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Launching a business? How to treat start-up expenses on your tax return
While the COVID-19 crisis has devastated many existing businesses, the pandemic has also created opportunities for entrepreneurs to launch new businesses. For example, some businesses are being launched online to provide products and services to people staying at home.
Entrepreneurs often don’t know that many expenses incurred by start-ups can’t be currently deducted. You should be aware that the way you handle some of your initial expenses can make a large difference in your tax bill.
How expenses must be handled
If you’re starting or planning a new enterprise, keep these key points in mind:
Start-up costs include those incurred or paid while creating an active trade or business — or investigating the creation or acquisition of one.
Under the Internal Revenue Code, taxpayers can elect to deduct up to $5,000 of business start-up and $5,000 of organizational costs in the year the business begins. As you know, $5,000 doesn’t get you very far today! And the $5,000 deduction is reduced dollar-for-dollar by the amount by which your total start-up or organizational costs exceed $50,000. Any remaining costs must be amortized over 180 months on a straight-line basis.
No deductions or amortization deductions are allowed until the year when “active conduct” of your new business begins. Generally, that means the year when the business has all the pieces in place to begin earning revenue. To determine if a taxpayer meets this test, the IRS and courts generally ask questions such as: Did the taxpayer undertake the activity intending to earn a profit? Was the taxpayer regularly and actively involved? Did the activity actually begin?
Expenses that qualify
In general, start-up expenses include all amounts you spend to:
Investigate the creation or acquisition of a business,
Create a business, or
Engage in a for-profit activity in anticipation of that activity becoming an active business.
To be eligible for the election, an expense also must be one that would be deductible if it were incurred after a business began. One example is money you spend analyzing potential markets for a new product or service.
To qualify as an “organization expense,” the expenditure must be related to creating a corporation or partnership. Some examples of organization expenses are legal and accounting fees for services related to organizing a new business and filing fees paid to the state of incorporation.
Thinking ahead
If you have start-up expenses that you’d like to deduct this year, you need to decide whether to take the elections described above. Recordkeeping is critical. Contact us about your start-up plans. We can help with the tax and other aspects of your new business.
© 2020
Overview of the CARES Act and Paycheck Protection Program with Partner Vincent Gotko
Overview of the CARES Act and Paycheck Protection Program with Partner Vincent Gotko
Recently, our partner Vincent Gotko presented to the Birmingham Bloomfield Chamber about legislation passed due to COVID-19. Gotko’s presentation focused on the CARES Act recently signed in to law.
Viewers can learn more about how the CARES Act impacts businesses and individuals, as well as get more information on the Paycheck Protection Program. This program was passed on March 27, 2020. The intended purpose of the fund is to continue paying employees. Loan forgiveness options are available. More information and an overview of the program can be found here:
https://www.youtube.com/watch?v=javRS5uO5r8
Another important topic impacting many businesses is employee tax credits for employers. This includes the employee retention credit, credit for required paid sick leave, and credit for required paid family leave. The last two are part of a separate act passed just before the CARES Act. More information about these credits and how to use them can be found here: https://www.youtube.com/watch?v=FGta8BfFsow
You can find a summary of COVID-19 legislation here: https://www.youtube.com/watch?v=EPnFl5GP58I
This video goes over individual provisions regarding special rules for the use of retirement funds: https://www.youtube.com/watch?v=Oy0uKCovJj8
This video provides more information on the changes to charitable contribution deduction rules: https://www.youtube.com/watch?v=grls5L5csPQ
If you want to learn more about the modifications for net operating losses impacting businesses, click here: https://www.youtube.com/watch?v=-m4PGZvFOBE
This video covers the delayed payment of employer payroll taxes:
https://www.youtube.com/watch?v=SbZftbeD-0k
For more information about the importance of hiring a CPA and how CPAs can help during this time, click here: https://www.youtube.com/watch?v=vZqw-QzO67c
More information about Fenner, Melstrom & Dooling, PLC can be found here: https://www.youtube.com/watch?v=4e5Rysy4Vrg
For more information and to better understand the full picture, Mr. Gotko’s full presentation can be viewed here: https://www.youtube.com/watch?v=iOsJnfEh8dQ.
If you need more assistance determining how these new laws and programs impact you and your business, a trusted Fenner, Melstrom & Dooling, PLC advisor would be happy to answer your questions. Fill out the form on our contact page or give us a call, and we will help you determine your plan moving forward. These are unique times, but we are getting through it together!
Re-evaluate your company’s competitiveness in a changed economy
Just about every business owner’s strategic plans for 2020 look far different now than they did heading into the year. The COVID-19 pandemic has changed the economy in profound ways, forcing many companies to recalibrate suddenly and severely.
As your business moves forward in this uncertain environment, it’s important to re-evaluate competitiveness. You may have lost an edge that previously existed, or you may have the opportunity to gain one. Here are some critical elements to consider.
Objectively assess leadership
More than likely, you and your management team have had to make some difficult decisions over the last few months. Even if you feel confident that you’ve done most everything right, objectively examine and discuss your successes, failures, strengths and weaknesses.
For instance, maybe you’ve had some contentious interactions with employees while adjusting to remote work environments or increased safety protocols. Ask your managers whether underlying tensions exist and, if so, how you might improve morale.
Reassess external relationships
Most businesses rely on relationships to function competitively. These include connections with customers, suppliers, lenders, advisors and the local community. In addition, if your company is subject to regulatory oversight, it must cooperate with local, state and federal officials.
