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Accounting and Tax Planning Special Coverage

Reading the Fine Print

By Julie Quink

 

The economic stress created by the COVID-19 pandemic compelled business owners and individuals to apply for the relief funds provided by the Small Business Administration (SBA) in the form of Paycheck Protection Program (PPP) loans and Economic Injury Disaster Loans (EIDL).

The rollout of these programs came at a time when the reality of the pandemic began to unfold, creating a frenzy for businesses and individuals to apply for the funding, in some cases, before the funding ran out.

Before the ink on the guidance and requirements for these stimulus funds was dry, applications for the funding were being processed, and funds were in the hands of businesses and individuals. To expedite getting funds to those who needed them, much of the clarification about the use of the funds, taxability of the funds, and criteria for forgiveness were ironed out after the funding was in hand and being spent by the recipients. What ensued was months of additions to the SBA’s frequently-asked-questions (FAQ) document clarifying the eligible uses of the funding to ensure forgiveness and further attempts by Congress and the SBA to adjust program requirements as the pandemic continued.

More than 50 FAQs were issued to clarify the PPP requirements, and 20 relating to the EIDL loans.

In the frenzy to obtain the funding for the PPP and EIDL loans, it became clear that not everyone read the fine print, or that the fine print changed as clarity was provided for these programs. The fine print provided recipients with additional requirements for the funding they may have been unaware of at the time of application or even during the spend-down period.

As trained professionals, accountants and business advisors spent months learning the requirements and pivoting as they changed. It would be unreasonable to assume that those who received the funding could keep up with the fast-paced changes that were occurring, including the fine print. For accountants, there have been times we could barely keep up with the changes.

Julie Quink

Julie Quink

“With the second round of PPP funding recently released and requirements more recently clarified, reading the fine print should hopefully not be such a daunting or surprising task.”

The result is that those receiving the funding need to be aware of those items in the fine print for the PPP funding and the EIDL loans that may impact them.

 

EIDL

Recipients of the EIDL loans, which could be up to $2 million in amount, were required to sign loan paperwork, outlining the terms of the funding. In the fine print of these loan documents are provisions that the borrower should look out for and be aware of. Some of the provisions are:

• For loans under $25,000, collateral is not required. For loans of more than $25,000, the SBA is provided collateral through business assets, current and future. Transfers or sales of collateral, except inventory, require prior SBA approval. In addition, prior approval is required by the SBA in the event these business assets will be used to secure other financing;

• Borrowers are required to keep itemized receipts, paid invoices, contracts, and all related paperwork for three years from the date of disbursement;

• Borrowers are encouraged to the extent feasible to purchase only American-made equipment and products with the proceeds of this loan;

• Borrowers must keep all accounting records five years before the loan and three years after in a manner satisfactory to the SBA;

• Borrowers must agree to audits and inspection of assets, if requested by the SBA, at the expense of the borrower;

• Borrowers have a duty to provide hazard insurance on collateral and may be asked to provide proof;

• Within 90 days of the borrower’s year end, financial statements, in the format specified by the SBA, are required to be furnished by the borrower;

• The SBA may require a review-level financial statement for a borrower upon written request by the SBA at the borrower’s expense;

• Prior approval from the SBA is required for distributions of the borrower’s assets to the owners or employees, including loans, gifts, or bonuses;

• Borrowers must submit, within 180 days of receiving a loan, an SBA certificate or resolution. For most borrowers, the SBA has followed up or is following up on this requirement now;

• Default under the provisions may result if a borrower merges, consolidates, reorganizes, or changes ownership without prior SBA approval; and

• The loans can be prepaid, without penalty, if the borrower does not need the funds or secures other financing.

For most borrowers, the requirements may be routine considerations, but for others, these may be new requirements.

