Renting out your home? 9 expenses you can write off

Abby Hayes in Credit.com as published by USAToday.com on 10:00 AM Feb. 23, 2017

Home sharing through sites like Airbnb, VRBO and HomeAway are becoming more and more popular. My family jumped on the Airbnb hosting train recently, and we made a tidy little side income in January renting out our spare room. I won’t have to pay taxes on that income until next tax season, but I’m already wondering what expenses I can write off.

It turns out that lots of Airbnb host expenses are deductible, and those deductions work for other home-sharing services as well. (If you’re wondering about other ways to save on your taxes, check out Credit.com’s tax learning center.)

The basics of taxes and home sharing

Renting out a part of your home is similar to becoming a landlord for an entire property, and it’s a lot like running a small business. The general IRS rule is that you can deduct expenses that are “both ordinary and necessary” for your business. But you’ll pay taxes on any income that you earn over and above those deductions.

If you really like being a host, though, and rent all or part of your home for 15 days or more, you’ll have to report the income. So you’ll want to take all the deductions you possibly can. When it comes to deductions for rentals, you need to be careful, though. You can only deduct expenses that were spent on your business.

So if you buy new bath towels that your renters just happen to use in your shared bathroom, you can’t deduct the full cost of the bath towels. But if you buy linens just for your Airbnb renters, you can deduct the full cost.

With that in mind, below are some expenses you might deduct.

9 expenses you could deduct

1. Service fees: Most short-term rental services charge hosts a fee that comes off the top of the rent paid by the guest. Even if this fee comes out of the guest payment before it hits your bank account, you can deduct it as a business expense.

2. Advertising fees: If you pay for any advertising outside of that offered by the rental company (and, therefore, covered with your service fees), deduct those expenses.

3. Cleaning/maintenance fees: If you buy cleaning supplies for your rental room, deduct those. If you pay a professional for cleaning, deduct that expense, too. Any maintenance costs related to the rental property are also deductible. If you pay for whole-house maintenance, such as a furnace tune-up or a roof replacement, a part of that cost will be deductible.

4. Utilities: If you’re only renting part of your home part of the time, you’ll split the utilities — part as a personal expense and part as a business expense that can be deducted.

5. Property insurance: If you need to pay more insurance on your home because of having renters present, you can deduct the extra cost. Even if your property insurance fees haven’t increased, you can write off part of the expense as a business expense.

6. Property taxes: The same goes for property taxes: You can write off the portion of your property taxes equal to the portion of your home being rented.

7. Trash removal services: Services that you pay the municipality for can be deducted, because they’re both reasonable and necessary.

8. Property improvements: You can deduct the cost — or the interest paid on a loan, if you don’t pay cash — of improvements made to the property if those apply to the rented area.

9. Furniture, linens and food: You presumably provide guests with at least a couch, if not a bed. If you buy new furniture for your guest room, you can deduct that. You can also deduct the cost of linens, curtains, shower supplies, or food that you provide to your guests.

Splitting the expenses

Unless you’re renting your whole home for the full year, you’ll need to prorate these deductions. In short, you can only deduct these expenses when they actually apply to the rental space while it’s being rented.

As you can see, things can get hairy! If you decide to host through Airbnb or another similar service this year, here’s what you need to do:

  • Keep detailed records. Know exactly when you had renters and for how much. Keep all your receipts related to expenses for the rental, or for improvements or utilities for your whole house.
  • Know your local laws. In some cases, you may have to pay additional local taxes when you do a short-term rental. Get familiar with those laws, which vary by state and locality.
  • Get a professional to help. Because these issues are so complex, it’s best to consult with a tax professional about your rental income, especially if you made a decent amount of money through the year. You want to take all the deductions you can to lower your tax bill. But you also want to make sure you’re doing it legally.

Coronavirus Telecommuters could face a Tax Nightmare

BY JEFF JOHN ROBERTS in Fortune.com on June 27, 2020 7:00 AM CDT

As the COVID-19 outbreak battered Brooklyn in March, Beth and Ryan Carey decided to flee. The two educators and their toddler, Finn, drove nine hours south to stay with family in North Carolina. They have yet to return. Like many others who left New York during pandemic, the Careys have discovered numerous upsides to leaving the city: a lower cost of living, ample space for Finn and their hound dog, Cash Money, to roam, a more leisurely pace of life. And since both can do their job remotely, the couple are tempted to leave the stresses of New York life behind for good.

But just because they may be ready to part ways with New York doesn’t mean the state is ready to part ways with them.

What is the ‘convenience rule’?

As it turns out, moving to another state—even one 500 miles away—doesn’t mean workers can escape the clutch of New York’s powerful tax collectors. The reason is a controversial tax policy, known as the “convenience rule,” which deems that those who work for a New York company are earning wages in the state even if they are telecommuting. In the view of the Albany tax gnomes, a move to North Carolina, like the one made by the Careys, is one of convenience, not necessity. And that means, for tax purposes, they are are still working in New York.

A handful of other states—Pennsylvania, Delaware, and Nebraska have formal convenience rules of their own—but tax lawyers say those states don't enforce the rules with nearly the same vigor as the Empire State.

“New York has always had an aggressive tax department,” says Elizabeth Pascal, an attorney with Hodgson Russ, adding the state uses sophisticated auditing software in its hunt for revenue.

The upshot is that many middle-class workers who are contemplating permanent post-COVID relocations could face tax headaches more familiar to affluent earners like hedge fund managers and professional athletes. And many could face the prospect of double taxation.

Edward Zelinsky, a professor at Cardozo Law School, knows this firsthand. The Connecticut resident has battled New York in court for years, saying he is willing to pay tax on the days he is physically present to teach, but that he should not have to pay income tax on the days he works from home. His legal challenges have come up short in New York’s courts, however, meaning Zelinsky has had to pay income tax in two states.

Tax credits for commuters


Zelinsky and other telecommuters caught a break two years ago when Connecticut changed its tax policy to let its residents who paid New York income tax obtain an offsetting credit. But the credit does not entirely reduce the burden since New York tax rates are higher than those in Connecticut.

