PPP Loan Forgiveness Guidance from the SBA as of April 15, 2020

sbaIf you were or are fortunate to get a PPP Loan, then there is a loan forgiveness that can be applied to the full amount of the loan and any accrued interest. The amount of loan forgiveness will depend on the total amount of payroll costs, payment of interest on mortgage interest (business) obligations incurred before February 15, 2020, rent payments on leases dated before February 15, 2020, and utility payments under service agreements on leases dated before February 20, 2020. However, not more than 25% of the loan forgiveness amount may be attributable to non-payroll costs.

Independent Contractors do not count as employees for the purpose of PPP loan forgiveness.

During the 8 weeks (56 days) after the date of funding of the PPP Loan, the PPP Loan is to be used for payroll costs (wages, commissions, bonuses, group health, medical and family leave, state & local payroll taxes, and employer retirement contributions), rent payments, utility payments and interest on mortgage payments and interest payments on any other debt obligations incurred before February 15, 2020. But remember that 75% of the loan forgiveness amount must be for Payroll Costs.

Proceeds from any advance up to $10,000 on the EIDL Loan will be deducted from the loan forgiveness amount on the PPP Loan.

It is presumed that the documentation for the loan forgiveness will be your payroll registers, lease agreements, health insurance invoices, retirement contributions, bank statements, and copies of checks/bank documents showing the payments. Additional guidance from the SBA is expected.

The CARE Act specifically says that the forgiveness amount of the PPP loan is not taxable. However, the IRS stated on April 30, 2020 that it believes the expenses that result in forgiveness of PPP loan are not tax deductible (the agency cited Section 256 of the tax code, which states that deductions can’t be taken if they are tied to a certain class of tax-exempt income). This essentially makes the loan forgiveness amount taxable. We will monitor to see if this gets changed.

CARE Act Loan Forgiveness of Paycheck Protection Loan

SBAThe Paycheck Protection Loan has a Loan Forgiveness feature.  During the 8 week period beginning on the date a Paycheck Protection Loan is funded (the Forgiveness Period), a borrower will be eligible for forgiveness and cancellation of indebtedness for up to the full principal amount of the Paycheck Protection Loan.  The amount eligible for forgiveness is equal to the total costs incurred and payments made during the Forgiveness Period of 8 weeks for 1) payroll, 2) mortgage interest, 3) rent and 4) utilities.

The cancellation on the debt owed on the Paycheck Protection Loan would also not be taxable.  So, you would not report income from the cancellation of this debt.  Essentially, with proper planning you can have two and a half months of payroll costs funded by the government and be able to have a tax deduction for the expense (you would have up to 4 interest while the loan is outstanding, but this would also be tax deductible).

CARES Act – Paycheck Protection Loan Program

The CARCost Seg2ES Act that has been passed by the Senate contains a Paycheck Protection Loan Program through the SBA.  The program offers a maximum loan of the lessor of your monthly average Payroll Costs over the twelve months prior to the loan multiplied by 2.5 or $10,000,000.  Basically, the maximum loan under this program is 2 1/2 months of your total Payroll Costs not to exceed $10,000,000.  They defined Payroll Costs to include salary, wages, commissions, vacation pay, leave pay, severance, health care benefits (including health insurance premiums), retirement benefits, and state & local payroll taxes.

The loan would carry a maximum interest rate of 4% with a maximum term of 10 years.  There is a payment deferral of both principal and interest for at least 6 months, but not to exceed 1 year.  There is no prepayment penalty, the loan is non-recourse with no personal guarantee required, and no collateral needed.

It also appears that the loan fees would be covered and reimbursed by the SBA.  The loan proceeds are meant to be used for payroll costs, healthcare, rent, and utilities to keep the business operating and it’s employees employed.

H.R. 6201 – Frequently Asked Questions

HR 6201President Trump signed the Families First Coronavirus Response Act (H.R. 6201) bill into law on March 18, 2020 in response to COVID-19.  There will be additional bills that will add, possibly change, and certainly clarify bill H.R. 6201 in the coming days and weeks.  I put together the following Frequently Asked Questions surrounding this bill to help answer some questions.  I will follow up with updates to these FAQs as new information comes to light and/or changes occur.

