New CARES Act Provides Tax Relief
Key tax breaks in COVID-19 law
In response to the COVID-19 outbreak, Congress passed the Coronavirus Aid, Relief, and Economic Security (CARES) Act, signed into law on March 27. This new federal legislation includes relief for both individuals and businesses of all shapes and sizes. Following is a brief roundup of several key tax-related provisions affecting individuals and small business owners.
Stimulus checks: The most publicized provision in the new law provides $1,200 cash payments to single filers and $2,400 to joint filers. Plus, you will receive $500 for each “child” as defined by the Child Tax Credit (CTC). Generally, the CTC is available for dependent children under age 17 living in your household.
But the checks phase out for higher-income taxpayers. The phase-out begins at $75,000 of adjusted gross income (AGI) for single filers and $150,000 of AGI for joint filers. The phase-out is complete for single filers with an AGI of $99,000 or more and $198,000 or more for joint filers.
The payments are technically advances of refundable credits. These amounts are generally based on your 2019 tax return, if you have already filed it, or your 2018 return.
Charitable contributions: Due to changes in the Tax Cuts and Jobs Act (TCJA), many taxpayers who previously itemized now claim the standard deduction. Thus, they receive no current tax benefit from their charitable donations. The CARES Act allows you to deduct up to $300 in donations to qualified charities even if you do not itemize on your tax return and regardless of your AGI. Corporations can deduct donations up to 25% of taxable income in 2020 instead of the usual 10% limit.
Early plan withdrawals: Generally, if you make a withdrawal from a qualified retirement plan or IRA before age 59½, you must pay a 10% penalty tax in addition to regular income tax. But the tax code includes a list of exceptions to the penalty. The new law adds another exception for coronavirus-related distributions of up to $100,000 in 2020.
Required minimum distributions: Most qualified plan and IRA owners must begin taking “required minimum distributions” (RMDs) after attaining age 72 (recently increased from age 70½). But the CARES Act suspends all RMDs, including inherited accounts, for 2020.
y, you are taxed on IRA and qualified plan distributions, unless you roll over the funds to another account within 60 days. The CARES Act permits you to take COVID-19 related withdrawals of up to $100,000 and replace the funds within three years without any tax liability. In addition, the new law enhances the rules for loans from qualified plans.
Employers may provide up to $5,250 this year in student loan repayment benefits on a tax-free basis. In other words, employers could assist with loan payments and employees would not be responsible for tax on those amounts, up to the stated limit. Borrowers can defer payments on qualified student loans without any penalty until September 30.
Qualified improvement property: Initially, Congress had intended for qualified improvement property placed in service after 2017 to have a 15-year depreciation recovery period, which would make it eligible for special “bonus depreciation.” However, due to a drafting error in the TCJA, the 15-year recovery period for this type of property wasn’t reflected in the statute. Now the CARES Act fixes this problem retroactive to January 1, 2018.
Employee retention credit: The new law authorizes a credit for 2020 only against an employer’s 6.2% share of Social Security payroll taxes. This refundable credit is available to businesses that suspend or close operations due to COVID-19, or certain companies with reduced gross receipts, as long as they continue to pay their employees. For each eligible quarter, the credit is equal to 50% of the first $10,000 of qualified wages per employee, through the quarter ending on December 31, 2020.
Payroll tax delay: A qualified employer will be able to defer its share of the 6.2% Social Security tax that would otherwise be due through December 31, 2020. The new law permits 50% to be paid by the end of 2021 and 50% by the end of 2022. Similarly, a self-employed taxpayer may defer payment of 50% of self-employment tax, with 25% due at the end of 2021 and 25% due at the end of 2022.
Net operating losses: The TCJA changed the rules for net operating losses (NOLs). Briefly stated, it disallowed carrybacks relating to NOLs after 2017 and provided an indefinite carryforward period with a limit of 80% of taxable income. The CARES Act repeals these NOL changes and also temporarily eliminates a cap for net losses based on $250,000 of income for single filers and $500,000 for joint filers.
Business interest limit: Under the TCJA, business interest expense deductions were limited to the sum of business interest income and 30% of “adjusted taxable income” (ATI). A provision in the CARES Act temporarily increases the ATI limit to 50% for 2019 and 2020.
Finally, the CARES Act includes numerous provisions signed to help small businesses weather the storm, including hundreds of billions of dollars in emergency funds to cover immediate operating costs and loans through the Small Business Administration (SBA). Extensive improvements to unemployment benefits for individuals were also approved.
This is just the tip of the iceberg. For more details about the CARES Act and the impact on your personal situation, contact your professional advisors.
