Webinar: Tax Implications of PPP Loans on Tuesday, December 1, at 12:00 PM (EST)

Tarlow Invites You: PPP Webinar – Tax Implications of PPP Loans 

The CARES Act stated that forgiveness of a Paycheck Protection Program (PPP) loan would be considered tax-exempt income, but it failed to address the impact of the associated expenses paid. 

On November 18, 2020, the Internal Revenue Service (IRS) issued Revenue Ruling 2020-27 which provides needed clarity on a taxpayers’ ability to deduct eligible expenses for PPP loan forgiveness.

On Tuesday, December 1, 2020, at 12:00 PM (EST), our CPA channel affiliate partner, Aprio, will host a complimentary webinar to review the latest updates from the IRS.

Speakers on the panel include:
  • Justin Elanjian, Partner, Assurance Services, Aprio
  • Tommy Lee, Partner in Charge, Retail, Franchise & Hospitality, Aprio

Register Today


Tarlow is Here to Help – Please Contact Us with Questions

Tarlow Partners and staff members are closely monitoring guidance from the SBA, the Department of Treasury, Congress, and the IRS, as well as the PPP rules, tax-related legislation, and regulations. We are readily available to assist business owners and will continue to send updates about relevant news and changing guidelines. If you have any questions about this update or any tax and/or year-end planning matter, please contact your Tarlow advisor for assistance.

IRS Clarifies the Deductibility of PPP Loan Expenses

On Wednesday, November 18, 2020, the Internal Revenue Service (IRS) and the Treasury Department issued guidance in the form of a Revenue Ruling 2020-27 (Ruling) and a revenue procedure to clarify the tax implications of expenses when a loan from the Small Business Administration’s (SBA) Paycheck Protection Program (PPP) has not been forgiven by December 31, 2020.  In a related update, the American Institute of CPAs (AICPA) and other groups are expressing concern about the SBA’s lengthy questionnaire for forgiveness of loans of $2 million or more.

According to the Ruling, since businesses are not taxed on the proceeds of a forgiven PPP loan, the expenses are not deductible. The result is neither a tax benefit nor a tax detriment since the taxpayer has not paid any funds out-of-pocket. If the taxpayer reasonably expects that a PPP loan will be forgiven in the future, loan expenses are not deductible. This is the case whether the business applied for forgiveness of the covered loan by the end of such taxable year or not. Therefore, the IRS and the Treasury are persuading businesses to file for forgiveness as soon as possible.

In circumstances where a PPP loan was expected to be forgiven but was not, taxpayers can deduct those expenses. On Wednesday, November 18, Treasury Secretary Steven Mnuchin stated, “Today’s guidance provides taxpayers with greater clarity and flexibility. These provisions ensure that all small businesses receiving PPP loans are treated fairly, and we continue to encourage borrowers to file for loan forgiveness as quickly as possible.”

In conjunction with the Ruling, the IRS issued Revenue Procedure 2020-51 (Rev Proc) to outline the following steps for when forgiveness is denied, in whole or in part, or not requested:

  1. The eligible expenses are paid or incurred during the taxpayer’s 2020 taxable year,
  2. The taxpayer receives a covered loan guaranteed under the PPP, which at the end of the taxpayer’s 2020 taxable year the taxpayer expects to be forgiven in a subsequent taxable year, and
  3. In a subsequent taxable year, the taxpayer’s request for forgiveness of the covered loan is denied, in whole or in part, or the taxpayer decides never to request forgiveness of the covered loan.

In the event forgiveness is denied or otherwise not requested in whole or in part, the Rev Proc provides for two safe harbors for taxpayers that would allow for the deduction of expenses in either the 2020 or a subsequent tax year.

Open Issues to be Addressed

This new guidance does not address the order in which the eligible expenses, i.e., payroll, rent, utilities, and mortgage interest, lose the ability to be deducted.  In addition, the Ruling does not address matters that could have significant tax implications on the following:

  • Qualified business income deduction (Section 199A)
  • Research and development credits
  • Interest deduction limitation (Section 163(j))

Tarlow is Here to Help – Please Contact Us with Questions

Tarlow Partners and staff members are closely monitoring guidance from the SBA, the Department of Treasury, Congress, and the IRS, as well as the PPP rules, tax-related legislation, and regulations. We are readily available to assist business owners and will continue to send updates about relevant news and changing guidelines. If you have any questions about this update or any tax and/or year-end planning matter, please contact your Tarlow advisor for assistance.

How Do You Create Price Levels in QuickBooks?

You may know that when you create a product or service record in QuickBooks, you must assign a sale price to it. But did you know that QuickBooks gives you a great deal of flexibility when to comes to pricing items you sell? The software allows you to create one or more additional Price Levels that you can access for invoices, estimates, sales receipts, credit memos, and sales orders. 