 

PPP

In the fine print of the PPP loan documents are also provisions that the borrower should consider, as follows:

• For borrowers who received a PPP loan greater than $2 million, the SBA has indicated it will likely audit those borrowers for compliance with spending requirements;

• Although Congress has confirmed that the proceeds of the PPP loan are not taxable and the expenses paid with PPP are deductible, some states, such as Massachusetts, are not following the federal laws relative to forgiveness of the PPP loans as they have their own rules. For individuals in Massachusetts, the loan forgiveness is taxable income. This affects sole proprietors, S-corp shareholders, and partners of partnerships. A bill, co-sponsored by state Sen. Eric Lesser, state Rep. Brian Ashe, and five other co-sponsors, has been proposed to allow for non-taxability of the forgiveness amounts in Massachusetts;

• Depending on when the PPP loan was funded, the borrower may have a repayment term of two or five years for the loan; and

• Although forgiveness may be granted, the borrower should retain the records used for forgiveness. Generally, most records should be retained for seven years.

 

Bottom Line

Navigating the fine print is key for those who received the PPP and EIDL loans. The navigation becomes increasingly more difficult when the requirements continue to change and the funds have already been received and used to operate the business.

With the second round of PPP funding recently released and requirements more recently clarified, reading the fine print should hopefully not be such a daunting or surprising task.

 

Julie Quink is managing partner with West Springfield-based Burkhart Pizzanelli; (413) 734-9040.

Accounting and Tax Planning

Round 2

By Jonathan Cohen-Gorczyca, CPA, and Amila Hadzic

On Dec. 27, 2020, the Economic Aid to Hard-Hit Small Businesses, Nonprofits, and Venues Act was signed into law to assist businesses who have been financially impacted by the COVID-19 pandemic. As a result of the Economic Aid Act, the Paycheck Protection Program’s second-draw loan program was created.

This program will allow the U.S. Small Business Administration to provide eligible businesses with additional loans, similar to those from the original Paycheck Protection Program (PPP). The last day to apply for the second-draw loan is March 31, 2021, and there are eligibility and documentation requirements that need to be met during the application process.

 

Eligibility

This loan can only be made to a business that has received a first-draw PPP loan and has used the full amount of the loan on eligible expenses before the disbursement of the second loan. A business that was ineligible for the first loan cannot receive the second-draw PPP loan.

In order to be eligible for this second-draw PPP loan, the business must have 300 or fewer employees. The business must have also experienced at least a 25% reduction in revenue in 2020 compared to 2019. The revenue reduction can be calculated by comparing one quarter in 2019 with the same quarter in 2020. However, if the business was not in operation for the full year in 2019, there are other periods that can be used for this calculation. If an entity was in operation for all four quarters in 2019, then the annual revenue can be compared with 2020.

 

Loan Amount

The maximum loan amount for the second loan is the lesser of $2 million or two and half months of the business’ average monthly payroll. For those who are assigned a NAICS code with 72 or are a seasonal employer, the loan amount can be greater than two and a half months. The borrower can use either total wages paid in 2019 or wages paid in a 12-month period before the loan was made to calculate average monthly payroll. There is also the option to use 2020 wages.

 

Application and Documentation

In order to apply for this loan, the SBA Form 2483-SD needs to be completed. Form 941, state quarterly wage unemployment forms for the applicable quarter used, and other payroll records may be needed depending on the payroll period used to calculate the loan amount. For ease of applying for a second-draw loan, it is recommended that you apply using the same lender, as much less payroll documentation will be needed because it should already be on file with the institution.

The documentation requirements are similar to the first PPP loan. If the loan is greater than $150,000, documentation will be needed to show the revenue reduction at the time of application. Bank statements, annual tax forms, and quarterly financial statements can be provided as documentation. For loans under $150,000, this information can be submitted during the loan-forgiveness process.

 

What If I Did Not Receive a First-draw PPP Loan?

The SBA is also accepting applications for first-time PPP borrowers. The loan is capped at $10 million for eligible businesses. If the loan is used to pay for payroll and other eligible expenses during the eight- or 24-week period, it is eligible for forgiveness. Eligible costs for both the second-draw loan and first-draw PPP loan include payroll costs, business mortgage interest, rent, lease payments, utility payments, worker-protection costs, property damage costs due to looting and vandalism not covered by insurance, and other supplier and operation costs. Payments made to an independent contractor do not qualify.

As with the first-draw PPP loan, it is best to reach out to both your accountant and loan provider to find out if a second-draw PPP loan is right for you. They will be able to help you determine what is right for your business and help walk you through the application process.

