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President Trump Signs an Executive Order and Three Memoranda to Provide or Extend COVID-19 Relief to Individuals and Businesses

On Saturday, August 8, 2020, President Trump issued an Executive Order and three Memoranda to provide or extend COVID-19 relief to individuals and businesses.  Although the Executive Orders are not currently operational, at Tarlow, we feel that it is important for us to communicate this update.

Payroll Tax Deferral

The Executive Order directs the Secretary of Treasury to defer the withholding, deposit, and payment of the employee portion of social security tax, excluding Medicare tax, on wages or compensation paid during the period of September 1, 2020, through December 31, 2020. The deferral applies to any employee whose pre-tax wages or compensation during any biweekly payroll period are generally less than $4,000, calculated on a pre-tax basis, or the equivalent amount during other payroll periods. The tax payments are deferred without penalties, interest, additional amounts, or addition to the tax.

The Executive Order directs the Secretary of Treasury to issue guidance to implement the Memorandum and to identify methods to eliminate the obligation to pay the deferred taxes. It provides only for the deferral of the employee portion of social security tax and, in the event the Secretary of Treasury does not eliminate the deferred tax entirely, an affected employee will be required to pay any remaining deferred tax. We await further guidance; currently, it is not clear how an employee would pay the deferred tax following the end of the deferral period.

Employers have already had 50% of their portion of payroll tax payments due during the period that begins on March 27, 2020, and ends on December 31, 2020, delayed until December 31, 2021, and the other 50% until December 31, 2022, by the Coronavirus Aid, Relief, and Economic Security (CARES) Act, P.L. 116-136.

The other Executive Orders involve compensation to unemployed individuals, evictions, and student loan relief, as follows:

Disaster Relief/Unemployment Insurance Benefits

The CARES Act provided a $600 per week federally funded unemployment compensation assistance to an eligible unemployed person, in addition to standard state unemployment benefits. This benefit expired on July 31, 2020.

The Disaster Relief Memorandum directs the Federal Emergency Management Agency (“FEMA”) to provide benefits from the Department of Homeland Security’s Disaster Relief Fund. It also directs states to utilize their Coronavirus Relief Fund allocation to provide financial relief to unemployed Americans affected by COVID-19. The maximum amount is $400 per week supplemental unemployment compensation benefit. In comparison to the $600 supplemental benefit under CARES, the Disaster Relief Memorandum calls for two significant changes in eligibility:

  • Individuals must receive at least $100 per week in regular state unemployment compensation assistance, an increase from $1.
  • Individuals must certify that their lost wages are attributable to disruptions caused by COVID-19.

The funding for this new benefit differs from the funding under the CARES Act in that the federal government will only pay for 75% of the costs associated with this benefit. The remaining 25% will be the responsibility of the state governments, subject to an agreement between the federal government and the state in terms of the program and funding.

Eviction Minimization

The Housing Executive Order directs members of the Cabinet to consider, identify, review, and minimize residential evictions and foreclosures during the COVID-19 pandemic. President Trump directs the Secretary of Health and Human Services and the Director of the Centers for Disease Control and Prevention to consider whether any temporary ceasing of evictions for failure to pay rent are reasonably necessary to prevent further COVID-19 spread. President Trump directs the Secretary of the Treasury and the Secretary of Housing and Urban Development to identify Federal funds that could be allocated to provide temporary financial assistance to renters and homeowners struggling to make monthly payments. The President also directs the HUD Secretary to promote the ability of renters and homeowners to avoid eviction or foreclosure, including by providing Federal funds to landlords.

Student Loan Payment Relief

The Education Memorandum directs the Secretary of Education to effectuate waivers of and modifications to the requirements and conditions of economic hardship deferments.  It provides such deferments as necessary to continue the temporary cessation of payments and the waiver of all interest on student loans held by the Department of Education until December 31, 2020. The Education Memorandum also states that student loan borrowers may continue to make payments.

Tarlow is Here to Help – Please Contact Us with Questions

Tarlow Partners and staff members are closely monitoring these Executive Orders, tax-related legislation and regulations, and new guidance from the SBA and the Department of Treasury. 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 matter, please contact your Tarlow advisor for assistance.