Meanwhile, most other states do not provide any credit to resident telecommuters who pay under New York’s long-arm tax rules. The reason, says Zelinsky, is that those states don’t believe the New York policy is legitimate. (Unsurprisingly, Zelinsky agrees with this position, arguing New York’s convenience rule violates the Constitution).

In an ideal world, Congress or the 50 states themselves would devise a compact to prevent double taxation and to clarify how telecommuters should be taxed. And indeed, there are pockets of such cooperation—notably in the form of reciprocity agreements among the District of Columbia and neighboring states, and between Illinois and its neighbors.

The broader reality, though, is that many of those who telecommute across state lines will face conflict and confusion. And the situation is likely to get worse as states react to the economic shocks created by COVID-19.

The State of Arkansas, for instance, created a buzz among tax lawyers this May after it issued a legal opinion saying that a computer programmer in Washington State should pay income tax to Little Rock for work done for an Arkansas entity.

As these situations become more common, the nation’s growing telecommuter workforce will face hard choices in the coming tax year.

Exceptions and enforcement of the convenience rule
While New York is aggressive about enforcing its convenience rule, there are three ways to escape it. The clearest exemption is for those employees who transfer to a company’s out-of-state office: A New Yorker who moves to her firm’s satellite office in Boston need only pay taxes to Massachusetts.

In the case of an out-of-state employee working from a home office, though, it’s not so easy to escape New York’s clutches, says tax lawyer Pascal. In order to qualify for an exemption, she says, the worker must be performing a task at the employer’s behest that could only be done out of state. For instance, the employee might require proximity to a special laboratory or factory that doesn’t exist in New York.

The third way to avoid New York’s convenience rule is for telecommuters to avoid setting foot in the state—though there is some debate about what this entails. Pascal says an employee can safely go to New York for a vacation so long as the trip doesn’t have work purposes, but a recent bulletin from Ernst & Young suggests that spending even “one day” a year in the state could trigger the rule.

Zelinsky, meanwhile, says he used to tell people they could go New York for non-work purposes, but that he believes tax authorities will no longer grant such latitude.

Fortune sought clarity from New York’s Department of Taxation and Finance about how and when the convenience rule applies, but did not receive a response.

Some other states, meanwhile, have issued guidance to say they won’t tax those who are working remotely in their states as a result of the coronavirus. But many others have not, and given the dire fiscal situations many states are finding themselves in, it’s unlikely tax authorities will be in a forbearing mood next year.

New York, in particular, could become still more aggressive in seeking income tax revenue. Several tax lawyers have noted the state offered little relief to those who had to relocate in the wake of Hurricane Sandy in 2012. And Zelinsky points out the state has even refused to provide tax exemptions for medical workers who came to the state to assist with the COVID-19 emergency—including many nurses from Tennessee, where there is no income tax at all.

Some middle-class telecommuters may wonder if they can avoid out-of-state tax headaches by simply declaring income in their resident state, and hoping for the best. Tom Corrie, a tax lawyer at Friedman LLP, says that New York has historically targeted high-income individuals for audits, rather than those making $50,000 a year.

But a modest income is no guarantee, of course, that an out-of-state telecommuter will escape an audit by New York tax authorities. This is especially the case given that the state, according to Corrie, is facing a drastic shortfall in sales-tax revenue as a result of the pandemic.

“The state is extremely hungry for money,” he says.


Months after filing, thousands of Americans are still waiting for their tax refunds

Pandemic closed IRS offices, but employees are back and trying to clear backlog of paper returns

 

American taxpayers got an extra three months from the Internal Revenue Service to pay their taxes this year. But this act of bureaucratic largesse didn’t benefit many people who filed their returns long before the usual April 15 deadline. They are still awaiting refunds.

For the most part, the IRS stopped processing paper returns around March 30 because of the novel coronavirus. Some work was curtailed even earlier.
 

“Yes, some paper returns filed early in the season have not yet been processed,” said IRS spokesman Eric Smith. “We have been hearing this from a number of folks and very much understand that people are concerned. We are continuing to whittle away at our paper inventory.”

The coronavirus-related chaos that has marred this year’s tax season should give people who still mail paper tax returns additional incentive to switch to electronic filing.

One reader, waiting on a $10,000 refund, said his tax preparer doesn’t like e-filing returns.

“Big mistake,” he emailed. “Next time will hope my accountant of 40 years will do electronic filing or just retire. We filed a paper federal return on February 25. We are due a large refund. I got my Maryland state tax refund promptly (paper return) and can’t tell if my federal return got lost in the mail. Stupid me, I did not send it certified. Or is it still sitting in a trailer waiting to be reviewed? I’m not sure if the IRS ‘penalizes’ someone due a refund of several thousand dollars if the return just never got to them.”

The agency began a phased reopening on June 1, with employees working to dig out from under a backlog of mail. “Even now, we’re still not at 100 percent staffing,” Smith said.

As of the week ending July 4, the agency estimates that it had 7.8 million pieces of mail correspondence, which includes about 3.6 million unopened returns, Smith said.
  “These are not exact figures, and because both paper and electronic returns continue to come in, it’s very much a moving target,” he said. “So, we don’t yet have an estimated date of when the backlog will be completed.”
 

The IRS remains scaled back to comply with social distancing recommendations. Still, in the week ending July 10, the agency processed more than 4 million returns compared to the previous week.

At least if you’re getting a refund, your return gets priority treatment — whether your return arrived early in the year or during the typical spike around the filing deadline, which shifted to July 15 this year.

There are four key points to keep in mind if you’re worried about when your return will be processed, or whether the IRS received it.

— Even without receipt proof, it’s very likely your return is in the backlog. But if you’re unsure, don’t file a second tax return or bother calling the IRS.

“We completely sympathize with your concern that the IRS may not have received your return, especially when it comes to refunds,” said Smith. “Right now, sending in a follow-up letter or another copy of the return won’t help, and in fact it will usually slow things down. It could take even longer to get your refund.”

As of July 10, the average refund was $2,762.

— Check the status of your refund by using the “Where’s My Refund?” tool at irs.gov/refunds or by calling 800-829-1954. But you don’t have to check multiple times a day. The refund portal is only updated once a day, usually overnight.