 

Jonathan Cohen-Gorczyca, CPA, is a manager, and Amila Hadzic is a staff accountant with the accounting firm Melanson, which has offices in Greenfield and Andover, as well as Merrimack, N.H. and Ellsworth, Maine.

Economic Outlook

Accounting

‘Uneasiness.’

That was the word Julie Quink summoned, after considerable thought, to describe the sentiment of most small-business owners as the calendar turns to 2021.

And it seems like an appropriate choice.

Indeed, regardless of how a business fared in 2020 — and some of her clients actually held up pretty well — Quink, managing partner at the West Springfield-based accounting firm Burkhart Pizzanelli, said most simply don’t know what to expect for the year again. Thus, they are uneasy and likely to be cautious and conservative in the months to come, which will likely play a role in how quickly and profoundly this region bounces back from all the body blows it took over the past 10 months or so.

Julie Quink

Julie Quink

“I have clients that are doing swimmingly well — they’re in the right industries that are flourishing in this environment — and I have others, third-generation businesses, that are closing; we’re helping them wind down.”

Many of these businesses are also uneasy because they were able to “limp along,” as she put it, thanks to support from the CARES Act, especially in the form of forgivable Paycheck Protection Program (PPP) loans that provided a much-needed cushion from sometimes dramatic drops in revenue.

Starting this past fall, when many businesses effectively spent down their PPP, they’ve been getting a look at operating without a net underneath them, if it can be called that, and for many, it’s a scary proposition.

“That’s why I think we’re going to see the true impact of this crisis over the next 12 months or so, especially as the pandemic continues,” said Quink, adding quickly that, another round of PPP was included in the recently passed stimulus package, little is known about how much help will be available, when, and to whom. And even for those businesses that get another round of help, 2021 is likely to be a struggle, she went on, again because of all that uneasiness.

Quink, like most of those in the accounting and tax field, has a good read on the economy and the factors driving it because her portfolio of clients is diverse and represents virtually every sector. Slicing through the phone calls, the questions asked, and the answers provided, she said some businesses have actually done well during this pandemic (she has a few commercial cleaners, for example), others are holding their own, and still others are really struggling.

“There is such a mixed bag with our clients,” she said, adding that this diversity of performance reflects what’s happening across the region. “I have clients that are doing swimmingly well — they’re in the right industries that are flourishing in this environment — and I have others, third-generation businesses, that are closing; we’re helping them wind down.”

She related the story of a second-generation business, a wholesaler that services the airline industry, among many others. Revenues are down roughly 50% from a year ago, not because there are fewer customers, but because most of the existing customers are ordering far less as their needs have diminished.

“We had a conversation today about how to plan, and I said, ‘you should tighten your belt because I think this is going to be a rough ride this year,’” she recalled, adding that she has given this same advice to many of her clients.

Getting back to that sentiment of uneasiness, Quick said there are many things to be uneasy about, from the ongoing pandemic to a presidential election that, while officially over, has been tumultuous in every way, to the deep uncertainty about the year ahead.

“People are waiting — they’re waiting for things to be final,” she said, using that phrase to describe everything from the stimulus package to the pandemic itself. “And I don’t think the election helped anything; all the events surrounding the election have made people uneasy.”

Still another factor contributing to this state concerns changes that have come to how business is being done, and questions about when, or even if, things will go back to normal.

“I have some clients who are international and can’t fly and can’t participate internationally in person,” she explained. “So they’ve had to refocus on how they do business now, and they don’t really know what the future will bring.”

As for her own profession, 2020 was certainly a different year, one with a tax season that never seemed to end. But it was a good year for most, because clients needed more assistance, or ‘touches,’ as she called them, with PPP and other matters.

And 2021 is certainly shaping up as more of the same, with another round of PPP looming, more questions concerning how to plan for the months and quarters ahead, and more of that uneasiness that will certainly play a large role in determining what kind of year this will be.

 

—George O’Brien

Accounting and Tax Planning

Fight Back with Diligence, Communication, Monitoring, Education

By Julie Quink, CPA, CFE

Julie Quink

Julie Quink

In recent months, business owners have been faced with difficult business decisions and worries surrounding the financial and safety impacts of the COVID-19 pandemic, including the temporary closure of non-essential businesses, layoffs and the health of their workforce, remote work, and financial stability (short- and long-term) for their business.