 

 

FAQ – What businesses are affected by the new bill?

If you have fewer than 500 employees, then this bill covers your business

FAQ – When does this bill go int effect?

The bill was signed into law on March 18, 2020 and goes into effect 15 days later and will remain into effect until the end of 2020.

FAQ – Can I opt out of the new bill?

Companies with fewer than 50 employees will be allowed to opt out of the bill provisions if it would jeopardize the viability of the business.

Companies between 50 and 5oo employees cannot opt out of the bill’s provisions.

FAQ – How can I opt out if the viability of my business would be affected by this bill?

The Secretary of Labor has the authority to exempt small businesses with fewer than 50 employees from the bill’s paid leave.  The Department of Labor will establish guidelines and procedures on how small businesses will be able to apply for this exemption.

FAQ – I’m a healthcare provider.  Can I exclude the leave provisions of this bill?

Exception for Health Care Providers and Emergency Responders. Employers who are health care providers or emergency responders may elect to exclude their employees from the public health emergency leave provisions of the bill.

FAQ – What paid leave can my employees claim?

  1. They have been exposed to coronavirus or exhibit symptoms
  2. They are recommended to quarantine by a healthcare provider and cannot work from home
  3. They need to care for a family member who has been exposed to coronavirus or exhibits symptoms of coronavirus
  4. They need to care for a child younger than 18 years old because their school or day care is closed, or their childcare provider is unavailable.

FAQ – How much paid leave can my employees claim?

Employees under the bill are entitled to 10 weeks of paid leave (a provision of the bill has any extension beyond 10 weeks to be granted only to parents taking care of children with shuttered schools and day care centers).

The first 14 days of leave:  Under the bill, the first 14 days in which an employee takes emergency leave may be unpaid.  An employee may elect, or an employer may require the employee, to substitute any accrued paid vacation leave, personal leave, or sick leave for unpaid leave.

Paid Leave Rate for Subsequent Days: After 14 days of unpaid leave, an employer is required to provide paid leave at an amount not less than two-thirds of an employee’s regular rate of pay up to $200 per day or $10,000 in the aggregate.

The bill also addresses hourly employees whose schedules vary to the extent than an employer cannot determine the exact number of hours the employee would have worked. For those employees, the employee’s paid leave rate should equal the average number of hours that the employee was scheduled per day over the six-month period prior to the leave. If the employee did not work in the preceding six-month period, the paid leave rate should equal the “reasonable expectation” of the employee at the time of hiring with respect to the average number of hours per day that the employee would be scheduled to work.

The following are further details:

Paid Sick Time: Full-time employees are entitled to 80 hours of paid sick leave. Part-time employees are entitled to the number of hours that the employee works, on average, over a two-week period.

For hourly employees whose schedules vary, the employee’s paid leave rate should equal the average number of hours that the employee was scheduled per day over the six-month period prior to the leave. If the employee did not work in the preceding six-month period, the paid leave rate should equal the “reasonable expectation” of the employee at the time of hiring with respect to the average number of hours per day that the employee would be scheduled to work.

Once an employee’s coronavirus-related need for using the emergency paid sick leave ends, then the employer may terminate the paid sick time. Further, paid sick time provided under H.R. 6201 shall not carry over from one year to the next.

Paid Leave Rate: Employees who take paid sick leave because they are subject to a quarantine or isolation order, have been advised by a health care provider to self-quarantine, or are experiencing coronavirus symptoms and seeking medical diagnosis are entitled to be paid at their regular pay rate or at the federal, state or local minimum wage, whichever is greater. In these circumstances, the paid sick leave rate may not exceed $511 per day, or $5,110 in aggregate.

Employees who take paid sick leave to care for another individual or child or because they are experiencing another substantially similar illness (as specified by HHS) are entitled to be paid at two-thirds their regular rate. In these circumstances, the paid sick leave rate may not exceed $200 per day, or $2,000 in aggregate.