Review and discuss the state of each of these relationships. Are you getting positive customer feedback on your response to the crisis? Have you been paying suppliers on time? If not, are you openly communicating about potential solutions?
Examine supply chain and technology
Competitiveness can hinge on a company’s ability to access the supplies it needs to operate profitably, and the crisis has had a major impact on supply chains. Are you in danger of being cut off or limited from any mission-critical supplies or materials?
Also, look into whether you have access to optimal and scalable technology that allows you to produce and deliver competitive products or services. This has become a major issue in many industries as companies pivot to operate more virtually and do less business in-person.
Look to the future
Finally, identify how COVID-19 and the resulting economic fallout is affecting your industry. Many sectors have obviously struggled, but others are booming in response to pandemic-driven needs for certain supplies and services.
Study how this year’s changes are affecting industry outlook and projected customer demand. You may need to operate more cautiously to deal with lower revenue for another year or more. Then again, now could be the time to claim greater market share if competitors have been struggling more than you.
Rise to the challenges
The pandemic has complicated strategic planning for every business owner. You must now anticipate not only the usual challenges to your competitiveness, but also the difficulties of operating safely in a pandemic and recovering economy. Our firm can help you identify, quantify and analyze all the factors that contribute to stability and profitability.
© 2020
Good records are the key to tax deductions and trouble-free IRS audits
If you operate a small business, or you’re starting a new one, you probably know you need to keep records of your income and expenses. In particular, you should carefully record your expenses in order to claim the full amount of the tax deductions to which you’re entitled. And you want to make sure you can defend the amounts reported on your tax returns if you’re ever audited by the IRS or state tax agencies.
Certain types of expenses, such as automobile, travel, meals and office-at-home expenses, require special attention because they’re subject to special recordkeeping requirements or limitations on deductibility.
It’s interesting to note that there’s not one way to keep business records. In its publication “Starting a Business and Keeping Records,” the IRS states: “Except in a few cases, the law does not require any specific kind of records. You can choose any recordkeeping system suited to your business that clearly shows your income and expenses.”
That being said, many taxpayers don’t make the grade when it comes to recordkeeping. Here are three court cases to illustrate some of the issues.
Case 1: Without records, the IRS can reconstruct your income
If a taxpayer is audited and doesn’t have good records, the IRS can perform a “bank-deposits analysis” to reconstruct income. It assumes that all money deposited in accounts during a given period is taxable income. That’s what happened in the case of the business owner of a coin shop and precious metals business. The owner didn’t agree with the amount of income the IRS attributed to him after it conducted a bank-deposits analysis.
But the U.S. Tax Court noted that if the taxpayer kept adequate records, “he could have avoided the bank-deposits analysis altogether.” Because he didn’t, the court found the bank analysis was appropriate and the owner underreported his business income for the year. (TC Memo 2020-4)
Case 2: Expenses must be business related
In another case, an independent insurance agent’s claims for a variety of business deductions were largely denied. The Tax Court found that he had documentation in the form of cancelled checks and credit card statements that showed expenses were paid. But there was no proof of a business purpose.
For example, he made utility payments for natural gas, electricity, water and sewer, but the records didn’t show whether the services were for his business or his home. (TC Memo 2020-25)
Case number 3: No records could mean no deductions
In this case, married taxpayers were partners in a travel agency and owners of a marketing company. The IRS denied their deductions involving auto expenses, gifts, meals and travel because of insufficient documentation. The couple produced no evidence about the business purpose of gifts they had given. In addition, their credit card statements and other information didn’t detail the time, place, and business relationship for meal expenses or indicate that travel was conducted for business purposes.
“The disallowed deductions in this case are directly attributable to (the taxpayer’s) failure to maintain adequate records,“ the court stated. (TC Memo 2020-7)
We can help
Contact us if you need assistance retaining adequate business records. Taking a meticulous, proactive approach to how you keep records can protect your deductions and help make an audit much less painful.
© 2020
Rioting damage at your business? You may be able to claim casualty loss deductions
The recent riots around the country have resulted in many storefronts, office buildings and business properties being destroyed. In the case of stores or other businesses with inventory, some of these businesses lost products after looters ransacked their property. Windows were smashed, property was vandalized, and some buildings were burned to the ground. This damage was especially devastating because businesses were reopening after the COVID-19 pandemic eased.
A commercial insurance property policy should generally cover some, or all, of the losses. (You may also have a business interruption policy that covers losses for the time you need to close or limit hours due to rioting and vandalism.) But a business may also be able to claim casualty property loss or theft deductions on its tax return. Here’s how a loss is figured for tax purposes:
Your adjusted basis in the property
MINUS
Any salvage value
MINUS
Any insurance or other reimbursement you receive (or expect to receive).
Losses that qualify
A casualty is the damage, destruction or loss of property resulting from an identifiable event that is sudden, unexpected or unusual. It includes natural disasters, such as hurricanes and earthquakes, and man-made events, such as vandalism and terrorist attacks. It does not include events that are gradual or progressive, such as a drought.
For insurance and tax purposes, it’s important to have proof of losses. You’ll need to provide information including a description, the cost or adjusted basis as well as the fair market value before and after the casualty. It’s a good time to gather documentation of any losses including receipts, photos, videos, sales records and police reports.
Finally, be aware that the tax code imposes limits on casualty loss deductions for personal property that are not imposed on business property. Contact us for more information about your situation.
© 2020
Does your company have an emergency succession plan?
