What every business owner should know when it comes to filing taxes!

Proactive Bulletin BoardThe tax code contains many tax-saving and reduction opportunities, but to take advantage of these opportunities you must act throughout the year. When tax filing times rolls around, it’s often too late to take advantage of many of these tax savings opportunities. The most important thing you can do is meet with your tax professional every year between June and November, tell them how things are going, and ask them to help you find tax-saving opportunities that will reduce your taxes and provide other benefits. For example, it might make sense to put your kids or another family member on the payroll. Remember, they need to do something to earn their place on the payroll, but that can be anything from stuffing envelopes to answering phones or even cleaning the office. This transfers income from your tax bracket to theirs and can even qualify them for a ROTH IRA. Setting up a pension plan might just make sense as well, as it could reduce your taxes, put money away for retirement, and even provide some funds that are creditor proof. There are many opportunities, but you have to be proactive to take advantage of them and you must do this in a timely fashion.

Resident Aliens vs Non-Resident Aliens

𝗗𝗶𝗱 𝘆𝗼𝘂 𝗸𝗻𝗼𝘄 𝘁𝗵𝗮𝘁 𝘆𝗼𝘂 𝗱𝗼𝗻’𝘁 𝗵𝗮𝘃𝗲 𝘁𝗼 𝗯𝗲 𝗮 𝗹𝗲𝗴𝗮𝗹 𝗿𝗲𝘀𝗶𝗱𝗲𝗻𝘁 𝗼𝗳 𝘁𝗵𝗲 𝗨.𝗦. 𝘁𝗼 𝗯𝗲 𝗮 𝘁𝗮𝘅 𝗿𝗲𝘀𝗶𝗱𝗲𝗻𝘁 𝗮𝗻𝗱 𝗵𝗮𝘃𝗲 𝗮𝗻 𝗼𝗯𝗹𝗶𝗴𝗮𝘁𝗶𝗼𝗻 𝘁𝗼 𝗳𝗶𝗹𝗲 𝗮 𝗨.𝗦. 𝘁𝗮𝘅 𝗿𝗲𝘁𝘂𝗿𝗻?

Alien Space Ship with tax collector

Non-U.S. citizens that live in the U.S. as residents are required to file U.S. income tax return and pay tax on their worldwide income even if their status in the U.S. is not that of legal resident.

For tax purposes a non-U.S. citizen is a resident of they meet one of two tests.

1) Under the lawful permanent residence test, a person is a resident alien if the person is a lawful permanent U.S. resident under the U.S. immigration laws.

2) Under the substantial presence test, a person is a resident alien if (i) the person is physically present in the current year for at least 31 days and (ii) the sum of the days present in the U.S. during the current tax year, plus one-third of the days for the immediately preceding tax year, plus one-sixth of the days for the second preceding tax year equals 183 or more. An individual who meets the substantial presence test can remain a nonresident alien he or she is present for fewer than 183 days during the current year, and, during this period, he or she maintains a closer connection with a foreign country. Certain days are excluded, including days present for medical reasons, commuting from Canada or Mexico, and present as a foreign government related individual, teacher or trainee, student, or professional athlete. An individual otherwise classified as a resident alien under these rules can be classified for U.S. tax purposes as a nonresident alien under a U.S. tax treaty if he or she is a dual- resident taxpayer and a resident of the treaty country under the treaty provisions.

It’s also important to remember that U.S. Residents, like citizens are taxable on their world wide income and that the statute of limitations for tax filing does not begin to run until the returns are filed.

Non-resident aliens may also be liable for taxes on U.S. Source income such as U.S. business income, rental income or capital gains generated in the U.S. https://rmsaccounting.com/non-resident-alien/

Because the rules are complex it’s best to discuss your situation with a tax professional that understands the complex laws and rules surrounding taxation if you have U.S source income or spend substantial time in the U.S.

Guidance On Payroll Tax Deferral Creates As Many Questions As It Answers

08/29/2020 – Last night the IRS Issued Notice 2020-65 dealing with the employee social security tax deferral announced by the president on August 8, 2020, in a Memorandum to the Secretary of State.  The Memorandum directed the Secretary of the Treasury to use his authority, pursuant to section 7508A of the Internal Revenue Code, to defer the withholding, deposit, and payment of certain payroll tax obligations. These obligations are the employee portion of social security tax under section 3102(a) or the railroad retirement tax equivalent under section 3202(a).

