Accounting for Small Businesses

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).

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.

 

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.

Why Dental Work isn’t Covered by Medical Insurance

dentist-home3NBC’s Nicola Spector takes a look at why dental work is not covered under medical insurance. She notes modern dentistry’s roots are in the barbershop rather than more traditional medical practice. Until the nineteenth century, dentistry was practiced in the same chair in which men got their hair cut and their beards trimmed. Dr. Gary Glassman, an endodontist based in Toronto, Canada who also practices in the U.S., says such divergence between dental and medical is not helpful because “oral health is directly related to general health . . . The oral cavity is a gateway to your body. A lot of stuff in the mouth can indicate kidney disease, heart disease, diabetes, HPV, cancer, etc. Your dentist can be your first line of defense.”

Meanwhile, Dr. Adam C. Powell, president of healthcare-focused management advisory and operational consulting firm Payer+Provider Syndicate, notes that “Dental insurance, unlike medical, is not regulated and it tends to be very constrained . . . The annual maximum benefit is not that high, and there’s usually some sort of deductible.”

Read more at NBC News

What are the Tax Advantages of Being a Landlord?

Woman inspecting house interior
Owning rental property can bring in extra income, but it’s not without its downsides. If the furnace breaks or a pipe bursts, you can be sure you’ll get the call — sometimes in the middle of the night. But for all the hassles being a landlord can bring, there are some bright spots. One of them is the ability to deduct certain expenses from your total rental income on your tax return.

Owning a rental home, apartment, or other residential property may entitle you to take some or all of the following deductions.

House Calls

Real estate taxes and mortgage interest on rental property are potentially deductible, as are fire, flood, theft, and liability insurance premiums. Services, such as lawn care, performed on the rental property and any wages you pay employees in connection with the rental activity may be deductible as well.

Wanted: Tenants

You can deduct expenses associated with renting the property, including management fees, commissions, and cleaning and maintenance.

This Old House

The costs of repairs that keep the property in good condition, such as painting, are deductible in the year you incur them.

Cost Recovery

You generally can begin claiming deductions for depreciation on rental property in the year the property is ready and available for rent. In addition, you can recover the cost of improvements that add value to your property, such as replacing the roof or adding a deck, by claiming depreciation over time.

Over the River, Through the Woods

You may be able to deduct the expenses of traveling to your property when the main purpose of your visit is to collect rental income or to manage and maintain the property.

It’s important to keep complete and accurate records of all expenses related to your rental property. Keep in mind that there are tax law limits on deducting losses from rental activities.

Don’t deal with tax issues on your own. Call us right now at 949-759-5626 to find out how we can provide you with the answers you need. Or, learn more about our real estate CPA accounting services on our website.

As an S Corporation Shareholder do You Need to Worry about Taxes?

S corporation shareholders have extra reason to worry about their company’s annual performance: It has a direct impact on their own income taxes.

How It Works

Unlike a regular C corporation, an S corporation usually doesn’t pay federal income taxes itself. Instead, each shareholder is allocated a portion of the corporate income, loss, deductions, and credits on a special “K-1″ tax form. The shareholder then must report the items listed on the K-1 on his or her personal tax return.

The K-1 allocations are based on stock ownership percentages. So, for example, if an S corporation has $100,000 of taxable business income for the year, a person who owns 75% of the stock in the corporation would be allocated 75% of that income, or $75,000.

This scheme can get complicated. Case in point: The K-1 may show more income than the shareholder actually received from the company during the year. That’s because the K-1 figure is based on the corporation’s actual taxable income — not on the distributions made to the shareholder.

Example. Tom starts a new corporation, electing S status. In the first year, Tom draws a $30,000 salary and receives no other distributions from the company. The company’s ordinary business income (after deducting his salary) is $10,000. Since Tom is the only shareholder, all the company’s $10,000 of income is allocated to him on his K-1. Tom must include both the $30,000 of salary and the $10,000 on his personal income-tax return, even though all he actually received from the corporation was his salary.

This result seems harsh, but it’s not the end of the story. Special rules in the tax law prevent the same income from being taxed again. Essentially, Tom will be credited with already having paid taxes on the $10,000 so that any future distribution of the funds will not be taxable.

Tracking Basis

To determine whether non-dividend distributions* are tax free, S corporation shareholders must keep track of their stock basis. The computation generally starts with a shareholder’s initial capital contribution (or the stock’s cost if it was purchased) and changes from year to year as the shareholder is allocated corporate income, loss, etc. Non-dividend distributions that don’t exceed a shareholder’s stock basis are tax free.

Don’t deal with tax issues on your own. Call us right now to find out how we can provide you with the answers you need.

* Most distributions made from an S corporation are non-dividend distributions. Dividend distributions can occur if the company was previously a regular C corporation (or in other limited situations).

