SBA Questioning PPP Borrowers with Loans Over $2 Million

Article Highlights: 

  • PPP Loans 
  • Affected Borrowers 
  • Loan Application Certifications 
  • SBA Compliance Questionnaires 
  • SBA Information Review 

When Congress initially authorized the Paycheck Protection Program, it was intended to provide loans that would be partially or completely forgiven if used for the intended purposes of helping businesses affected by COVID-19 stay afloat and to help those businesses maintain payroll. As part of the Small Business Administration’s (SBA’s) loan application, Form 2483 or lender’s equivalent form, borrowers had to certify under penalty of imprisonment and monetary penalties to the following: 

  • Current economic uncertainty makes this loan request necessary to support the ongoing operations of the Applicant. 
  • The funds will be used to retain workers and maintain payroll or make mortgage interest payments, lease payments, and utility payments, as specified under the Paycheck Protection Program Rule; I understand that if the funds are knowingly used for unauthorized purposes, the federal government may hold me legally liable, such as for charges of fraud. 

The contemplation of free money had businesses scrambling to take out PPP loans, whether the economic effects of COVID-19 impacted them or not. 

The treasury secretary had initially indicated the need for all PPP loans to be audited but later specified only those of $2 million or more would be subject to audit. 

After a long wait, and as long-anticipated, the SBA has initiated a compliance program to evaluate the good-faith certifications that borrowers made on their PPP Borrower Applications stating that economic uncertainty made the loan requests necessary. Accordingly, each borrower that, together with its affiliates, received PPP loans with an original principal amount of $2 million or greater will be required to participate in this compliance program and will soon be receiving one of the following multi-page forms from their lender: 

Sometimes referred to as a “loan necessity questionnaire,” the form and requested supporting documents must be submitted to the lender servicing the borrower’s PPP loan. The completed form is due to the lender within ten business days of receipt. Among other things, the form requests: 

  • If the borrower’s business was shut down as a result of a government order. 
  • If any of the business’s owners were compensated in excess of $250,000. 
  • The borrower’s liquidity before and after receipt of the loan funds and during the covered period.
  • The business’s gross revenue amounts for 2019 and 2020. 

The SBA says it is reviewing these loans to maximize program integrity and protect taxpayer resources. The information collected will be used to inform the SBA’s review of each borrower’s good-faith certification that economic uncertainty made their loan request necessary to support ongoing operations. Receipt of this form does not mean that SBA is challenging that certification. After this form is submitted, the SBA may request additional information, if necessary, to complete the review. The SBA’s determination will be based on the totality of the borrower’s circumstances. 

Failure to complete the form and provide the required supporting documents may result in the SBA’s determination that the borrower is ineligible for either the PPP loan or any forgiveness amount claimed. The SBA may seek repayment of the loan or pursue other available remedies. 

If you have any questions about this issue or need assistance completing the form and assembling supporting documentation, please contact us.

PPP Economic Uncertainty Certification: Here’s What You Need to Know

On Thursday, December 9, 2020, the Small Business Administration (SBA) and the U.S. Department of the Treasury updated the Paycheck Protection Program (PPP) Loan FAQs regarding the recently imposed loan necessity questionnaires. FAQ 53 was released to address why some PPP borrowers are receiving a For-Profit and Non-Profit Loan Necessity Questionnaire (SBA Forms 3509 and 3510).

In general, the SBA forms assist in assessing and auditing PPP loans of $2 million or more. The information collection questionnaires recently received criticism from business groups and stakeholders stating that a retroactive necessity certification is burdensome and confusing.

FAQ 53 states that the SBA’s assessment of a borrower’s certification will be based on the totality of the borrower’s circumstances through a multi-factor analysis. The SBA will assess whether the borrower had an adequate basis to make the required good-faith certification, considering the intention of the SBA certification guidance. Although borrowers were required to make this certification in good faith at the time of the loan application, subsequent developments may have resulted in the loan no longer being necessary. The SBA may consider the borrower’s circumstances and actions before and after the borrower’s certification. This process will help the SBA determine whether the borrower made the statutorily required certification in good faith at the time of its loan application.