In short, they have had much on their minds to stay operational on a day-to-day basis or in planning for reopening. And with that, businesses are prime targets for fraud schemes.

As professionals who counsel clients on best practices relative to fraud prevention and detection techniques, we unfortunately are not immune to fraud attempts as well. The filing of fraudulent unemployment claims is a scheme for which we have recent personal experience. The importance of internal controls — and making sure that appropriate controls are in place in a remote environment, with possibly leaner staff levels — should be heightened and reinforced.

Fraudulent Unemployment Claims

The filing of fraudulent unemployment claims has been one of the newest waves of fraud surrounding employees. These claims certainly have an impact for the individual for whom a claim is filed, but also have further-reaching implications for the victimized business as well.

In these schemes, an unemployment claim is filed using an employee’s identifying information, including Social Security number and address. Unfortunately, if you have ever been a victim of a data breach, you can feel confident that your personal information has been bought and sold many times since that initial breach.

Since these claims can be filed electronically, an online account is created by the fraudster for the individual. In that online setup and given that unemployment payments can be electronically paid, the fraudster sets up his or her own personal account as the receiver of the unemployment funds.

“The filing of fraudulent unemployment claims has been one of the newest waves of fraud surrounding employees. These claims certainly have an impact for the individual for whom a claim is filed, but also have further-reaching implications for the victimized business as well.”

In most cases, the first notification that an unemployment claim has been filed is a notice of monetary determination received by the individual via mail at their home address from the appropriate unemployment agency for the state that the claim has been filed with. By then, the claim has already made its way to the unemployment agency for approval and has gone through its system for approvals. In these pandemic times, the unemployment agencies have increased the speed at which claims are processed to get monies in the hands of legitimate claimants, but in the process have allowed fraudulent claims to begin to enter the process more rapidly.

So, you might wonder how this impacts a business if the claim is fraudulently claimed against an individual. Again, with some personal firm experience in tow, we can say that these claims are making it to determination status at the business level.

Even though the claim is fraudulent and, in some cases, the employee is gainfully employed at the business, the claim makes its way to the employer’s unemployment business account. Hopefully, affected individuals have been notified through some means that the claim has been filed. However, employers should not bank on that as a first means of notification of the fraud.

Perhaps employers are monitoring their unemployment accounts with their respective states more frequently because they may have laid off employees, but for those employers who still have their workforce intact, the need to monitor may not be top priority.

Impact of the Scheme

The impact on an employer of a fraudulently filed unemployment scheme targeting one of its employees is not completely known at this time because the scheme is just evolving. However, we do know this scheme merits notification to employees of the scam and increased monitoring of claims — both legitimate and false — by the company, all during a time when financial and human capital resources are stretched.

The scheme could cause employer unemployment contributions going forward to be inflated because of the false claims. For nonprofit organizations, which typically pay for unemployment costs because claims are presented against their employer account, this scheme could have significant financial implications.

For the individual, the false claim, if allowed to move through the system, shows they have received unemployment funds. This has several potential negative effects, including the ability to apply for unemployment in the future, the compromise of personal information, and the potential tax ramifications in the form of taxable unemployment benefits even though the monies were not actually received.

Detection and Prevention Techniques

Internal controls surrounding the human resources and payroll area should be heightened and monitored to encompass more frequent reviews of unemployment claims.

Communication with employees about the unemployment scam and the importance of forwarding any suspicious correspondence received by the employer is key. The employee may be the first line of defense.

Also, working in a remote environment should give business owners cause to pause and re-evaluate systems in place, including data security and privacy. It is unclear how these fraudsters may be obtaining information, but it is critical to be diligent and reinforce the need for heightened awareness relative to e-mail exchanges, websites visited, and data that is accessible.

Diligence, communication, monitoring, and education are important for business owners to prevent and detect fraud. Diligence in ensuring appropriate systems are in place, continued open and deep lines of communication with team members, monitoring relative to the effectiveness of systems, and educating team members on the changing schemes and the importance of their role are effective first steps.

Julie Quink is managing principal with West Springfield-based accounting firm Burkhart Pizanelli; (413) 734-9040.