For business owners, succession planning is ideally a long-term project. You want to begin laying out a smooth ownership transition, and perhaps grooming a successor, years in advance. And you shouldn’t officially hand over the reins until many minute details have been checked and rechecked.
But it doesn’t always work out this way. As the coronavirus (COVID-19) pandemic has made clear, a business owner may suddenly vanish from the picture — leaving the company adrift in a time of crisis. In such an instance, a traditional succession plan may be too cumbersome or indistinct to execute. That’s why every company should create an emergency succession plan.
Contingency people
When preparing for potential disasters in the past, you’ve probably been urged to devise contingency plans to stay operational. In the case of an emergency succession plan, you need to identify contingency people.
Larger organizations may have an advantage here as a CFO or COO may be able to temporarily or even permanently replace a CEO with relative ease. For small to midsize companies, the challenge can be greater — particularly if the owner is heavily involved in retaining key customers or bringing in new business.
Nevertheless, an emergency succession plan needs to name someone who can take on a credible leadership role if you become seriously ill or otherwise incapacitated. He or she should be a trusted individual who you expect to retain long-term and who has the skills and personality to stabilize the company during a difficult time.
After you identify this person, consider the “domino effect.” That is, who will take on your emergency successor’s role when he or she is busy running the company?
Communication strategies
A traditional succession plan is usually kept close to the vest until it’s fully formulated and nearing execution. An emergency succession plan, however, needs to be transparent and well-communicated from the beginning.
After choosing an “emergency successor,” meet with the person to discuss the role in depth. Listen to any concerns raised and take steps to alleviate them. For instance, you may need to train your emergency successor in various duties or allow him or her to participate in executive-level decisions to get a feel for running the business.
Beyond that, your company as a whole should know about the emergency succession plan and how it will affect everyone’s day-to-day duties if executed. Now may be an optimal time to do this because COVID-19 has put everyone in a “disaster recovery” frame of mind. It’s also a good idea to develop a communications strategy for letting customers and suppliers know that you have an emergency succession plan in place.
Total preparedness
Along with all the hardships wrought by the pandemic, some powerful lessons are emerging. One of them is the importance of preparedness at every level. We offer assistance in developing both traditional business succession plans and emergency ones.
© 2020
Business meal deductions: The current rules amid proposed changes
Restaurants and entertainment venues have been hard hit by the novel coronavirus (COVID-19) pandemic. One of the tax breaks that President Trump has proposed to help them is an increase in the amount that can be deducted for business meals and entertainment.
It’s unclear whether Congress would go along with enhanced business meal and entertainment deductions. But in the meantime, let’s review the current rules.
Before the pandemic hit, many businesses spent money “wining and dining” current or potential customers, vendors and employees. The rules for deducting these expenses changed under the Tax Cuts and Jobs Act (TCJA), but you can still claim some valuable write-offs. And keep in mind that deductions are available for business meal takeout and delivery.
One of the biggest changes is that you can no longer deduct most business-related entertainment expenses. Beginning in 2018, the TCJA disallows deductions for entertainment expenses, including those for sports events, theater productions, golf outings and fishing trips.
50% meal deductions
Currently, you can deduct 50% of the cost of food and beverages for meals conducted with business associates. However, you need to follow three basic rules in order to prove that your expenses are business related:
The expenses must be “ordinary and necessary” in carrying on your business. This means your food and beverage costs are customary and appropriate. They shouldn’t be lavish or extravagant.
The expenses must be directly related or associated with your business. This means that you expect to receive a concrete business benefit from them. The principal purpose for the meal must be business. You can’t go out with a group of friends for the evening, discuss business with one of them for a few minutes, and then write off the check.
You must be able to substantiate the expenses. There are requirements for proving that meal and beverage expenses qualify for a deduction. You must be able to establish the amount spent, the date and place where the meals took place, the business purpose and the business relationship of the people involved.
It’s a good idea to set up detailed recordkeeping procedures to keep track of business meal costs. That way, you can prove them and the business connection in the event of an IRS audit.
Other considerations
What if you spend money on food and beverages at an entertainment event? The IRS has clarified that taxpayers can still deduct 50% of food and drink expenses incurred at entertainment events, but only if business was conducted during the event or shortly before or after. The food-and-drink expenses should also be “stated separately from the cost of the entertainment on one or more bills, invoices or receipts,” according to the guidance.
Another related tax law change involves meals provided to employees on the business premises. Before the TCJA, these meals provided to an employee for the convenience of the employer were 100% deductible by the employer. Beginning in 2018, meals provided for the convenience of an employer in an on-premises cafeteria or elsewhere on the business property are only 50% deductible. After 2025, these meals won’t be deductible at all.
Plan ahead
As you can see, the treatment of meal and entertainment expenses became more complicated after the TCJA. It’s possible the deductions could increase substantially under a new stimulus law, if Congress passes one. We’ll keep you updated. In the meantime, we can answer any questions you may have concerning business meal and entertainment deductions.
© 2020
Businesses revise sales compensation models during pandemic
Economists will look back on 2020 as a year with a distinct before and after. In early March, most companies’ sales projections looked a certain way. Just a few weeks later, those projections had changed significantly — and not for the better.
Because of the novel coronavirus (COVID-19) pandemic, businesses across a variety of industries are revising their sales compensation models. Nonprofit workforce researchers WorldatWork released a report in late April indicating that 36% of organizations had begun addressing sales compensation in light of the crisis, and another 49% were developing plans to do so.