There are three ways you can use these. Once you’ve created them, they’ll be available in a drop-down list in the Rate field. This allows you to assign them manually to individual transactions. The second option is to assign them globally to specific customers or jobs. Once you’ve done so, that price will apply every time you create a transaction for one of them. Finally, you can create price levels for selected items. 

Here’s how it works. Let’s say you want to create a price level that’s 15 percent below the actual price that you can use in individual transactions. You open the Lists menu and select Price Level List. Click the arrow in the lower-left corner next to Price Level and choose New. A window like this will open:

You can create price levels in QuickBooks and assign them to individual sales transactions. 

Fill in the field next to Price Level Name, and then click the arrow next to Price Level Type. Select Fixed %. Select decrease from the drop-down list on the next line and enter your percentage number. Round up to the nearest is an optional field; click OK when you’re done. The next time you create a sales transaction, your new price level will be available as an option when you open the drop-down list in the Rate column. 

When you need to edit or delete a price level, go to Lists | Price Level List again and click the arrow next to Price Level in the lower-left corner. You have several options here. For example, you can make a price level inactive, so it doesn’t appear on the list. The field next to Price Level is labeled Reports. Click on the arrow to see what’s available there. 

Customers and Jobs 

You can also apply a price level you’ve created to a specific customer or job, perhaps to reward a customer for frequent purchases. When you do so, that rate will appear every time you enter a sales transaction for the customer or job you selected. 

Open the Customers menu and select Customer Center. Double click on a customer or job’s name to open the record. Click on the Payment Settings tab. Click the arrow in the field next to Price Level and select the right one, then click OK. 

 

You can assign a Price Level to specific customers or jobs. 

Per Item Price Levels 

QuickBooks also allows you to set custom prices for specific items associated with preferred customers or jobs (this option is only available if you’re using QuickBooks Premier or Enterprise). Let’s say you want to give a 10 percent discount to specific customers who purchase your website development services. Go to Lists | Price Level List and click the arrow next to Price Level in the lower-left corner again, then select New (you can also get to the New command by right-clicking anywhere in the window). 

Give your price level a name (like Web Development 10 Off), then select Per Item from the Price Level Type drop-down list. Click in front of the Item you want to include. The next line’s fields should read as pictured in the image below: 10% | lower | standard price. Click Adjust. You’ll see your reduced prices in the Custom Price column in the table above. 

You can establish a Price Level for specific items in QuickBooks.

Again, the rounding field is optional. When you’re finished here, click OK. The next time you create a sales transaction for a customer eligible for the lower price, you’ll select Web Development 10 Off from the drop-down list in the Rate column. 

Feel like you’re outgrowing your current version of QuickBooks, or is it several years old? Contact us about upgrading. We’re here to support you and help you more effectively use the software as your business changes and grows.

Gambling and Tax Gotchas

Article Highlights: 

  • Winnings 
  • Losses 
  • Social Security Income 
  • Health Care Insurance Premium Subsidies 
  • Medicare B & D Premiums 
  • Online Gambling Accounts 

Gambling is a recreational activity for many taxpayers, and as one might expect, the government takes a cut if you win and won’t allow you to claim a loss above your winnings. There are far more tax issues related to gambling than you might expect, and they may impact your taxes in more ways than you might believe. Here is an overview of the many issues and the “gotchas,” that can affect you. 

Reporting Winnings – Taxpayers must report the full amount of their gambling winnings for the year as income on their 1040 returns. Gambling income includes, but is not limited to, winnings from lotteries, raffles, lotto tickets and scratchers, horse and dog races, and casinos, as well as the fair market value of cars, houses, trips, or other non-cash prizes. The full amount of the winnings must be reported, not the net, after subtracting losses. The last statement’s exception is that the cost of the winning ticket or winning spin on a slot machine is deductible from the gross winnings. For example, if you put $1 into a slot machine and won $500, you would include $499 as the number of your gross winnings, even if you’d previously spent $50 feeding the machine. 

Frequently, taxpayers with winnings only expect to report those winnings included on Form W-2G. However, while that form is only issued for “Certain Gambling Winnings,” the tax code requires all winnings to be reported. All winnings from gambling activities must be included when computing the deductible gambling losses, which is always an issue in a gambling loss audit. 

GOTCHA #1 – Since you can’t net your winnings and losses, the full amount of your winnings ends up in your adjusted gross income (AGI). The AGI is used to limit other tax benefits, as discussed later. So, the higher the AGI, the more your other tax benefits may be limited.

Reporting Losses – A taxpayer may deduct gambling losses suffered in the tax year as a miscellaneous itemized deduction (not subject to the 2% of AGI limitation), but only to the extent of that year’s gambling gains. 

GOTCHA #2 – If you don’t itemize your deductions, you can’t deduct your losses. Thus, individuals taking the standard deduction will end up paying taxes on all of their winnings, even if they had a net loss. 

