Author Archive: CCG

Educate yourself about the revised tax benefits for higher education

Posted on by

Attending college is one of the biggest investments that parents and students ever make. If you or your child (or grandchild) attends (or plans to attend) an institution of higher learning, you may be eligible for tax breaks to help foot the bill.

The Consolidated Appropriations Act, which was enacted recently, made some changes to the tax breaks. Here’s a rundown of what has changed.

Deductions vs. credits

Before the new law, there were tax breaks available for qualified education expenses including the Tuition and Fees Deduction, the Lifetime Learning Credit and the American Opportunity Tax Credit.

Tax credits are generally better than tax deductions. The difference? A tax deduction reduces your taxable income while a tax credit reduces the amount of taxes you owe on a dollar-for-dollar basis.

First, let’s look at the deduction

For 2020, the Tuition and Fees Deduction could be up to $4,000 at lower income levels or up to $2,000 at middle income levels. If your 2020 modified adjusted gross income (MAGI) allows you to be eligible, you can claim the deduction whether you itemize or not. Here are the income thresholds:

  • For 2020, a taxpayer with a MAGI of up to $65,000 ($130,000 for married filing jointly) could deduct qualified expenses up to $4,000.
  • For 2020, a taxpayer with a MAGI between $65,001 and $80,000 ($130,001 and $160,000 for married filing jointly) could deduct up to $2,000.
  • For 2020, the allowable 2020 deduction was phased out and was zero if your MAGI was more than $80,000 ($160,000 for married filing jointly).

As you’ll see below, the Tuition and Fees Deduction is not available after the 2020 tax year.

Two credits aligned

Before the new law, an unfavorable income phase-out rule applied to the Lifetime Learning Credit, which can be worth up to $2,000 per tax return annually. For 2021 and beyond, the new law aligns the phase-out rule for the Lifetime Learning Credit with the more favorable phase-out rule for the American Opportunity Tax Credit, which can be worth up to $2,500 per student each year. The CAA also repeals the Tuition and Fees Deduction for 2021 and later years. Basically, the law trades the old-law write-off for the more favorable new-law Lifetime Learning Credit phase-out rule.

Under the CAA, both the Lifetime Learning Credit and the American Opportunity Tax Credit are phased out for 2021 and beyond between a MAGI of $80,001 and $90,000 for unmarried individuals ($160,001 and $180,000 for married couples filing jointly). Before the new law, the Lifetime Learning Credit was phased out for 2020 between a MAGI of $59,001 and $69,000 for unmarried individuals ($118,001 and $138,000 married couples filing jointly).

Best for you

Talk with us about which of the two remaining education tax credits is the most beneficial in your situation. Each of them has its own requirements. There are also other education tax opportunities you may be able to take advantage of, including a Section 529 tuition plan and a Coverdell Education Savings Account.

© 2021 Covenant CPA

Make your fraud contingency plan a blueprint for swift action

Posted on by

Over the past year, most businesses have been forced to contend with multiple crises, including COVID-19, social unrest and financial challenges. The last thing you need right now is a fraud incident. But if your company is defrauded, you can help mitigate the damage with a fraud contingency plan.

Identifying likely scenarios

No contingency plan can cover every possibility, but yours should be as wide-ranging as possible. Work with your senior management team and financial advisors to devise as many fraud scenarios as you can dream up. Consider how your internal controls could be breached — whether the perpetrator is a relatively new hire, an experienced department manager, a high-ranking executive or an outside party.

Next, decide which scenarios are most likely to occur given such factors as your industry and size. For example, retailers are particularly vulnerable to skimming. And small businesses without adequate segregation of duties may be at greater risk for theft in accounts payable. Also identify the schemes that would be most damaging to your business. Consider this from both a financial and a public relations standpoint.

Assigning responsibility

As you write your plan, assign responsibilities to specific individuals. When fraud is suspected, one person should lead the investigation and coordinate with staff and any third-party investigators. Put other employees to work where they can be most effective. For example, your IT manager may be tasked with preventing loss of electronic records and your head of human resources may be responsible for maintaining employee morale.