Tarlow Update: Small Business Administration Issues Interim Final Rule for the Paycheck Protection Program

On the evening of April 2, 2020, the Small Business Administration (SBA) released an Interim Final Rule (IFR) implementing the Paycheck Protection Program (PPP) provisions of the Coronavirus Aid, Relief, and Economic Security (CARES) Act, which will run from April 3, 2020, through June 30, 2020.

The release of the IFR follows the March 31, 2020, issuance of the informal U.S. Department of the Treasury (the Treasury) guidance on PPP and the enactment of the CARES Act on March 27, 2020. The IFR Rule provides further guidance to lenders and borrowers regarding the PPP application, loan terms, and loan forgiveness provisions.

The rule also provides clarification regarding the SBA’s interpretation of several aspects of the PPP, including the following:

  • While the CARES Act allowed a maximum interest rate of 4%, initial guidance from the Treasury guidance provided for 0.5%. The Treasury and the SBA have raised the interest rate slightly to 1%.
  • Independent contractors may themselves apply for their own PPP loan and therefore do not count as employees of a business applicant for purposes of the PPP
  • Borrowers may only apply for one PPP loan between now and June 30, 2020.  The IFR encourages borrowers to consider applying for the maximum amount for which they are eligible.
  • The CARES Act authorizes payment of principal and interest to be deferred for up to one year. The SBA and the Treasury have determined a six-month deferral is more appropriate due to the 1% interest rate and loan forgiveness provisions of the CARES Act.
  • The SBA and the Treasury have confirmed that no more than 25% of the loan forgiveness amount may be attributable to non-payroll costs although not required by the CARES ACT
  • Applicants must submit SBA Form 2483 (Paycheck Protection Program Application Form) and supporting payroll documentation described in the Interim Final Rule directly to their lender.
  • E-signatures and e-consents may be used for completing the application.
  • Lenders must submit SBA Form 2484 (Paycheck Protection Program Lender’s Application for 7(a) Loan Guaranty) electronically to the SBA and maintain the forms and supporting documentation provided by the borrower in its files.
  • While the maximum maturity for PPP loans under the CARES Act is 10 years from the date the borrower applies for loan forgiveness, the SBA and the Treasury have determined that a two-year loan term is appropriate.
  • Borrowers who received a loan through the SBA Economic Injury Disaster Loan (EIDL) program from January 31, 2020, through April 3, 2020, are eligible to apply for a PPP loan.
    • If the EIDL loan was not used for payroll costs, it does not affect eligibility for PPP.
    • If the EIDL loan was used for payroll costs, the PPP loan must be used to refinance the EIDL loan.
    • Proceeds from any advance of up to $10,000 on the EIDL loan will not also be eligible for forgiveness under the PPP.
  • Lenders do not need to conduct any independent verification of the documentation and attestation provided by borrowers in support of their requests for loan forgiveness.

Tarlow Coronavirus Loan & Capital Assistance – Helping small business owners impacted by the spread of Coronavirus

Tarlow’s Coronavirus Disaster Loan and Capital Assistance team is committed to serving small business owners who are being impacted by the public policy measures to contain the spread of the Coronavirus. Learn more.

 

Tarlow is Here to Help — Contact Us with Questions

At Tarlow, our Partners and staff members are closely monitoring tax-related legislation and regulations. We will continue to update you by sending communications about relevant news and changing guidelines.  If you have any questions, please contact your Tarlow advisor.

COVID-19 Update: Paycheck Protection Program – Initial Guidance Issued

On Tuesday evening, March 31, 2020, the U.S. Treasury and Small Business Administration (“SBA”) released their initial Information Sheet (“Fact Sheet”) as well as the Application Form for the Paycheck Protection Program (the “PPP”).   As mentioned in previous email alerts, the PPP is part of The CARES Act, which appropriated $349 billion to enable eligible businesses to apply for loans from approved lenders, which are guaranteed by the SBA.  Proceeds from these loans are intended to be used to cover operational costs such as payroll, benefits, rent, utilities, and mortgage interest payments.

The Fact Sheet provides important guidance for the PPP, including the dates that applicants can begin to apply for PPP loans through participating SBA Lenders:

  • Business and sole proprietors as soon as April 3, 2020; and
  • Independent contractors and self-employed individuals as soon as April 10, 2020.