Social Security Income – For taxpayers receiving Social Security benefits, whether those benefits are taxable depends upon the taxpayer’s income (AGI) for the year. The taxation threshold for Social Security benefits is $32,000 for married taxpayers filing jointly, $0 for married taxpayers filing separately, and $25,000 for all other filing statuses. If the sum of AGI (before including any SS income), interest income from municipal bonds, and one-half the amount of SS benefits received for the year exceeds the threshold amount, 50–85% of the SS benefit is taxable. 

GOTCHA #3 – If your gambling winnings push your AGI for the year over the threshold amount, your gambling winnings—even if you had a net loss—can cause up to 85% of your Social Security benefits to become taxable.

Health Insurance Subsidies – Lower-income individuals who purchase their health insurance from a government marketplace are given a subsidy in the form of a tax credit to help pay the cost of their health insurance. Most people eligible for the tax credit use it to reduce their monthly health insurance premiums. That tax credit is based upon the AGIs of all members of the family. The higher the family income, the lower the subsidy becomes. 

GOTCHA #4 – The addition of gambling income to your family’s income can result in significant reductions in the health insurance subsidy, requiring you to pay more for your family’s health insurance coverage for the year. If your subsidy was based upon your estimated income for the year, your premiums were reduced by applying the subsidy in advance. If you subsequently had some gambling winnings, then you could get stuck with paying back some or all of the subsidy when you file your return for the year.

Medicare B & D Premiums – If you are covered by Medicare, the amount you are required to pay (generally withheld from your Social Security benefits) for Medicare B premiums is normally $144.60 per month and is based on your AGI two years prior. However, if that AGI was above $87,000 ($174,000 for married taxpayers filing jointly), the monthly premiums can increase to as much as $491.60. If you also have prescription drug coverage through Medicare Part D, and if your AGI exceeds the $87,000/$174,000 threshold, your monthly surcharge for Part D coverage will range from $12.20 to $76.40 (2020 rates). 

GOTCHA #5 – The addition of gambling winnings to your AGI can result in higher Medicare B & D premiums.

Online Gambling Accounts – If you have an online gambling account, there is a good chance that the account is with a foreign company. All U.S. persons with a financial interest or signature authority over foreign accounts with an aggregate balance of over $10,000 anytime during the prior calendar year must report those accounts to the Treasury by the April due date for filing individual tax returns or face draconian penalties. 

GOTCHA #6 – Regardless of whether you are a gambling winner or loser, if your online account was over $10,000, you will be required to file FinCEN Form 114 (Report of Foreign Bank and Financial Accounts), commonly referred to as the FBAR. For non-willful violations, civil penalties up to $10,000 may be imposed. The penalty for willful violations is the greater of $100,000 or 50% of the account’s balance at the violation time. The $10,000 and $100,000 penalty amounts are subject to adjustment for inflation, and after February 19, 2020 are $13,481 and $134,806, respectively.

Other Limitations – Those as mentioned above are the most significant “gotchas.” Numerous different tax rules limit tax benefits based on AGI, as discussed in gotcha #1. These include medical deductions, certain casualty losses, child and dependent care credits, the Child Tax Credit, and the Earned Income Tax Credit, to name a few. 

If you have questions related to gambling and taxes, please contact us.

Is a Living Trust Appropriate for You?

Article Highlights: 

  • What Is a Living Trust? 
  • Is a Living Trust Appropriate? 
  • Establishing a Living Trust 
  • Pros of a Revocable Trust 
  • Cons of a Revocable Trust 

You may have heard others discuss living trusts, but may not understand why you should have one. Every living trust is an estate-planning tool that is unique to the individual. A living trust is helpful for special circumstances or larger estates that need more protection or control. The vast majority of the population can get by without using a living trust, and a simple will is perfect for most people unless their estate is large or there are unique circumstances to be taken care of. 

There are two types of these trusts: revocable and irrevocable. As the names imply, an irrevocable trust generally cannot be undone once made. In contrast, provisions of a revocable trust can be changed or rescinded as long as the grantor (the individual who established the trust) is still living. A living trust becomes irrevocable when the grantor passes. 

An irrevocable trust would only be established under extraordinary circumstances; they will not be discussed in this article. While you can designate your beneficiaries in either a will or a living trust, there are some things that only one document or the other can do. So, even if you create a living trust, you may still need a will. Because these are legal documents, it is probably best to have an attorney’s assistance in preparing them, although do-it-yourself software does exist. Yes, you’ll have to pay legal fees to have the work done by a lawyer, but the cost of a professional’s expertise often will pay for itself by having all the I’s dotted and T’s crossed. Unfortunately, these legal fees aren’t tax-deductible. 