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.

Preparing for 2021: Tax Planning Strategies for Small Business Owners

If you are a small business owner, every penny of your income counts. This means that you want to optimize your revenue and minimize your expenses and your tax liability. Unfortunately, far too many entrepreneurs are not well-versed in the tricks and tools available to them and end up paying far more than they need to. You don’t need an accounting degree to take advantage of tax-cutting tips. Here are a few of our favorites. 

Think About Changing to a Different Type of Tax Structure 

When you started your business, one of the first decisions you needed to make was whether you wanted to operate as a sole proprietor, partnership, LLC, S corporation, or C corporation. But as more time goes by, the initial reasons for structuring your business the way that you did may no longer be applicable or in your best interest from a tax perspective. There is no requirement that you stick with the business structure you initially chose. 

Ever since the Tax Cuts and Jobs Act of 2017 (TCJA) changed the highest corporate income tax rate from 35% to 21%, sole proprietorships, LLCs, partnerships, and S corporations can realize significant tax savings by electing to be taxed as a C corporation. This simple change can make sense if these pass-through businesses’ owner is taxed at a high tax bracket. If so, all you need to do is fill out and file Form 8832. Before doing so, make sure that the tax savings you can realize are a reasonable tradeoff for the other reasons that you may have initially selected the structure you are currently in. 

Pass-Through Businesses Can Get a 20% 

One of the most impactful changes that the TCJA made for pass-through businesses whose income is passed-through for taxation as their owners’ income is a valuable tax break known as the qualified business income (QBI) deduction. For eligible recipients, this deduction is worth a maximum 20% tax break on the income they receive from the business – but determining whether or not you qualify can be a challenge. 

There are several restrictions on taking advantage of the deduction, particularly regarding specified service trade or businesses (SSTBs) whose owners either earn too much income or rely specifically on their employees’ or owners’ reputation or skill. Though architecture and engineering firms escape this limitation, other business models – including medical practices, law firms, professional athletes and performing artists, financial advisors, investment managers, consulting firms, and accountants – fall into the category that loses out of their income is too high. In 2019 single business owners of SSTBs began phasing out at $160,700 and are excluded once their income exceeds $210,700, while those who are married filing a joint return phase out at $321,400 and are excluded at $421,400. To calculate the deduction, use Part II of Form 8995-A

Businesses that are not SSTBs are eligible to take the deduction even when they pass the upper limits of the thresholds, but only for either half of the business owners’ share of the W-2 wages paid by the business or a quarter of those wages plus 2.5% of their share of qualified property. 

These limitations and specifications for what type of business is and is not eligible are head-spinning. Though it is tempting to take the deduction simply, it’s a good idea to confirm whether you qualify and how to claim it with our office before moving forward. 

Know How You’re Going to Pay Your Taxes

It is gratifying to live the dream of owning your own small business, but the hard work required to generate revenue makes paying taxes extra painful. This is especially true because of the “pay as you go” tax system that the United States uses, asking business owners to make estimated quarterly payments. While employees pay their taxes ahead via payroll deductions withheld by their employers, no such automatic system is set up for small business owners. That leaves many with the temptation of delaying making payments to maintain liquidity. 

Unfortunately, failing to pay taxes quarterly can put you in the uncomfortable position of still having to pay at one point, with the additional burden of penalties and interest resulting from your delay. Though setting aside the money to pay taxes requires discipline, doing so will save you from the penalties charged by the IRS. These are calculated based on the amount you should have paid each quarter multiplied by your shortfall and the effective interest rate during the specific quarter (established as 3 percent over the federal short-term rate – C corporations pay a different rate). Even if you don’t calculate your quarterly estimated rates correctly, the safe harbor rule allows small businesses to pay the lower amount, which is either 90% of the tax due on your current year return or 100% of the tax shown on your last filed tax return. For those whose AGI was over $150,000 in the previous tax year, the safe harbor percentage is 110% of the previous year’s taxes. 

