The possible tax consequences of PPP loans

Posted on August 14, 2020August 14, 2020 by CCG

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:

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

File cash transaction reports for your business — on paper or electronically

Posted on August 11, 2020August 11, 2020 by CCG

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.

Strengthen your supply chain with constant risk awareness

Posted on August 4, 2020August 4, 2020 by CCG

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.

Why do partners sometimes report more income on tax returns than they receive in cash?

Posted on July 29, 2020July 29, 2020 by CCG

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.

Does your business have a unique selling proposition?

Posted on July 22, 2020July 22, 2020 by CCG

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.

Businesses: Get ready for the new Form 1099-NEC

Posted on July 20, 2020July 20, 2020 by CCG

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.

6 key IT questions to ask in the new normal

Posted on July 16, 2020July 16, 2020 by CCG

The sudden shutdown of the economy in March because of the COVID-19 pandemic forced many businesses to rely more heavily on technology. Some companies fared better than others.

Many businesses that had been taking an informal approach to IT strategy discovered their systems weren’t as robust and scalable as they’d hoped. Some may have lost ground competitively as fires were put out and employees got back up to speed in an altered working environment.

To keep your approach to technology relevant, you’ve got to regularly reassess processes and assets. Doing so is even more important in the new normal. Here are six key questions to ask:

1. What are our users saying? Every successful IT strategy is built on a foundation of plentiful user feedback. Talk with (or survey) your employees about what’s happened over the last few months from a technology perspective. Find out what’s working, what isn’t and why.

2. Do we have information silos? Most companies today use multiple applications. If these solutions can’t “talk” to each other, you may suffer from information silos — when different people and teams keep data to themselves. Shifting to a more remote workforce may have worsened this problem or made it more obvious. If it’s happening, determine how to integrate critical systems.

3. Do we have a digital file-sharing policy? Businesses used to generate tremendous amounts of paperwork. Sharing documents electronically is much more common now but, without a formal approach to file sharing, things can still get lost or various versions of files can cause confusion. Implement (or improve) a digital file-sharing policy to better manage system access, network procedures and version control.

4. Has our technology become outdated? Along with being an incredible tragedy and ongoing problem, the pandemic is accelerating change. Technology that may have been at least passable before the crisis may now be falling far short of optimal functionality. Look closely at whether your business may need to upgrade hardware, software or platforms sooner than you previously anticipated.

5. Do employees need more training? You may have implemented IT changes over the past few months that employees haven’t fully understood or have adjusted to in problematic ways. Consider mandatory training and ongoing refresher sessions to ensure users are taking full advantage of available technology and following proper procedures.

6. Are your security protocols being followed? Changes made to facilitate working during the pandemic may have exposed your systems and data to threats from disgruntled employees, outside hackers and ever-present viruses. Make sure you have a closely followed policy for critical actions such as regularly changing passwords, removing inactive users and installing security updates.

Technology has played a critical role in enabling businesses to stay connected internally, communicate with customers and remain operational during the COVID-19 crisis. Our firm can help you assess your IT strategy in today’s economy and identify cost-effective process changes and budget-conscious asset upgrades.

Steer clear of the Trust Fund Recovery Penalty

Posted on July 10, 2020July 10, 2020 by CCG

If you own or manage a business with employees, you may be at risk for a severe tax penalty. It’s called the “Trust Fund Recovery Penalty” because it applies to the Social Security and income taxes required to be withheld by a business from its employees’ wages.

Because the taxes are considered property of the government, the employer holds them in “trust” on the government’s behalf until they’re paid over. The penalty is also sometimes called the “100% penalty” because the person liable and responsible for the taxes will be penalized 100% of the taxes due. Accordingly, the amounts IRS seeks when the penalty is applied are usually substantial, and IRS is very aggressive in enforcing the penalty.

Far-reaching penalty

The Trust Fund Recovery Penalty is among the more dangerous tax penalties because it applies to a broad range of actions and to a wide range of people involved in a business.

Here are some answers to questions about the penalty so you can safely stay clear of it.

Which actions are penalized? The Trust Fund Recovery Penalty applies to any willful failure to collect, or truthfully account for, and pay over Social Security and income taxes required to be withheld from employees’ wages.

Who is at risk? The penalty can be imposed on anyone “responsible” for collection and payment of the tax. This has been broadly defined to include a corporation’s officers, directors and shareholders under a duty to collect and pay the tax as well as a partnership’s partners, or any employee of the business with such a duty. Even voluntary board members of tax-exempt organizations, who are generally excepted from responsibility, can be subject to this penalty under certain circumstances. In addition, in some cases, responsibility has been extended to family members close to the business, and to attorneys and accountants.

IRS says responsibility is a matter of status, duty and authority. Anyone with the power to see that the taxes are (or aren’t) paid may be responsible. There’s often more than one responsible person in a business, but each is at risk for the entire penalty. Although a taxpayer held liable can sue other responsible people for contribution, this is an action he or she must take entirely on his or her own after he or she pays the penalty. It isn’t part of the IRS collection process.

Here’s how broadly the net can be cast: You may not be directly involved with the payroll tax withholding process in your business. But if you learn of a failure to pay over withheld taxes and have the power to pay them but instead make payments to creditors and others, you become a responsible person.

What’s considered “willful?” For actions to be willful, they don’t have to include an overt intent to evade taxes. Simply bending to business pressures and paying bills or obtaining supplies instead of paying over withheld taxes that are due the government is willful behavior. And just because you delegate responsibilities to someone else doesn’t necessarily mean you’re off the hook. Your failure to take care of the job yourself can be treated as the willful element.