If your company is considering changes to how it compensates sales staff in a drastically changed economy, here are three of the most common actions being implemented according to the survey:
1. Adjusting sales quotas. Of the organizations surveyed, 46% were adjusting their quotas to account for the pandemic’s impact. For many businesses, this means providing “quota relief” to salespeople who find themselves in a reluctant buying environment. Of course, any adjustment should be based on a realistic and detailed forecast of what your sales will likely look like for the current period and upcoming ones.
2. Modifying performance measures. The report indicates that 44% of organizations will modify how they measure the performance of their sales staffs. Whereas a sales quota is a time-bound target assigned to an individual, performance measures encompass much wider metrics.
For example, you might want to amend your average deal size to account for more conservative buying during the pandemic. This metric is typically calculated by dividing your total number of deals by the total dollar amount of those deals. Also look at conversion rate (or win rate), which measures what percentage of leads ultimately become customers. Scarcer leads will likely lead to a lower rate.
3. Lowering plan thresholds. Survey results showed 36% of organizations intend to lower the plan thresholds for their sales teams. From a compensation plan perspective, a threshold describes what performance level qualifies the employee for a specified payout. This includes a max threshold to identify outstanding sales performances during a given period.
The pandemic-triggered economic downturn serves as a prime, even extreme, example of the kinds of external, macroeconomic factors that can alter the effectiveness of a plan threshold. When looking into corrective action, it’s critical to go beyond the usual adjustments and conduct analyses specific to your company’s size, market and industry outlook.
Setting sales compensation has never been a particularly straightforward endeavor. Businesses often tweak their approaches over time or even implement completely new ways when competitively necessary — and this is during normal times. Our firm can help you assess your sales figures since the pandemic hit, forecast upcoming ones and design a compensation model that’s right for you.
© 2020
IRS releases 2021 amounts for Health Savings Accounts
The IRS recently released the 2021 inflation-adjusted amounts for Health Savings Accounts (HSAs).
HSA basics
An HSA is a trust created or organized exclusively for the purpose of paying the “qualified medical expenses” of an “account beneficiary.” An HSA can only be established for the benefit of an “eligible individual” who is covered under a “high deductible health plan.” In addition, a participant can’t be enrolled in Medicare or have other health coverage (exceptions include dental, vision, long-term care, accident and specific disease insurance).
In general, a high deductible health plan (HDHP) is a plan that has an annual deductible that isn’t less than $1,000 for self-only coverage and $2,000 for family coverage. In addition, the sum of the annual deductible and other annual out-of-pocket expenses required to be paid under the plan for covered benefits (but not for premiums) cannot exceed $5,000 for self-only coverage, and $10,000 for family coverage.
Within specified dollar limits, an above-the-line tax deduction is allowed for an individual's contribution to an HSA. This annual contribution limitation and the annual deductible and out-of-pocket expenses under the tax code are adjusted annually for inflation.
Inflation adjustments for 2021 contributions
In Revenue Procedure 2020-32, the IRS released the 2021 inflation-adjusted figures for contributions to HSAs, which are as follows:
Annual contribution limitation. For calendar year 2021, the annual contribution limitation for an individual with self-only coverage under a HDHP is $3,600. For an individual with family coverage, the amount is $7,200. This is up from $3,550 and $7,100, respectively, for 2020.
High deductible health plan defined. For calendar year 2021, an HDHP is a health plan with an annual deductible that isn’t less than $1,400 for self-only coverage or $2,800 for family coverage (these amounts are unchanged from 2020). In addition, annual out-of-pocket expenses (deductibles, co-payments, and other amounts, but not premiums) can’t exceed $7,000 for self-only coverage or $14,000 for family coverage (up from $6,900 and $13,800, respectively, for 2020).
A variety of benefits
There are many advantages to HSAs. Contributions to the accounts are made on a pre-tax basis. The money can accumulate year after year tax free and be withdrawn tax free to pay for a variety of medical expenses such as doctor visits, prescriptions, chiropractic care and premiums for long-term-care insurance. In addition, an HSA is "portable." It stays with an account holder if he or she changes employers or leaves the work force. For more information about HSAs, contact your employee benefits and tax advisor.
© 2020
Attuning your social media strategy to the pandemic
Social media for business: Your time has come. That’s not to say it wasn’t important before but, during the novel coronavirus (COVID-19) pandemic, connecting with customers and prospects via a popular platform is essential to maintaining visibility, building goodwill and perhaps even generating a bit of revenue.
What’s challenging is that the social media strategy you deployed before the crisis may no longer be effective or appropriate. Now that businesses have had a couple of months to adjust, some best practices are emerging:
Review your approach. Assuming your company already has an active social media presence, take a measured, objective look at what you do and how you do it. Gather feedback from managers and key employees. If feasible, ask trusted customers if they feel your posts have been in tune with the times. While you recalibrate, don’t hesitate to slow down or even pause your social media efforts.
Look to help, not sell. The drastic economic slowdown has ratcheted up the pressure on everyone. When revenue starts falling off, it’s only natural to want to market aggressively and push sales as hard as possible.
But, on social media, this tactic generally doesn’t play well. Many people are dealing with job losses and financial hardship. They may view hard-sell tactics as insensitive or, worse yet, exploitive of the crisis. Create posts that offer positive messages of empathy and encouragement while also letting friends and followers know that you’re open for business.
Deliver consistency. Although you may need to tweak the content of your posts to avoid appearing out of touch, a national crisis probably isn’t the time to drastically change the look and style of your posts. Customers value brand consistency and may even draw comfort from seeing your business soldier on in a familiar fashion.