It is always a good idea to increase the amount you send in if you have a higher-income year. By doing a simple calculation of your safe harbor number and dividing it by four, you have a reasonable quarterly payment that you can safely send in on the due dates (April 15th, June 15th, September 15th, and January 15th of the following year). By setting aside the appropriate percentage that you will owe from each payment you receive, you can easily set aside the money you will need to pay and entirely avoid concerns about penalties or interest. Payment is most easily submitted using the online link for IRS Direct Pay, though many people opt for sending in the paper vouchers for IRS Form 1040-ES, along with a check. There is also an EFTPS system available for C Corporations’ use. 

Choose Your Accounting Method Carefully

Each small business owner calculates their income and revenue differently, with many using a method of accounting that is based on when money is received rather than when an order is placed and counts expenses when they are paid rather than the item or service ordered. This is known as the cash method of accounting. 

Whatever method of accounting you use, smart business owners can strategically adjust their approach—reporting their annual income based on cash receipts to reduce their end-of-year revenues, especially if there is reason to believe that next year’s income will be lower or they anticipate being in a lower tax bracket. 

An example of how this approach would be helpful can be seen in a business that expects to add new employees in the new year. Between that expense and other improvements planned, it makes sense to anticipate that net income will be down. The tax bracket for the business will be lower, so any work is done or orders placed towards the end of the current tax year should be accounted for when payments arrive so that the income can be taxed at a lower rate. The contrast to this is if you anticipate your business revenue to increase and be forced into a higher tax bracket in the new year. In that case, it makes sense to try to collect monies for work done in the current year early so that you can take advantage of your current, lower tax rate. This can be done for business expenses such as office supplies and equipment, which can be deferred and accelerated in the same way so that you can take advantage of tax deductions in the most advantageous way. 

Establish and Make Deposits Into a 401(k) or SEP 

One of the smartest ways to lower your taxable income is to contribute to a retirement account. Not only does doing so reduce your business’ tax liability, but it also ensures a more secure future. As a small business owner, either a 401(K) plan or a Simplified Employee Pension (SEP) plan will do the trick while benefiting both you and those who work for you in the future. 

While a 401(k) that is established before year-end will let you deduct any contributions you make (with contributions limited to the lower of $57,000 or the employee’s total compensation), business owners who fail to set up this type of plan by December 31st can still turn to the SEP as an alternative. Though SEP contributions are restricted to 25% of the business owner’s net profit, less the SEP contribution itself (technically 20%), a SEP can be established, and contributions made up until the extended due date of your return. Suppose you obtain an extension for filing your tax return. In that case, you have until the end of that extension period to deposit the contribution, regardless of when you file the return.

If You Took Out a PPP Loan, Plan on it Being Forgiven 

Many small businesses took advantage of the PPP loans that were offered by the government in the face of the COVID-19 crisis. While these loans were attractive because they are forgivable and gave businesses a chance to survive the dire circumstances, in April of 2020, the IRS issued Notice 2020-32, which indicated that even though the forgivable loans can be excluded from gross income, the expenses associated with the money received cannot be deducted. This effectively erases the tax benefit initially offered because losing the employee and expense deduction increases the business’ income and profitability. 

There is some chance that this issue will be resolved by Congress, as it contradicts the original intent of the tax benefit that accompanied the PPP funds, but that action has not yet been taken. It’s a good idea to talk to our office about this as soon as possible. Having to pay taxes on expenses incurred may be particularly challenging in the face of the difficulties the pandemic has imposed. Being financially prepared to pay more taxes than you originally intended may be a bitter pill to swallow. However, it will still be better than paying penalties and interest if you fail to pay what the government says that you owe. 

Though all of these strategies can be helpful, they may not all be appropriate for your situation. Keep them in mind as you go into the end of the year, and be prepared to ask questions to determine which apply to you when you speak with our office. Contact us to discuss tax planning for your business today.

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.

Don’t Miss Out on Year-End Tax-Planning Opportunities

Article Highlights: 

  • October 15 extended due date for filing federal individual tax returns for 2019. 
  • Late-filing penalty. 
  • Interest on tax due. 
  • Other October 15 deadlines. 