You’ll also want to define the objectives of any fraud investigation. Some companies want only to fire the person responsible, mitigate the damage and keep news of the incident from leaking. Others may want to seek prosecution of offenders as examples to others or to recover stolen funds. Your fraud contingency plan should include information on who will work with law enforcement and how they will do so.

Releasing information

Employee communications are particularly important during a fraud investigation. Staff members who don’t know what’s going on will speculate. Although you should consult legal and financial advisors before releasing any information, aim to be as honest with your employees as you can. It’s equally important to make your response visible so that employees know you take fraud seriously.

Also designate someone to manage external communications. This person should be prepared to deflect criticism and defend your company’s stability, as well as control the flow of information to the outside world.

Taking swift action 

A fraud contingency plan isn’t designed to prevent fraud. Instead, it’s a blueprint for taking swift and effective action should fraud occur. To reduce the risk of theft, you’ll need to ensure that you have strong internal controls. Contact us for help with both plans.

© 2021 Covenant CPA

4 questions single parents should ask about their estate plans

Posted on by

Did you know that the United States has the highest rate of children living in single parent households? According to the Pew Research Center, nearly a quarter (23%) of U.S. children under the age of 18 live with one parent. This is more than three times the share (7%) of children from around the world who do so. If your household falls into this category, ensure your estate plan properly accounts for your children.

In many respects, estate planning for single parents is similar to estate planning for families with two parents. But when only one parent is involved, certain aspects of an estate plan demand special attention.

If you’re a single parent, here are four questions you should ask:

1. Are my will and other estate planning documents up-to-date? If you haven’t reviewed your estate plan recently, now is the time to do so to ensure it reflects your current circumstances. The last thing you want is for a probate court to decide your children’s future.

2. Have I selected an appropriate guardian? If the other parent is unavailable to take custody of your children should you become incapacitated or die suddenly, does your estate plan designate a suitable, willing guardian to care for them? Will the guardian need financial assistance to raise your kids and provide for their education? If not, you might want to preserve your wealth in a trust until your children are grown.

3. Am I adequately insured? With only one income to depend on, plan carefully to ensure that you can provide for your retirement as well as your children’s financial security. Life insurance can be an effective way to augment your estate. You should also consider disability insurance. Unlike many married couples, single parents generally don’t have a “backup” income in the event they can no longer work.

4. What happens if I remarry? Will you need to provide for your new spouse as well as your children? Where will you get the resources to provide for your new spouse? What if you placed your life insurance policy in an irrevocable trust for your kids to avoid estate taxes on the proceeds? Further complications can arise if you and your new spouse have children together or if your spouse has children from a previous marriage.

If you’ve recently become a single parent, contact us because it’s critical to review and, if necessary, revise your plan. We’d be pleased to help.

© 2021 Covenant CPA

Need another PPP loan for your small business? Here are the new rules

Posted on by

Congress recently passed, and President Trump signed, a new law providing additional relief for businesses and individuals during the COVID-19 pandemic. One item of interest for small business owners in the Consolidated Appropriations Act (CAA) is the opportunity to take out a second loan under the Paycheck Protection Program (PPP).

The basics

The CAA permits certain smaller businesses who received a PPP loan to take out a “PPP Second Draw Loan” of up to $2 million. To qualify, you must:

  • Employ no more than 300 employees per physical location,
  • Have used or will use the full amount of your first PPP loan, and
  • Demonstrate at least a 25% reduction in gross receipts in the first, second or third quarter of 2020 relative to the same 2019 quarter. Applications submitted on or after Jan. 1, 2021, are eligible to use gross receipts from the fourth quarter of 2020.

Eligible entities include for-profit businesses (including those owned by sole proprietors), certain nonprofit organizations, housing cooperatives, veterans’ organizations, tribal businesses, self-employed individuals, independent contractors and small agricultural co-operatives.

Additional points

Here are some additional points to consider:

Loan terms. Borrowers may receive a PPP Second Draw Loan of up to 2.5 times the average monthly payroll costs in the year preceding the loan or the calendar year. However, borrowers in the hospitality or food services industries may receive PPP Second Draw Loans of up to 3.5 times average monthly payroll costs. Only a single PPP Second Draw Loan is permitted to an eligible entity.