You should call the IRS if it has been more than 21 days since you e-filed your return or you get a message while using the “Where’s My Refund?” tool to contact the IRS. Although phone lines supported by customer service representatives are open, expect long waits because of limited staffing.
 

— If you’re due a refund, you’ll get the full amount. There’s no penalty assessed by the IRS even if the return is late. There is only a late-filing penalty if you owe.

— There is a decent bonus for your wait. If you filed your tax return before July 15, you’ll receive interest on your refund. The interest rate for the second quarter, which ended June 30, is 5 percent, compounded daily. After this date, the interest rate for the third quarter, ending Sept. 30, drops to 3 percent.

The interest accrues from April 15 to whenever the IRS issues your refund, and it could come in a separate check or direct deposit.

And, in case you’re wondering, yes, the interest is considered taxable income.


The PPP Loan Forgiveness Process Just Got Easier

Robin Saks Frankel on Forbes.com at
 

If doing the paperwork to have your Paycheck Protection Program (PPP) loan forgiven seems intimidating, help has arrived. A new online tool can simplify the process—and it won’t cost you a cent.

You can find the new PPP forgiveness platform at PPPForgivenessTool.com. Any business that took out a PPP loan can use the tool for free, regardless of whether they worked with a bank or a non-bank lender. The American Institute of CPAs (AICPA) and CPA.com released the platform this week, which is powered by software from small business lender Biz2Credit.

An Easy Way to Get Started on PPP Loan Forgiveness

Business owners or their accountants can access a suite of loan aids on the platform, including the AICPA’s PPP forgiveness calculator, the PPP loan forgiveness application and all of the required government forms mandated when you submit your loan forgiveness application.

You can even submit your application on the platform using an electronic signature, although the site recommends holding off on filing the application until the federal government offers additional guidance on calculating PPP loan forgiveness.

“From the beginning [of the PPP], we’ve been issuing documents with what our recommendations were and our suggestions on how loan forgiveness works,” says Erik Asgeirsson, president and CEO of CPA.com. “And now we’ve put it all into one application process.”

If you’ve been hesitant to apply for a PPP loan, the new tool could make the forgiveness application part of the process easier.

The PPP forgiveness tool also will incorporate the latest guidelines surrounding forgiveness as they’re released by the U.S. Small Business Administration (SBA) and the Treasury Department, Asgerisson says. From the site: “Once additional guidance is released, PPPForgivenessTool.com will be updated to reflect the new rules and we will contact borrowers who have started applications on the tool.”

Until that occurs, the site recommends you do not submit your completed application.

PPP Loan Money Still Available

Lenders have issued over $517 billion in PPP loans to date to help small businesses struggling to stay solvent during the COVID-19 pandemic. According to data from the SBA, more than 51 million jobs were supported by PPP funds. While the initial $349 billion round of funding ran out in less than two weeks, fewer businesses rushed to claim a second round of $310 billion

The complexity surrounding the requirements for PPP loan forgiveness, plus the extensive paperwork documenting eligibility, may have deterred some small-business owners from applying. Even as the government relaxed forgiveness rules, over $100 billion in PPP funds remains unclaimed. 

PPP loan forgiveness terms state that at least 60% of the funds must be used for eligible payroll costs and must be used over a span of 24 weeks.  Although repayment of PPP loans for those not seeking or who are ineligible for forgiveness was extended to five years at an interest rate of 1%, and additional rules were released allowing for partial loan forgiveness, the possibility of taking on any more debt is unlikely to appeal to anyone struggling to keep their business running.

“This tool hopefully will also encourage people with the next phase of business relief to make sure that complexity in the process is not a reason to not get the assistance they need,” Asgeirsson says. 

The government is still ironing out the details of what will come next in a second stimulus relief package. But GOP lawmakers and Senate Majority Leader Mitch McConnell began discussions this week about what might be included in the Republican proposal, indicating that additional aid to small businesses was likely to be part of any package.


U.S. Companies Get Tax Reprieve in IRS Foreign-Income Rules

Government softens blow of new minimum tax on foreign profits but doesn’t give companies all they wanted

The Treasury rules finalized on Monday will reduce the U.S. tax burden on companies operating in places such as Germany and Japan.

WASHINGTON—The Treasury Department relaxed some tax rules on U.S.-based multinational corporations, issuing final regulations Monday that give relief to companies operating in high-tax foreign countries.

The final rules gave companies some but not all of what they wanted and will reduce the U.S. tax burden on companies operating in places such as Germany and Japan. The change may encourage them to invest more in such high-tax places, according to an analysis by the Treasury Department and Internal Revenue Service.

Companies can now seek retroactive benefits, going back to periods before the proposed regulations came out in June 2019. And they also have somewhat looser rules about how their foreign subsidiaries are defined.

The rules implement the Global Intangible Low-Taxed Income, or GILTI, system that Congress created in the 2017 tax law. That requires U.S. companies to pay additional U.S. taxes if their foreign rates are below certain thresholds. It was designed to prevent companies from concentrating profits in low-tax jurisdictions.

Lawmakers and companies say they thought the GILTI tax wouldn’t apply if companies paid rates above 13.125%. But there were technicalities in how the new U.S. system interacted with longstanding U.S. tax rules, which meant that many companies with relatively high foreign tax rates were subject to GILTI—including Kansas City Southern and Procter & Gamble Co.

The Treasury rules finalized on Monday largely mean that companies with tax rates above 18.9% shouldn’t owe GILTI. That higher rate mirrors the rule that applies when U.S. companies earn investment income abroad.

Companies such as Freeport McMoRan Inc., Corning Inc. and Hanesbrands Inc. had filed public comments seeking changes to the proposed rules.

The rules give companies some choice in how the system applies to them each year, and they will invariably pick the way that lets them pay lower taxes, said Sen. Ron Wyden of Oregon, the top Democrat on the Finance Committee.

“This is yet another case where the Trump administration makes the rules more favorable toward megacorporations as the regulatory process moves forward,” he said in a statement.


