ppp

Non-Deductibility of PPP Related Expenses to the Extent of Forgiven PPP Funds (IRS Notice 2020-32)

Janet Kim, CPA, MST

Wright Ford Young & Co., CPAs

 

The IRS released Notice 2020-32 on April 30, 2020, which provides guidance on the deductibility of expenses paid with Paycheck Protection Program (PPP) loan proceeds that are forgiven and excluded from the borrower’s income. The IRS has determined otherwise deductible expenses that are paid with PPP funds may not be deductible for federal income tax purposes to the extent the expenses were reimbursed by a PPP loan that was then forgiven.

The PPP was created by Section 1106 of the Coronavirus Aid, Relief, and Economic Security Act (CARES Act). Under the PPP, the borrower can receive forgiveness of indebtedness in the amount equal to the sum of payments made for the following expenses during the 8-week “covered period” beginning on the covered loan’s origination date: payroll costs, mortgage interest, rent, and utilities during the COVID-19 crisis. The forgiven amount is excluded from gross income under the PPP. The IRS notice explains that to the extent that Sec 1106 excludes from gross income the amount of a covered loan forgiven, this results in a “class of exempt income” under Sec. 265 which disallows otherwise allowable deduction for the amount of covered loan forgiveness because such payment is allowable to tax-exempt income. This treatment prevents a double tax benefit.

The CARES Act did not address whether deductions otherwise allowable under the Code for payments of eligible Section 1106 expenses paid by the PPP borrowers are allowable if the covered loan is subsequently forgiven as a result of the payment of those expenses. According to Senate Finance Committee Chairman Chuck Grassley “the intent was to maximize small businesses’ ability to maintain liquidity, retain their employees and recover from this health crisis as quickly as possible, this notice is contrary to that intent.” It may take clarification in a future bill if the original intent of Congress is that these expenses remain tax deductible.

We continue to monitor all newly issued legislation and guidance to assist you in making informed decisions.  If you have any questions or concerns regarding this latest guidance, please contact your WFY advisor or contact us here.

business transition

Business Transition Preparedness Post COVID-19

During the ongoing management of COVID-19 restrictions, we are all trying to determine and assess the short- and long-term damage on businesses, the economy, and the capital markets. While we don’t pretend to have answers better than others, we would like to share our thoughts on the impact of the virus on M&A transactions. First off, we don’t want to trivialize the health impact imposed by the pandemic nor the human element of lost jobs, life disruptions, and family separations. Our intent is to provide our strategic thoughts while we try to maintain a sense of normalcy.

Prior to the onset of COVID-19—only a month ago—the M&A markets were as strong as ever. We had all heard about the strength of economic fundamentals. The combination of a strong US economy, tremendous amounts of capital raised, liquid debt markets, low interest rates, and favorable demographics were the driving forces. Deal values and volumes were at a record pace.

Today, the economy is certainly shaken but several favorable factors remain—significant capital ready to be deployed, favorable debt markets, and demographics. But with hopes of slowing the spread of the virus and escalating medical capabilities, coupled with the massive CARES Act and PPP aid packages passed by Congress, many analysts have suggested the US economy should start showing signs of recovery in the coming quarters. With this optimism in mind, we believe M&A volume will once again strengthen later in the year.

As companies approach the M&A market, we believe there will be a need to defend current financial results, projected financial forecasts, and valuation expectations. These discussions will need to be fact-based, convincing interested parties that first half declines in revenue and earnings were temporary and a result of extraordinary circumstances, and therefore nonrecurring in nature. We believe valuations will likely be impacted short-term, but we expect to see a return to higher levels especially with the return of competition from private equity investors and strategic acquirers and for those companies that experience less business interruptions.

For business owners who are or were considering ownership transition, we believe now is a good time to prepare and plan ahead. This may include estate and tax planning, retirement and wealth management, accounting clean-up (such as pre-transaction quality of earnings), thoughts on succession management, pre-market activities (such preparing a confidential investment presentation), and strategizing with your M&A advisor on likely investors/acquirers. Accordingly, now is a good time to think and plan ahead. There will be a return to normalcy soon and pent-up demand from investors and acquirers will create a competitive M&A market once again. Those who are prepared for the opportunity will fare well.