Engage with customers. Unlike traditional marketing, social media is designed to be interactive. So, seek out viable opportunities to increase engagement with those who follow your accounts. Many people are feeling isolated and would welcome conversation starters, coping tips, authentic replies to questions and gratitude for compliments.
As always, however, interaction with the public on social media can be fraught with danger. Choose discussion topics carefully, exercise restraint in dealing with criticism, and be on guard for “trolling” or conversations that could get into politics, religion or other sensitive topics.
Social media was once a brave new world for businesses to navigate. For the time being, it may be the only world in which many companies can interact directly with a large number of customers and prospects. Manage your message carefully. We can help you assess the costs and results of your marketing efforts, including on social media, and devise sensible strategies.
© 2020
How to succeed at virtual team building
Thanks to affordable technology, more and more companies have been allowing employees to work remotely in recent years. It’s become feasible to procure laptops, set up security protocols, use cloud servers and rely on employees’ home Wi-Fi connections to create functional virtual workspaces. In turn, many of these businesses have lowered overhead costs such as office rent and utilities.
Of course, with the onset of the coronavirus (COVID-19) pandemic, many companies have had to mandate that any employees who can work from home do so. As a result, virtual team building has become more important than ever.
Ensure consistency of processes and expectations
When employees work from home, many of the processes they use to complete tasks and fulfill duties may change slightly — or even drastically — to fit the technology used to execute them. This can cause confusion and lead to mistakes or conflicts that affect employee morale.
Make sure every virtual team develops and follows processes that produce results consistent with those generated on your physical premises. Doing so may require a concerted effort that slows productivity temporarily while everyone gets on the same page.
Meanwhile, reinforce with workers that your expectations of them are the same whether they work on-site or remotely. They shouldn’t feel as if they must work extra hard from home to “prove themselves,” but they do need to demonstrate that they’re getting things done.
Hold regular meetings — and “irregular” ones
Among the biggest challenges for work-from-home employees is feeling disconnected from their fellow team members. Brief, regularly scheduled Web-based meetings are a good way to address this dilemma. These gatherings allow everyone to see or hear one another (or both) and provide employees with the opportunity to voice concerns and contribute ideas.
If a given team is relatively new at working remotely, or you just want to bring any group of employees closer together, you could also hold special meetings specifically geared toward team building. There’s a wide variety of icebreakers, games and activities that teams can use to learn more about each other and to gain comfort in communicating.
For example, you can invite participants to share stories and photos of their pets, hold trivia contests or even sing karaoke. Just be sure to tailor such team-building efforts to your company’s culture and be wary of pushing remote workers too far out of their comfort zones.
Find a way
Whether your business has had employees working remotely for years or just recently had to ask workers to stay home because of COVID-19, there are plenty of ways to help them communicate better and enhance their performance as a team. We offer assistance in measuring productivity and making smart investments in the right team-building technology.
© 2020
Hiring independent contractors? Make sure they’re properly classified
As a result of the coronavirus (COVID-19) crisis, your business may be using independent contractors to keep costs low. But you should be careful that these workers are properly classified for federal tax purposes. If the IRS reclassifies them as employees, it can be an expensive mistake.
The question of whether a worker is an independent contractor or an employee for federal income and employment tax purposes is a complex one. If a worker is an employee, your company must withhold federal income and payroll taxes, pay the employer’s share of FICA taxes on the wages, plus FUTA tax. Often, a business must also provide the worker with the fringe benefits that it makes available to other employees. And there may be state tax obligations as well.
These obligations don’t apply if a worker is an independent contractor. In that case, the business simply sends the contractor a Form 1099-MISC for the year showing the amount paid (if the amount is $600 or more).
No uniform definition
Who is an “employee?” Unfortunately, there’s no uniform definition of the term.
The IRS and courts have generally ruled that individuals are employees if the organization they work for has the right to control and direct them in the jobs they’re performing. Otherwise, the individuals are generally independent contractors. But other factors are also taken into account.
Some employers that have misclassified workers as independent contractors may get some relief from employment tax liabilities under Section 530. In general, this protection applies only if an employer:
Filed all federal returns consistent with its treatment of a worker as a contractor,
Treated all similarly situated workers as contractors, and
Had a “reasonable basis” for not treating the worker as an employee. For example, a “reasonable basis” exists if a significant segment of the employer’s industry traditionally treats similar workers as contractors.
Note: Section 530 doesn’t apply to certain types of technical services workers. And some categories of individuals are subject to special rules because of their occupations or identities.
Asking for a determination
Under certain circumstances, you may want to ask the IRS (on Form SS-8) to rule on whether a worker is an independent contractor or employee. However, be aware that the IRS has a history of classifying workers as employees rather than independent contractors.
Businesses should consult with us before filing Form SS-8 because it may alert the IRS that your business has worker classification issues — and inadvertently trigger an employment tax audit.
It may be better to properly treat a worker as an independent contractor so that the relationship complies with the tax rules.
Be aware that workers who want an official determination of their status can also file Form SS-8. Disgruntled independent contractors may do so because they feel entitled to employee benefits and want to eliminate self-employment tax liabilities.
If a worker files Form SS-8, the IRS will send a letter to the business. It identifies the worker and includes a blank Form SS-8. The business is asked to complete and return the form to the IRS, which will render a classification decision.
Contact us if you receive such a letter or if you’d like to discuss how these complex rules apply to your business. We can help ensure that none of your workers are misclassified.