The bill requires the Secretary of Labor to issue guidelines to assist employers in calculating paid sick time within 15 days of the bill’s enactment.

FAQ – Can I discourage my employees from taking this leave?

Employers cannot discourage or prevent eligible employers from claiming paid sick leave.  If they do, it could be considered discriminatory or an obstruction of their legal rights.  

Employer Notice Requirement: Employers shall post and keep posted, in conspicuous places, notice of the emergency paid sick leave requirements made available under H.R. 6201. Within seven days of the enactment of the bill, the Secretary of Labor will provide a model notice for use by employers.

FAQ – Will my business get reimbursed 

Employers initially pay for the sick leave and are reimbursed by the federal government within three months through refundable tax credits that count against employers’ payroll tax.

FAQ – How does the reimbursement work?

EMPLOYER TAX CREDITS

H.R. 6201 provides for employer tax credits to offset the costs associated with the paid public health emergency leave and sick leave required for employees under Divisions C and E of the bill.

Payroll Tax Credit: The bill provides a refundable tax credit worth 100 percent of qualified public health emergency leave wages (as provided by Division C) and qualified paid sick leave wages (as provided by Division E) paid by an employer for each calendar quarter through the end of 2020. The tax credit is allowed against the tax imposed under the employer portion of Social Security and Railroad Retirement payroll taxes.

Credit Amount: The bill allows employers to take tax credits for qualified public health emergency leave wages and qualified sick leave wages:

Credit Amount for Public Health Emergency Leave Wages. The amount of qualified public health leave wages taken into account for each employee is capped at $200 per day and $10,000 for all calendar quarters.

Credit Amount for Sick Leave Wages. In instances when an employee receives paid sick leave because they are subject to a quarantine or isolation order, have been advised by a health care provider to self-quarantine, or are experiencing coronavirus symptoms and seeking medical diagnosis, the amount of qualified sick leave wages taken into account for each employee is capped at $511 per day.

In instances when an employee receives paid sick leave because they are caring for another individual or child or because they are experiencing another substantially similar illness (as specified by HHS) the amount of qualified sick leave wages taken into account for each employee is capped at $200 per day.

In determining the total amount of an employer’s qualified sick leave wages paid for a calendar quarter, the total number of days that the employer can take into account with respect to a particular employee for that quarter may not exceed 10 days minus the number of days taken into account for that employee for all previous quarters.

Credit for Health Plan Expenses. Under the bill, the public health emergency leave and paid sick leave credits would be increased to include amounts employers pay for the employee’s health plan coverage while they are on leave. Specifically, the bill allows for the credit amounts to be increased by the amount of the employer’s group health plan expenses that are “properly allocated” to the qualified emergency leave and sick leave wages. Health plan expenses are “properly allocated” to qualified wages if made on a pro rata basis (among covered employees and periods of coverage).

FAQ – If an employee goes on leave, then what happens when they come back to work?

Generally, eligible employees who take emergency paid leave are entitled to be restored to the position they held when the leave commenced or to obtain an equivalent position with their employer. H.R. 6201 limits this rule for employers with fewer than 25 employees. In such circumstances, if an employee takes emergency leave, then the employer does not need to return the employee to their position if:

  • The position does not exist due to changes in the employer’s economic or operating condition that affect employment and were caused by the coronavirus emergency;
  • The employer makes “reasonable efforts” to restore the employee to an equivalent position; and
  • If these efforts fail, the employer makes an additional reasonable effort to contact the employee if an equivalent position becomes available. The “contact period” is the one-year window beginning on the earlier of (a) the date on which the employee no longer needs to take leave to care for the child or (b) 12 weeks after the employee’s paid leave commences.

Refundability of Excess Credit: The amount of the paid sick leave credit that is allowed for any calendar quarter cannot exceed the total employer payroll tax obligations on all wages for all employees. If the amount of the credit that would otherwise be allowed is so limited, the amount of the limitation is refundable to the employer.

Limitation on Tax Credits: Employers may not receive the tax credit if they are also receiving a credit for paid family and medical leave under the 2017 Tax Cuts and Jobs Act (P.L. 115-97). Employers would instead have to include the credit in their gross income.