Avoiding the penalty

You should never allow any failure to withhold and any “borrowing” from withheld amounts — regardless of the circumstances. All funds withheld must also be paid over to the government. Contact us for information about the penalty and making tax payments.

Assessing productivity as you cope with the pandemic

Posted on July 7, 2020July 7, 2020 by CCG

The COVID-19 crisis is affecting not only the way many businesses operate, but also how they assess productivity. How can you tell whether you’re getting enough done when so much has changed? There’s no easy, one-size-fits-all answer, but business owners should ask the question so you can adjust expectations and objectives accordingly.

Impact of remote work

Heading into the crisis, concerns about productivity were certainly on the minds of many in leadership positions. In March, research firm Gartner conducted a snap poll that found 76% of HR leaders reported their organizations’ managers were concerned about “productivity or engagement of their teams when remote.”

Many of these fears may well have been alleviated after a month or two. News provider USA Today collaborated with researchers YouGov and social media platform LinkedIn to conduct a poll in April that found 54% of respondents (professionals ages 18-74) said that working remotely has positively affected their productivity. They cited factors such as time saved by not having to commute and fewer distractions from co-workers.

The bottom line is that allowing — or, in recent months, requiring — employees to work remotely shouldn’t drastically alter your expectations of their productivity. Every employee must continue to fulfill his or her job duties and meet annual performance management objectives (as perhaps adjusted in light of the pandemic and altered economy).

However, it’s unrealistic to expect anyone to accomplish markedly more just because he or she is no longer subject to a long commute and regular office hours. In fact, when assessing productivity, business owners should bear in mind the dual challenge of work-life balance while working remotely (childcare obligations, etc.) and the mental health component of living through a pandemic.

Solid metrics

If remote work isn’t a major concern for your company — either because your employees were already doing it, adapted to it readily or simply cannot work from home — there remain some tried-and-true ways to evaluate productivity. Metrics can be useful.

For example, one broad measurement of productivity is revenue per employee. To calculate it, you’ll need to check your financial statements to see how much revenue your business brought in during a defined period. Then, you divide that dollar figure by your total number of employees. The idea is that every worker should generally bring in enough revenue to rationalize his or her paycheck.

It’s not a “be all, end all” metric by any means, but revenue per employee can help accurately shape your understanding of productivity and cash flow. And, as mentioned, you’ll need to think about how this year’s economic conditions have altered your productivity needs and what employees can reasonably accomplish.

Careful calibration

When the subject of productivity arises, many business owners’ instinctive answer is “more, more, more!” Carefully calibrating your expectations and goals, however, can lead to more sustainable results. We can help you choose and calculate the right metrics and set realistic productivity objectives.

Haven’t filed your 2019 business tax return yet? There may be ways to chip away at your bill

Posted on July 2, 2020July 2, 2020 by CCG

The extended federal income tax deadline is coming up fast. As you know, the IRS postponed until July 15 the payment and filing deadlines that otherwise would have fallen on or after April 1, 2020, and before July 15.

Retroactive COVID-19 business relief

The Coronavirus Aid, Relief and Economic Security (CARES) Act, which passed earlier in 2020, includes some retroactive tax relief for business taxpayers. The following four provisions may affect a still-unfiled tax return — or you may be able to take advantage of them on an amended return if you already filed.

Liberalized net operating losses (NOLs). The CARES Act allows a five-year carryback for a business NOL that arises in a tax year beginning in 2018 through 2020. Claiming 100% first-year bonus depreciation on an affected year’s return can potentially create or increase an NOL for that year. If so, the NOL can be carried back, and you can recover some or all of the income tax paid for the carryback year. This factor could cause you to favor claiming 100% first-year bonus depreciation on an unfiled return.

Since NOLs that arise in tax years beginning in 2018 through 2020 can be carried back five years, an NOL that’s reported on a still-unfiled return can be carried back to an earlier tax year and allow you to recover income tax paid in the carry-back year. Because federal income tax rates were generally higher in years before the Tax Cuts and Jobs Act (TCJA) took effect, NOLs carried back to those years can be especially beneficial.

Qualified improvement property (QIP) technical corrections. QIP is generally defined as an improvement to an interior portion of a nonresidential building that’s placed in service after the date the building was first placed in service. The CARES Act includes a retroactive correction to the TCJA. The correction allows much faster depreciation for real estate QIP that’s placed in service after the TCJA became law.

Specifically, the correction allows 100% first-year bonus depreciation for QIP that’s placed in service in 2018 through 2022. Alternatively, you can depreciate QIP placed in service in 2018 and beyond over 15 years using the straight-line method.

Suspension of excess business loss disallowance. An “excess business loss” is a loss that exceeds $250,000 or $500,000 for a married couple filing a joint tax return. An unfavorable TCJA provision disallowed current deductions for excess business losses incurred by individuals in tax years beginning in 2018 through 2025. The CARES Act suspends the excess business loss disallowance rule for losses that arise in tax years beginning in 2018 through 2020.

Liberalized business interest deductions. Another unfavorable TCJA provision generally limited a taxpayer’s deduction for business interest expense to 30% of adjusted taxable income (ATI) for tax years beginning in 2018 and later. Business interest expense that’s disallowed under this limitation is carried over to the following tax year.

In general, the CARES Act temporarily and retroactively increases the limitation from 30% to 50% of ATI for tax years beginning in 2019 and 2020. (Special rules apply to partnerships and LLCs that are treated as partnerships for tax purposes.)

Assessing the opportunities

These are just some of the possible tax opportunities that may be available if you haven’t yet filed your 2019 tax return. Other rules and limitations may apply. Contact us for help determining how to proceed in your situation.