When will I get my tax refund? ‘We’re focused on the paper returns,’ the IRS says as it reopens offices

Andrew Keshner, June 2020, MarketWatch, msn.com

As tax season winds down, the Internal Revenue Service is gearing up its operations.

The federal tax collector’s plans and procedures have been upended this year, like countless other government agencies and companies contending with the coronavirus pandemic.

The IRS temporarily closed offices in March due to the COVID-19 public-health emergency and the filing deadline was pushed from April 15 to July 15. On top of that, lawmakers tasked the agency with distributing millions of stimulus checks, beginning in April. The IRS started reopening its offices last month after 90% of its facilities were closed at the peak of the pandemic.

The IRS has processed 130.5 million returns by July 3, down 9.5% from the same point last year when it had already processed 144.3 million, according to the most recent data. It’s issued 95.2 million refunds so far, which is 9.6% fewer issued refunds than the same point last year.

As of late June, the IRS was also working its way through 12.3 million pieces of correspondence, IRS Commissioner Charles Rettig told senators at a June 30 Finance Committee hearing. Paper tax returns are the top priority in the mountain of documents, he noted.

“We’re focused on the paper returns because many of those also obviously will have refunds,” Rettig said, referring to the tax credit for low- and moderate-income families.

The IRS is processing paper returns in the order it receives them.

When it comes to on-site office returns, Rettig said the IRS has focused first on staffing up its capacity to issue refunds and handle customer service calls. “We’re trying to ramp up as quickly as we can,” he said.

By this week, all of the IRS processing facilities and call centers were scheduled to be open, Rettig said last month, “understanding that ‘open’ is a relative term for socially distanced working, different schedules, working different shifts, having people spread out.”

The IRS did not immediately respond to a request for comment on the latest working status for its facilities.

So when will I get my refund?

Anxious taxpayers don’t need to raise their stress level by constantly refreshing the page. The refund tracker gets updated once a day, and it’s usually overnight, the IRS says. (Around 98% of all returns with refunds are processed and paid in 21 days, Rettig noted during his testimony.)

The average refund, a reimbursement for overpayment of income tax, is $2,762. That’s basically unchanged from last year’s average amount — and worth more than two $1,200 stimulus checks. In theory, they should start to arrive around the same the additional $600 in weekly unemployment benefits expire at the end of July.

98% of all refunds should be processed and paid in 21 days, but there may be delays given the extraordinary set of circumstances related to the pandemic. —

If a taxpayer has already submitted their tax return, they can track the status of their refund through the IRS’ “Where’s My Refund?” portal. Users need to supply their Social Security or individual taxpayer identification number. They must also provide their filing status and exact refund amount.

If you have already submitted your tax return and expect money, track the refund status through the IRS site, experts told MarketWatch.

Rafael Alvarez, CEO and founder, of ATAX, a national tax-preparation company, said if you haven’t yet filed your return, do so electronically and supply bank-account information for a direct-deposit receipt.

A taxpayer who doesn’t supply bank-account information will get a paper check for their refund, which could prolong the wait by a week, Alvarez said.

If you already submitted a return without bank account information, you can give updated account information to the IRS. However, Alvarez said that may be a tough task for a backlogged agency that’s wary of enabling scammers who could make off with someone else’s refund money.

“It can be modified by talking to IRS agents, but you need to explain the reason why you are doing this,” Alvarez said.

The IRS was never an agency designed for downtime given its time-sensitive work, according to Robert Kerr, executive vice president of the National Association of Enrolled Agents, a trade organization for tax professionals. That’s especially true during filing season, he added.

He credits the IRS for doing its best under extraordinary circumstances, but says the sheer number of returns mean a small percentage of snafus and delays can equate to big numbers.

For example, the IRS has fraud and error filters to screen out potentially questionable returns. Some mistakenly flagged returns are taking a long time to fix and send refunds, according to the National Taxpayer Advocate report.

“When these returns bounce, they bounce to somebody’s desk,” Kerr said.


Expecting a tax refund? Be prepared to wait.

The IRS is facing a paper return pile-up.

Taxpayers may be in for a long wait for refunds, as an estimated 4.7 million returns were backlogged at the IRS by mid-May because of the agency’s employee evacuation for the coronavirus pandemic, according to a National Taxpayer Advocate report released Monday.

“Although the IRS is reopening some of its core operations, it is not clear when it can open and log all the returns sitting in mail facilities,” the report said.

While more than 90 percent of individual tax returns filed annually to the IRS are sent in electronically, another approximately 10 million paper returns still arrive by mail.

The paper return pile-up — which the taxpayer advocate's office computed through May 16 — started happening after the IRS in late March sent tens of thousands of employees home to limit the pandemic’s spread. Processing such documents can’t be done remotely, so IRS workers who’ve been recalled throughout June to resume more normal duties have just begun to address the paper return inventory.

The holdup in processing paper returns comes amidst an unusual filing season in which the IRS delayed the tax return deadline by three months to July 15 due to the pandemic. The agency also delayed numerous other taxpayer deadlines in the process, numbering more than 300 in total, according to the report.

Among other disruptions, it also said the IRS has had trouble processing applications for business taxpayers that have filed claims for the pandemic-related tax credit they can get for keeping employees on payroll. IRS phone lines and other taxpayer assistance processes like refund corrections have also been unusually hampered this year, in which much of the agency's focus has shifted to distributing some 160 million economic stimulus payments.

The report was the first filed to Congress by Erin Collins, who took over as National Taxpayer Advocate earlier this year.

IRS Commissioner Chuck Rettig is scheduled to testify on this year’s tax filing season Tuesday in front of the Senate Finance Committee. Collins’s report said she’d submit a more comprehensive follow-up when the filing season is more complete.


Why New PPP Loan Rules For Owner-Employees Of S And C Corporations Are Bad News

By Alan Gassman in Forbes on June 22, 2020

Much has already been written about the Flexibility Act, SBA Interim Rule changes, and EZ Forgiveness Application and instructions with respect to the Payroll Protection Act, all of which have been enacted and published since June 5th.  