The guidance issued and the Fact Sheet are similar to the provisions in the CARES Act; however, there are some important differences to the initial guidance issued, which we have highlighted below.  We should note that it is still possible the SBA issues additional rules and regulations regarding the PPP, and we will keep you informed immediately if that occurs.

Maximum Loan Amount 

The CARES Act provides that the maximum PPP loan a borrower can receive is equal to the lesser of (i) 2.5x TTM average monthly payroll costs and (ii) $10 million.   The sample application indicates that (non-seasonal) business applicants will use the average monthly payroll for 2019 (rather than include January or February 2020 in the calculation).

Loan Forgiveness

The CARES Act provided that loans will be eligible for forgiveness in an amount not to exceed the sum of payments for permitted payroll costs, interest payments on mortgages, rent, and utilities paid within 8 weeks from the origination of the PPP Loan.  The Fact Sheet indicates that “due to likely high subscription, it is anticipated that not more than 25% of the forgiven amount may be for non-payroll costs.” This factor needs to be considered if you were planning on applying for PPP loans to cover non-approved costs as a portion of such costs may not be subject to loan forgiveness.

Payroll Costs

In addition to employee compensation, certain paid vacation and leave, cash tips, severance payments, group healthcare benefits, retirement benefits, and payroll taxes, the CARES Act also seemed to define “payroll costs” to include payments to independent contractors as noted in our previous correspondences.  The description of payroll costs in the Fact Sheet suggests that compensation to independent contractors will be considered “payroll costs” (i.e., for purposes of calculating PPP loan size and loan forgiveness amounts) if the applicant is the independent contractor.  This could imply that businesses that pay independent contractors will not be able to include such compensation in the calculation of payroll costs.  We will be reviewing this in-depth to get additional guidance for you.

 

Interest Rate, Maturity Date and Payment Deferral Provisions

Initial guidance was that the interest rate on the PPP loans would be set at 4% and have a 10-year term.  Additionally, it was widely believed there would be no payments on PPP loans due for one year from origination.  Based on the Fact sheet, the interest rate will be set at 0.5%, and the term of the loan will be 2 years from maturity. Additionally, payments will be deferred for six months from origination; however, interest will accrue during these six months.

Foreign Ownership

It was widely believed that foreign ownership would not be an issue for eligibility for a PPP loan.  The application form indicates that if any 20% or greater owner answers no to whether or not they are “a U.S. Citizen” OR “have Lawful Permanent Resident status, “the application will be denied indicating that businesses with foreign ownership may be ineligible for the PPP loan.” We are still reviewing this and will have additional guidance shortly.

The application also makes it clear that for businesses seeking PPP loans each greater than 20% owner will need to complete an application and make certain certifications including: (i) that current economic uncertainty makes the loan request necessary to support the ongoing operations of the applicant business; and (ii) that the loan proceeds will be used to retain workers and maintain payroll or make mortgage payments, lease payments, and utility payments.

COVID-19 Webinar on April 2, 2020 at 3:00 PM (ET) – Get Your SBA Loan Questions Answered

Tarlow Invites You: COVID-19 Webinar
Get Your SBA Loan Questions Answered

On Thursday, April 2, 2020, at 3:00 PM to 4:00 PM (ET), our CPA channel affiliate partner, Aprio, will host a complimentary webinar to address your most pressing questions related to SBA loans amid the COVID-19 crisis and the steps you can take to get your refunds faster.

Panelists will discuss:

  • SBA Disaster Relief Loans vs. Payroll Protection Program vs. traditional SBA loans;
  • Eligibility for each loan type and how/if you can benefit from each;
  • How funds from each loan type can be used; and
  • How we can help you get your money faster.

Experts on the panel include:

  • Tommy Lee, Partner-In-Charge of Retail, Franchise, and Hospitality at Aprio
  • Saeed Moghadam, Partner, Aprio Strategic Partners, LLC

Register here

COVID-19 Update and NYC Financial Assistance Programs for Small Businesses

As the Coronavirus (COVID-19) situation continues to evolve, we want to assure you that Tarlow is taking all necessary precautions to ensure the health and safety of our team members, their families, and our clients. It is our number one priority. To that end, we are continuously monitoring updates and recommendations from the World Health Organization (WHO), U.S. Centers for Disease Control and Prevention (CDC) as well as regional government agencies.

