be generating, excess business losses in 2021.

Another change provides that an excess business loss is taken into account in determining any NOL carryover but isn’t automatically carried forward to the next year. And a generally beneficial change states that excess business losses don’t include any deduction under the tax code provisions involving the NOL deduction or the qualified business income deduction that effectively reduces income taxes on many businesses. 

And because capital losses of non-corporations can’t offset ordinary income under the NOL rules:

  • Capital loss deductions aren’t taken into account in computing the excess business loss and
  • The amount of capital gain taken into account in computing the loss can’t exceed the lesser of capital gain net income from a trade or business or capital gain net income.

Contact us with any questions you have about this or other tax matters.

© 2020 Covenant CPA

If your business was fortunate enough to get a Paycheck Protection Program (PPP) loan taken out in connection with the COVID-19 crisis, you should be aware of the potential tax implications.

PPP basics

The Coronavirus Aid, Relief and Economic Security (CARES) Act, which was enacted on March 27, 2020, is designed to provide financial assistance to Americans suffering during the COVID-19 pandemic. The CARES Act authorized up to $349 billion in forgivable loans to small businesses for job retention and certain other expenses through the PPP. In April, Congress authorized additional PPP funding and it’s possible more relief could be part of another stimulus law.

The PPP allows qualifying small businesses and other organizations to receive loans with an interest rate of 1%. PPP loan proceeds must be used by the business on certain eligible expenses. The PPP allows the interest and principal on the PPP loan to be entirely forgiven if the business spends the loan proceeds on these expense items within a designated period of time and uses a certain percentage of the PPP loan proceeds on payroll expenses.

An eligible recipient may have a PPP loan forgiven in an amount equal to the sum of the following costs incurred and payments made during the covered period:

  1. Payroll costs;
  2. Interest (not principal) payments on covered mortgage obligations (for mortgages in place before February 15, 2020);
  3. Payments for covered rent obligations (for leases that began before February 15, 2020); and
  4. Certain utility payments.

An eligible recipient seeking forgiveness of indebtedness on a covered loan must verify that the amount for which forgiveness is requested was used to retain employees, make interest payments on a covered mortgage, make payments on a covered lease or make eligible utility payments.

Cancellation of debt income

In general, the reduction or cancellation of non-PPP indebtedness results in cancellation of debt (COD) income to the debtor, which may affect a debtor’s tax bill. However, the forgiveness of PPP debt is excluded from gross income. Your tax attributes (net operating losses, credits, capital and passive activity loss carryovers, and basis) wouldn’t generally be reduced on account of this exclusion.

Expenses paid with loan proceeds

The IRS has stated that expenses paid with proceeds of PPP loans can’t be deducted, because the loans are forgiven without you having taxable COD income. Therefore, the proceeds are, in effect, tax-exempt income. Expenses allocable to tax-exempt income are nondeductible, because deducting the expenses would result in a double tax benefit.

However, the IRS’s position on this issue has been criticized and some members of Congress have argued that the denial of the deduction for these expenses is inconsistent with legislative intent. Congress may pass new legislation directing IRS to allow deductions for expenses paid with PPP loan proceeds.

PPP Audits

Be aware that leaders at the U.S. Treasury and the Small Business Administration recently announced that recipients of Paycheck Protection Program (PPP) loans of $2 million or more should expect an audit if they apply for loan forgiveness. This safe harbor will protect smaller borrowers from PPP audits based on good faith certifications. However, government leaders have stated that there may be audits of smaller PPP loans if they see possible misuse of funds.

Contact us with any further questions you might have on PPP loan forgiveness.

© 2020 Covenant CPA

Does your business receive large amounts of cash or cash equivalents? You may be required to submit forms to the IRS to report these transactions.

Filing requirements

Each person engaged in a trade or business who, in the course of operating, receives more than $10,000 in cash in one transaction, or in two or more related transactions, must file Form 8300. Any transactions conducted in a 24-hour period are considered related transactions. Transactions are also considered related even if they occur over a period of more than 24 hours if the recipient knows, or has reason to know, that each transaction is one of a series of connected transactions.

To complete a Form 8300, you will need personal information about the person making the cash payment, including a Social Security or taxpayer identification number.

You should keep a copy of each Form 8300 for five years from the date you file it, according to the IRS.

Reasons for the reporting

Although many cash transactions are legitimate, the IRS explains that “information reported on (Form 8300) can help stop those who evade taxes, profit from the drug trade, engage in terrorist financing and conduct other criminal activities. The government can often trace money from these illegal activities through the payments reported on Form 8300 and other cash reporting forms.”

What’s considered “cash”

For Form 8300 reporting, cash includes U.S. currency and coins, as well as foreign money. It also includes cash equivalents such as cashier’s checks (sometimes called bank checks), bank drafts, traveler’s checks and money orders.

Money orders and cashier’s checks under $10,000, when used in combination with other forms of cash for a single transaction that exceeds $10,000, are defined as cash for Form 8300 reporting purposes.

