Author Archives: Carl Hartung

Seek PPP Loan Forgiveness

The massive economic stimulus law – the Coronavirus Aid, Relief and Economic Security (CARES) Act – provides a wide range of relief to small businesses, including Paycheck Protection Program (PPP) loans supervised by the Small Business Administration (SBA).

Now is the time to apply for PPP loan forgiveness. If you qualify, you won’t owe any federal income tax on the forgiven debt.

But be aware that you must meet certain requirements to avoid being taxed on any forgiveness.

PPP loans are forgiven if the loan proceeds are used over a 24-week period to cover payroll costs or other qualified expenses like employee benefits, mortgage interest, rent and utilities. At least 60% of the money must go to payroll.

Normally, loan forgiveness results in taxable income. The CARES Act creates an exception for forgiven PPP loans.

But the SBA has created confusion by issuing murky guidance on when PPP loans can be forgiven. Consider the following points:

  • If your business received a PPP loan and retained or recalled employees and paid at least 60% of the loan proceeds for payroll, the entire debt is forgiven – without any federal income tax consequences.
  • A loan can be partially forgiven based on a complex calculation. For example, if you use 50% of the proceeds for payroll and 50% rent and utilities, you still qualify for forgiveness on a big piece of the pie. Leave the number crunching to your tax pro.
  • For these purposes, payroll costs are limited to $100,000 of annual wages per employee on a pro-rata basis. The IRS has clarified that this amount includes hazard pay, commissions, bonuses, etc. paid to furloughed employees.
  • The beginning date for PPP loan repayments is postponed for six months, but time can fly by for a struggling business. Under the latest guidelines, your bank has 60 days to review forgiveness applications, but the SB can take another 90 days.
  • The IRS has stated that qualifying expenses other than payroll costs must be paid or incurred during a 24-week period or before the next regular billing date to qualify for loan forgiveness.

How can you improve your chances for PPP loan forgiveness? Take the following three-step approach.

  1. Rally the troops. Restore the number of full-time equivalent (FTE) employees to previous levels by the safe-harbor due date of December 31. Bring back furloughed FTEs as soon as possible.
  2. Stack up payroll costs. Run payroll and other remaining qualified expenses – including mortgage interest, rents and utilities – on the last day of the 24-week period. This allows your business to maximize the amount of loan forgiveness.
  3. Pay out bonuses. Reward employees with bonuses to ensure that your business meets the requirement of 60% of payroll costs. The bonuses can even go to family members like your spouse or child. Reminder: You can only count up to $100,000 of an individual’s prorated wages as payroll costs, including any bonus for the calculation.

As of this writing, the government is debating more small business relief.

Small Business Tax Strategies
September 2020

Give IRA Funds Directly to Charity

If you are over age 70 ½ and receive annual required minimum distributions (RMDs) from your IRA (s), you may have more flexibility this year than you think.

Transfer funds directly from an IRA to a charity. There are no federal income tax consequences to this “qualified charitable distribution” (QCD).

A 2020 QCD may still make sense in your situation, even though the RMD rules are suspended for this year.

Under current law, a taxpayer who is age 70 ½ and older can transfer IRA funds directly to a qualified charitable organization, up to an annual limit of $100,00 ($200,000 for a married couple, if both spouses own IRA’s in their own names). Although no federal income tax deduction is allowed for QCD’s donors are not taxed on the transfer either. In other words, it’s a “wash” for tax purposes.

Usually, taxpayers who are older than age 72 (70 ½ prior to 2020) must begin taking RMDs from their IRAs each year. Failure to do so results in a 50% tax penalty on any shortfall, on top of the regular income tax hit. Fortunately, a QDC counts as an RMD.

But the Coronavirus Aid, Relief and Economic (CARES) Act suspended RMDs for the 2020 tax year. So, you don’t have to take any RMDs this year.

Practical Idea: Despite the CARES Act respite, you might complete a QCD anyway. The distribution isn’t taxable and enables you to satisfy charitable intentions.

Furthermore, a QDC isn’t included in your adjusted gross income (AGI) for 2020. As a result, you may avoid the loss of deductions and credits, the alternative minimum tax (AMT) and 3.8% tax on net investment income (NII).

Small Business Tax Strategies
September 2020

Connect with Electric Vehicles Credit

The tax law rewards environmentally conscious car owners.

Buy an electric vehicle that qualifies for a special tax credit. The options continue to expand as technology improves.

But you may have to move fast to get the car you want. The credit begins to phase out for a manufacturer’s vehicles when at least 200,000 qualifying vehicles have been sold for domestic use.

The credit for “plugin vehicles” is equal to the sum of (1) $2,500 plus (2) $417 for a vehicle that draws propulsion energy from a battery with not less than five kilowatt (kw) hours of capacity in excess of 5 kw hours, not to exceed $5,000. Thus, the maximum electric vehicle credit is $7,500, regardless of weight.

To qualify for the credit for plug-in vehicles, these requirements must be met:

  • A vehicle with at least four wheels must be manufactured primarily for use on public streets, roads, and highways (not including a vehicle operated exclusively on a rail or rails). For example, golf carts do not qualify.
  • The vehicle is treated as a motor vehicle for purposes of Title II of the Clean Air Act. This effectively bars certain low-speed motor vehicles from the credit.
  • The vehicle has a gross vehicle weight rating (GVWR) of less than $14,000 pounds.
  • The vehicle is propelled to a significant extent by an electric motor that draws electricity from a battery that has a capacity of being recharged from an external source of electricity.
  • The vehicle is used predominantly in the United States.
  • You are the original use of the vehicle. You must have acquired it for use or lease and not for resale.

Based on current projections, most manufacturers will not clear the 200,000 mark before the end of the year. But Tesla, a notable exception, crossed the threshold in 2019, so the credit disappeared on July 1. Similarly, the credit for GM’s Chevy Bolt has been halved to $3, 750 in 2020. If you are in the market for one of the other top-selling electric vehicles – say, a Ford Focus or a Toyota Prius – do not delay.

Find the list of qualified vehicles at www.irs.gov/business/qualified-vehicles-acquired-after-12-31-2009

Small Business Tax Strategies
September 2020

A Roth For Your Kid? It Works

Suppose your teenage child was fortunate enough to land a job this summer. Typically, your progeny might have an eye on the latest video game craze or a smartphone, but there may be a better way for him or her to spend the hard-earned cash.

Encourage your child to make a Roth IRA contribution. Even though retirement is a long time away, this can be a tax-smart financial move.

But how do you convince a high school student to contribute to a Roth? Explain the tax breaks. If, for example, a 17-year-old can sock away $6,000 a year (the current annual maximum) and receives a hypothetical 7% annual return, the pot will grow to a staggering $2.74 million at age 67! (Note that your child’s Roth contribution for a year cannot exceed the child’s earned income for that year.)

Under current law, future qualified distributions from a Roth account are 100% federal-income-tax-free. Although you generally must wait until age 59 ½ to qualify for tax-free distributions, earlier distributions may be wholly or partially tax free under applicable IRS ordering rules.

Finally, if you want to take some, or even all, of the sting out of the situation, give your teenager a cash gift up to the amount of the Roth contribution. For 2020, you can give the child up to $15,000 with no federal gift or estate tax consequences.