While the updated Interim Rules are still far from clear or thorough, the limitations and procedures explained by the Forgiveness Applications and associated formulas give us the lion’s share of what we need to know for the vast majority of borrowers. 

The most unpleasant surprise from these changes for many borrowers and advisors was the manner in which forgiveness attributable to compensation, health insurance, and retirement plan contribution expenses for S-Corporation and C-Corporation shareholder employees are unexpectedly being limited.

We had vague indications that this might occur in previous iterations of SBA pronouncements, but the terminology used was unclear and more indicative that these limitations would only apply to individually owned businesses that file a Schedule C to a Form 1040 of the owner or entities treated as partnerships for income tax purposes. For those who are not tax experts, the discussion below covers how these rules apply specifically to LLCs and other entities that are taxed as S corporations or C corporations. 

Different rules apply to entities taxed as partnerships vs. individuals (commonly referred to as independent contractors and sole proprietors) who file their taxes under the Schedule SE or F of their Form 1040 personal tax returns.  These individuals were very well served by the newest Interim Rule changes and applications, which allow them to consider the lesser of: (a) 20.833% (2.5 divided by 12) of their 2019 net income; or (b) $20,833 as having been spent on forgivable costs, regardless of what they do with these funds. Most such individuals got their loans based upon 20.833% (2.5 divided by 12) of their 2019 net income, and can count the same exact amount toward forgiveness, plus permitted rent, interest, and utility costs, to put them clearly above the amount of expenses needed to gain full forgiveness.                 

What we now know for certain about compensation and benefits for shareholders/owners of S corporations and C corporations, which the SBA seems to be referring to as “owner-employees”, is as follows:

1. The group health insurance costs of an individual who is an owner of an S corporation cannot be included in the forgiveness amount.

This makes sense because health insurance premiums paid for S corporation shareholders who own more than 2% of the company are deductible but are reported as compensation on Form W-2, thus the amount of the shareholder’s health insurance costs are already included in his or her W-2 income.

The forgiveness credit applies to the W-2 income (including the health insurance costs reported on the W-2) unless the shareholder is over the W-2 forgiveness ceiling, which will be $15,385 if an 8-week forgiveness period is chosen or $20,833 if a 24-week forgiveness period is chosen. The $15,385 and $20,833 numbers are explained under section 3 below.

Here is an example of how the health insurance rules will apparently work. John owns 2% or more of ABC LLC and earns $98,000 a year in salary. His health insurance costs are $6,000 per year. From an annualized basis standpoint, these rules will allow all of John’s $98,000 salary and $2,000 of his health insurance costs to count towards forgiveness. 

If an 8-week forgiveness testing period is selected, this means that the company can count $15,077 of John’s salary and $308 of his health insurance based upon 8/52 of $98,000 and 8/52 of $2,000. 8/52nds of $4,000 in health insurance ($615) cannot be counted since that would exceed the $15,385 limit on owner compensation.

If a 24-month testing period applies, then the total combined wages and health insurance allowable for an employee shareholder will be $20,833, and excess insurance costs will not be counted towards forgiveness.

It is interesting that this rule is directly contrary to previous SBA guidance issued in FAQ #7, which allowed shareholders of S-Corporations to include health insurance costs above and beyond the cash compensation limit of $15,385. Many Loan Applications were filed to include health insurance costs above the limit on cash compensation, and now such borrowers may have a mismatch between what loan amount they received and the amount that can be forgiven. Presumably this can be made up by spending money on non-payroll costs, or maybe future guidance will allow health insurance costs to be included above and beyond the owner compensation limit. 

Larry Starr has noted that his interpretation of the rule related to the inability to include health insurance costs for S-Corporation shareholders with more than 2% ownership on line 6 of the Loan Forgiveness Application is that such shareholders cannot include any of their health insurance costs. I do not believe this to be the case since the reasoning for not including such health insurance costs is that they are already included in W-2 compensation, which is reported on Line 9 of the Loan Forgiveness Application, but future guidance would be helpful to clarify this issue. 

A greater limitation and disadvantage might apply for S-Corporation shareholders with less than 2% ownership and less than $100,000 in annualized wages because the W-2 income does not include health insurance costs, so the company presumably receives no forgiveness for the health insurance costs since the recently released guidance makes no distinction or exception for shareholders owning less than 2%. An aggressive position might be to include health insurance costs of shareholders owning less than 2%, based upon the reasoning that since such costs are not included in W-2 compensation reported on Line 9 of the Forgiveness Application, they should therefore be reported on Line 6. 

2. Compensation Counted for Owner-Employees Cannot Exceed The Pro rata Portion of What They Were Paid in 2019.

The above rule and example assumes that John’s 2019 annual compensation was at least $100,000.

What if John’s 2019 compensation was $49,000 and his health insurance was $3,000 because he only worked 6 months in 2019 for whatever reason?

Assuming that the company had significant other payroll so that it’s PPP loan was much more than $100,000, one would have assumed that either 8/52nds or 20.833% (2.5 divided by 12) of John’s entire $100,000 amount would count as forgiveness, but the new modified interim rules indicate that such forgiveness will be limited to not exceed a pro-rata portion of his 2019 earnings.

This means that many small businesses that primarily relied upon non-owner workers in 2019 will not be able to receive full forgiveness if the primary workers in the company are owners during the testing period. 

The SBA’s reasoning for this rule is that the loan was based on a maximum of 20.833% of 2019 compensation for owners, and with the extension to 24 weeks, many business owners might receive a windfall by only paying themselves and relying upon one of the numerous exceptions to maintaining full employment for their employees. 

For example, if John’s 2019 compensation was $49,000 in 2019 because he only worked for 6 months, then John would receive a loan of $10,208 based on his compensation. Let’s also assume that John had two other employees that each made $25,000 in 2019, and that there were no benefits or state employment taxes, so that John’s total loan was $20,624 (10,208 + $10,416). If not for the above mentioned rule, John could lay off both of his employees and still achieve full forgiveness based upon paying himself the maximum wages of $20,833 by relying on the exception that his employee headcount was reduced because his business could not return to the same level of business activity. The SBA is trying to avoid this so-called “windfall” to owners by limiting forgiveness to 20.833% of 2019 compensation for the 24-week period so that forgiveness for owners will match the portion of the loan received for their own compensation.