IRS Issues New Business Meal Regs
Follow-up provides more guidance
Although the massive tax law passed at the end of 2017—the Tax Cuts and Jobs Act (TCJA)—eliminated deductions for business entertainment expenses, you can still write off expenses for certain meals and beverages while you are away from home on business. New proposed regulations just issued by the IRS clarify the rules.
Background: Under the TCJA, you can no longer deduct 50% of entertainment, amusement or recreation costs, beginning in 2018. However, it was not initially clear how the new rules applied to business meal expenses.
In 2018, the IRS released Notice 2018-76, providing some guidelines. Significantly, the Notice stated that food and beverages purchased as part of or during a business entertainment activity remained 50% deductible if they were purchased separately from the entertainment or if the cost of the food and beverages was stated separately from the entertainment on bills, invoices or receipts.
Now the new proposed regulations go further. For starters, they create an "objective test" to determine if an activity is generally considered to constitute entertainment. This objective test precludes arguments that entertainment means only entertainment of others or that expenses for entertainment should be characterized as advertising or public relations expenses.
In addition, the new regs generally follow the ground rules established in Notice 2018-76 for deducting meal expenses. Under the proposed regulations, taxpayers may continue to deduct 50% of their meal expenses if these conditions are met:
· The expense is an “ordinary and necessary” business expense paid or incurred during the tax year when carrying on a trade or business.
· The expense is not lavish or extravagant under the circumstances.
· The taxpayer, or an employee of the taxpayer, is present when the food and beverages are furnished.
· The food and beverages are provided to a current or potential business customer, client, consultant or similar business contact.
· Any food and beverages provided during or at an entertainment activity are purchased separately from the entertainment or the cost of the food and beverages is stated separately from the cost of entertainment on one or more bills, invoices, or receipts.
For example, say you are a small business owner and you bought two tickets for you and a client to attend a basketball game earlier this year. During the game, you paid for a beer and hot dog for each of you. Because the food and beverages were purchased separately from the ticket, you can deduct 50% of the cost—but not the cost of the tickets.
Along the same lines, if you leased a luxury box and a client attended a game with you, no deduction is allowed if the cost of food and beverages was included in the luxury box rental. However, if the food and beverages were invoiced separately, you can still deduct 50% of that cost.
Furthermore, the new proposed regs clarify that deductions for a “potential” business customer or other contact are limited to costs attributable to someone you can reasonably expect to have business dealings with during the normal course of business. In other words, you cannot deduct expenses for a friend or relative you invited to a game.
Conclusion: Final regs are expected soon. Contact your professional tax advisor concerning your personal situation.
Realize Benefits From Social Media
Fine-tune your marketing strategies
Are you using social media for your small business yet? At a minimum, this marketing technique warrants a closer look. But it is not quite as simple as joining Twitter, Facebook, LinkedIn or Instagram (or one of the countless other platforms) and hoping for positive results. Here are four potential strategies for enhancing your efforts.
1. Aim at a specific target. The overall approach for a small business should not be the same as a mega-corporation with national awareness. Instead, you might devote more of your time and resources to finding clients likely to use your goods or services.
For example, you may use software to monitor keywords and phrases related to your business. Besides tracking results, you can respond to inquiries and comments—both pro and con—in “real time.” The new technology should be a friend, not a foe.
2. Become more vocal. Unlike most traditional marketing methods, such as direct mail or radio or TV advertising, social media is not a one-way street. This method gives you an opportunity to open a dialogue.
Typically, advocates want you to reciprocate. For instance, if someone took time to share a blog post you wrote or offer a positive review, show your appreciation. Some companies go further by asking “fans” for a testimonial or to provide a guest blog. Prove that you are truly listening to what others are saying.
3. Make special offers. For those who are already familiar with your firm, it might only take a small nudge to bring them back into the fold or to have them expand their business dealings. As you thank them (see #2), consider offering an extra incentive, such as a volume discount, to renew acquaintances.
If people know that you value their input, they could become even stronger advocates. This is a way you may develop “repeat customers.”
4. Share and display content. Another social media technique is to find and share interesting content about certain topics with others. It is possible for a company of any size to develop effective marketing strategies based on content.
Build relationships with people by engaging them based on their interests. Do not just launch into a sales pitch right away. If your firm relies on consumers, share something that is interesting to your audience so the message will be perpetuated.
Similarly, you should tailor your content for various social networks. For instance, a tweet of just 50 characters may not work on other sites. Adapt to the format that is appropriate for a particular platform. Finally, encourage fans to return for shared content as well as other messages and special offers (see #3).
Finally, remember that social media is a good way to regularly stay in touch with clients during these turbulent times. It is a way to contact them quickly and efficiently.