Accounting and Tax Planning

Items That Add Up

By Kathryn A. Sisson, CPA, MST

There are many changes that businesses and individuals should be aware of under The Tax Cuts and Jobs Act (TCJA), the most significant tax legislation in the U.S. in more than 30 years. Here are the 10 changes that will have the most significant impact this tax season.

Individuals

1. Tax Rates. The 2018 tax brackets have changed, resulting in lower tax rates for most individuals. For example, the 15% tax bracket has been reduced to 12% and the 25% bracket to 22%.

2. Income-tax Withholding. As a result of the lower taxes rates, income-tax withholding during 2018 also decreased for most individuals. This could result in underpayment of taxes for 2018, depending on your tax situation. Taxpayers should carefully review their withholding going into 2019 and discuss it with their tax professional.

3. Itemized Deductions. TCJA made several changes to itemized deductions as noted below.

Medical Expenses: TCJA lowered the threshold for the medical-expense deduction to 7.5% of AGI for 2017 and 2018. The threshold for 2019 is 10% for most taxpayers.

State and Local Taxes: TCJA limits the deduction for state and local taxes to $10,000 per year. This includes payments for state income tax, property tax, and excise tax. The same $10,000 limit applies regardless of whether you are a single taxpayer or if you are married and file a joint return. The deduction for taxpayers who are married and filing separate returns is limited to $5,000.

Kathryn A. Sisson

Kathryn A. Sisson

Mortgage Interest: Interest is generally deductible on original home acquisition debt up to $750,000. Home-equity interest is deductible only if the funds were used to improve the mortgaged property.

Charitable Donations: Donations are generally deductible up to 60% of AGI, up from 50%, for most donations. You could also consider giving directly from your IRA if you are over age 70 1/2 or gifting appreciated stock directly to a charity. Discuss with your tax professional in order to maximize your benefit.

Miscellaneous Itemized Deductions: TCJA has eliminated miscellaneous itemized deductions. These include deductions for unreimbursed employee business expenses, tax-preparation fees, and investment-advisory fees.

4. Increased Standard Deduction. One of the most significant provisions of TCJA is the near-doubling of the standard deduction for all taxpayers. For 2018, the standard deduction amounts are $24,000 for joint filers, $18,000 for head of household, and $12,000 for all other filers. The limitations on itemized deductions as noted above and the increased standard deduction amounts may make it less advantageous to itemize deductions.

5. Personal Exemptions. TCJA eliminated personal exemptions for 2018. For 2017, taxpayers received a personal exemption deduction of $4,050 per person. Therefore, a family of four received a deduction of $16,200 in 2017 that is no longer available under the new tax act.

Businesses

6. Tax Rates. A flat tax rate of 21% replaces the graduated tax rate brackets for C corporations that ranged from 15% to 39% in prior years.

7. Qualified Business Income (QBI) Deduction. A deduction of up to 20% of business income may be available to owners of pass-through entities. There are limitations based on several factors, including income of the taxpayer as well as the type of trade or business. The purpose of the deduction is to provide some parity between the new flat 21% corporate rate and the tax rates paid by owners of pass-through entities on their individual income-tax returns.

8. Depreciation. TCJA made significant changes to encourage businesses to expand and invest in new property; 100% bonus depreciation is now available for federal purposes, and the limitation on expensing certain assets has been increased to $1 million, with a $2.5 million investment limitation.

9. Business Credits. TCJA created a Family Leave Credit for employers making family-leave payments to employees. The credit is available only to employers who have a written policy in place for the payment and credit.

10. Deductions. Previously, the deduction for meals and entertainment was limited to 50% of expenses incurred. For 2018, 50% of meals are still deductible; however, entertainment expenses are no longer deductible.

Many of these changes are significant and warrant your full attention. As you approach tax season this year, seek the assistance of tax professionals, and do not follow your neighbor’s tax advice.

Kathryn A. Sisson, CPA, MST is a tax manager in the Commercial Services Department of Melanson Heath in Greenfield. She has 20 years of experience in public accounting and has been with Melanson Heath for 10 years. She has extensive experience in corporate and individual income-tax planning and review as well as financial-statement compilations and reviews. Her corporate experience includes working with businesses doing business in multiple states. She is also a QuickBooks ProAdvisor assisting many clients with general ledger systems and software training.