Because of the COVID-19 pandemic emergency, the IRS postponed the original due date for filing 2019 returns to July 15, 2020. If you could not complete your 2019 tax return by July 15 and filed a request for additional time to file, that extension expires on October 15, 2020. Failing to file before the extension period runs out may cost you late-filing penalties. 

There are no additional extensions available (except in designated disaster areas), so if you do not or will not have all of the information needed to complete your return by October 15, please contact this office. We can explore your options for meeting your extended filing deadline. 

If you are waiting for a K-1 from a partnership, S-corporation, or fiduciary return, the extended deadline for those returns is September 15 (September 30 for fiduciary returns); so you should probably make inquiries if you have not received that information yet. 

Late-filed individual federal returns are subject to a penalty of 5% of the tax due for each month (or part of a month) if a return is not filed, up to a maximum of 25% of the tax due. If you are required to file a state return and do not do so, the state will also charge a late-file penalty. The filing extension deadline for individual returns is also October 15 for most states. 

 Interest continues to accrue on any balance due, currently at the rate of 3% per year, and this rate is subject to quarterly adjustment. 

If this office is waiting for some missing information to complete your return, we will need that information at least a week before the October 15 due date. Please contact this office immediately if you anticipate complications related to providing the required information so that we can determine a course of action to avoid the potential penalties. 

Additional October 15, 2020 Deadlines – In addition to being the final deadline to file 2019 individual returns on an extension, October 15 is also the deadline for the following actions: 

  • FBAR Filings – Taxpayers with foreign financial accounts exceeding an aggregate value of $10,000 at any time during 2019 must file a Financial Crimes Enforcement Network (FinCEN) Form 114, Report of Foreign Bank and Financial Accounts (FBAR) electronically with the Treasury Department. The original due date for the 2019 report was April 15, but individuals have been granted an automatic extension to file until October 15, 2020. 
  • SEP-IRAs – October 15, 2020, is the deadline for a self-employed individual to set up and contribute to a SEP-IRA for 2019. The deadline for contributions to traditional and Roth IRAs for 2019 was July 15, 2020, instead of the usual April 15 contribution due date because of the COVID-19 emergency, but no further extension is available. 
  • Special Note: Disaster Victims – If you reside in a presidentially declared disaster area, the IRS and most states provide additional time to file various returns and make payments. 

Please contact us for information on extended due dates of other types of filings and payments as well as extended filing dates in disaster areas.

The SBA Issued Loan Necessity Questionnaires for Borrowers of PPP Loans $2M or More

In conjunction with its review of Paycheck Protection Program (PPP) loans that total $2 million or more, the U.S. Small Business Administration (SBA) will send loan necessity questionnaires to loan recipients. The information that is collected will inform the SBA’s evaluation of borrowers’ good-faith certification of their economic need. The SBA issued two versions of the loan necessity questionnaire, Form 3509, used by for-profit entities, and Form 3510, used by non-profit entities.  The notice was issued by the SBA on Monday, October 26, 2020, requesting approval from the Office of Management and Budget (OMB).

The loan necessity questionnaires require borrowers to provide additional information to validate the certification that “[c]urrent economic uncertainty makes this loan necessary to support the ongoing operations” of the borrowing entity made during the PPP loan application process. After the lender has reviewed the loan forgiveness application and provided a recommendation on forgiveness to the SBA, the SBA will likely request additional information from borrowers via the applicable loan necessity questionnaire.

Lenders who submitted loan forgiveness decisions will receive notification letters through the SBA Forgiveness Platform requesting that borrowers complete the questionnaire and provide general instructions about which documents to provide to the SBA.  The SBA stated that lenders are not required to verify or validate borrowers’ responses, or any supporting documents related to the questionnaires.  Borrowers that received a loan of $2 million or greater are required by the SBA to complete the applicable loan necessity questionnaire, along with the supporting documentation, within 10 business days of receipt.