One unanswered question is whether or not this limitation applies to spouses or other relatives of the owner. Under current rules, no such attribution exists, so wages exceeding amounts paid in 2019 can be paid to spouses or other family members that work in the business assuming that the wages paid are legitimate compensation for services rendered to the company. 

3. $20,833 for 8-Week Testing Versus $46,154 for 24-Week Testing and Why?

As mentioned above, forgiveness for wages and health insurance for an owner and employee during a 24-week testing period cannot exceed $20,833. If an 8-week testing period is elected, the limitation is $15,385.

This is based upon the premise that the forgiveness for a company should not exceed the amount that was loaned for the wages of its owners (2.5 months/12 months X $100,000). 

On the other hand, a non-owner employee’s compensation can be counted based upon as much as $46,154 (24/52′s of $100,000) if the person has wages of $100,000 or more. In addition to this, the company’s entire cost of providing the non-owner employee with health insurance and retirement plan benefits (paid or incurred) during the 24-week period can be counted.

While this limitation was not expected, most borrowers will not be hurt because they will have plenty of other expenses to apply towards forgiveness. 

4. What About Retirement Plan Expenses?

The PPP loan program was very generous on the lending side by including an amount equal to 2.5 times the average annual expense for retirement plan contributions, considering that in many small companies, the vast majority of contributions are for highly paid employees and owners.

The SBA could have required employers to measure how much of each retirement plan contribution for 2019 was attributable to salaries above the $100,000 annualized limit, but this would have been extremely complicated and would have significantly lowered the PPP loans going to many companies who are already struggling to maintain their pension benefits, let alone keeping the same number of workers on the payroll.

The planning opportunity left open by all indications under FAQ’s, Interim Final Rules, and Forgiveness Applications and Instructions, was that all pension plan expenses “paid or incurred” during the 8-week or 24-week testing period would count as forgiveness.

This can be interpreted to mean that at least 8/52, or 24/52 (as applicable), of the 2020 annual pension costs can be considered as paid toward forgiveness, whether paid or not during the 8-week or 24-week period, since the expense was incurred during that period but would likely have to be paid in the normal course prior to filing the Loan Forgiveness Application to get credit for such costs.

By the same token, the rules can be read to provide that paying the entire 2019 pension obligation during the 8-week or 24-week period (which is normal in pension planning), would also facilitate having the entire 2019 pension contribution counted towards forgiveness and that paying the 2020 contribution amount during the testing period can cause 100% of the 2020 expense to be counted towards forgiveness.

The Application for Forgiveness makes no reference to these planning opportunities, and there is nothing in the revised Interim Final Rules that would limit this either.

Please see the words we have underlined below from the following language that is taken verbatim from the new EZ Application, and may provide for a limitation on retirement plan contributions for owners. This language also provides a good review of the rules that are discussed above:

Employee Benefits: The total amount paid by the Borrower for:

  1. Employer contributions for employee health insurance, including employer contributions to a self-insured, employer-sponsored group health plan, but excluding any pre-tax or after-tax contributions by employees. Do not add employer health insurance contributions made on behalf of a self-employed individual, general partners, or owner-employees of an S-corporation, because such payments are already included in their compensation.
  2. Employer contributions to employee retirement plans, excluding any pre-tax or after-tax contributions by employees. Do not add employer retirement contributions made on behalf of a self-employed individual or general partners, because such payments are already included in their compensation, and contributions on behalf of owner-employees are capped at 2.5 months’ worth of the 2019 contribution amount.
  3. Employer state and local taxes paid by the borrower and assessed on employee compensation (e.g., state unemployment insurance tax), excluding any taxes withheld from employee earnings.

This above underlined language is not included in the main Loan Forgiveness Application, and we know of no reason why, unless it is a drafting error to include it in the EZ Application, or it was an error not to include it in the non-EZ Application. Alternatively the SBA may not want this “loophole” to be available for those who file an EZ Application, or will do this now to save face and claim that this was not an error. Under this limitation, the maximum pension expense permitted for amounts put away for an employee shareholder will be based upon 2.5/12 (20.8%) of the annual retirement plan expense, as opposed to the larger amounts that would otherwise be counted in the Forgiveness Application.

It is unknown whether it was intended that this limitation would apply only for borrowers who use the EZ Application and not for borrowers who use the full Loan Forgiveness Application, or if it was intended to apply to both.

5What Is An Owner-Employee and What Can Be Done to Avoid this Limitation?

The rules provide no hint as to what an “owner-employee” is, but we can assume that this is any person who has an ownership interest in the borrower company of any size, and that this will not include the spouse or another family member of the owner who might work for the company.   Also, there seems to be nothing to prevent the person who has owned the company in the past from selling or gifting their ownership to someone else, like a spouse, and while continuing to work for the company so as to not be subject to these limitations during the period of the testing weeks that the person is no longer an owner.      

For example, an individual or part-owner of a company who worked for the first ten weeks of the 24-week testing period, earning whatever salary was paid, can transfer her ownership to her spouse and receive $46,154 of compensation between the date of the transfer and the end of the 24-week period, even if part of the compensation in those last weeks is pre-paid for work the employee becomes legally responsible to perform after the 24th week.

This would allow an entire $46,154 to count towards forgiveness, assuming the compensation amount is reasonable for the work that is being performed.

Larry Starr has expressed his disagreement with me that an S/C Corporation shareholder is considered an “owner-employee” and thus subject to the above mentioned rules limiting compensation to a pro-rated portion of 2019 earnings. His reasoning comes from Internal Revenue Code Section 401(c)(3), which defines an owner-employee for purposes of qualified pension, profit-sharing, and stock bonus plans rules as “an employee who (1) owns the entire interest in an unincorporated trade or business [a sole proprietor], or (2) in the case of a partnership, is a partner who owns more than 10 percent of either the capital interest or the profits interest in such partnership.”