While the notice answers some questions it still leaves many questions unanswered and the deferral period starts only a few days from now.

What We Know From the Notice:

The deferral period is Sept 1, 2020 thru December 31, 2020 and it applies only to eligible employees that earn less than $4,000, bi-weekly or the equivalent amount based on their pay period, calculated on a pre-tax basis.

For qualifying workers, the deferral applies to the employee’s portion of Social Security taxes. This is the 6.2% of the total 7.65% of FICA taxes withheld from employees. The deferral does not affect the 1.45% that is designated for Medicare.

The Notice defines Affected Taxpayers not as employees, but as employers!  It goes on to say  “An Affected Taxpayer must withhold and pay the total Applicable Taxes that the Affected Taxpayer deferred under this notice ratably from wages and compensation paid between January 1, 2021 and April 30, 2021 or interest, penalties, and additions to tax will begin to accrue on May 1, 2021, with respect to any unpaid Applicable Taxes.” This means the repayment obligation is the responsibility of the employer and that the employer will be responsible for any interest and penalties on amounts not repaid.

It also makes clear that it is the employer’s responsibility to collect these deferred taxes from employees who participated in the deferral.

What We Don’t Know From the Notice:

The Notice doesn’t address what happens when an employee leaves the company or doesn’t make enough money to ratably pay back the tax, but it would appear that the obligation to make those payments remains with the employer.

It’s also fails to explain how this will be reported for tax purposes. We can only assume we’re going to see a revamped version of Form 941 (that’s a payroll tax form).

Also missing are any provisions for the self employed and it appears that self employed individuals have been purposely excluded.

Another very important missing item is a clear answer to the question of whether or not the deferral is optional, and if so, is it optional on the part of the employer or employee? While Treasury Secretary Mnuchin, has said that it would be optional, the notice contained no reference to this statement by the Secretary.

As you can see this notice is not the clear definitive statement that anyone wanted and with only days left until the deferral is scheduled to go into effect, those of us in the tax profession are left to argue over how we think things will shake out with very few definitive answers to many tough questions.

Door to unknown

Reference material

Notice 2020-65 https://www.irs.gov/pub/irs-drop/n-20-65.pdf

Presidential Memorandum on Deferring Payroll Tax https://www.whitehouse.gov/presidential-actions/memorandum-deferring-payroll-tax-obligations-light-ongoing-covid-19-disaster/

Forbes https://www.forbes.com/sites/kellyphillipserb/2020/08/28/questions-remain-after-irs-rolls-out-guidance-on-payroll-tax-deferral/#2a70a9485f7c

IRS https://www.irs.gov/newsroom/guidance-issued-to-implement-presidential-memorandum-deferring-certain-employee-social-security-tax-withholding

IRS Commissioner Charles P. Rettig, Says Enforcement is a Priority

File photo if IRS Commissioner Charles P. RettigThe Commissioner of the Internal Revenue Service, Charles Rettig, testified before the Senate Finance Committee. His message was a clear one: He is an enforcement-minded commissioner and “the IRS is committed to pursuing those who . . . intentionally evade their tax obligations.” Mr. Rettig did not mince words. His IRS will “aggressively pursue non-compliant taxpayers . . . with visible civil and criminal enforcement efforts.” But the message, though a stern one, is also one of fairness: Honest taxpayers need to believe—to feel confident—that others are paying their fair share, whether voluntarily or through enforcement efforts.

For his full Senate Finance Committee Testimony  click here

Federal Payroll & Tax Withholding Effects Covid-19 and the CARES Act

The CARES Act has the following provisions effecting the federal taxes on payroll and payroll tax withholding. These provisions deal with employer payments for student loan repayments, as well as changes in terms of permitted benefits under health savings accounts (HSAs), Archer Medical Savings Accounts (MSAs), health flexible spending accounts (FSAs), and health reimbursement arrangements (HRAs). Other federal withholding provisions of interest to employers during the COVID-19 public health emergency include employer-provided disaster relief payments and donate leave programs.

