Missing the July 15 Deadline

For those who missed the July 15 tax deadline, some taxpayers may have extra time to file and pay any taxes due without penalties and interest. These include:

File to get a tax refund
The only way to get a refund is to file a tax return. There is no penalty for filing after the deadline if a refund is due. The IRS reminds taxpayers that, while they continue to process electronic and paper tax returns, issue refunds, and accept payments, they’re experiencing delays in processing paper tax returns due to limited staffing. Taxpayers can track a refund using the “Where’s My Refund?” tool on IRS.gov, IRS2Go, and by phone at 800-829-1954.

File to reduce penalties and interest
Normally taxpayers should file their tax return or request an extension and pay any taxes they owe by the deadline to avoid penalties and interest. Remember that an extension to file is not an extension to pay. Penalties and interest will apply to taxes owed after July 15. Even if a taxpayer can’t afford to immediately pay the taxes they owe, they should still file a tax return as soon as possible to reduce possible penalties.Ordinarily, the failure-to-file penalty is 5% of the tax owed for each month or part of a month that a tax return is late. But if a return is filed more than 60 days after the due date, the minimum penalty is either $435 or 100% of the unpaid tax, whichever is less. The basic failure-to-pay penalty rate is generally 0.5% of unpaid tax owed for each month or part of a month.Taxpayers who have a history of filing and paying on time often qualify for penalty relief. A taxpayer will usually qualify if they have filed and paid timely for the past three years and meet other requirements. For more information, see the first-time penalty abatement page on IRS.gov.

Posted in IRS, Taxes

Converting an LLC to an S Corporation

Maybe your business situation has changed and now you need to change your entity from a Limited Liability Company to an S Corporation.

Below are 2 options for converting your LLC to an S Corporation:

–Change ONLY the tax status of the entity, but not change the entity

–Change the tax status AND the entity

Change ONLY the tax status: An election can be made to be taxed as an S Corporation while retaining the structure of an LLC. To change an entity’s tax status to be treated as an S Corporation but stay an LLC, file a Form 8832 (Entity Classification Form) with the IRS.  Once it is classified as a Corporation, it can file a Form 2553 to be taxed as an S Corporation.

Change the tax status AND the entity: To change your entity’s structure from an LLC to a corporation requires the LLC to actually convert to a Corporation with the formation state’s agency that handles corporate filings.With this option, the LLC is converted a Corporation with the state.  Then it can also request to be an S Corporation for tax purposes.In Colorado the conversion process for converting an LLC to a Corporation includes filing with the state a new corporation with the same name & simultaneously canceling the LLC, sending a letter to the IRS telling them of the change in structure, and electing to be an S Corp (by filing an S Election Form 2553).

Posted in Colorado, Taxes

S Corporation Taxes

Much like owners of a partnership, shareholders of an S-corporation are taxed on their allocated share of the business’s profits — no matter whether or not those profits were actually distributed to them.

The main reason for being recognized as an S Corporation is for the tax savings.  By allowing the corporation’s profits or losses to pass through to the shareholders, the shareholders avoid double taxation which is an issue with a regular corporation (C Corporation).

One of the best methods of saving taxes for the S Corporation is to reduce FICA or Self Employment Taxes.  For example, if a contractor were paid $100,000 per year, the contractor would have to pay self-employment taxes of about $15,000 per year.  However, if the contractor’s S Corporation were paid $100,000 and the S Corporation paid the contractor a $50,000 salary (this must be considered a fair wage) for services, the contractor would only have to pay FICA (same as self-employment taxes) on his $50,000 wages or about $7500, saving the contractor about $7500 each year in taxes.

However, running a salary through payroll includes extra costs and the addition of unemployment tax.  The rules are that the owners must pay themselves a “realistic” salary and can take the rest in dividends.

Posted in Colorado, Taxes

Payroll Protection Program Loan Forgiveness Changed as Senate passes House bill

The U.S. Senate passed the House version of Paycheck Protection Program (PPP) legislation Wednesday night, tripling the time allotted for small businesses and other PPP loan recipients to spend the funds and still qualify for forgiveness of the loans.  The Senate approval sent the House bill to President Donald Trump who signed it Friday.