FAQ – My business was shut down and I had to layoff my employees.  Are they eligible for unemployment?

Unemployment Insurance: The bill provides for the Secretary of Labor to make emergency administration grants to states in the Unemployment Trust Fund. States are directed to demonstrate steps toward easing eligibility requirements and expand access to unemployment compensation for claimants directly impacted by COVID-19. The legislation also appropriates funds for states that aim to establish work-sharing programs that permit employers to reduce employee hours rather than laying them off. Under such programs, employees would receive partial unemployment benefits to offset the wage loss.

FAQ – Will this bill change?

Many new bills are being worked on that can and likely will make changes to this bill and/or clarify many of it’s provisions.

 

What You Need to Know Before You Rent Your Vacation Home

Laguna BeachRenting out a second home can help defray the cost of owning and maintaining the property. And there may be valuable tax benefits from the rental arrangement as well. At Morey & Associates, an Orange County CPA firm, we understand the tax implications and can help you make the most of renting your vacation property.

Here are some things to think about if you are going to rent out a vacation property.

Two Week Rule

Your rental income won’t be taxable as long as you limit the number of rental days to 14 or fewer each year. In this situation, you won’t be able to deduct your rental expenses (other than property taxes and qualifying mortgage interest).

More Than 14 Rental Days

Once you exceed 14 rental days, all rental income becomes taxable to you. But you may deduct various rental expenses. There are different limits on rental deductions depending on your personal use of the home.

All expenses associated with renting out the property, such as utilities and maintenance, are potentially deductible if you limit personal use of the home to no more than the greater of (1) 10% of the total number of days the home is rented or (2) 14 days. However, if there’s a rental loss, the tax law’s passive activity rules may limit your loss deduction.
Where personal use exceeds the 10% or 14-day threshold, your tax deductions for rental expenses generally will be limited to the amount of rental income you collect. No loss is allowed.
To learn more about vacation homes and taxes, give us a call today at 949-759-5626. Our knowledgeable and trained staff is here to help from our two office locations in Newport Beach and San Clemente.

Is Your Hobby a Business?

Is your activity a business or a hobby? It’s important to know because if the IRS views your activity as a hobby rather than as a business, your tax deductions for business-type expenses are subject to certain limitations.

Business Versus Hobby

To qualify as a business, an activity must be conducted for the primary purpose of making a profit. Factors that are considered in determining whether you have a profit-making objective include:

  • How the activity is conducted
  • Your expertise and that of any advisors
  • The time and effort put into the activity
  • Whether you expect that assets used in the activity will appreciate in value
  • Your success in other similar or dissimilar activities
  • Your history of income/loss with respect to the activity
  • The amount of any profit
  • Your financial status
  • The presence of personal pleasure or recreation
  • Generally, the IRS presumes that an activity qualifies as a business if it shows a profit for three out of the last five years.

What’s Deductible?

If your activity is considered a hobby, two rules limit the amount of expenses you can deduct. First, your deduction for hobby expenses (such as rent and advertising) cannot exceed the activity’s gross income. So if your hobby income is $5,000 but your expenses are $6,000, you may take only $5,000 in expenses. You may not use the additional $1,000 to offset other income.

Second, hobby expenses are deductible only to the extent they (when combined with other miscellaneous expenses) exceed 2% of your adjusted gross income (AGI). So in the example above, if your AGI was $100,000, you would be able to deduct only $3,000 of the $5,000 in expenses.

Running your activity in a businesslike way can help you avoid the hobby-loss restrictions. Connect with our Orange County, CA CPA Firm at 949-759-5626 for all the latest and most current tax rules and regulations.

Are There Advantages to Owning a Second Home?

Whatever the location, size, or value of a second home, certain tax advantages are built in. However, your opportunity to benefit from them depends on how you use the property.

Personal Use

Both property taxes and mortgage interest are as deductible for a second home as they are for your primary residence — and are subject to the same limitations. If you file a joint return, you cannot deduct interest on more than $1 million of acquisition debt ($500,000 for married persons filing separately) on one or two homes.