We know these remain uncertain times but if you would like to learn more about how we can help, please visit us at www.cpa-wfy.com.

cares act

Learn the Business Benefits of the CARES Act

Our WFY Tax Partner, Richard Huffman, has created a 15-minute video presentation to illustrate the benefits your business may qualify for under the CARES Act.  Included are the Paycheck Protection Program Loans, Employee Retention Credit and deferral and income tax benefits. Watch the video to learn which benefits apply to you.

Please contact your WFY advisor to discuss how your business can benefit from these programs or you can contact us here.

economic impact payment

IRS Launches Economic Impact Payment Direct Deposit Portal

Today, the IRS launched a portal specifically focusing around the Economic Impact Payment. The portal is designed for taxpayers to check the status of their stimulus payment, set up direct deposit, and more.  Click here to visit the Economic Impact Payment Direct Deposit portal.

When clicking the “Get My Payment” button, taxpayers will be able to:

  • Get their payment status
  • Confirm their payment type (direct deposit or check)
  • Other information if needed, such as their bank account information

Taxpayers who want to accelerate the process of receiving their payment must add their bank account information and provide the following information:

  • Their AGI from their most recent tax return filed, either 2019 or 2018
  • The refund or amount owed from their latest filed tax return
  • Bank account type, account and routing numbers.

When clicking the “Non-Filers: Enter Payment Info Here” button, taxpayers who have not filed their 2018 or 2019 federal income tax return and their gross income didn’t exceed $12,200 will be able to:

  • Enter your current information such as your name, current mailing address, bank account information, and more
  • Find out if you’re eligible for an Economic Impact Payment

If you need more information on COVID-19 resources for your business and employees, click here.

Disaster Relief Payment Tax Assistance to Employees Affected by COVID-19

By Richard A. Huffman, CPA, MST

The national emergency declaration on March 13 triggered a tax benefit which allows employers to make non-taxable qualified disaster relief payments to employees for reasonable and necessary expenses resulting from the coronavirus pandemic.

Reimbursable expenses excludable from employee taxable income are as follows:

  1. Unreimbursed medical expenses including co-pays, deductibles, vitamins and supplements
  2. Increased expenses associated with being quarantined at home (e.g., increased utilities and home office expenses)
    1. Home office expenses include expenses associated with setting up or maintaining a home office such as enhanced internet connections, computer monitors, laptops, printers, office supplies, etc.
  3. Housing for additional family members (e.g., transportation and living expenses for college students returning home including duplicate meal expenses)
  4. Nonperishable food purchases/reserves
  5. Increased childcare expenses
  6. Expenses to enhance mental health and physical well-being from social distancing such as meditation apps and home health fitness
  7. Alternative commuting means in lieu of mass transit

Due to the extraordinary circumstances surrounding a qualified disaster, there is no dollar limit to what qualifies just as long as the expenses in question are reasonable and necessary with respect to the coronavirus.  Furthermore, employees are not required to account for or substantiate actual expenses in order to qualify for the exclusion and payments are not subject to discrimination testing.

With generous tax benefits and easy administration, qualified disaster relief payments are a valuable benefit that all employers should consider when trying to respond to the adverse financial impact that the coronavirus has on its employees.

If you have any questions, please contact your WFY tax specialist or email us at info@cpa-wfy.com.

Copyright 2020.  All Rights Reserved

The Senate and House Passes CARES Act of 2020

Richard A. Huffman, CPA, MST

Wright Ford Young & Co, CPAs

On March 27th, 2020, the House passed an amended version of the Senate’s Coronavirus Aid, Relief, and Economic Security (CARES) Act sending to the President to sign into law.

The Act provides a wide sweeping infusion of cash into the economy helping individuals and businesses during these extraordinary times.  Below is a summarized version of the Act explaining all the key details for individuals and businesses including the various loan programs.