Each of these provisions are outlined below:

  • Employers may provide student loan repayment assistance

The CARES Act allows employers that provide student loan repayment benefits to employees to do so on a tax-free basis and such payments may be excluded from the employee’s income. This benefit is available through Dec. 31, 2020.  The payment is subject to the same $5,250 annual cap available under Code Sec. 127 for tuition, books, fees and supplies.

  • Benefit plan provisions amended during COVID-19

The CARES Act ensures individuals are able to use all tax-favored health care accounts, like Health Savings Accounts (HSAs) and Flexible Spending Accounts (FSAs), to buy over-the-counter medicines tax-free without a prescription. This change would apply for amounts paid or expenses incurred after Dec. 31, 2019. In addition, Sections 3703 and 3704 explain that high deductible health care plans with HSAs will be able to provide coverage for telehealth services without having to satisfy the plan’s minimum deductible.

  • Employer may provide disaster relief payments

Due to the Presidential Disaster declared for all 50 states for Covid-19, employers may make qualified disaster relief payments to employees impacted by the COVID-19 public health emergency. Qualified disaster relief payments, under this provision, made to an employee by an employer may be excluded from the employee’s taxable income. Qualified disaster relief payments include amounts to cover necessary personal, family, living or funeral expenses that were not covered by insurance. They also include expenses to repair or rehabilitate personal residences or repair/replace the contents to the extent that they were not covered by insurance. Again, these payments would not be included in the individual recipient’s gross income.

  • Employers may administer a donated leave program

Leave donated by employees to an employer-sponsored leave bank under a major disaster leave-sharing plan is not taxable for the leave donor if certain requirements are met.  Leave donated by employees to an employer-sponsored leave bank under a major disaster leave-sharing plan is not taxable for the leave donor if certain requirements are met.  Amounts paid to medical emergency leave bank recipients are taxable employee compensation and subject to FITW, FICA, and FUTA. Employees who surrender or deposit their time in the leave bank do not realize any income and incur no deductible expense or loss

  • COVID-19 added as adverse condition for foreign income and housing exclusions.

Waives the required residency period for qualifying individuals with a tax home in a foreign country to use the foreign income and housing exclusion. The law added to the already existing conditions for waiver for Covid-19. For 2019 and 2020, for purposes of Code Sec. 911(d)(4), the coronavirus pandemic (“COVID-19 Emergency”) is an adverse condition that precluded the normal conduct of business as follows: (1) in the People’s Republic of China, excluding the Special Administrative Regions of Hong Kong and Macau (China), as of Dec. 1, 2019; and (2) globally, as of Feb. 1, 2020. The period covered by Rev Proc 2020-27 ends on July 15, 2020, unless an extension is announced by the Treasury and IRS.

  • IRS revises trust fund penalty assessment procedures

Due to Covid-19 and the shutdown of many IRS offices and services centers the IRS is directed to delay the assessment of the trust fund penalty on individuals responsible for the collections and payment of payroll taxes withheld and not deposited to the U.S, Treasury. Said delays are only available when no imminent statute or exigent circumstances exist.

  • IRS provides deadline relief for correcting employment taxes and other time-sensitive actions.

Deadlines extended to July 15. The IRS has now postponed deadlines for certain specified time-sensitive actions on account of the ongoing COVID-19 pandemic.

Notice 2020-35, 2020-25 IRB extends tax deadlines to July 15, 2020 for the following: (1) employers correcting employment tax reporting errors using the interest-free adjustment process; and (2) employers correcting employment tax underpayments or overpayments.

  • IRS provides guidance on leave-sharing program to aid COVID-19 victims

Under an employer leave-based donation program, employees elect to forgo vacation, sick, or personal leave in exchange for cash payments an employer makes to organizations described in Code Sec. 170(c).

The IRS will not consider any cash payments an employer makes to a Code Sec. 170(c) organization in exchange for vacation, sick, or personal leave that employees donate to be gross income or wages if the payments are: (1) made to the Code Sec. 170(c) organizations for the relief of victims of COVID-19; and (2) paid to the Code Sec. 170(c) organizations before Jan. 1, 2021.

Similarly, the IRS will not assert that the opportunity to make such an election results in constructive receipt of gross income or wages to the employees. Electing employees may not claim a charitable contribution deduction under Code Sec. 170(c) with respect to the value of forgone leave excluded from compensation and wages.