Two tax advantages of home ownership are not available for a second home — the immediate deduction of mortgage points when purchasing and the capital gain exemption when selling. Both tax breaks require the home to be your “principal residence.” However, you can deduct the points on your second home’s mortgage over the loan’s term.

Rental Use

More tax advantages become available if you forgo some of your personal use in favor of renting out your second home for part of the year. But there may be drawbacks as well.

If you rent out your home for 14 or fewer days during the year, you do not have to report rental income on your tax return, regardless of the amount, and there is no effect on your mortgage interest deduction. But you cannot deduct any rental expenses.

If you rent out your property for more than 14 days during the year, all rental income becomes taxable from day one. However, rental-related ownership expenses — including depreciation, maintenance, and utilities — become tax deductible. Your personal use of the second home affects the deductible amount. When personal use is more than 14 days (or 10% of the number of days your home is rented, whichever is greater), the maximum deduction is 100% of the rental income. Note that allowing relatives to use your vacation home usually counts as personal use, regardless of how much they pay for the privilege. And, if a friend rents your home for less than the fair market rate, that also counts as personal use.

If your vacation home qualifies as a rental property (i.e., personal use doesn’t exceed the allowable limits), a deduction is allowed only for mortgage interest allocated to rental use. That could be important. If you were to rent your second home during July only, for example, then only 1/12 of your interest expense would be deductible.

Deducting Losses

What if your rental expenses exceed the rent you collect? Only an “active” investor can deduct rental losses. If you actively participate in managing the rentals and maintaining the property, you can apply up to $25,000 of losses each year against your regular income. This loss deduction is phased out for taxpayers with adjusted gross income between $100,000 and $150,000. But, if you hire a manager, you become a passive investor and can use rental expenses to offset only rental income. However, you can carry any excess deductions forward to future tax years.

Your use determines the tax treatment of a second home. Before you decide to rent your second home for more than 14 days a year, carefully weigh the benefits and disadvantages.

Deductible Yacht and Motor Home Financing

Your second home doesn’t have to sit on a fixed foundation to qualify for tax advantages.

According to the IRS, a facility qualifies as a residence if it has sleeping, cooking, and bathroom accommodations. Therefore, your yacht or smaller boat can be a second home. So can a motor home of any size or value.

Provided the boat or motor home secures the purchase loan, your mortgage interest s as deductible as it would be on a more conventional second home. The same $1 million limit on total debt to buy or improve your residences also applies.

For more help with individual or business taxes, connect with us today. Our Orange County CPA Accounting team can help you with all your tax issues, large and small.

Protect Your Finances – Plan Today for an Emergency Tomorrow by Organizing Your Records Now

head-in-hands No one expects to be the victim of a disaster, but every year, people find themselves in the midst of fires, floods, earthquakes, and other catastrophic events, with little, if any, time to prepare.

With the fires and heavy rainfall that has hit California recently, it’s best to be prepared. And, every year, personal and financial records are lost because they can’t be located quickly in an emergency.

That’s why it’s important to take the time to organize your business and personal records and essential information so that they’re easily accessible if you are forced to leave your home suddenly.

What To Include

You’ll want to safeguard both personal and financial records.

Personal Records:

Birth certificates for you and your family
Adoption papers
Social Security cards
Health insurance identification cards
Marriage certificate, divorce decree, or separation agreement
Passports

Financial Records:

Deeds to your home and other property
Vehicle titles and registrations
Auto, life, and homeowners insurance policies
Bank account information
Investment records
Wills, trust agreements, and other estate planning documents
Mortgage and loan agreements
Credit card information
Copies of tax returns
You may also want to make a list of the names, addresses, and phone numbers of your financial institution, insurance agent, attorney, doctor, and financial advisor, and keep them with your records.

You’ve Gathered Them — Now What?

Now that you have all your important documents together, you’ll want to keep them that way. A fireproof box that you can take with you during an evacuation is one option. But you also should keep copies of all important documents in a safe place outside your home.

You could rent a safe deposit box and keep copies there. Just be sure that someone who doesn’t live in your home has a key. You may even want to stash some extra cash or a credit card in both places to cover expenses such as food or a hotel room.