Direct financial help to individuals:

  • Rebates of up to $1,200 for individuals and $2,400 for married couples.  People with children can receive $500 per child.  Amounts start to phase out for individuals with more than $75,000 adjusted gross income (AGI) and $150,000 for joint filers based on the taxpayer’s 2019 tax returns or 2018 if 2019 not yet filed.  The amount is completely phased-out for single taxpayers with AGI exceeding $99,000 and $198,000 for joint filers.
  • Waive the 10% early withdrawal penalty for distributions up to $100,000 from qualified retirement accounts for Coronavirus-related purposes.  In addition, income attributable to such distributions would be subject to tax over three years, and the taxpayer may recontribute the funds to an eligible retirement plan within three years without regard to that year’s cap on contributions.  Further, the provision provides flexibility for loans from certain retirement plans for Coronavirus-related relief.
  • Waive the required minimum distribution rules for certain defined contribution plans and individual retirement accounts in calendar year 2020.
  • Encourages Americans to contribute to churches and charitable organizations in 2020 by permitting them to deduct up to $300 of cash contributions, whether they itemize their deductions or not.
  • Increases the limitations on deductions for charitable contributions by individuals who itemize, as well as corporations.  For individuals, the 50-percent of adjusted gross income limitation is suspended for 2020.  For corporations, the 10-percent limitation is increased to 25 percent of taxable income.
  • Permit employers in 2020 to provide a student loan repayment benefit to employees on a tax-free basis.  An employer may contribute up to $5,250 annually toward an employee’s student loans and the payment would be excluded from the employee’s income.  The $5,250 cap applies to both the new student loan repayment benefit as well as other educational assistance (for example, tuition, fees, books) provided by the employer under current law.
  • Separately with the IRS announced postponement of April 15, 2020 tax payments now being owed July 15, 2020 individual 2019 IRA contribution deadlines are now extended until July 15, 2020 as well.

Business provisions:

  • Refundable employee retention credit to encourage employers to maintain headcounts computed on a calendar-quarter basis against the 6.2% employer-side social security payroll tax applicable to employers carrying on a trade or business in 2020 which either fully or partially suspend operations due to a government order or which sustain a significant decline in gross receipts (defined as the first calendar quarter after December 31, 2019, for which gross receipts are less than 50% of the amount in the corresponding prior-year quarter and ending with the next quarter in which gross receipts exceed 80% of the corresponding prior year quarter).  The refundable credit is only applicable for wages paid after March 12, 2020, and before January 1, 2021 up to $10,000 in qualifying wages per employee.  The credit is available to certain tax-exempt organizations as well.  If an employer takes out a payroll protection loan under Section 7(a) of the Small Business Act (detailed below) no employee retention credit will be available.
  • Allows employers and self-employed individuals to defer payment of the employer share of the 6.2% Social Security tax on employee wages to be paid over the following two years, with half of the amount required to be paid by December 31, 2021 and the other half by December 31, 2022.
  • Allows net operating losses incurred in 2018, 2019 or 2020 to be carried back five years without limitation.
  • Excess business loss rules that originally suspended non-corporate taxpayer losses to $250,000 ($500,000 in the case of joint filers) has been suspended through December 31, 2020.
  • Temporarily increases the amount of interest expense businesses are allowed to deduct on their returns, by increasing the 30-percent limitation to 50-percent of taxable income for 2019 and 2020 and allow businesses to use their adjusted taxable income from 2019 in tax year 2020 for the taxable income limitation.
  • Qualified improvement property (facility improvements) tax life will be corrected to 15-year and be eligible for 100% bonus depreciation retroactively starting 9/28/17 allowing for amended returns.