Banking and Financial Services

Giving Some Insight

By Terri Judycki

Terri Judycki, CPA, MST

Terri Judycki, CPA, MST

The Tax Cuts and Jobs Act (TCJA) has resulted in many changes for taxpayers. One area in particular is charitable giving.

For those who regularly make charitable contributions, changing philanthropic giving habits may result in greater tax benefits. This article will explore various strategies for maximizing the tax benefit of charitable giving under the new law.

The TCJA increases the standard deduction to $12,000 for a single taxpayer and $24,000 for a married couple filing a joint tax return. In addition, the itemized deduction for taxes has been capped at $10,000 for all combined state and local tax payments. The Congressional Budget Office estimates that these changes will reduce the number of taxpayers who itemize deductions by more than half.

To maximize the benefit of the higher standard deduction, consider bunching charitable contributions in alternating years. For example, if a married couple with no mortgage ordinarily gives $12,000 to charity each year, they will likely take advantage of the $24,000 standard deduction ($12,000 to charity plus $10,000 in state and local states is less than the $24,000 standard deduction). If, instead, they give $24,000 every other year, they will use the $24,000 standard deduction in the ‘off’ year and $34,000 in itemized deductions in the year with the gifts ($24,000 charitable contributions plus $10,000 state and local taxes), resulting in lower taxable income without any increase in cash expenditures.

From the charity’s perspective, though, this could leave some budget challenges.

Another way to bunch deductions without bunching the charities’ income is through the use of a donor-advised fund (DAF). DAFs are funds controlled by 501(c)(3) organizations in which the person establishing the fund has advisory privileges as to the ultimate distribution to charities.

In our example above, the married couple might establish a DAF with $24,000 in one year and direct or ‘advise’ that donations be made to specific charities over time. Amounts used to establish the DAF are deductible charitable contributions when transferred to the sponsoring organization.

“For those who regularly make charitable contributions, changing philanthropic giving habits may result in greater tax benefits.”

Whether the idea of bunching appeals to you or not, don’t overlook the benefits of gifting appreciated stock to charity. The stock must have been held for more than a year to take advantage of this planning opportunity. The charitable deduction is the fair market value on the date gifted. Gifting the stock instead of cash avoids income tax on the appreciation.

For example, if a taxpayer wants to make a gift of $10,000 to a charity and sells stock worth $10,000 for which he paid $7,000, he would have a $10,000 deduction and $3,000 taxable gain. If, instead, he directs his broker to transfer the stock to the charity, he is still entitled to a $10,000 deduction, but does not report the $3,000 gain.

Finally, taxpayers age 70½ or older have another option available. An individual who is 70½ or older on the transfer date can direct the trustee of his IRA to distribute directly to a qualified public charity. The distribution is called a qualified charitable distribution (QCD). The amount transferred counts as a distribution for purposes of meeting the minimum distribution requirement but is not included in the taxpayer’s income.

There are a few requirements. The charity cannot be a private foundation or a donor-advised fund. No more than $100,000 can be donated by an account owner each year. The gift to the charity must be one that would have been entirely deductible if made from the taxpayer’s other assets — for example, the donor should obtain adequate substantiation from the charity, and the donation should not be one that entitles the donor to attend a dinner, play golf, or receive any other benefit.

In our example above, the couple who makes a QCD from IRAs for the $12,000 each year reduces taxable income by $12,000 and still uses the standard deduction.

Another possible advantage is the effect the reduction may have on other taxable items. Depending on the taxpayer’s total income, reducing adjusted gross income could result in reduction of the amount of Social Security benefits that are taxed, an allowed loss from certain real-estate rentals, or a reduction in the net investment income tax (if the amount of excess AGI exceeds the net investment income).

Reducing income may also result in lower Medicare premiums that are based on income for higher-income taxpayers. In addition, some states do not provide deductions for charitable donations, but do follow the federal treatment of excluding the QCD from income.

These changes may result in tax savings that could be used to make an even larger donation to a favorite charity.

Terri Judycki is a senior tax manager with the Holyoke-based public accounting firm Meyers Brothers Kalicka, P.C.; (413) 322-3510; [email protected]

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