Gross receipts and simplified certification of revenue test. PPP Second Draw Loans of no more than $150,000 may submit a certification, on or before the date the loan forgiveness application is submitted, attesting that the eligible entity meets the applicable revenue loss requirement. Nonprofits and veterans’ organizations may use gross receipts to calculate their revenue loss standard.

Loan forgiveness. Like the first PPP loan, a PPP Second Draw Loan may be forgiven for payroll costs of up to 60% (with some exceptions) and nonpayroll costs such as rent, mortgage interest and utilities of 40%. Forgiveness of the loans isn’t included in income as cancellation of indebtedness income.

Application of exemption based on employee availability. The CAA extends current safe harbors on restoring full-time employees and salaries and wages. Specifically, it applies the rule of reducing loan forgiveness for a borrower reducing the number of employees retained and reducing employees’ salaries in excess of 25%.

Deductibility of expenses paid by PPP loans. The CARES Act didn’t address whether expenses paid with the proceeds of PPP loans could be deducted. The IRS eventually took the position that these expenses were nondeductible. The CAA, however, provides that expenses paid both from the proceeds of loans under the original PPP and PPP Second Draw Loans are deductible.

Further questions

Contact us with any questions you might have about PPP loans, including applying for a Second Draw Loan or availing yourself of forgiveness.

© 2021 Covenant CPA

The COVID-19 relief law: What’s in it for you?

Posted on by

The new COVID-19 relief law that was signed on December 27, 2020, contains a multitude of provisions that may affect you. Here are some of the highlights of the Consolidated Appropriations Act, which also contains two other laws: the COVID-related Tax Relief Act (COVIDTRA) and the Taxpayer Certainty and Disaster Tax Relief Act (TCDTR).

Direct payments

The law provides for direct payments (which it calls recovery rebates) of $600 per eligible individual ($1,200 for a married couple filing a joint tax return), plus $600 per qualifying child. The U.S. Treasury Department has already started making these payments via direct bank deposits or checks in the mail and will continue to do so in the coming weeks.

The credit payment amount is phased out at a rate of $5 per $100 of additional income starting at $150,000 of modified adjusted gross income for marrieds filing jointly and surviving spouses, $112,500 for heads of household, and $75,000 for single taxpayers.

Medical expense tax deduction

The law makes permanent the 7.5%-of-adjusted-gross-income threshold on medical expense deductions, which was scheduled to increase to 10% of adjusted gross income in 2021. The lower threshold will make it easier to qualify for the medical expense deduction.

Charitable deduction for non-itemizers

For 2020, individuals who don’t itemize their deductions can take up to a $300 deduction per tax return for cash contributions to qualified charitable organizations. The new law extends this $300 deduction through 2021 for individuals and increases it to $600 for married couples filing jointly. Taxpayers who overstate their contributions when claiming this deduction are subject to a 50% penalty (previously it was 20%).

Allowance of charitable contributions 

In response to the pandemic, the limit on cash charitable contributions by an individual in 2020 was increased to 100% of the individual’s adjusted gross income (AGI). (The usual limit is 60% of adjusted gross income.) The new law extends this rule through 2021.

Energy tax credit

A credit of up to $500 is available for purchases of qualifying energy improvements made to a taxpayer’s main home. However, the $500 maximum allowance must be reduced by any credits claimed in earlier years. The law extends this credit, which was due to expire at the end of 2020, through 2021.

Other energy-efficient provisions

There are a few other energy-related provisions in the new law. For example, the tax credit for a qualified fuel cell motor vehicle and the two-wheeled plug-in electric vehicle were scheduled to expire in 2020 but have been extended through the end of 2021.

There’s also a valuable tax credit for qualifying solar energy equipment expenditures for your home. For equipment placed in service in 2020, the credit rate is 26%. The rate was scheduled to drop to 22% for equipment placed in service in 2021 before being eliminated for 2022 and beyond.

Under the new law, the 26% credit rate is extended to cover equipment placed in service in 2021 and 2022 and the law also extends the 22% rate to cover equipment placed in service in 2023. For 2024 and beyond, the credit is scheduled to vanish.