Note: Under a separate reporting requirement, banks and other financial institutions report cash purchases of cashier’s checks, treasurer’s checks and/or bank checks, bank drafts, traveler’s checks and money orders with a face value of more than $10,000 by filing currency transaction reports.

E-filing and batch filing

Businesses required to file reports of large cash transactions on Form 8300 should know that in addition to filing on paper, e-filing is an option. The form is due 15 days after a transaction and there’s no charge for the e-file option. Businesses that file electronically get an automatic acknowledgment of receipt when they file.

The IRS also reminds businesses that they can “batch file” their reports, which is especially helpful to those required to file many forms.

Setting up an account

To file Form 8300 electronically, a business must set up an account with FinCEN’s BSA E-Filing System. For more information, interested businesses can also call the BSA E-Filing Help Desk at 866-346-9478 (Monday through Friday from 8 am to 6 pm EST) or email them at BSAEFilingHelp@fincen.gov. Contact us with any questions or for assistance.

© 2020 Covenant CPA

When the COVID-19 crisis exploded in March, among the many concerns was the state of the nation’s supply chains. Business owners are no strangers to such worry. It’s long been known that, if too much of a company’s supply chain is concentrated (that is, dependent) on one thing, that business is in danger. The pandemic has only complicated matters.

To guard against this risk, you’ve got to maintain a constant awareness of the state of your supply chain and be prepared to adjust as necessary and feasible.

Products or services

The term “concentration” can be applied to both customers and suppliers. Generally, concentration risks become significant when a business relies on a customer or supplier for 10% or more of its revenue or materials, or on several customers or suppliers located in the same geographic region.

Concentration related to your specific products or services is something to keep a close eye on. If your company’s most profitable product or service line depends on a few key customers, you’re essentially at their mercy. If just one or two decide to make budget cuts or switch to a competitor, it could significantly lower your revenues.

Similarly, if a major supplier suddenly increases prices or becomes lax in quality control, your profit margin could narrow considerably. This is especially problematic if your number of alternative suppliers is limited.

To cope, do your research. Regularly look into what suppliers might best serve your business and whether new ones have emerged that might allow you to offset your dependence on one or two providers. Technology can be of great help in this effort — for example, monitor trusted news sources online, follow social media accounts of experts and use artificial intelligence to target the best deals.

Geography

A second type of concentration risk is geographic. When gauging it, assess whether many of your customers or suppliers are in one geographic region. Operating near supply chain partners offers advantages such as lower transportation costs and faster delivery. Conversely, overseas locales may enable you to cut labor and raw materials expenses.

But there are also risks associated with geographic centricity. Local weather conditions, tax rate hikes and regulatory changes can have a substantial impact. As we’ve unfortunately encountered this year, the severity of COVID-19 in different regions of the country is affecting the operational ability and capacity of suppliers in those areas.

These same threats apply when dealing with global partners, with the added complexity of greater physical distances and longer shipping times. Geopolitical uncertainty and exchange rate volatility may also negatively affect overseas suppliers.

Challenges and opportunities

Business owners — particularly those who run smaller companies — have always faced daunting challenges in maintaining strong supply chains. The pandemic has added a new and difficult dimension. Our firm can help you assess your supply chain and identify opportunities for cost-effective improvements.

© 2020 Covenant CPA

If you’re a partner in a business, you may have come across a situation that gave you pause. In a given year, you may be taxed on more partnership income than was distributed to you from the partnership in which you’re a partner.

Why is this? The answer lies in the way partnerships and partners are taxed. Unlike regular corporations, partnerships aren’t subject to income tax. Instead, each partner is taxed on the partnership’s earnings — whether or not they’re distributed. Similarly, if a partnership has a loss, the loss is passed through to the partners. (However, various rules may prevent a partner from currently using his share of a partnership’s loss to offset other income.)

Separate entity

While a partnership isn’t subject to income tax, it’s treated as a separate entity for purposes of determining its income, gains, losses, deductions and credits. This makes it possible to pass through to partners their share of these items.

A partnership must file an information return, which is IRS Form 1065. On Schedule K of Form 1065, the partnership separately identifies income, deductions, credits and other items. This is so that each partner can properly treat items that are subject to limits or other rules that could affect their correct treatment at the partner’s level. Examples of such items include capital gains and losses, interest expense on investment debts and charitable contributions. Each partner gets a Schedule K-1 showing his or her share of partnership items.

Basis and distribution rules ensure that partners aren’t taxed twice. A partner’s initial basis in his partnership interest (the determination of which varies depending on how the interest was acquired) is increased by his share of partnership taxable income. When that income is paid out to partners in cash, they aren’t taxed on the cash if they have sufficient basis. Instead, partners just reduce their basis by the amount of the distribution. If a cash distribution exceeds a partner’s basis, then the excess is taxed to the partner as a gain, which often is a capital gain.