Information Requested via Loan Necessity Questionnaires

The loan necessity questionnaires request information that supports business activity and liquidity assessments, including, but not limited to, the following:

  • Borrower’s gross revenue in Q2 of both 2020 and 2019
  • Borrower’s expenses in Q2 of both 2020 and 2019
  • If the borrower has been ordered to shut down by a state or local authority due to COVID-19
  • If the borrower has been ordered to significantly alter its operations by a state or local authority due to COVID-19
  • If the borrower voluntarily ceased or reduced its operations due to COVID-19
  • If the borrower began any new capital improvement projects not due to COVID-19
  • Borrower’s cash and cash equivalents as of the end of the last calendar quarter prior to the PPP loan application
  • If the borrower paid any dividend or other capital distributions, in excess of distributions to pay taxes, prior to the end of the Covered Period
  • If the borrower prepaid any outstanding debt prior to the end of its Covered Period
  • If any employees received compensation in excess of $250,000 on an annualized basis during its Covered Period
  • If any owners received compensation in excess of $250,000 on an annualized basis during its Covered Period
  • If the borrower received funds from any other CARES Act program

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.

Did You Know Unemployment Benefits are Taxable?

Article Highlights: 

  • CARES Act 
  • Unemployment Benefits 
  • States Taxation of Unemployment 
  • Will Unemployment Be Taxable? 

With the passage of the CARES Act stimulus package earlier this year, the federal government added $600 to the standard state weekly unemployment benefits and increased the number of benefit weeks to a total of 39. 

In many cases, workers are receiving unemployment benefits for the first time in their lives, and they may not be aware that the benefits are fully taxable for federal purposes. Making matters worse is that most states also tax unemployment benefits, which may come as a surprise with a potentially unpleasant outcome for many when it comes time to file their 2020 tax return next year. 

Those who received unemployment benefits will be sent a Form 1099-G (Certain Government Payments) from the state that paid the benefits. This tax form shows the amount of unemployment benefits received and the amount of tax withheld, if any. 

There are several states where unemployment benefits are not taxable. Seven states do not have a state income tax, so obviously, unemployment benefits are not taxable in those states, which are: 

  • Alaska 
  • Florida 
  • Nevada 
  • South Dakota 
  • Texas 
  • Washington 
  • Wyoming

 Seven states have state income tax but do not tax employment benefits. They include: 

  • California 
  • Montana 
  • New Hampshire 
  • New Jersey 
  • Oregon 
  • Pennsylvania 
  • Tennessee 
  • Virginia 

Two states exempt 50% of amounts above $12,000 (single taxpayer) or $18,000 (married taxpayers). They are: 

  • Indiana 
  • Wisconsin 

If you’ve collected unemployment compensation this year, your benefits’ impact on your tax bill will depend on several factors. These factors include the amount of unemployment received, what other income you have, if you are single or married (and, if married, whether you and your spouse are both receiving unemployment benefits), and whether you had or are having income tax withheld from benefit payments. 

If you have questions about the taxation of unemployment compensation, please contact us.

Tax Consequences of Losing Your Job

Article Highlights: 

  • Severance Pay 
  • Unemployment Compensation 
  • Health Insurance 
  • Employer Pension Plan 
  • Coronavirus-related Distributions 
  • Home Sale 

If you lost your job, there are several tax issues you may encounter. How you deal with these issues can profoundly impact your taxes and finances. The following are typical issues related to tax treatment: 

Severance Pay – Your employer may provide you with severance pay. Severance pay and payment for unused vacation time will be included in your W-2 income, and both are fully taxable. 

Unemployment Compensation – If you do not find another job right away, you generally qualify for unemployment compensation. Unemployment benefits, both the regular benefits you receive from your state unemployment department and the enhanced unemployment payments during the COVID-19 emergency, are taxable for federal purposes and may or may not be taxable by your state of residence. To minimize the tax you may owe when you file your 2020 tax return; you may want to request federal income tax withholding of 10% of the unemployment benefit amount. Do that by submitting a Form W-4V (Voluntary Withholding Request) to your state’s unemployment office. 