When a living trust is established, generally, all of an individual’s assets are assigned to the trust, including the home, rentals, stock accounts, and bank accounts. However, while living, the grantor still gets the use and benefit of these assets, as if the living trust had not been established, and income and capital gains derived from assets in the trust are reported on the individual’s 1040 and state (if applicable) tax returns. As part of the process of setting up the living trust, the assets placed into the trust will need to be retitled into the trust’s name. 

Generally, the benefits of a living trust outweigh the negative implications. Here is a condensed overview of the pros and cons of a living trust: 

Some of the Pros of a Revocable Trust:

Avoid Probate – Probate is the legal process through which the court ensures that their debts are paid when an individual dies. Their assets are distributed according to the individual’s will if there is one, or per state law if there’s no will or trust. Upon the grantor’s death, all of the assets held in the revocable trust bypass probate, meaning they pass to the grantor’s beneficiaries without having to go through the often time-consuming and expensive probate court process. Probate can take a long time, and the proceedings are a public process. 

Maintain Control of Assets after Death – A living trust can include provisions to delay distributions to children until they reach a specific age and help protect assets from falling into the hands of creditors or an ex-spouse. Distributions can be designed to fit the heirs’ circumstances. 

Reduce the Possibility of a Court Challenge – A living trust is often more difficult to challenge than a will because it is harder to prove incompetence. 

Prevent Conservatorship – If the grantor becomes incapacitated, then a living trust can protect the family from undergoing a conservatorship process. A conservatorship is when a court-appointed representative is given the authority to manage an incapacitated person’s financial matters for them. Instead, with a living trust, if the grantor ever reaches the point where they cannot control their affairs, a successor trustee who is already named in the trust by the grantor will step in. That trustee has a fiduciary responsibility to manage the trust’s assets for the grantor’s benefit. 

Some of the Cons of a Revocable Trust: 

Additional Paperwork – A disadvantage of a living trust is the additional paperwork required in assigning ownership of the grantor’s assets to the trust. For this to be effective, the ownership of all of the grantor’s property must be legally transferred to the “grantor as the trustee.” If an asset has a title (e.g., real estate, stocks, mutual funds), then the title should be changed to show that the trust now owns the property. 

No Tax Benefits – Shifting assets to a revocable trust does not save income or estate taxes. Until the trust becomes irrevocable upon the grantor’s death, the grantor is still responsible for all tax issues related to assets included in the trust. Thus, the grantor should continue to implement appropriate tax strategies. 

Lacks Asset Protection – Assets held within a revocable trust are treated as being owned by the grantor and are within reach of creditors. 

Difficulty Refinancing Trust Property – Since real estate’s legal title is held in the trustee’s name, some banks and title firms may balk if the grantor wants to refinance the property. Providing a copy of the trust document, which explicitly gives the grantor, as trustee, the power to borrow against the trust’s property, should satisfy their concerns. Otherwise, it may be necessary to remove the asset from the trust temporarily by retitling it in the grantor’s name and then reversing the procedure once the refinancing has been completed. 

If you have general questions related to living trusts, please contact us.

There is More to Deducting Health Insurance than Meets the Eye

Article Highlights: 

  • Itemized Deduction 
  • AGI Limitations 
  • What Insurance is Deductible 
  • Above-the-Line Deduction for the Self-Employed 
  • Income Limitation 
  • Subsidized Limitation 

Health insurance premiums, especially in the wake of the Affordable Care Act, have risen dramatically and are one of the highest expenses that most individuals pay. Although the cost of health insurance is allowed as part of an individual’s medical deductions when itemizing deductions, only the amount of total medical expenses that exceed 7.5% of the taxpayer’s adjusted gross income (AGI) is deductible. The 7.5% limitation is increased to 10% for years after 2020. 

This article’s purpose is twofold: to remind you what can be included as a medical deduction and inform you of an alternate means of deducting health insurance for specific self-employed individuals—a means that avoids the AGI limitation and allows for deduction without itemizing. 

Let’s start by looking at what classifies as deductible health insurance. It includes the premiums you pay for coverage for yourself, your dependents, and your spouse, if applicable, for the following types of plans: 

  • Health care and hospitalization insurance 
  • Long-term care insurance (limited based on age) 
  • Medicare A in some circumstances* 
  • Medicare B 
  • Medicare C (aka Medicare Advantage plans) 
  • Medicare D 
  • Dental insurance 
  • Vision insurance 
  • Premiums paid through a healthcare marketplace net of the Premium Tax Credit 

*Most workers, and any government employees who pay Medicare tax, have a portion of their wages deducted for contributions to Medicare A. This payroll tax isn’t a deductible medical expense. However, those not covered under Social Security, and government employees who didn’t pay Medicare tax, can voluntarily enroll in Medicare A. In that case, Medicare A premiums are a medical expense.