In summary: There is no definitive “right” or “wrong” way to market a small business, but you may be able to utilize social media to your advantage if you budget for it. As an added incentive, it is likely that your main business competitors have already jumped into the fray. Do not be left behind in the lurch.
Sweep Up Nanny Tax Obligations
Tax duties of household employers
Do you employ a household worker—perhaps a babysitter or a housekeeper—on a regular basis? Or have you hired someone to watch your kids at home due to the coronavirus outbreak? Much to your surprise, you may be treated as an “employer” for federal tax purposes. As a result, you could face certain tax obligations.
These tax responsibilities are often collectively referred to as the “nanny tax” because of several high-profile cases involving wealthy taxpayers with nannies. But the nanny tax is not limited to the rich and famous. It can affect people from all walks of life.
Background: The tax law requires you to pay employment taxes if the wages paid to a household employee exceeds a relatively low annual threshold. The threshold for 2020 is $2,200 (up from $2,100 in 2019). The nanny tax encompasses the following three taxes:
1. Social Security tax: The 6.2% Old Age Survivor and Disability Insurance (OASDI) portion of Social Security tax is withheld from an employee’s pay and matched by an employer up to the amount of the annual wage base. The wage base for 2020 is $137,700 (up from $132,900 in 2019). In addition, an employer must withhold and match the 1.45% Hospital Insurance (HI) portion of the tax on all wages paid to an employee.
For example, say you pay a housekeeper a total of $10,000. The Social Security tax that both you and the housekeeper owe is $765 ($620 OASDI tax + $145 HI tax).
2. Federal unemployment tax: An employer must pay 6% tax on the first $7,000 in wages, but this amount is normally reduced by a 5.4% credit. Thus, the effective net tax is 0.6% if you all required state unemployment and disability taxes have been paid.
3. State unemployment and disability taxes: Typically, an employer is also responsible for its share of these state taxes and for withholding the proper amount on behalf of an employee. If these taxes are not withheld, the employer must pay them.
The nanny tax may apply to a wide variety of household employees, including nannies, babysitters, private nurses, caretakers, cleaning people, yard workers and other domestic workers. But a worker is an "employee" only if you control the conditions. For instance, if you pay an agency directly instead of the worker, the agency is treated as the employer of the worker and is responsible for the taxes.
Alternatively, if the worker controls how and when the work is performed and works for several households, he or she may be considered to be a self-employed individual. This typically occurs when the worker offers services to the general public and provides tools and supplies for the job. Self-employed individuals are responsible for the own employment taxes.
Finally, note that there are several exclusions. The nanny tax is not imposed for amounts paid to a spouse; a child under age 21; a parent (unless certain special conditions apply); or an employee who is under age 18 at any time during the year unless providing household services is the employee's principal occupation.
Coping With the Health Crisis
At this writing, no one is sure how bad the COVID-19 outbreak will be and what further measures may be taken. But your small business may be well-advised to follow these steps for the foreseeable future.
· Eliminate face-to-face meetings. Set up conference or video calls or communicate online. Use online tools like Zoom, Skype or Microsoft Teams to hold your meetings virtually.
· Stop all non-essential travel for employees.
Provide paid sick leave to all employees and encourage them to use it when they are feeling under the weather.
· Work from home and mandate that all employees work from home except for those whose essential functions require them to be in the office. Reexamine what can be done from home, if at all possible.
· Have all high-touch surfaces in the office cleaned and disinfected.
· Cross-train employees to perform multiple jobs.
· Maintain contact with employees by phone, email or text (or a combination).
A little common sense can go a long way in minimizing the transmission of this virus and keeping your employees safe.
Facts and Figures
Timely points of particular interest
Tax Return Update—After first extending the traditional tax payment deadline for 90 days due to the COVID-19 outbreak, the IRS officially also delayed the tax filing due date from April 15 to July 15. Therefore, you have until the extended deadline to pay tax for the 2019 tax year and file your return, without incurring any interest or penalties. This change also applies to the first quarterly installment of estimated tax normally due on April 15.
New Tax Credits—The first COVID-19 relief law—the Families First Coronavirus Response Act—requires small employers with fewer than 500 employees to provide paid sick leave benefits to employees. It also gives employees the right to take up to 12 weeks of family leave for a COVID-19 quarantine. In turn, employers may claim a tax credit equal to the cost of its emergency sick leave and family leave payments. This new credit first offsets the Social Security tax component of payroll tax. Any excess is refundable.
IRA Contributions—The IRS now says that you can still make contributions to a IRA for the 2019 tax year by the extended tax return due date of July 15. Contributions to an IRA may be wholly or partially tax-deductible depending on your income and whether you (or your spouse, if married) actively participate in an employer retirement plan.
Consult with your professional tax advisor about your personal situation.