Health Insurance – If you lose your job and have health insurance through your employer’s group health coverage plan, you will need to determine your available options for continued coverage via COBRA or a replacement policy. If you give up coverage, you may be subject to penalties in some states for not being insured. 

  • COBRA Coverage – The Consolidated Omnibus Budget Reconciliation Act (COBRA) requires continuation coverage to be offered to covered employees, their spouses, former spouses, and dependent children when group health coverage would otherwise be lost. COBRA continuation coverage is often more expensive than the amount that active employees must pay for group health coverage because they usually cover part of employees’ coverage costs. 102% of the total cost can be charged to individuals receiving continuation coverage (the extra 2% covers administration costs). COBRA generally applies to private-sector employers with 20 or more employees and state or local governments that offer group health coverage to their employees. In most cases, COBRA coverage is limited to 18 months. 
  • Health Insurance Marketplace Coverage – When existing health coverage is lost, a family may purchase health insurance through a government health insurance marketplace outside of the standard enrollment window. Depending upon your income for the year, you may qualify for the premium tax credit for the part of the year when you don’t have coverage through your employer, which will help pay for the insurance. Suppose coverage was already through a marketplace and not your employer; you should notify the Marketplace that you’ve lost your job and that your income has decreased, as you may then be eligible for a higher advance premium tax credit. However, advise the Marketplace once you are employed again to make appropriate adjustments to the advance premium tax credit amount. This may alleviate having to repay some of the credit when you file your 2020 return. 

Employer Pension Plan – Depending upon your employer’s pension plan, you may have the option of leaving your retirement funds in the employer’s plan or moving the funds to your IRA account. You can have the funds transferred to your IRA or take a distribution and roll it into your IRA within 60 days. However, this is where a tax trap exists; for distribution, the employer is required to withhold 20% for federal taxes, meaning only 80% of the funds will be available to roll over, and the remaining 20% will end up being taxable unless you can make up the difference with other funds. 

If you ever want to roll those funds into a new employer’s retirement plan, those retirement distributions should not be commingled with other IRA accounts. 

Should you be tempted not to roll the funds over, be aware that the distribution will generally be taxable, and if you are under the age of 59½, there will also be a 10% early withdrawal penalty. However, the CARES Act allows qualified taxpayers to make COVID-19-related distributions from qualified plans or IRAs (not to exceed $100,000 from January 1, 2020, to December 31, 2020) and receive favorable tax treatment. These distributions are penalty-free; they are taxed over three years and can be redeposited to an IRA or qualified plan within three years. 

Home Sale – If you relocate and have to sell your home and have owned and occupied the house as your primary residence for 2 of the previous 5 years, you will be able to exclude up to $250,000 of the gain ($500,000 if you are married and you and your spouse qualify for the exclusion). If you do not meet the 2-out-of-5-years qualifications, you will be allowed a prorated gain exclusion because you have lost your job.

As you can see, several issues may apply when a job loss occurs; this is even more relevant during the coronavirus emergency. To learn more about how these issues might affect your particular situation, please contact us

Webinar on Thursday, October 22, at 12:30 PM (ET): Unpacking PPP Loan Forgiveness

Tarlow Invites You: PPP Webinar

Unpacking PPP Loan Forgiveness
What you need to know to maximize forgiveness

Your Covered Period is coming to an end and you are getting ready to complete your loan forgiveness application. But it seems like every week there’s a change in the Paycheck Protection Program rules. Have you kept up with the changes in the SBA guidance? Failure to do so could cause your business to miss out on loan forgiveness.

On Thursday, October 22, 2020, at 12:30 PM (ET), our CPA channel affiliate partner, Aprio, will host a complimentary webinar to revisit the PPP regulations, including the latest developments.

This webinar will cover:
  • Eligible costs for forgiveness
  • Limitations on non-payroll costs
  • Documentation requirements and best practices
  • Which application is right for you
Speakers on the panel include:
  • Justin Elanjian, Partner, Assurance Services, Aprio
  • Tommy Lee, Partner in Charge, Retail, Franchise & Hospitality, Aprio

Register Today