All of the information contained herein is intended to provide information on options and updates created by the CARES ACT and other changes effecting the payroll taxes and withholding. Each topic is covered in summary form only and it should not be considered tax or accounting advice.  Before taking action it’s important to review all information regarding the provision and to consult a tax professional.

 

8/11/20 – SBA Releases New PPP Loan Forgiveness FAQs

In consultation with the Treasury Department, the Small Business Administration (SBA) has released a set of Frequently Asked Questions (FAQs) addressing forgiveness of Paycheck Protection Program (PPP) loans. The FAQs provide guidance on general loan forgiveness, payroll costs, nonpayroll costs, and reductions to a borrower’s forgiveness amount. Among other things, the FAQs provide examples on how to calculate the amount of forgivable compensation for owners of C corporations, S corporations, self-employed Schedule C (or Schedule F) filers, general partners, and LLC members. In addition, the FAQs clarify that payments of transportation utility fees assessed by state and local governments are eligible for loan forgiveness. According to the SBA, borrowers and lenders may rely on the FAQs. For more information, see www.sba.gov/document/support-frequently-asked-questions-ppp-loan-forgiveness .

Executive Orders 08/08/2020

President Uses Executive Orders Too Authorize Extending Unemployment Benefits and More

President Trump signed four executive orders Saturday. These orders provide additional jobless benefits, suspend the collection of payroll taxes, avoid evictions and assist with student-loan payments.

Here is a breakdown of the Executive Orders:

Unemployment Benefits

The administration plans to roll out a $400 weekly payment, funded 75% by the federal

government and 25% by states. It remains unclear if the states will go along with this plan, given that many of them are facing budget shortfalls due to the coronavirus-sparked recession.

Under the executive action the additional jobless benefits will be paid from the Disaster Relief  Fund, the government’s primary source of money to pay for emergency costs. The extra weekly benefits would be available until December 6, 2020, or until the disaster fund’s balance drops to $25 billion, according to the executive action.

Evictions

This executive order directs the Department of Treasury and the Department of Housing and  Urban Development (HUD) to identify funds to provide temporary financial assistance to renters and homeowners who are struggling to meet their monthly rental or mortgage obligations. The order also directs HUD to take action to “promote the ability of renters and homeowners to avoid eviction or foreclosure.”

It falls short however, of reauthorizing the eviction moratorium set in the Cares Act which expired at the end of July. The moratorium applied only to properties with government-backed mortgages, covering just one-third of renters. Pressure is mounting in Washington to find a way to prevent a wave of evictions—and the resulting domino effect of defaults and foreclosures by landlords.

Regulators could potentially instruct the government-sponsored mortgage corporations Fannie Mae and Freddie Mac to offer landlords forbearance on their monthly mortgage payments if their tenants are unable to pay rent, assuming they do not evict their tenants. But Fannie and Freddie are overseen by the Federal Housing Finance Agency (FHFA), which is an independent government agency. The executive order directs the FHFA to “review all existing authorities and resources that may be used to prevent evictions and foreclosures for renters and homeowners.”

Other government housing agencies such as the Federal Housing Administration (FHA) do fall under the President’s authority and could potentially be used to help prevent evictions, however, FHA is not technically permitted to spend money without it being appropriated by Congress.

Payroll Tax

The President directed the Treasury Department to defer the 6.2% Social Security tax on wages for employees making less than about $100,000 a year. That suspension would last from Sept. 1 through Dec. 31. Under the executive order the taxes would still be due by employers and employees. The President said he would press Congress to revert the deferral into an actual tax cut.

The tax code gives the Treasury Secretary authority to delay tax filing and collection after presidentially declared disasters. The administration already used this authority to postpone a series of spring tax deadlines until July 15 and used it again Friday to delay some excise-tax collections. It is far from certain that many employers will stop withholding payroll taxes given the potential for future liability.

Student Loan Payment

The Cares Act gave borrowers with federal student loans a six-month suspension of their monthly payments, interest-free. The law applied to roughly 35 million borrowers whose loans are held by the federal government. However, the law excludes about eight million borrowers whose loans are held by private lenders with a government guarantee. This payment moratorium is set to expire September 30. Saturday’s executive order would extend the payment moratorium and zero-interest until the end of the coronavirus crisis.