Your Life in Words and Pictures

Having a list of what you own can help you with insurance claims or tax deductions in the event of a loss. Take an inventory of your furniture, audio and video equipment, appliances, computer equipment, jewelry, collectibles, and other expensive items. Write down what you paid for the items, and keep the list, along with sales receipts, with your important documents.

Photographing or videotaping your possessions can help you prove what you owned. Include the photos or tape in your fireproof container or safe deposit box.

You can buy computer software programs to help you organize your records. Make sure you print out a hard copy of the information or copy it to a disk and store it with your other important documents.

For more tips on how to keep business best practices front and center for your company, give us a call today at 949-759-5626. We offer a full range of business accounting services. We can’t wait to hear from you.

Get a Tax Credit when You Install a Home Renewable Energy System

452801359Thinking about installing a renewable energy system in your residence? Uncle Sam offers individual taxpayers a federal income-tax credit equal to 30% of the cost of qualified residential energy-efficient property (REEP).

What Systems Qualify?

Credit-eligible property includes:

  • Solar electric
  • Solar water heating
  • Geothermal heat pump (uses ground or ground water as a thermal energy source for heating or cooling)
  • Small wind energy (generates electricity using a wind turbine)
  • Fuel cell (generates electricity from hydrogen and oxygen through an electrochemical process)
  • The credit covers the cost of both the equipment and its installation, including labor and any piping or wiring necessary to connect it to your home.

The system must meet specified standards for energy efficiency. You should obtain a certification from the manufacturer that the component you are purchasing meets the relevant requirements for the REEP credit. Note that the manufacturer’s certification is different from the U.S. Department of Energy’s Energy Star label; not all products with the Energy Star label meet the credit requirements.

When available, the tax credit is quite generous. For example, let’s say you spend $6,000 on year on a home solar water heating system that meets all requirements for the REEP tax credit. After considering the $1,800 credit ($6,000 × 30%), the system costs you only $4,200.

Restrictions

The home you are installing the equipment in must be located in the United States and you must use it as your residence. The credit is not available for equipment used to heat a swimming pool or hot tub.

Solar, geothermal, or wind energy property can qualify for the credit whether it is installed in your principal residence or another residence. The credit for fuel cell property is limited to equipment installed in your principal residence.

As for cost, the tax law generally places no dollar limits on the credit. However, there is an exception for fuel cell property: The maximum credit is $500 for each 0.5 kilowatt of capacity.

Some states and public utilities offer incentives to encourage the purchase of energy-efficient property. Certain types of incentives may require an adjustment to your purchase price or cost for credit calculation purposes.

Connect with our team today for all the latest and most current tax rules and regulations.

What Start-Up Costs Can You Deduct?

200359336-001Starting a new business is an exciting prospect but there are many serious financial and tax implications that must be considered in order to be successful. Make sure you work with an Orange County, CPA firm that understands the needs of local businesses and can help a business that incorporates in California.

Launching a new business takes hard work — and money. Costs for market surveys, travel to line up potential distributors and suppliers, advertising, hiring employees, training, and other expenses incurred before a business is officially launched can add up to a substantial amount.

The tax law places certain limitations on tax deductions for start-up expenses.

    • No deduction is available until the business becomes active.
    • Up to $5,000 of accumulated start-up expenses may be deducted in the tax year in which the active business begins. This $5,000 limit is reduced (but not below zero) by the excess of total start-up costs over $50,000.
    • Any remaining start-up expenses may be deducted ratably over the 180-month period beginning with the month in which the active business begins.

Instead of deducting start-up costs, a business may elect to capitalize them (treat them as an asset on the balance sheet). Deductions for “organization expenses” — such as legal and accounting fees for services related to forming a corporation or partnership — are subject to similar rules.

Whether you need individual or business tax advice, give us a call at 949-759-5626 to reach our Orange County CPA firm. We can assist local small businesses with their business accounting needs, and specialize in new businesses advisory. We’ve got the answers you’re looking for, so don’t wait. Call us today.