Here’s an example

Two individuals each contribute $10,000 to form a partnership. The partnership has $80,000 of taxable income in the first year, during which it makes no cash distributions to the two partners. Each of them reports $40,000 of taxable income from the partnership as shown on their K-1s. Each has a starting basis of $10,000, which is increased by $40,000 to $50,000. In the second year, the partnership breaks even (has zero taxable income) and distributes $40,000 to each of the two partners. The cash distributed to them is received tax-free. Each of them, however, must reduce the basis in his partnership interest from $50,000 to $10,000.

Other rules and limitations

The example and details above are an overview and, therefore, don’t cover all the rules. For example, many other events require basis adjustments and there are a host of special rules covering noncash distributions, distributions of securities, liquidating distributions and other matters.

© 2020 Covenant CPA

Many business owners — particularly those who own smaller companies — spend so much time trying to eliminate weaknesses that they never fully capitalize on their strengths. One way to do so is to identify and explicate your unique selling proposition (USP).

Give it some thought

In a nutshell, a USP states why customers should buy your product or service rather than a similar one offered by a competitor. A USP might be rather obvious if you offer a type of state-of-the-art technology or specialize in a certain kind of service that’s not widely available. Many businesses, however, will need to dedicate some serious thought and discussion to identifying their USP — and they may need to do so every year or two to adapt to market changes.

Ask the right questions

Involve employees from every level of your company in brainstorming sessions to develop your USP. During these meetings, consider the answers to questions such as:

  • What makes our products or services distinctive?
  • What aspect of our business is most important to its growth?
  • Which elements of what we do are the most difficult for competitors to copy?
  • Why should customers buy from us instead of the competition?

As you might have noticed, knowledge of your competitors is critical to developing a strong USP. You can’t differentiate your business from theirs unless you’re familiar with what competitors are selling, how they sell their products or services, and how they support those sales in terms of customer service. To this end, you may need to undertake some “competitive intelligence” efforts to gather needed information.

Integrate it into the sales process

Your USP should be a powerful, concise statement that customers and prospects will immediately understand and recognize as fulfilling their wants or needs. Among the most commonly cited examples is package delivery giant FedEx’s “When it absolutely, positively has to be there overnight.” Although the company doesn’t use this slogan anymore, it remains a perfect example of a USP that’s clear and memorable.

Of course, your USP must be more than just words. Once established, it should serve as a sort of “mantra” for your sales team. That is, after identifying your customers’ needs during the sales process, they should use the USP (or an iteration of it) to explain to customers why your product or service is the right choice. Just be careful not to overuse your USP in sales and marketing materials, including on your website.

Now may be the time

Given the monumental changes that have occurred in the U.S. economy and in many industries because of the COVID-19 pandemic, now may be an imperative time to reconsider and relaunch your USP. We can help you evaluate your sales numbers, as well as return on investment in marketing efforts, to carefully craft the right approach.

© 2020 Covenant CPA

There’s a new IRS form for business taxpayers that pay or receive nonemployee compensation.

Beginning with tax year 2020, payers must complete Form 1099-NEC, Nonemployee Compensation, to report any payment of $600 or more to a payee.

Why the new form?

Prior to 2020, Form 1099-MISC was filed to report payments totaling at least $600 in a calendar year for services performed in a trade or business by someone who isn’t treated as an employee. These payments are referred to as nonemployee compensation (NEC) and the payment amount was reported in box 7.

Form 1099-NEC was reintroduced to alleviate the confusion caused by separate deadlines for Form 1099-MISC that report NEC in box 7 and all other Form 1099-MISC for paper filers and electronic filers. The IRS announced in July 2019 that, for 2020 and thereafter, it will reintroduce the previously retired Form 1099-NEC, which was last used in the 1980s.

What businesses will file?

Payers of nonemployee compensation will now use Form 1099-NEC to report those payments.

Generally, payers must file Form 1099-NEC by January 31. For 2020 tax returns, the due date will be February 1, 2021, because January 31, 2021, is on a Sunday. There’s no automatic 30-day extension to file Form 1099-NEC. However, an extension to file may be available under certain hardship conditions.

Can a business get an extension?

Form 8809 is used to file for an extension for all types of Forms 1099, as well as for other forms. The IRS recently released a draft of Form 8809. The instructions note that there are no automatic extension requests for Form 1099-NEC. Instead, the IRS will grant only one 30-day extension, and only for certain reasons.

Requests must be submitted on paper. Line 7 lists reasons for requesting an extension. The reasons that an extension to file a Form 1099-NEC (and also a Form W-2, Wage and Tax Statement) will be granted are:

  • The filer suffered a catastrophic event in a federally declared disaster area that made the filer unable to resume operations or made necessary records unavailable.
  • A filer’s operation was affected by the death, serious illness or unavoidable absence of the individual responsible for filing information returns.
  • The operation of the filer was affected by fire, casualty or natural disaster.
  • The filer was “in the first year of establishment.”
  • The filer didn’t receive data on a payee statement such as Schedule K-1, Form 1042-S, or the statement of sick pay required under IRS regulations in time to prepare an accurate information return.

Need help?

If you have questions about filing Form 1099-NEC or any tax forms, contact us. We can assist you in staying in compliance with all rules.

© 2020 Covenant CPA