Premiums paid on your or your family’s behalf by your employer aren’t deductible because their cost is not included in your wage income. Or, if you pay premiums for coverage under your employer’s insurance plan through a “cafeteria” plan, those premiums aren’t deductible either because they are paid with pre-tax dollars. 

Special Rule for Self-Employed Taxpayers 

If you are a self-employed individual, you can deduct 100% (no AGI reduction) of the premiums paid on behalf of yourself, your spouse, your dependents, and your children who were under age 27 at the end of the year without itemizing your deductions. This above-the-line deduction is limited to your net profits from self-employment, less the deductible part of your SE tax and contributions to SEP, SIMPLE and qualified retirement plans. 

No above-the-line deduction is permitted for any month when the self-employed individual is eligible to participate in a subsidized health plan which is maintained by an employer of the taxpayer, taxpayer’s spouse, any dependent, or child of the taxpayer who has not attained age 27 as of the end of the tax year. The plan is considered subsidized when 50% or more of the employer pays the premium. This rule is applied separately to plans that provide coverage for long-term care services. Thus, if you are a self-employed individual eligible for employer-subsidized health insurance, you may still be able to deduct long-term care insurance premiums as long as you aren’t eligible for employer-subsidized long-term care insurance. 

If you are a partner who performs services in the capacity of a partner and the partnership pays health insurance premiums on your behalf, those premiums are treated as guaranteed payments deductible by the partnership and are includible in your gross income. In turn, you may deduct the cost of the premiums as an above-the-line deduction under the rules discussed in this article. 

This above-the-line deduction is also available to more-than-2% S corporation shareholders. For purposes of income limitation, the shareholder’s wages from the S corporation are treated as his or her earned income. 

If you have any questions about deducting health insurance premiums, whether as an itemized deduction or an above-the-line deduction for self-employed individuals, please contact us.

12 Financial Metrics Small Business Owners Should Track

Operating a small business is an exhilarating and, at times, overwhelming endeavor. There are so many details and daily tasks, and it’s essential for you to stay on top of your organizations’ finances. Whether you’re assembling your financial reports or hiring a professional to do it, it’s crucial to understand which numbers are most important and what they mean in terms of the decisions you make and your health assessment of your overall business. In this article, we review a list of 12 of the most important elements of your financial report.

1. Profit and Loss 

Every quarter, you should refresh your business’s profit and loss report to understand your bank and tax reporting needs. It is the single, at-a-glance snapshot of your bottom line that you can use to drive your own decisions and that you can show to an outsider for them to gauge your strength. If you have a reconciled balance sheet, it will ensure that everything in your profits and losses has been accounted for. 

2. Average Cost of Customer Acquisition 

We all want customers, and especially high-paying customers. Though it’s tempting to assume a ‘whatever it takes’ attitude, you need to know the average cost of acquiring profitable customers and then assess whether you can cut those costs to make them even more profitable. Knowing the average cost of customer acquisition can also help you figure out what to spend on customer retention and the value of upselling. 

3. Budget Versus Actual 

Think you’re sticking to the plan based on what you see in your bank account? The truth is that if you compare what you’ve budgeted with what you’ve spent, it will give you a far better sense of whether you’re staying on track and what kind of adjustments you need to make. 

4. Cash Flow 

Most people consider cash flow the most telling metric of all, and cash certainly is the lifeblood of any company. If you’re not keeping an eye on your cash flow, you could find yourself unaware and flatfooted when making essential payments. During your regular business health check, make sure you measure your cash flow, your cash burn (the amount you go through monthly), and your runway (how much you can operate based on your cash on hand).

5. Fixed Burn Rate 

No matter how well you are doing, there is always the chance that you’re going to encounter some unforeseen circumstance or drop in business that is going to drive the need to cut costs. It’s crucial to take a close look at your fixed burn rate and make sure that it isn’t too high. As tempting as it may be to sign on to a long-term contract to save a little money, if you commit yourself to a payment that you can’t afford at all in the future, you’re putting your business at risk. You may be better off taking some of those expenses off of a contracted status so that you can eliminate them if you have to. 

6. Employee Productivity 

Though it’s a given that your employees are your most valuable asset, that doesn’t mean that you should be operating without ensuring that you are getting enough value out of them to justify what you are spending. The best way to do that is to monitor each employee’s productivity to ensure that each staff member is pulling their weight. 

7. Operating Cash Cycle 

When a business wants to expand, it can’t move forward blindly. Business owners need to have a good handle on how long it takes for the cash to become available to the business after their capital investment to feel confident in their ability to go through with their plans. Those who fail to understand their operating cash cycle risk joining the ranks of the 82% of businesses that fail due to poor cash flow management.