At this time, Tarlow’s offices remain open. If closing our physical locations becomes necessary for the safety of our team members and our clients, Tarlow will immediately shift to remote operations. Our investments in robust technology infrastructure and our commitment to a flexible work environment will allow us to remain available and responsive to our clients during this time of uncertainty. During remote operations, your advisors will be available to you by phone or virtual meetings over Zoom.

In the interim, to the extent that you can provide your client service team documentation electronically and do virtual meetings and phone calls rather than in-person meetings that would help us protect against physical transmission of the virus. 

While our goal is to maintain the highest level of service during this health crisis, we understand some team members will require personal time off due to the spread of the coronavirus. If you have any questions or concerns regarding Tarlow’s service, please reach out to your advisor or Partner. If you are unable to reach your Partner and need immediate assistance, please email info@tarlow.com and someone will respond to you within 24 hours. 

Additionally, for our small business clients fearing a reduction in revenue because of COVID-19, we would like to ensure you are aware of Mayor Bill De Blasio’s announcement that for businesses with fewer than 100 employees who have seen sales decreases of 25% or more there is the potential for zero-interest loans of up to $75,000. The City is also offering small businesses with fewer than 5 employees a grant to cover 40% of payroll costs for two months to help retain employees. More information can be found here: NYC COVID-19 assistance.  

Please reach out to your Tarlow Partner if you would like assistance with the City’s program.

As this situation evolves, we will continue to update you. We thank you for your continued loyalty and trust in our firm.

Child Daycare and Taxes

Article Highlights:

  • Daycare Providers
  • Simplified Food Deduction
  • Special Rules for Business Use of the Provider’s Home
  • Home Sale Consequences
  • Other Expenses
  • Other Daycare Provider Issues
  • Daycare User Credit
  • Employer Dependent Care Benefits
  • Other Credit Criteria

When discussing daycare for children so their parents can work, there are two primary areas of discussion: one from the viewpoint of the individual providing the daycare services and another from the parents using a daycare provider’s services. Tax law provides exclusive benefits for both.

DAYCARE PROVIDERS

Daycare providers are generally self-employed individuals who provide care in their home, and like other self-employed individuals conducting a business, they are allowed to deduct business expenses, including the following:

  • Business Use of a Vehicle – Examples of business-related use of a personal vehicle by a daycare provider include taking the kids to the park, on field trips, or the movies. Also eligible are miles used to purchase supplies and other business-related travel. What’s deductible is the standard mileage rate of 58 cents per business mile (2019) or the prorated business portion of the actual operating expenses for the vehicle. In either case, daycare providers should maintain a contemporaneously prepared log detailing all business-related trips.
  • Food – Daycare providers can deduct the cost of meals provided to the children, not including meals for their own children. The simplest method, which does not require documenting food purchases, is to use the simplified meal deduction. The simplified meal deduction does not preclude a care provider from using the actual expenses if the actual cost is higher, and the provider is willing to document the costs without including food purchased for his or her own family’s use. The simplified meal deduction amounts for 2019 are illustrated in the table below. 
Year States Breakfast Lunch Dinner Snack
2019 Contiguous States
Alaska
Hawaii
$1.31
$2.09
$1.53
$2.46
$3.99
$2.88
$2.46
$3.99
$2.88
$0.73
$1.19
$0.86

The rates do not include the cost of nonfood supplies (e.g., utensils), which may be deducted separately. The number of meals per day per child is limited to the amounts below. (The table uses the amounts based upon the rates for contiguous states and will be higher for Alaska and Hawaii.)

Meal Rate 2019 Allowance
One Breakfast $1.31 $1.31
One Lunch $2.46 $2.46
One Dinner $2.46 $2.46
Three Snacks $0.73 $2.19
2019 Daily Maximum Per Child $8.42

If the provider receives some form of reimbursement or subsidy, then the provider may deduct only the part of the simplified rate that exceeds the reimbursed amount.

Business Use of the Home – Self-employed individuals may take a business deduction for the business use of a portion of their home if that portion is used exclusively for business. Daycare facilities are not subject to the exclusive use requirement that applies to other home offices. However, that special rule only applies to providers who:

  1. Are licensed, certified, registered, or approved as a daycare provider under state law;
  2. Have a pending application for licensing, certification, registration, or approval under state law as a daycare provider that has not been denied; or
  3. Are exempt from licensing, certification, registration, or approval under state law.