I hope that Larry is right but I think that the SBA will clarify this based upon my view, particularly in light of the below quoted Application Instructions that seem to put the nails in the coffin:

  • “Do not add employer health insurance contributions made on behalf of a self-employed individual, general partners, or owner-employees of an S-corporation, because such payments are already included in their compensation.”

Consistent therewith, the Interim Final Rules on Loan Forgiveness provide as follows:

  • “Owner-employees are capped by the amount of their 2019 employee cash compensation and employer retirement and health care contributions made on their behalf. Schedule C filers are capped by the amount of their owner compensation replacement, calculated based on 2019 net profit. General partners are capped by the amount of their 2019 net earnings from self-employment.”

I do not see how “owner-employee” does not mean S and C corporation owners when the wording above specifically mentions “a self-employed individual” and “general partners”. What else could an “owner-employee” be?

There will undoubtedly be more questions and changes in these rules, but PPP borrowers who can attain full forgiveness while navigating these somewhat wavy waters should be on their way to the successful completion of an Application for Forgiveness, and a fresh start in saving their business or professional practice, as intended by Congress.

 

5 reasons your stimulus check might have been less than you expected

Susan Tompor
Detroit Free Press
16/May'2020
 

As much as you'd like to be happy about seeing a stimulus check in your mailbox – or spotting the direct deposit in your bank account – sometimes, you end up wondering why you didn't see more money. 

And more people than some might imagine are miffed. The Internal Revenue Service even now has listed a group of reasons for why the dollar amount of your Economic Impact Payment could be, as the IRS delicately puts it, "different than anticipated."

Many people already have received stimulus payments of up to $1,200 for singles and up to $2,400 for couples, plus $500 for dependent children ages 16 and younger. 

But those amounts aren't guaranteed. They will vary based on your income. And in some cases, you might not see any money at all.

Here's a look at some reasons why your stimulus might have fallen a little short:

Is there a hold up with your 2019 federal income tax return? 

If you qualify, you're automatically going to get stimulus money if you filed a 2018 or 2019 tax return.

You aren't required to file your 2019 return until July 15, as the traditional April 15 deadline was extended as part of the economic relief efforts during the coronavirus crisis.

If you filed the 2019 return, though, you could be experiencing some delays.

The IRS says it typically would calculate the Economic Impact Payment based on your income and information on the 2019 return.

And there seems to continue to be a backlog of 2019 tax returns to process. Remember, some people were filing returns in late April and even early May. 

Now, the stimulus money needs to rush out the door after millions of consumers have been complaining that they haven't yet received their money. (The IRS and Treasury Department say that nearly 130 million Economic Impact Payments have been successfully delivered so far. That still would leave millions undelivered.) 

So, if the 2019 return isn't ready, the IRS is going with 2018 information. 

The IRS said Monday that if it used the 2018 tax return information, it is possible that your Economic Impact Payment would not include money for a dependent child, such as if your child was born or adopted in 2019.

As a result, you could be $500 short. Or if you had twins in 2019, you could be $1,000 short.

You can't fix this problem right now. You could make adjustments when you file your 2020 federal income tax return in 2021.

Or maybe your income was higher in 2018 than it was in 2019, which would mean you might get less money for adults in the family. Again, you'd be able to make adjustments when you file the 2020 tax return. You're going to have to wait a year or so before this can be fixed. 

Do you or your spouse owe past-due child support?

Again, your payment will be smaller than expected. And it could be even worse than you might imagine, thanks to a glitch. 

The federal Bureau of the Fiscal Service will send a notice to indicate if a stimulus payment was reduced as a result of previously owed child support. 

Yet there have been some problems for couples when it comes to the "injured spouse" claims. And plenty of people are upset to see their stimulus checks cut far more than they should be reduced. 

You'd need to file a Form 8379, the Injured Spouse Allocation. It only applies if you file a joint return. And this only works if the debt is the liability of only one of the spouses. 

Now, when it comes to stimulus payments, the IRS should be taking those injured spouse claims into account. 

Only the stimulus payment for the spouse on the joint return who owes past-due child support should be offset.

On Monday, the IRS acknowledged: "The IRS is aware that a portion of the payment sent to a spouse who filed an injured spouse claim with his or her 2019 tax return (or 2018 tax return if no 2019 tax return has been filed) may have been offset by the injured spouse's past-due child support."

The IRS said it is working with the Bureau of Fiscal Service and the U.S. Department of Health and Human Services, Office of Child Support Enforcement, to resolve the issue as quickly as possible.

"If you filed an injured spouse claim with your return and are impacted by this issue," the IRS said, "you do not need to take any action. The injured spouse will receive their unpaid half of the total payment when the issue is resolved."

Did you make too much money?

The maximum stimulus payment goes to those who have an adjusted gross income of up to $75,000 for single filers, $112,500 for head of household filers and $150,000 for married filing jointly.

If your adjusted gross income is higher than those amounts, the stimulus check will be reduced by $5 for each $100 above those thresholds.

So some married households with no children might get $1,000 or less – not the full $2,400 – if say their adjusted gross income was $178,000 or higher. 

And you would not qualify for any stimulus money if you're single with an adjusted gross income that's above $99,000. The stimulus check won't arrive at all for those with adjusted gross incomes of $136,500 for head of household filers and $198,000 for joint filers with no children.

What about the $500 for my kids?

You might love your children equally but the stimulus program won't treat them all the same.

If your son or daughter is 17 or older and claimed as a dependent, you're not getting an extra $500. 

What about $1,200 for my son in college?

In many cases, the college student won't get that money either. 

The IRS notes that "a 20-year-old full-time college student claimed as a dependent on their mother's 2019 federal income tax return is not eligible for a $1,200 Economic Impact Payment." 

And the parent isn't getting an extra $500 for that college student if they do not qualify as a child age 16 or younger. 

If the student was claimed as a dependent on a 2018 tax return, the student might not get the stimulus now. 

But there could be some good news next year for some.

"If the student cannot be claimed as a dependent by their mother or anyone else for 2020," the IRS said, "that student may be eligible to claim a $1,200 credit on their 2020 tax return next year."

"Wait until next year" could be the answer for many. 

The Economic Impact Payment is "an advance payment of a new temporary tax credit that eligible taxpayers can claim on their 2020 return," the IRS said.