For those wanting to know what all this means right now we can’t be sure just how things will shake out. Open questions include: will court actions delay, or cancel any of these orders? Will some all or none of the states go along with the requirement to pay 25% of the expanded and yet reduced federal unemployment benefits? Just how will these orders be implemented?

It will take time for more information, along with rules and regulations to be propagated that spell out just how to take advantage of the benefits covered by the executive orders, so stay tuned to our website as we will do our best to keep you informed.

Qualified Plan Loans Avoiding Unplanned Distributions & Penalties

Having trouble making payments on a loan from a qualified employer pension or retirement plan?

The CARES Act may just have provided you with the perfect solution, allowing you to avoid losing the tax deferral and being subject to the early withdrawal penalty.

The CARES Act temporarily liberalizes the plan loan rules in two key ways:

1) Loan payments that would otherwise be due between March 27, 2020, and December 31, 2020, can be suspended for up to one year. Payments due after the suspension period will be adjusted to reflect interest that accrued during the suspension period.

2) For plan loans made between March 27, 2020, and September 22, 2020, the maximum loan amount can be increased to the lesser of: a) $100,000 minus any existing plan loan balances, or b) 100% of the participant’s vested account balance or benefit.

So if you can’t make payments on a retirement or pension plan loan, due to a loss of income, furlough  or other reason, the sooner you contact your plan administrator the better.

Employees Working at Home?

Employees Working at Home? Time to Rethink Your Space.

In a pre-Covid-19 world, working from home was considered a luxury. It is now considered a necessity to keep so many hardworking businesses open and workers employed.

If enough of your employees will and are working from home successfully, it might be time to think about whether this could be something you would consider for the long-term. Employees working from home can mean giving up some pricey real estate space, allowing you to lower rent and utility expenses. Let us take a look at some factors to consider.

Wondering how other businesses are managing these new remote working arrangements? A recent survey by Mercer reveals some interesting findings:

  • 93% had provided “more flexible work options to align to the new way of working” during the pandemic. Of those, only 9% had at least 25% of their employees working remotely
  • 58% said that once regulations are lifted, they expect at least 25% of their employees to work remotely
  • When asked to predict future post-pandemic work-from-home policies, 52% expect they’ll change to “allow for more flexibility to work both on-site and remotely.”

There are a variety of factors to consider:

Estimate how big the opportunity will be for your business. Impact varies from business to business, but consider what you could do if you reduced your rent by 25%. This could save a good chunk of your monthly expenses. You will need to analyze whether the savings in your business would make cutting your space worthwhile or if by reducing your space needs you may be able to afford a more desirable location for the same cost.

What will your new arrangements, in a smaller space, look like? You may still want your remote workers to be in the office some of the time to help stay connected in ways that cannot be accomplished virtually. A time-tested model to solve this issue has been to maintain several flexible workspaces that workers who just pop in can use on an as needed basis.

Take a look at your current space. Think about the wasted space you currently have. Try zero-basing your workspace needs by determining what you require without reference to your current workspace. Looking at your needs from a fresh perspective can be eye opening.

Additionally, you’ll need to consider expenses of having employees who plan to work from home on a long-term basis. You may be footing the bill for a proper desk, chair, and other essential furnishings that you supply for workers in your current space.  You also may need to purchase printers and office supplies in addition to providing a cell phone and internet reimbursements, to compensate home workers that purchase items used for business purposes. You will also want to consider increasing IT safety measures to prevent cyberattacks on less-secure home networks.

What are your current lease obligations? You will need to carefully review all your contracts to assess how soon you can make a change. It never hurts to negotiate but understand that even if you’re using only a fraction of your renter space, you might be stuck until your lease is up.

Be creative! Maybe you could give up some of the space you’re currently renting and sublease the extra space to another tenant. Or, if it’s allowed under your lease contract, you could find a tenant to sublease all the space you are currently renting and relocate to somewhere that better meets your needs. Beware – this will make you a landlord, with all the monetary risks and potential headaches that may arise.

You could also negotiate a buyout of your lease, but you’ll want to analyze the numbers to ensure you’re actually coming out ahead. The current commercial real estate market along with where your rent falls in the market will determine how much your landlord is willing to work with you.

Considering and making a move for a business is no small feat. The cost of moving and setting up shop at a new location could be greater than what you would save in rent, depending on how long you plan to occupy the new, less expensive quarters. It’s important to think long term with whatever you decide.