8. Churn Rate 

When you think about how hard you work to acquire new customers, knowing how long you’re holding on to them is a key metric. If you’re churning through your customers too quickly, it means that your product or service isn’t valuable enough for them to stick around for more. Addressing why your customers are leaving quickly is the first step in making your business more profitable for the long term. 

9. Regulatory Requirements for Your Industry

It’s easy to forget about renewing your industry license or maintaining a minimum capital in keeping with regulatory requirements. However, failing to keep track leads to unnecessary and costly non-compliance penalties. Make sure that you include your regulatory requirements within your financial report and calendar. 

10. Projected Profit Loss Versus Actual 

A significant part of your annual financial plan should include a projection of what you believe your profit and loss will be, as well as a budget for each of your expense areas. This will allow you to compare what you projected to your actual profit and loss and then review where things went askew. Some may be explainable and worthwhile, and others may be warnings of things getting out of control. 

11. Profit Goals and Profit Per Customer 

One of the most effective ways to promote profitability is to take a granular, analytical approach to your profit goals. By determining your short-term and long-term profit goals, you can then break it down to your profit goal based on your existing customers or the number of new customers you need to acquire. All of these numbers can drive internal processes and help you get where you want to go. 

12. Financial Ratios 

Ratios are among the most useful metrics that a small business owner can use to determine their organization’s overall financial health. Among the most important are their liquidity ratio (how much cash you have on hand to pay the monies you owe); your efficiency ratio (how much it costs you to bring in a single dollar); and your profitability ratio (profit as it compares to revenue). 

These twelve elements are extremely beneficial in helping you understand where your money is at all times. If you would like to discuss how we can help you run a successful business, please contact us for more information.

Solar Tax Credit is Sunsetting Soon

A federal tax credit for the purchase and installation costs of a residential solar system is fading away. After 30% of the value for several years through 2019, the credit amount drops to 26% in 2020 and then to 22% in 2021, the credit’s final year. 

The credit is nonrefundable, meaning it can only reduce an individual’s tax liability to zero. However, the credit portion that is not allowed because of this limitation may be carried to the next tax year and added to the credit allowable for that year. The tax code infers that any credit carryover can be added to the credit allowed in the subsequent year. However, it’s unclear whether any carryover will be allowed to 2022 once the credit expires at the end of 2021. In addition to the credit reducing the regular tax, it also reduces the alternative minimum tax should a taxpayer be subject to it. 

Qualifying Property – Only the following solar power systems are eligible for the credit: 

  • Qualified solar electric property – a property that uses solar energy to generate electricity for use in a home that is the taxpayer’s primary or second residence. 
  • Qualifying solar water heating property – qualifies if used in a dwelling located in the U.S. operated by the taxpayer as a primary or secondary residence where at least half of the energy used to heat water is derived from the sun. Heating water for swimming pools or hot tubs does not qualify for the credit. The solar equipment must be certified for performance by the Solar Rating Certification Corporation or a comparable entity endorsed by the state government where the property is installed.

When Is the Credit Available? The credit may be claimed on the year’s tax return in which the installation is completed. If a taxpayer has purchased and paid for a system and it is completed in 2020, the credit will be 26% of the cost. But if the project isn’t completed until 2021, the credit will only be 22%. This becomes an even bigger issue for systems being installed during 2021 that aren’t completed before 2022 when the credit rate will be zero. If you plan to purchase a solar system in 2021, the purchase should be made early enough in the year to ensure the installation is completed before 2022. 

Who Gets the Credit – It may come as a surprise, but the taxpayer does not need to own the residence where the solar property is installed to qualify for the credit, as the taxpayer need only be a “resident” of the home. The tax code does not specify that an individual has to own the home, only that it is the taxpayer’s residence. For example, a son lives with his mother, who owns the home. The son pays to have the solar system installed; the son is the one who qualifies for the credit. 

Multiple Installations – The credit is available for numerous installations. For instance, after the initial installation, if a taxpayer adds additional panels to increase capacity, these would be treated as original installations and qualify for credit at the credit rate applicable for the year the additional installation is completed, provided that the installation is done before 2022. On the other hand, if a taxpayer had to replace damaged panels or perform other maintenance on the system, these items would not be an original system, and their costs would not qualify for the credit. 

Battery – A battery qualifies for the credit if charged only by solar energy and not off the grid. This has become popular in areas where there are frequent power outages. However, this may be more of a convenience than a necessity, so carefully consider the cost. A software-management tool—whether part of the original installation or added later (before 2022)—also qualifies for the credit in cases in which the software is necessary to monitor the charging and discharging of solar energy from a battery attached to solar panels. 

Installation Costs – Amounts paid for labor costs allocable to onsite preparation, assembly, or original installation of property eligible for the credit. For piping or wiring, connecting the property to the residence are expenditures that qualify for the credit. This includes expenses relating to a solar system installed on a roof or ground-mounted installations. 