Relief for small businesses:

  • Extends the qualifications for borrowers and the size of loans that are available through the U.S. Small Business Administration (SBA):
    • During the covered period from February 15, 2020 through June 30, 2020 payroll protection loans fully guaranteed by the federal government through December 31, 2020 [SBA 7(a) loans] are available to any business, private nonprofit, or public nonprofit organization with under 500 employees.  Borrowers can receive loans equal to 2.5 times their U.S. monthly payroll (excluding annual compensation greater than $100,000 per employee), mortgage, rent, and debt payment expense, up to $10 million.  Borrowers can use these loans for a broad range of business expenses including payroll, paid sick leave, mortgage, rent, utilities, and payments on existing debts.  No collateral or personal guarantee is required for a loan and the standard fee is waived.  The loans will have a maximum maturity of 10 years and an interest rate not to exceed four percent.  An additional provision in the CARES Act provides for possible deferment of repayment of the loans for a period of at least six months, but not to exceed a year.
    • The requirements to obtain a loan are as follows:
      • The loan is needed to continue operations during the COVID-19 emergency.
      • Funds will be used to retain workers and maintain payroll or make mortgage, lease, and utility payments.
    • There is a special eligibility rule for businesses in the hospitality and dining industries that have more than one physical location, employ 500 or fewer employees per location and are assigned to the accommodation and food services sector 72 under the North American Industry Classification System.
    • Business that were operating on February 15, 2020 and that have a pending or approved loan application under this program are presumed to qualify for complete payment deferment relief (for principal, interest, and fees) for six months to one year.  Lenders are required to provide such relief during the covered period (if secondary market investors decline to approve a lender’s deferral request, the Administration must purchase the loan).
    • Indebtedness is forgiven (and excluded from gross income) in an amount (not to exceed the principal amount of the loan) equal to the following costs incurred and payments made during the eight week period beginning on the date of the loan:
      • U.S. Payroll costs (excluding annual compensation greater than $100,000 per employee)
      • Interest payments on mortgages
      • Rent
      • Utility payments
    • Forgiveness amounts will be reduced for any employee cuts or reductions in wages below the average number of full-time equivalent employees as of February 15, 2019 to June 30, 2019 or January 1, 2020 until February 29, 2020 (at election of borrower) calculated on a monthly basis.
    • There is relief from these forgiveness reduction penalties for employers who rehire employees or make up for wage reductions by June 30, 2020 and will not apply to an employer between February 15, 2020 and 30 days following enactment of the CARES Act.
  • Expands the SBA’s Disaster Loan Program through 2020 for businesses with 500 or fewer employees as follows:
    • Waives rules related to personal guarantees on advances and loans of $200,000 or less for all applicants;
    • Waives the requirement that an applicant be unable to find credit elsewhere
    • Allows lenders to approve applicants based solely on credit scores
    • Applicants can request an emergency advance from the Administrator of up to $10,000, which does not have to be repaid, even if the loan application is later denied.
    • Advances may be used for purposes already authorized under the SBA Disaster Loan Program including:
      • Providing sick leave to employees unable to work due to direct effect of COVID-19
      • Maintaining payroll during business disruptions during slow-downs
      • Meeting increased supply chain costs
      • Making rent or mortgage payments
      • Repaying debts that cannot be paid due to lost revenue
  • The CARES Act also provides benefits to those with loans under Section 7(a) of the Small Business Act OTHER THAN the new paycheck protection loans, in the form of a government subsidy whereby the SBA will pay six months of principal, interest and fees on qualifying loans.

If you have any questions about how you or your business can obtain the many benefits of the CARES Act, contact your WFY tax specialist or email us at info@cpa-wfy.com.

© Copyright 2020. All rights reserved.

payroll tax

Changes with 2020 Payroll Tax and Standard Auto Mileage Rate

by WFY Accountant, Bonnie Thompson

Beginning January 1, 2020, the following changes go into effect for the withholding of payroll taxes and reimbursement of auto mileage:

SOCIAL SECURITY

The wage base for withholding social security tax has increased to $137,700 The social security tax rate will be 6.2% for both employers and employees for a maximum expense of $8537.40 For Medicare, the rate is still 1.45% each for employers and employees with no limit this year. Continuing in 2020 employees earning in excess of $200,000 will be subject to a mandatory additional 0.9% Medicare tax withholding regardless of their individual tax filing status. This withholding does not require the employer match.