© 2020
IRS extends some (but not all) employee benefit plan deadlines
The IRS recently issued Notice 2020-23, expanding on previously issued guidance extending certain tax filing and payment deadlines in response to the novel coronavirus (COVID-19) crisis. This guidance applies to specified filing obligations and other “specified actions” that would otherwise be due on or after April 1, 2020, and before July 15, 2020. It extends the due date for specified actions to July 15, 2020.
Specified actions include any “specified time-sensitive action” listed in Revenue Procedure 2018-58, including many relating to employee benefit plans. The relief applies to any person required to perform specified actions within the relief window, and it’s automatic — your business doesn’t need to file any form, letter or other request with the IRS.
Filing extensions beyond July 15, 2020, may be sought using the appropriate extension form, but the extension won’t go beyond the original statutory or regulatory extension date. Here are some highlights of Notice 2020-23 specifically related to employee benefit plans:
Form 5500. The relief window covers Form 5500 filings for plan years that ended in September, October or November 2019, as well as Form 5500 deadlines within the window as a result of a previously filed extension request. These filings are now due by July 15, 2020. Notably, the relief window does not include the July 31, 2020 due date for 2019 Form 5500 filings for calendar-year plans. Those plans may seek a regular extension using Form 5558.
Retirement plans. The extended deadlines apply to correcting excess contributions and excess aggregate contributions (based on nondiscrimination testing) and excess deferrals. They also apply to:
Plan loan repayments,
The 60-day timeframe for rollover completion, and
The deadline for filing Form 8955-SSA to report information on separated plan participants with undistributed vested benefits.
The relief for excess deferrals is a change from previous guidance indicating that 2019 excess deferrals still needed to be corrected by April 15, 2020. In addition, while loan relief is already available to certain individuals for specified reasons related to COVID-19, this relief appears to apply more broadly — albeit for a shorter period. The Form 8955-SSA due date is the same as for the plan’s Form 5500, so the extension applies in the same manner.
Health Savings Accounts (HSAs). The notice extends the 60-day timeframe for completing HSA or Archer Medical Savings Account (MSA) rollovers. It also extends the deadline to report HSA or Archer MSA contribution information by filing Form 5498-SA and furnishing the information to account holders. The regular deadline for the 2019 Form 5498-SA would be June 1, 2020, placing it squarely within this relief period.
Business owners and their plan administrators should carefully review Notice 2020-23 in conjunction with Revenue Procedure 2018-58 to determine exactly what relief may be available. For example, the revenue procedure covers various cafeteria plan items, but many deadlines may fall outside the notice’s window. We can provide you with further information about this or other forms of federal relief.
© 2020
New COVID-19 law makes favorable changes to “qualified improvement property”
The law providing relief due to the coronavirus (COVID-19) pandemic contains a beneficial change in the tax rules for many improvements to interior parts of nonresidential buildings. This is referred to as qualified improvement property (QIP). You may recall that under the Tax Cuts and Jobs Act (TCJA), any QIP placed in service after December 31, 2017 wasn’t considered to be eligible for 100% bonus depreciation. Therefore, the cost of QIP had to be deducted over a 39-year period rather than entirely in the year the QIP was placed in service. This was due to an inadvertent drafting mistake made by Congress.
But the error is now fixed. The Coronavirus Aid, Relief, and Economic Security (CARES) Act was signed into law on March 27, 2020. It now allows most businesses to claim 100% bonus depreciation for QIP, as long as certain other requirements are met. What’s also helpful is that the correction is retroactive and it goes back to apply to any QIP placed in service after December 31, 2017. Unfortunately, improvements related to the enlargement of a building, any elevator or escalator, or the internal structural framework continue to not qualify under the definition of QIP.
In the current business climate, you may not be in a position to undertake new capital expenditures — even if they’re needed as a practical matter and even if the substitution of 100% bonus depreciation for a 39-year depreciation period significantly lowers the true cost of QIP. But it’s good to know that when you’re ready to undertake qualifying improvements that 100% bonus depreciation will be available.
And, the retroactive nature of the CARES Act provision presents favorable opportunities for qualifying expenditures you’ve already made. We can revisit and add to documentation that you’ve already provided to identify QIP expenditures.
For not-yet-filed tax returns, we can simply reflect the favorable treatment for QIP on the return.
If you’ve already filed returns that didn’t claim 100% bonus depreciation for what might be QIP, we can investigate based on available documentation as discussed above. We will evaluate what your options are under Revenue Procedure 2020-25, which was just released by the IRS.
If you have any questions about how you can take advantage of the QIP provision, don’t hesitate to contact us.
© 2020
Relief from not making employment tax deposits due to COVID-19 tax credits
The IRS has issued guidance providing relief from failure to make employment tax deposits for employers that are entitled to the refundable tax credits provided under two laws passed in response to the coronavirus (COVID-19) pandemic. The two laws are the Families First Coronavirus Response Act, which was signed on March 18, 2020, and the Coronavirus Aid, Relief, and Economic Security Act (CARES) Act, which was signed on March 27, 2020.
Employment tax penalty basics
The tax code imposes a penalty for any failure to deposit amounts as required on the date prescribed, unless such failure is due to reasonable cause rather than willful neglect.
An employer’s failure to deposit certain federal employment taxes, including deposits of withheld income taxes and taxes under the Federal Insurance Contributions Act (FICA) is generally subject to a penalty.
COVID-19 relief credits
Employers paying qualified sick leave wages and qualified family leave wages required by the Families First Act, as well as qualified health plan expenses allocable to qualified leave wages, are eligible for refundable tax credits under the Families First Act.