Basis Adjustment – The term basis is generally the cost of the home plus improvements and is the amount subtracted from the sales price to determine the gain or loss when the house is sold. The cost of a solar system adds to a home’s basis, and the credit reduces the basis. This will generally create a different basis for federal and state purposes where a state does not provide a solar credit, or it differs from the federal solar credit amount. 

Association or Cooperative Costs – A taxpayer who is a member of a condominium association for a condominium they own, or a tenant-stockholder in a cooperative housing corporation, is treated as having paid their proportionate share of any qualifying solar system costs incurred by the condo or cooperative association or corporation. 

Mixed-Use Property – In cases where a portion of a residence is used for deductible business use or is rented to others, the expenses must be prorated. Only the personal part of the qualified solar costs can be used to compute the credit. There is an exception when less than 80% of the property is used for non-business purposes, in which case the full amount of the expenditures is eligible for the credit. 

Newly Constructed Homes – If you plan to purchase a newly constructed home that includes a solar system, you may be entitled to claim the solar credit. However, to do so, the solar system’s costs must be separate from the home construction costs, and certification documents must be available. 

Utility Subsidy – Some public utilities provide a nontaxable subsidy (rebate) to their customers to purchase or install energy-conservation property. In that case, the cost of the solar system that’s eligible for the credit must be reduced by the amount of the nontaxable subsidy. 

Solar Installations are Not for Everyone – There are TV ads, telemarketing phone calls, and salespeople at your front door, all promoting solar power benefits. One of the key considerations and a frequently mentioned benefit is the federal tax credit. 

What isn’t included in the ads—and something most potential buyers are unaware of—is that the solar credit is a nonrefundable tax credit, meaning the credit can only be used to offset your tax liability. This can come as a very unpleasant surprise and is often a financial hardship when the purchaser of a home solar system finds out that the credit is nonrefundable and won’t benefit from the full credit. 

For example, a married couple with three children, all under age 17, and an annual income of $80,000 installed a solar system costing $20,000 in 2020, expecting a $5,200 ($20,000 x 26%) credit on their tax return. Their standard deduction in 2020 is $24,800, leaving them with a taxable income of $55,200. The tax on the $55,200 is $6,229. They are also entitled to a $2,000 child tax credit for each child, which reduces their tax liability by $6,000 and results in a tax liability of $229. Since the solar credit is nonrefundable, the only portion of the credit they can use is $229, not the $5,200 they had expected. 

On top of that, the family is probably financing the solar system, which significantly adds to its cost. If a 5% home equity loan financed the entire $20,000 price for 20 years, then the interest on that loan over its term would be $11,678, bringing the total cost of the solar system to $31,678 or a monthly fee of $132.

Instead of purchasing a solar system, some homeowners opt to lease a system. This arrangement is not eligible for the solar credit. 

As you can see, there is a lot to consider before making the final decision to install a solar system. Is it worth it, and is it the right financial move for you? Please contact us before signing any contract to make sure a solar system is appropriate for you.

What Happens if You Missed the October 15th Tax Extension Deadline?

We’ve all been there. Life is super busy. We have to take care of our families and friends, work obligations, and other everyday responsibilities. With all of the hustle and bustle, you realize that the October 15th tax extension deadline has passed, and unfortunately, you still haven’t filed. What should you do now? 

This article provides guidance when you miss the tax extension deadline and the next steps you should take. 

Will I Be Penalized for Filing After the Deadline? 

Yes, if you missed the October 15th filing deadline, you can be penalized. The IRS allowed you an additional six-month extension of time to file your taxes (from April 15th to October 15th). That was not an extension to pay taxes, only an extension to complete your return. In addition to any interest and penalties that you may owe as a result of failing to file (and pay) your tax on time, you will now be subject to a late filing fee on any unpaid taxes. The penalty, which includes interest, is generally 5% per month of any outstanding balance for up to 5 months. This penalty can increase to up to 25% of the remaining balance owed. To make matters worse, the interest continues to accrue until any liability is finally paid. 

If you file your taxes more than 60 days late, you may receive an additional penalty of $435. That is the minimum late filing penalty, which is the lesser of what you owe in taxes or the $435. It’s crucial to go ahead and file even if you can’t pay the outstanding balance in full and work with the IRS to create a payment arrangement. Even if you are missing some information you need to file, you can file now and amend later when the information becomes available. 

What Happens if the IRS Owes Me a Refund? 

For taxpayers who believe they are owed a refund from the Internal Revenue Service, you have three years from the original due date of the return to file and claim your refund. However, if you wait too long, you will forfeit any refund you might be entitled to. 

If you are filing your tax return after the October 15th deadline and do not owe any tax, there will be no late filing penalties or interest. 

What Happens If I Don’t File My Return? 