STATE DISABILITY INSURANCE (SDI)

The taxable wage limit has increased to $122,909. The tax rate will remain at 1%. Maximum to withhold is $1229.09

FEDERAL AND STATE UNEMPLOYMENT INSURANCE

Both the Federal and State of California taxable wage bases remain the same for 2020 at $7,000. You will receive notification of your state tax rate. The FUTA tax rate is .06 all year.

STANDARD AUTO MILEAGE RATE

At this time the standard auto mileage rate for reimbursement of deductible costs of operating an auto for business will be 57.5 cents per mile.

For those clients for whom we prepare quarterly tax returns and annual information returns, please submit the necessary information as soon as possible to assist us in preparing your forms on a timely basis. Please be sure that you have given us the most current information on names and addresses of W-2 and 1099 recipients.

We are available to answer any questions you may have regarding the proper reporting and withholding of payroll. Please feel free to contact our office should you need assistance.

law

CA Governor Signed Law to Conform to Federal Tax Law Changes

The California governor signed law AB 91, also known as the “Loophole Closure and Small Business and Working Families Tax Relief Act of 2019” which partially conforms to certain provisions of the Federal Tax Cuts and Jobs Act, some of the significant items are as follows:

  • Small business accounting method reform and simplification
    • Allow businesses with average gross receipts less than $25 million to adopt the cash method of accounting
  • Net operating losses
    • Only allow net operating loss carryforwards

The new California law does not conform to:

  • Opportunity zone gain deferrals and capital gain exclusions
  • Fringe benefit federal deduction limitations
    • Convenience of employer meals
    • Entertainment
    • Parking and transportation

Although the law goes into effect for many of the provisions starting in 2019, certain provisions can be elected to apply to 2018.

To discuss how best to apply these changes to your situation, please contact a WFY tax expert at (949) 910-2727 or info@cpa-wfy.com.

© Copyright 2019. All rights reserved.

calcpa

Cyndi LeBerthon Appointed Chair of CalCPA Peer Review Committee

Wright Ford Young & Co.’s Audit Partner, Cyndi LeBerthon, has been appointed Chair of the CalCPA Peer Review Committee for the term 2019 through 2021.

This committee of 20 members is responsible for overseeing all peer reviews of CPA firms in California, Arizona and Alaska administered by CalCPA. The peer review committee evaluates the results of the peer reviews, determines the need for follow up remedial or corrective actions, and oversees the performance of AICPA qualified peer reviewers in California, Arizona and Alaska. These measures taken ensure compliance with the AICPA Peer Review Program. Cyndi has served on the peer review committee since 2015 and is honored to be able to give back to the accounting profession through this volunteer, invitation-only role.

Congratulations, Cyndi!

If you’d like to learn more about WFY’s Audit Partner, Cyndi LeBerthon, click here.

WFY Hosts MGI North America West Coast Area Meeting

On January 4th, Wright Ford Young & Co. hosted the MGI North America West Coast Area Meeting at our offices in Irvine, CA.

Joe Tarasco, Regional Director, and Nancy Damato, Director of Marketing, starting the meeting off by talking about key points such as MGI North America new member recruiting initiatives and activities, marketing assessment calls/web meetings with MGI North America members, a guide about foreign companies doing business in United States, and upcoming conferences.

The meeting continued with discussions concentrating on MGI firm collaboration and practice management updates along with topics including business development, technical and niche areas, succession planning, and more.

Our WFY Tax Partner, Andy Bautista, hosted the meeting and said, “It was a great day spent with colleagues and friends, sharing ideas and ‘best practices,’ as well as networking and socializing. The meeting served as a reminder of how proud the respective firms are to be part of the MGI Worldwide network.”

Wright Ford Young & Co. is a member of MGI Worldwide, a Top 20 international accounting network of independent audit, tax and accounting firms, which brings together the expertise of some 6,000 professionals in over 300 locations around the world.  Through MGI Worldwide, our firm benefits from connections with people we get to know and trust in all corners of the globe.