Any daycare provider not meeting one of these three requirements is still subject to the exclusive use rules. These rules will generally preclude them from the deduction unless they use some portion of the home exclusively for daycare purposes, such as a bedroom or a storage area. The daycare facility exception does not apply if the services performed are primarily educational or instructional (e.g., musical instruction). However, the limitation does apply if the services are mostly custodial and if the educational, developmental, or enrichment activities are only incidental to the custodial services. The services must be provided for individuals age 65 or older, children, or individuals who are physically or mentally incapable of caring for themselves.

When calculating the percentage of the business use of the home, both the space used to operate the daycare business and the amount of time that space is used to provide daycare, including preparation and cleaning time, are factors.

Example: Edna uses her living room, kitchen, and bathroom ten hours a day, five days a week, to provide licensed daycare services. The home is 2,400 square feet, and the living room, kitchen, and bathroom are a combined 1,400 square feet. The exclusive use requirement doesn’t apply. Edna’s percentage use of her home for business is determined as follows:

Once the percentage is established, all of the home expenses, including interest, taxes, home insurance, maintenance, utilities, and depreciation, are summed up and multiplied by the percentage to determine the deduction for the business use of the home. If an individual rents the home, the rent expense replaces the interest, taxes, and depreciation. After determining the deduction, it is further limited to the gross income from the daycare. If limited by the total income, there is a specific order in which the home expenses can be used (not discussed in this article).

Claiming the business use of the home deduction will also impact any future sale of the home. For taxpayers who own and use their home for two years out of the five years before the sale, they can generally exclude up to $250,000 ($500,000 if married filing jointly) of any resulting gain. However, any depreciation claimed, or that could have been claimed after May 15, 1997, cannot be excluded and, as a result, will be taxable to the extent of any gain from the sale.

Example: A care provider is entitled to claim $1,000 per year of home depreciation, and she operates that business for ten years, claiming a total of $10,000 in depreciation. Whenever she ultimately sells her home, the $10,000 cannot be included in the excluded gain and will always be treated as a taxable capital gain to the extent of any home sale gain.

  • Other Expenses – Other expenses include just about any cost that has to do with operating the daycare facility, including, for example:
    • Advertising
    • Business banking account fees
    • Daycare licensing
    • Daycare organization membership expenses
    • Seminars and education related to managing a daycare center
    • Business insurance
    • Games and toys
    • Supplies, diapers, wipes, and cleaning supplies
    • Phone services
    • Prorated internet service
    • Field trip expenses
    • Payroll for employees
    • Additional important tax issues apply to daycare providers:

Self-Employment Tax – Like all self-employed taxpayers, daycare providers must pay self-employment tax, which is made up of the Social Security tax of 12.4% on the first $132,900 (2019) of profit from the business and a 2.9% Medicare tax on all of the profits. In addition, there is an additional 0.9% Medicare tax on the extent to which the profits exceed $200,000 for single taxpayers, $250,000 for married taxpayers filing jointly, and $125,000 for married taxpayers filing separately. Also, daycare providers can deduct half of the self-employment tax from their gross income.

Retirement Plan Contributions – Profits from a daycare business qualify for IRA contributions and self-employed retirement plans, allowing daycare providers to put away substantial amounts for their future retirement.

Medical Insurance Above-the-Line Deduction 

While most taxpayers must itemize their deductions to deduct the cost of their medical insurance, self-employed taxpayers, including daycare providers, can deduct the premiums from their adjusted gross income and avoid the 10% medical expense haircut when itemizing deductions.

Employer Identification Number – Most daycare clients can claim a tax credit for the cost of daycare. However, to do so, they must include either the daycare provider’s Social Security number (SSN) or an employer identification number (EIN) on their tax returns. It is a best practice in this age of ID theft not to use the SSN and instead obtain an EIN.

DAYCARE USERS 

Individuals who use the services of daycare providers may qualify for a tax credit if the expense is an “employment-related” expense. For example, it must enable a taxpayer or spouse, if married, to work, and it must be for the care of a child, brother, sister, or stepsibling (or a descendant of any of these) who is under 13, lives in the taxpayer’s home for more than half the year, and does not provide more than half of his or her own support for the year. Married couples must file jointly, and both spouses must work (or one spouse must be a full-time student or disabled) to claim the credit.