Suppose you don’t file your tax return with the IRS. In that case, they will likely create a substitute return on your behalf based on income data such as W-2s, 1099s, and other documentation provided to them by your employer and other financial institutions. 

It’s important to understand that this substitute return will not include any calculations for credits and deductions that you may be qualified for. Consequently, the substitute return will likely result in a higher balance owed and penalties than if you prepared your return. 

What Happens If I Can’t Pay the Tax Balance Owed? 

If you can’t pay your tax obligations with the IRS, it is crucial to go ahead and get the tax return filed and then work with the Internal Revenue Service to set up a payment plan. 

The IRS’ Fresh Start Program allows taxpayers with balances of less than $25,000 to set up a monthly installment plan, allowing you to make payments on your balance over several years. 

There is an “Offer In Compromise” option that allows you to settle your tax debt for less than the amount owed for those experiencing more financial difficulty. 

The interest and penalties for filing your tax return after the final tax deadline can be severe. It is important to get your return filed, even if you need to make arrangements to pay the balance owed to the IRS. 

If you have any questions about the steps you should take if the October 15th tax extension deadline has passed you by, or for more information about our tax planning and preparation services, please contact us.

The SBA Issues a Simplified PPP Loan-Forgiveness Application

Article Highlights: 

  • Paycheck Protection Program Loans 
  • Forgiveness Application 
  • The Small Business Administration (SBA) 
  • The Paycheck Protection Program Flexibility Act 
  • SBA Forgiveness Form 3508 
  • SBA Forgiveness Form 3508EZ 
  • SBA Forgiveness Form 3508S 

If you are the owner of a small business that obtained a Paycheck Protection Program (PPP) loan, you are most likely aware that the loan can be partially or completely forgiven if you used the loan proceeds for the required purposes. Loan forgiveness is not automatic and must be applied for. The borrower must submit a request to the lender or, if different, the lender that is servicing the loan, must decide the amount of forgiveness within 60 days. 

The request must include documents to verify the number of full-time-equivalent (FTE) employees and pay rates, as well as the payments on the eligible mortgage, lease, and utility obligations. The borrower must certify that the documents are valid and that the borrower used the forgiveness amount to keep employees and make eligible mortgage interest, rent, and utility payments. 

The process of obtaining a PPP loan and applying for forgiveness has been problematic from the start, with guidance from the Small Business Administration (SBA) and the IRS coming in occasionally; for a while, it seemed that the rules were modified every week. The SBA’s original forgiveness application was horrendously complicated, and one almost needed an accounting degree to figure it out. It required the applicant to complete numerous complicated side computations and did not provide any corresponding worksheets. 

To clarify the process, Congress stepped in and passed the Paycheck Protection Program Flexibility Act. As part of that legislation, the SBA was required to simplify the forgiveness application. In response, the SBA did somewhat simplify SBA Form 3508, the original forgiveness application, and came up with a more straightforward version: SBA Form 3508EZ. 

The 3508EZ is for use by: 

  • Self-employed borrowers with no employees 
  • Generally, borrowers with employees that, during the covered period, 
    • Did not reduce the annual salary or hourly wages of any employee by more than 25%;
    • Did not reduce the number of employees or the average paid hours of employees; and 
    •  Was unable to operate during the covered period at the same level of business activity as it did before February 15, 2020, due to compliance with requirements established or guidance issued by the Secretary of Health and Human Services, the director of the Centers for Disease Control and Prevention, or the Occupational Safety and Health Administration. 

During the week of October 5, the SBA released yet another simplified application—SBA Form 3508S—and instructions for its use. This form can only be used if the total PPP loan amount that the borrower received from their lender was $50,000 or less. However, a borrower that, together with its affiliates, received PPP loans totaling $2 million or more cannot use Form 3508S and instead must use either Form 3508 and its instructions or 3508EZ and its instructions (or their lender’s equivalent form). 

A borrower who qualifies for and uses SBA Form 3508S (or their lender’s equivalent form) is exempt from any reductions in the borrower’s loan forgiveness amount based on reductions in FTE employees or employee salaries or wages from the CARES Act that would otherwise apply. 

While SBA Form 3508S does not require borrowers to show the calculations they used to determine their loan forgiveness amount, the SBA may request information and documents to review those calculations as part of its loan-review process. Accordingly, the borrower must retain, for six years from the date when the loan is forgiven or repaid, all documentation:

  1. Submitted with the loan application.
  2. To prove the borrower’s certification of eligibility for the PPP loan and material compliance with the PPP’s requirements.
  3. To back up the loan-forgiveness application. 

Keep in mind that the application for forgiveness, which can be submitted electronically, must be submitted within 10 months after the end of the loan-covered period to the borrower’s lender or the lender servicing the borrower’s loan. 

If you have questions about how these changes might apply to your situation or need assistance with completing your forgiveness application, please contact us.