Specifically, provisions of the Families First Act provide a refundable tax credit against an employer’s share of the Social Security portion of FICA tax for each calendar quarter, in an amount equal to 100% of qualified leave wages paid by the employer (plus qualified health plan expenses with respect to that calendar quarter).
Additionally, under the CARES Act, certain employers are also allowed a refundable tax credit under the CARES Act of up to 50% of the qualified wages, including allocable qualified health expenses if they are experiencing:
A full or partial business suspension due to orders from governmental authorities due to COVID-19, or
A specified decline in business.
This credit is limited to $10,000 per employee over all calendar quarters combined.
An employer paying qualified leave wages or qualified retention wages can seek an advance payment of the related tax credits by filing Form 7200, Advance Payment of Employer Credits Due to COVID-19.
Available relief
The Families First Act and the CARES Act waive the penalty for failure to deposit the employer share of Social Security tax in anticipation of the allowance of the refundable tax credits allowed under the two laws.
IRS Notice 2020-22 provides that an employer won’t be subject to a penalty for failing to deposit employment taxes related to qualified leave wages or qualified retention wages in a calendar quarter if certain requirements are met. Contact us for more information about whether you can take advantage of this relief.
More breaking news
Be aware the IRS also just extended more federal tax deadlines. The extension, detailed in Notice 2020-23, involves a variety of tax form filings and payment obligations due between April 1 and July 15. It includes estimated tax payments due June 15 and the deadline to claim refunds from 2016. The extended deadlines cover individuals, estates, corporations and others. In addition, the guidance suspends associated interest, additions to tax, and penalties for late filing or late payments until July 15, 2020. Previously, the IRS postponed the due dates for certain federal income tax payments. The new guidance expands on the filing and payment relief. Contact us if you have questions.
© 2020
Answers to questions about the CARES Act employee retention tax credit
The recently enacted Coronavirus Aid, Relief, and Economic Security (CARES) Act provides a refundable payroll tax credit for 50% of wages paid by eligible employers to certain employees during the COVID-19 pandemic. The employee retention credit is available to employers, including nonprofit organizations, with operations that have been fully or partially suspended as a result of a government order limiting commerce, travel or group meetings.
The credit is also provided to employers who have experienced a greater than 50% reduction in quarterly receipts, measured on a year-over-year basis.
IRS issues FAQs
The IRS has now released FAQs about the credit. Here are some highlights.
How is the credit calculated? The credit is 50% of qualifying wages paid up to $10,000 in total. So the maximum credit for an eligible employer for qualified wages paid to any employee is $5,000.
Wages paid after March 12, 2020, and before Jan. 1, 2021, are eligible for the credit. Therefore, an employer may be able to claim it for qualified wages paid as early as March 13, 2020. Wages aren’t limited to cash payments, but also include part of the cost of employer-provided health care.
When is the operation of a business “partially suspended” for the purposes of the credit?The operation of a business is partially suspended if a government authority imposes restrictions by limiting commerce, travel or group meetings due to COVID-19 so that the business still continues but operates below its normal capacity.
Example: A state governor issues an executive order closing all restaurants and similar establishments to reduce the spread of COVID-19. However, the order allows establishments to provide food or beverages through carry-out, drive-through or delivery. This results in a partial suspension of businesses that provided sit-down service or other on-site eating facilities for customers prior to the executive order.
Is an employer required to pay qualified wages to its employees? No. The CARES Act doesn’t require employers to pay qualified wages.
Is a government employer or self-employed person eligible?No.Government employers aren’t eligible for the employee retention credit. Self-employed individuals also aren’t eligible for the credit for self-employment services or earnings.
Can an employer receive both the tax credits for the qualified leave wages under the Families First Coronavirus Response Act (FFCRA) and the employee retention credit under the CARES Act? Yes, but not for the same wages. The amount of qualified wages for which an employer can claim the employee retention credit doesn’t include the amount of qualified sick and family leave wages for which the employer received tax credits under the FFCRA.
Can an eligible employer receive both the employee retention credit and a loan under the Paycheck Protection Program? No. An employer can’t receive the employee retention credit if it receives a Small Business Interruption Loan under the Paycheck Protection Program, which is authorized under the CARES Act. So an employer that receives a Paycheck Protection loan shouldn’t claim the employee retention credit.
For more information
Here’s a link to more questions: https://bit.ly/2R8syZx . Contact us if you need assistance with tax or financial issues due to COVID-19.
© 2020
The difference between a mission statement and a vision statement
Many business owners put off writing a mission statement. Who has time to write down why you’re in business when you’re busy trying to run one! And perhaps even fewer owners have created a vision statement — possibly because they’re not sure what the term even means.
There are good reasons for creating both. Lenders, investors and job candidates appreciate strong, clear mission statements. And vision statements can give interested parties a clear idea of where a business is heading. In addition, you and your staff may benefit from the focus and direction that comes from articulating your mission and vision.
Describe your purpose
Let’s start with a mission statement. Its purpose is to express to the world why you’re in business, what you’re offering and whom you’re looking to serve. For example, the U.S. Department of Labor has this as its mission statement:
To foster, promote, and develop the welfare of the wage earners, job seekers, and retirees of the United States; improve working conditions; advance opportunities for profitable employment; and assure work-related benefits and rights.
Forget flowery language and industry jargon. Write in clear, simple, honest terms. Keep the statement brief, a paragraph at most. Answer questions that any interested party would want to know, such as:
Why did your company go into business?
What makes your products or services worth buying?