Keep the letter you receive by mail a few weeks after the stimulus payment is issued.

When taxpayers file their return next year, they can claim additional credits on their 2020 tax return if they are eligible for them.

The good news: The stimulus payment isn't going to reduce the taxpayer's refund or increase your tax bill when you file a tax return next year. 

The stimulus also is not taxable, the IRS said, and should not be included in income on a 2020 return.


Check Out the New W-4 Tax Withholding Form. Really

The first major redesign since 1987 is simpler and reflects tax code changes, the I.R.S. said. Workers should make sure it also reflects what they owe.

Tax
Till Lauer

By  in the New York Times on Dec. 13, 2019

If you are starting a new job next year or if you want to adjust the amount of income tax withheld from your paycheck, the form that you’ll have to complete and give to your employer will look much different.

Form W-4, which instructs employers how much tax to withhold, got a makeover for 2020 from the Internal Revenue Service.

The redesign reflects changes to the federal tax code from the Tax Cuts and Jobs Act, which took effect last year. The update, the I.R.S. said, “reduces the form’s complexity and increases the transparency and accuracy of the withholding system.”

The new design may at first appear daunting, said Pete Isberg, vice president of government affairs with the payroll processor ADP, but over all “it’s a lot more straightforward.”

 

Still, it’s a tax form. The American Payroll Association, an industry group, has warned employers that explaining the new form to workers may be “challenging,” and has provided a sample letter to help guide employees.

Accurate paycheck withholding is important because if too little money is deducted, you may face an unwelcome bill — and possibly a penalty — at tax time. Ideally, tax experts say, the amount withheld should roughly match the amount of tax owed.

If too much money is deducted, you may get a fat tax refund. Some people prefer large refunds as a sort of forced savings, said Alice Jacobsohn, senior manager of government relations with the payroll association. But a big refund means you gave the government a no-interest loan.

While the W-4 form had been tweaked over the years, the last major redesign occurred in 1987, in response to the Tax Reform Act of 1986. The old form was deemed too complex, so it was changed to cut down on work sheets and other instructions, an I.R.S. spokesman, Eric Smith, said in an email.

Perhaps the most obvious change is the banishment of “allowances,” which were used to calculate withholding on the previous W-4 form. The more allowances claimed, the less money the employer deducted for taxes.

But allowances were based on personal exemptions — an amount of money you could deduct for yourself and for each of your dependents — and those are now unavailable to taxpayers under the new tax law.

Instead, the new form takes workers through five steps that aim to account for all sources of income — including second jobs, a spouse’s job, self-employment income, and even income from things like dividends and interest — to determine the correct withholding amount. Employees also enter information about dependents and tax deductions to fine-tune withholdings.

“It’s like a mini income tax return,” said Andy Phillips, director of H&R Block’s Tax Institute.

Some workers may be leery about alerting employers to second jobs or sharing details about investment income, said Kelley Long, a consumer financial education advocate with the American Institute of Certified Public Accountants.

To address those concerns, the form allows workers to use the I.R.S.’s online tax withholding estimator tool or to complete a printed work sheet to determine how much to withhold. The amount is entered on a separate “extra withholding” line, without details about how it was calculated. (Data from the estimator and the work sheet are not shared with the employer.)

Workers may also calculate the amount and then make separate, estimated tax payments to the I.R.S., independent of paycheck withholding.

The withholding estimator asks detailed questions, so it’s helpful to have last year’s tax return handy along with your most recent pay stub. Because new employees may not have the documents at work or may want to confer with a spouse, Mr. Isberg suggests that employers give new hires extra time to fill out the form — perhaps by letting them take it home.

Alternatively, if new employees are rushed for time, they can simply fill out the first step of the form — which asks for their name, address, Social Security number and filing status — and sign it (Step 5), Mr. Isberg said. Then, after reviewing their withholdings at their convenience, they can submit a revised form to make any necessary changes.

 

Mr. Isberg said employees should read the form’s instructions carefully to be sure they understood what information they were being asked to provide.

The I.R.S. offers a series of questions and answers about the revisions. ADP also offers information on its website. And H&R Block offers a graphic comparing the new and old forms.

Here are some questions and answers about the new Form W-4 for 2020:

Does everyone have to complete a new Form W-4?

No. You’re required to complete the new form only if you’re hired by a new employer in 2020 or if you want to have more (or less) money withheld from your paycheck — perhaps because of a life change, like getting married or having a baby.

Employers can ask all workers to fill out new forms, the I.R.S. says, but it’s optional. Employers will continue to calculate withholding based on your most recent W-4.

Should I file a new W-4 in 2020 even if I don’t have to?

The I.R.S. encourages workers to review their paycheck withholdings each year and file a new W-4, if needed, to be sure enough money is being set aside for taxes. “It’s worth thinking about every year,” said Beth Logan, a federally licensed tax adviser known as an enrolled agent in Chelmsford, Mass.

The I.R.S. recommends that workers complete a “paycheck checkup,” by using the I.R.S.’s online estimator, to see if they need to adjust their withholdings. The mobile-friendly estimator is currently accurate only for 2019; the I.R.S. expects it to be updated for the 2020 tax year after the first of the year.

What if I have more than one job or my spouse has a job?

The I.R.S. says the most accurate way to determine withholding for someone with multiple jobs or a working spouse is to use the I.R.S. estimator.

 

“People who use it will find that it gives them very specific recommendations on how to fill out the W-4 they give to their employer,” Mr. Smith, of the I.R.S., said. “We urge everyone to give it a try.”

But if you are married and file a joint tax return, and you and your spouse have just one job each with similar incomes, you can skip the estimator — and instead check the box in Step 2. (Your spouse also checks the box on his or her own W-4.) This divides the standard deduction and tax brackets equally between the two jobs, according to the I.R.S.

That option is the easiest, Mr. Isberg of ADP said. “Just check the box and you’re good to go,” he said.

If the two salaries are divergent, however, it could mean that more tax than necessary would be withheld from your paycheck, although generally, “you won’t have too little tax withheld,” according to ADP.