Maximize tax breaks

These are only a few tax breaks contained in the massive new law. We’ll make sure that you claim all the tax breaks you’re entitled to when we prepare your tax return.

© 2021 Covenant CPA

New year, new fraud to watch out for

Posted on by

Whew, you made it through 2020! But don’t rest easy yet. Unfortunately, fraud perpetrators enjoyed a profitable year, and there are signs they may continue to feed off Americans as long as the pandemic is active. Here are several scams to watch for in 2021.

PPP fraud

Struggling small-business owners have welcomed last month’s 11th hour extension of the Paycheck Protection Program (PPP). They aren’t alone: Fraudsters skilled at falsifying loan applications are also likely rubbing their hands in anticipation.

The Justice Department has brought charges against at least 80 individuals for stealing $127 million from the first PPP. Law enforcement expects to charge more (likely many more) con artists as evidence is uncovered. Indeed, the House Select Subcommittee on the Coronavirus Crisis claims that at least $14 billion in PPP loans were improper. Not all of these cases were outright fraud, but there’s evidence that some business owners and lenders ignored PPP guidelines.

To help prevent further misuse of these loans, $50 million has been allocated to the Small Business Administration for PPP fraud prevention and audits. To avoid unnecessary scrutiny or legal trouble, business borrowers should make sure they understand all eligibility requirements for PPP loans and are qualified before applying.

Vaccine cons 

Consumer scams related to the pandemic also are still going strong. Even before COVID-19 vaccinations gained FDA approval, fraudsters conned many Americans (primarily via email and online ads) into paying for nonexistent cures and preventive treatments.

This past month, the FBI and several other federal agencies warned that perpetrators are now advertising COVID-19 vaccine “early access” for those willing to pay a fee or submit medical and other personal information. Make no mistake: These are fraud schemes. To receive a vaccine, visit the Food and Drug Administration (fda.gov) or Centers for Disease Control and Prevention (cdc.gov) websites or consult your physician to learn when you will be eligible.

Pet scams

Fraudsters took note when many Americans adopted pets to provide companionship during the pandemic. The Federal Trade Commission is warning about fake ads picturing puppies, kittens and other pets for sale or adoption. The fraudsters typically first request an amount that sounds reasonable up front. Once they receive that, they ask for more and more … for vet bills, health certificates, shipping and anything else they can come up with. Needless to say, there are no actual pets.

You can avoid falling for such scams by performing extensive due diligence. For example, get the name and address of the seller (and verify them) and arrange for a videoconference to see the pet in the possession of the seller. Even better, adopt an animal from a shelter you can visit in person.

Staying safe 

There are a lot of fraud threats out there these days. For help combating consumer and business fraud, contact us.

© 2021 Covenant CPA

New law doubles business meal deductions and makes favorable PPP loan changes

Posted on by

The COVID-19 relief bill, signed into law on December 27, 2020, provides a further response from the federal government to the pandemic. It also contains numerous tax breaks for businesses. Here are some highlights of the Consolidated Appropriations Act of 2021 (CAA), which also includes other laws within it.

Business meal deduction increased 

The new law includes a provision that removes the 50% limit on deducting business meals provided by restaurants and makes those meals fully deductible.

As background, ordinary and necessary food and beverage expenses that are incurred while operating your business are generally deductible. However, for 2020 and earlier years, the deduction is limited to 50% of the allowable expenses.

The new legislation adds an exception to the 50% limit for expenses of food or beverages provided by a restaurant. This rule applies to expenses paid or incurred in calendar years 2021 and 2022.

The use of the word “by” (rather than “in”) a restaurant clarifies that the new tax break isn’t limited to meals eaten on a restaurant’s premises. Takeout and delivery meals from a restaurant are also 100% deductible.

Note: Other than lifting the 50% limit for restaurant meals, the legislation doesn’t change the rules for business meal deductions. All the other existing requirements continue to apply when you dine with current or prospective customers, clients, suppliers, employees, partners and professional advisors with whom you deal with (or could engage with) in your business.