Who is your target market?
Presumably, you know the answers to these questions. But putting them down on paper may help renew your commitment to your original or actual mission, or it may reveal some areas where you’ve gotten off track. For example, if your target demographic is Millennials, have you maintained that focus or wandered off course a bit?
Proclaim your ambition
So, a mission statement essentially explains why you’re here, what you do and who you’re looking to serve. What does a vision statement do? It tells interested parties where you’re headed and what you ultimately want to accomplish.
A vision statement should be even briefer than your mission statement. Think of a tag line for a movie or even an advertising slogan. You want to deliver a memorable quote that will get the attention of readers and reinforce that you’re not looking to make a quick buck. Rather, you’re moving forward into the future while providing the highest quality products or services in the here and now. For instance, the trademarked vision statement of the Alzheimer’s Association is simple and aims high: “A world without Alzheimer’s and all other dementia.”
Get inspired
Should you bring your operations to a screeching halt so everyone can work on a mission and vision statement? Certainly not. But if you haven’t created either, or haven’t updated them in a while, it’s a worthwhile strategic planning task to put together the language and see what insights come of it. We’d be happy to review your statements and help you tie them to sound budgeting and financial planning.
© 2020
Small business owners still have time to set up a SEP plan for last year
Do you own a business but haven’t gotten around to setting up a tax-advantaged retirement plan? Fortunately, it’s not too late to establish one and reduce your 2019 tax bill. A Simplified Employee Pension (SEP) can still be set up for 2019, and you can make contributions to it that you can deduct on your 2019 income tax return. Even better, SEPs keep administrative costs low.
Deadlines for contributions
A SEP can be set up as late as the due date (including extensions) of your income tax return for the tax year for which the SEP first applies. That means you can establish a SEP for 2019 in 2020 as long as you do it before your 2019 return filing deadline. You have until the same deadline to make 2019 contributions and still claim a potentially substantial deduction on your 2019 return.
Generally, most other types of retirement plans would have to have been established by December 31, 2019, in order for 2019 contributions to be made (though many of these plans do allow 2019 contributions to be made in 2020).
Contributions are optional
With a SEP, you can decide how much to contribute each year. You aren’t required to make any certain minimum contributions annually.
However, if your business has employees other than you:
Contributions must be made for all eligible employees using the same percentage of compensation as for yourself, and
Employee accounts must be immediately 100% vested.
The contributions go into SEP-IRAs established for each eligible employee. As the employer, you’ll get a current income tax deduction for contributions you make on behalf of your employees. Your employees won’t be taxed when the contributions are made, but at a later date when distributions are made — usually in retirement.
For 2019, the maximum contribution that can be made to a SEP-IRA is 25% of compensation (or 20% of self-employed income net of the self-employment tax deduction), subject to a contribution cap of $56,000. (The 2020 cap is $57,000.)
How to proceed
To set up a SEP, you complete and sign the simple Form 5305-SEP (“Simplified Employee Pension — Individual Retirement Accounts Contribution Agreement”). You don’t need to file Form 5305-SEP with the IRS, but you should keep it as part of your permanent tax records. A copy of Form 5305-SEP must be given to each employee covered by the SEP, along with a disclosure statement.
Although there are rules and limits that apply to SEPs beyond what we’ve discussed here, SEPs generally are much simpler to administer than other retirement plans. Contact us with any questions you have about SEPs and to discuss whether it makes sense for you to set one up for 2019 (or 2020).
© 2020
Marketing is a game of adjustments
In business, a failure to evolve may lead to failure. One way to keep your company rolling is to regularly adjust how you market products or services to customers and prospects.
A marketing strategy shouldn’t be a knee-jerk reaction to some enticing rumor or hot trend. Rather, it needs to be a carefully calculated effort that assesses profitability (not just revenue) and identifies a feasible price point for the products or services in question.
Evaluating targets
Consider each prospect, existing customer or targeted group as an investment. Estimate your net profit after subtracting production, sales and customer service costs.
More desirable customers will purchase a sizable volume with enough frequency to provide a steady income stream over time rather than serve as just a one-time or infrequent buyer. They also will be potential targets for cross-selling other products or services to generate incremental revenue.
Bear in mind that you must have the operational capacity to fulfill a given prospect’s demand. If not, you’ll have to expand your operations to take on that customer, costing you more in resources and capital.
Also, be wary of becoming too dependent on a few large customers. They can use this status as leverage to lowball you. Or, if they decide to pull the plug, it could be financially devastating.
Naming your price
Another key factor to consider in adjusting your marketing strategy is how much you’ll charge. It’s a tricky balance: Setting your price low may help to attract customers, but it can also minimize or even eliminate your profit margin.
In addition, think about what kind of payment terms you’re prepared to offer. Sitting on large accounts receivable can strain your cash flow. Establishing a timely payment schedule with customers is critical to sustaining your operations and supporting the bottom line.
If you must make a major cash outlay for setting up a new customer, such as for new equipment, consider offering initial pricing that includes a surcharge for a specified period. For example, if the normal product price is $1.00 each, you might want to arrange for the customer to pay $1.10 each until you have recovered the cost of the equipment, plus carrying charges.
Taking the risk
If your company has been around for a while, you know that marketing is risky business. An unsuccessful campaign can not only waste dollars in the short term, but also hurt morale and even trigger bad PR if it’s particularly misguided. The costs of doing nothing, however, may be even greater. We can assist you in evaluating the potential profitability of your marketing initiatives, as well as calculating viable price points for your products or services.
© 2020