The qualifying expenses are limited to the income from working and, in the case of a married couple, are limited to the lower of the spouse’s income from working. However, under certain conditions, when one spouse has no actual income from working and that spouse is a full-time student or disabled, that spouse is considered to have a monthly income of $250 (if the couple has one qualifying child) or $500 (for two or more qualifying children). This means the income limitation is mostly removed for a spouse who is a student or disabled all year.

The qualifying expenses can’t exceed $3,000 per year for those who have only one qualifying child, while the limit increases to $6,000 per year for those with two or more qualifying persons.

If there are two children, the care expenses are not divided equally. For example, if the taxpayer paid $2,500 in qualified expenses for the care of one child and $3,500 for the care of another child, the $6,000 can be used to determine the credit. The credit is computed as a percentage of qualifying expenses, in most cases, 20%. See the table below for the credit percentages based on the taxpayer’s adjusted gross income.

AGI Adjusted Applicable Percentage

AGI
Over
But Not
Over
Applicable
Percent
AGI
Over
But
Not Over
Applicable
Percent
0 15,000 35 29,000 31,000 27
15,000 17,000 34 31,000 33,000 26
17,000 19,000 33 33,000 35,000 25
19,000 21,000 32 35,000 37,000 24
21,000 23,000 31 37,000 39,000 23
23,000 25,000 30 39,000 41,000 22
25,000 27,000 29 41,000 43,000 21
27,000 29,000 28 43,000 No Limit 20

 

Example: Al and Janice both work with combined earned income in excess of $50,000 for the year. Janice has a part-time job, from which she earns $10,000 for the year. Her work hours coincide with the school hours of their 11-year-old daughter, Susan, so while school is in session, Al and Janice incur no childcare expenses for Susan. However, during the summer vacation period, they place Susan in a day camp program that costs $4,000. Since the expense limitation for one child is $3,000, their childcare credit would be $600 (20% of $3,000).

The credit reduces a taxpayer’s tax bill dollar for dollar. Thus, in the above example, Al and Janice would pay $600 less in taxes by the credit. However, the credit can only offset income tax and alternative minimum tax liability, and any excess is not refundable. The credit cannot be used to reduce self-employment tax if a taxpayer is self-employed, or the taxes imposed by the Affordable Care Act.

Employer Dependent Care Benefits – Some employers provide dependent care assistance programs to help their employees with the cost of daycare. Payments under these plans used by employees to pay dependent care expenses are excludable from employees’ income, up to the lower of:

  1. The employee’s earned income (for married employees, this is the earned income of the lower-paid spouse) or
  2. $5,000 ($2,500 for married filing separate).

Because reimbursement up to these limits is excludable from income, the benefits the employee receives are treated as reimbursement for daycare expenses that reduce the expense limits of $3,000 for one child and $6,000 for two or more children. Compensation above these limits is taxable to the employee and does not reduce qualified expenses for the credit.

Other Credit Criteria:

  • Age of the Child – If the qualifying child turned 13 during the year, count only the care expenses paid for the child for the part of the year when he or she was under age 13.
  • Day Camps – Many working parents must arrange for care for their children under 13 years of age (or any age if disabled) during school vacation periods. A popular solution, with a tax benefit, is a day camp program. The cost of day camp can count as an expense toward the child and dependent care credit. However, it’s essential to note that fees for overnight camps do not qualify. Also, not eligible are expenses paid for summer school or tutoring programs.
  • Both Parents Working in an Unincorporated Business – When both spouses of a married couple are jointly involved in an unincorporated business, it is relatively common, but incorrect, for all of that business’s income to be reported as just one spouse’s income. As a result, they lose the benefits of the childcare credit, which requires both spouses to have income from working.
  • School Expenses – Only school expenses for a child below the kindergarten level are considered qualifying expenses for this credit.
  • In-Home Care Providers – If a taxpayer provides daycare in their home, the daycare provider is considered a household employee.

This article provides an overview of the various tax issues related to daycare from the perspectives of both the provider and the recipient of daycare services. However, as in everything taxes, many more rules and issues exist than could be included in this article. For additional information about daycare and how it impacts your taxes, please contact us.