Therefore, to be deductible:

  • The food and beverages can’t be lavish or extravagant under the circumstances, and
  • You or one of your employees must be present when the food or beverages are served.

If food or beverages are provided at an entertainment activity (such as a sporting event or theater performance), either they must be purchased separately from the entertainment or their cost must be stated on a separate bill, invoice or receipt. This is required because the entertainment, unlike the food and beverages, is nondeductible.

PPP loans

The new law authorizes more money towards the Paycheck Protection Program (PPP) and extends it to March 31, 2021. There are a couple of tax implications for employers that received PPP loans:

  1. Clarifications of tax consequences of PPP loan forgiveness. The law clarifies that the non-taxable treatment of PPP loan forgiveness that was provided by the 2020 CARES Act also applies to certain other forgiven obligations. Also, the law makes clear that taxpayers, whose PPP loans or other obligations are forgiven, are allowed deductions for otherwise deductible expenses paid with the proceeds. In addition, the tax basis and other attributes of the borrower’s assets won’t be reduced as a result of the forgiveness.
  2. Waiver of information reporting for PPP loan forgiveness. Under the CAA, the IRS is allowed to waive information reporting requirements for any amount excluded from income under the exclusion-from-income rule for forgiveness of PPP loans or other specified obligations. (The IRS had already waived information returns and payee statements for loans that were guaranteed by the Small Business Administration).

Much more

These are just a couple of the provisions in the new law that are favorable to businesses. The CAA also provides extensions and modifications to earlier payroll tax relief, allows changes to employee benefit plans, includes disaster relief and much more. Contact us if you have questions about your situation.

© 2021 Covenant CPA

Ring in the new year with a renewed focus on profitability

Posted on by

Some might say the end of one calendar year and the beginning of another is a formality. The linear nature of time doesn’t change, merely the numbers we use to mark it.

Others, however, would say that a fresh 12 months — particularly after the arduous, anxiety-inducing nature of 2020 — creates the perfect opportunity for business owners to gather their strength and push ahead with greater vigor. One way to do so is to ring in the new year with a systematic approach to renewing everyone’s focus on profitability.

Create an idea-generating system

Without a system to discover ideas that originate from the day-in, day-out activities of your business, you’ll likely miss opportunities to truly maximize the bottom line. What you want to do is act in ways that inspire and allow you to gather profit-generating concepts. Then you can pick out the most actionable ones and turn them into bottom-line-boosting results. Here are some ways to create such a system:

Share responsibility for profitability with your management team. All too often, managers become trapped in their own information silos and areas of focus. Consider asking everyone in a leadership position to submit ideas for growing the bottom line.

Instruct supervisors to challenge their employees to come up with profit-building ideas. Leaving your employees out of the conversation is a mistake. Ask workers on the front lines how they think your business could make more money.

Target the proposed ideas that will most likely increase sales, cut costs or expand profit margins. As suggestions come in, use robust discussions and careful calculations to determine which ones are truly worth pursuing.

Tie each chosen idea to measurable financial goals. When you’ve picked one or more concepts to pursue in real life, identify which metrics will accurately inform you that you’re on the right track. Track these metrics regularly from start to finish.

Name those accountable for executing each idea. Every business needs its champions! Be sure each profit-building initiative has a defined leader and team members.

Follow a clear, patient and well-monitored implementation process. Ideas that ultimately do build the bottom line in a meaningful way generally take time to identify, implement and execute. Don’t look for quick-fix measures; seek out business transformations that will lead to long-term success.

Many benefits

A carefully constructed and strong-performing profitability idea system can not only grow the bottom line, but also upskill employees and improve morale as strategies come to fruition. Our firm can help you identify profit-building opportunities, choose the right metrics to evaluate and measure them, and track the pertinent data over time.

© 2020 Covenant CPA

The right entity choice: Should you convert from a C to an S corporation?

Posted on by

The best choice of entity can affect your business in several ways, including the amount of your tax bill. In some cases, businesses decide to switch from one entity type to another. Although S corporations can provide substantial tax benefits over C corporations in some circumstances, there are potentially costly tax issues that you should assess before making the decision to convert from a C corporation to an S corporation.