ACH Payment Processing vs Wire Transfers

Payment ProcessingBusinesses today, including accounting firms, benefit greatly from both wire transfers and ACH payment processing. Each offers unique benefits for specific situations worth considering. In order to decide which electronic payment method to choose and when, it’s necessary to look at the definitions and distinctions of each.

ACH Payment Processing

Processing payments through an automated clearing house (ACH) means that you’re using an electronic network that works with several financial institutions in order to process transactions in groups or batches. The result is similar to a wire-transfer in that the money is shifted from one financial institution to another.

However, it’s not a real-time transaction the way a wire transfer is. The good news is that batch transactions usually show up within three of four business days. In some cases, they show up the next day.

This is far better than the traditional method of invoicing and waiting 30 to 60 days for the money to arrive (and then waiting the additional time required for the check to clear after depositing it into your bank account). In this way, the ACH payment processing provides accounting firms with a secure way to capture payments faster than the old fashioned way.

There’s also the versatility factor with ACH payments. ACH payments work well for online bill payments, payroll direct deposits, person to person (P2P) payments, and more. Some individuals even receive social security benefits and federal income tax refunds through ACH.

While some banks or financial institutions may charge a small fee for ACH payment processing, most banks offer this service free of charge. There’s a tradeoff though: While ACH payment processing may be inexpensive, it is not immediate.

Wire Transfers

Wire transfers still play an important role in today’s electronic banking world. Wire transfers are instantaneous transfers — within seconds in some cases — of money from one bank account to the next.

Accounting firms, in particular, benefit greatly from wire transfers on occasion as they are ideally suited to facilitate the instant transfer of funds from the business bank account, for instance, to a payroll processing center, if needed.

Further, wire transfers that occur between bank accounts are authenticated. This means the identity of the person on the receiving end is verified so that you’re certain the money is going to the person you intend to receive it. This reduces the chance of fraud in the transfer process and makes the transfer more secure.

On the downside, there is typically a fee involved in wire transfers. In some cases, the fees are substantial. This is often the deal breaker for those sitting on the fence in the debate between wire transfers and ACH payment processing.

That said, keep this in mind as you make your payment processing decisions. Sometimes, it’s worth paying the fee for the convenience and speed of the transfer.

The Bottom Line

When it comes to transferring money from one account to another, there is no clear winner. Different accounting business needs at different points in the business cycle make one or the other more appealing. The key is to make sure you’re matching the right needs at the right time to maximize ACH payment processing and wire transfers to their fullest benefit.

SBA Halts Loan Guarantees for Small Businesses

SBAThe U.S. Small Business Administration said it reached the $18.75 billion cap for its main loan guarantee program on Thursday, forcing it to halt the funding of new loans with more than two months left in the fiscal year.

SBA spokesman Miguel Ayala said the capacity for fiscal 2015 was exceeded by stronger-than-anticipated demand for the government-guaranteed 7(a) program loans made by banks to small businesses.

As the agency neared the cap, lenders submitted a crush of $3 billion in loan applications already in July, including $1.7 billion this week alone. The July figure is more than five times the agency’s recent monthly volume, Ayala said.

The strong demand, which has been building all year, is a sign of an improved economy in which small firms want to expand and need capital, particularly in poorer communities, Ayala said.

The agency’s loan guarantee capacity would normally be reset under a new cap at the Oct. 1 start to the next fiscal year but a two-month halt in lending could slow job growth in the sector of the economy that creates the most net new jobs.

Protecting My Business from Data Breach

There are many challenges small companies face in today’s highly competitive world of business. As such, many businesses have taken actions to streamline operations, and have made the move to paperless offices and cloud computing in order to get an edge over competitors. Unfortunately, this has left them vulnerable to a risk of a different nature – a data breach.

Hackers are evolving at a more advanced pace than the software to stop them in their tracks is. They want information of any kind about your business, your employees, and the clients and customers who have trusted you with their personal and financial information.

Why Do You Need Data Breach Insurance?

For most of today’s small businesses it’s not a matter of IF a data breach will occur, but WHEN will it happen. That’s why you need to invest in adequate data breach insurance coverage for your small business.

In addition to the public relations nightmare data breaches bring to businesses, there are costs that can be quite significant. These include costs of legal defense, credit monitoring services, court fees, and even the expenses of notifying your customers that their information may have been compromised in the attack.

These costs can be particularly detrimental to your business if you’re paying for these costs completely out of pocket, without the help of insurance.

What Does Data Breach Insurance Cover?

The nature of data breaches is brutal for small businesses that are ill-equipped to defend against brute force attacks despite their best efforts. Data breach insurance helps small businesses in these events by covering the costs of:

  • Litigation defense
  • Forensic investigations
  • Crisis management and public relations
  • Notification expenses
  • Liability expenses

It’s important for you to be proactive in your efforts to avoid the scandal associated with data breach by establishing strict policies about passwords, device usage, social media, etc. and to purchase adequate data breach insurance as a backup plan for the time when data breaches do occur.