Here are four issues to consider:

1. LIFO inventories. C corporations that use last-in, first-out (LIFO) inventories must pay tax on the benefits they derived by using LIFO if they convert to S corporations. The tax can be spread over four years. This cost must be weighed against the potential tax gains from converting to S status.

2. Built-in gains tax. Although S corporations generally aren’t subject to tax, those that were formerly C corporations are taxed on built-in gains (such as appreciated property) that the C corporation has when the S election becomes effective, if those gains are recognized within five years after the conversion. This is generally unfavorable, although there are situations where the S election still can produce a better tax result despite the built-in gains tax.

3. Passive income. S corporations that were formerly C corporations are subject to a special tax. It kicks in if their passive investment income (including dividends, interest, rents, royalties, and stock sale gains) exceeds 25% of their gross receipts, and the S corporation has accumulated earnings and profits carried over from its C corporation years. If that tax is owed for three consecutive years, the corporation’s election to be an S corporation terminates. You can avoid the tax by distributing the accumulated earnings and profits, which would be taxable to shareholders. Or you might want to avoid the tax by limiting the amount of passive income.

4. Unused losses. If your C corporation has unused net operating losses, they can’t be used to offset its income as an S corporation and can’t be passed through to shareholders. If the losses can’t be carried back to an earlier C corporation year, it will be necessary to weigh the cost of giving up the losses against the tax savings expected to be generated by the switch to S status.

Other considerations

When a business switches from C to S status, these are only some of the factors to consider. For example, shareholder-employees of S corporations can’t get all of the tax-free fringe benefits that are available with a C corporation. And there may be issues for shareholders who have outstanding loans from their qualified plans. These factors have to be taken into account in order to understand the implications of converting from C to S status.

If you’re interested in an entity conversion, contact us. We can explain what your options are, how they’ll affect your tax bill and some possible strategies you can use to minimize taxes. 

© 2020 Covenant CPA

Prevent and detect insider cyberattacks

Posted on by

In one recent cybercrime scheme, a mortgage company employee accessed his employer’s records without authorization, then used stolen customer lists to start his own mortgage business. The perpetrator hacked the protected records by sending an email containing malware to a coworker.

This particular dishonest worker was caught. But your company may not be so lucky. One of your employees’ cybercrime schemes could end in financial losses or competitive disadvantages due to corporate espionage. 

Best practices

Why would trusted employees steal from the hand that feeds them? They could be working for a competitor or seeking revenge for perceived wrongs. Sometimes coercion by a third party or the need to pay gambling or addiction-related debts comes into play.

Although there are no guarantees that you’ll be able to foil every hacking scheme, your business can minimize the risk of insider theft by implementing several best practices: 

Restrict IT use. Your IT personnel should take proactive measures to restrict or monitor employee use of email accounts, websites, peer-to-peer networking, Instant Messaging protocols and File Transfer Protocol.

Remove access. When employees leave the company, immediately remove them from all access lists and ask them to return their means of access to secure accounts. Provide them with copies of any signed confidentiality agreements as a reminder of their legal responsibilities for maintaining data confidentiality.

Don’t neglect physical assets. Some data thefts occur the old-fashioned way — with employees absconding with materials after hours or while no one is looking. Typically, a crooked employee will print or photocopy documents and remove them from the workplace hidden in a briefcase or bag. Some dishonest employees remove files from cabinets, desks or other storage locations. Controls such as locks, surveillance cameras and restrictions to access can help prevent and deter theft.

Treat workers well. Create a positive work environment and treat employees fairly and with respect. This can encourage loyalty and trust, thereby minimizing potential motives for employee theft.

Wireless risk 

In addition to the previously named threats, your office’s wireless communication networks — including Wi-Fi, Bluetooth and cellular — can increase fraud risk. Fraud perpetrators can, for example, use mobile devices to gain access to sensitive information. One way to deter such activities is to restrict Wi-Fi to employees with special passwords or biometric access.

For more tips on preventing employee-originated cybercrime, or if you suspect a fraud scheme is underway, contact us for help.

© 2020 Covenant CPA