The Paycheck Protection Program Flexibility Act of 2020 modifies several provisions of the Paycheck Protection Program (PPP) and amends the Small Business Act and the CARES Act:

  • The “covered period” is extended from 8 weeks to 24 weeks from the date the loan proceeds were deposited into the borrower’s bank account or Dec. 31, 2020 whichever occurs first.  This flexibility is designed to make it easier for more borrowers to reach full, or almost full, forgiveness.
  • Earlier in the year, SBA and Treasury issued an interim final rule which required borrowers to spend at least 75% of the PPP loan proceeds on payroll. The PPPFA reduces the payroll spending requirement to 60%.  The SBA and Treasury clarified on June 8 that the 60% threshold is not a cliff and that partial forgiveness is available under 60%.
  • CARES allows the deferral of the employer’s 2020 Social Security tax. Half of the deferred amount is due Dec. 31, 2021 and the remainder is due Dec. 31, 2022.  HR 7010 now allows the PPP loan borrower to deferral social security taxes even though the loan is forgiven.
  • The legislation includes two new exceptions allowing borrowers to achieve full PPP loan forgiveness even if they don’t fully restore their workforce. Previous guidance already allowed borrowers to exclude from those calculations employees who turned down good faith offers to be rehired at the same hours and wages as before the pandemic. The new bill allows borrowers to adjust because they could not find qualified employees or were unable to restore business operations to Feb. 15, 2020, levels due to COVID-19 related operating restrictions.
  • Borrowers can use the 24-week period to restore their workforce levels and wages to the pre-pandemic levels required for full forgiveness. This must be done by Dec. 31, a change from the previous deadline of June 30.
  • To the extent the loan is not forgiven, the maturity date of the loan has been extended from two years to five years.

It is still not clear how “salary” is treated for owner employees – 8/52 or 24/52 of 2019 wages? How does the calculation of “payroll expense” for the self-employed work, 8/52 or 24/52 of 2019 net Schedule C income?
Congress also did not address the deduction of expenses paid with the proceeds of the PPP. Thus, it seems that expenses paid with PPP loan proceeds are not deductible.

Posted in IRS, Taxes, Tips

S Corporations

An “S Corporation” is a for profit corporation which elects to be treated as an S Corporation.  S Corporations typically do not pay taxes and instead file an informational return Form 1120S showing net profit or loss which flows through to the owners (shareholders).  Instead of the S Corporation paying income tax, the shareholders show the net profit or loss on their personal tax returns.  An S Corporation starts as a regular corporation, and only by requesting the S Election to the IRS can it act as an S Corporation.

Profits and losses must be distributed to the shareholders in proportion to the shareholder’s interest. For example, if a shareholder owns 10 percent of the S corporation, he or she must receive 10 percent of the profits or losses.

Shareholders must adhere to the requirements at all times. If they don’t, they risk disallowing the S corporation election, the corporation would be treated as a C corporation with its corresponding restrictions and be subject to double taxation.

To become an S Corporation, the corporation must submit a completed Form 2553 (S Corp. Election) to the IRS 2 months and 15 days after the beginning of a corporation’s tax year.  For most S Corps, that would be on March 15th since most tax years begin on January 1st.  For newly formed corporations, the first tax year would start on the earliest of the date it first had assets, the date it first had shareholders, or the date it first operated.

For example, if a corporation was formed on March 12th, it issued stock on April 10th, it opened a checking account on April 17th, and started business operations on July 1st, the beginning date of the S Corporation’s first tax year is April 10th.  Therefore, the IRS must receive the S Corp election no later than June 25th for the S Corporation election to take effect during its first tax year.  If received after this, the corporation wouldn’t be able to operate as an S Corporation until January 1st of the next tax year.

Posted in Colorado, Taxes

LLCs

LLCs provide liability protection for their members. This means personal assets will be protected against debts, losses, and any court rulings against the business.

LLCs are “pass-through entities.” This means that dealing with business taxes is much easier, though it also means paying those taxes on a personal 1040 tax return.

LLCs provide great flexibility. Corporate management structures are far more rigid than those of an S Corporation.

Given that it takes far less red tape to organize and is generally cheaper to administer, the LLC might be your best choice if you’re a new business owner.

Posted in Taxes

Business Entity Type

If you have your own business, you could be contemplating a choice that many entrepreneurs face: Should your enterprise be structured as a limited liability corporation (LLC) or an S corporation (S corp), which is named after subsection S of Chapter 1 of the Internal Revenue Code?

These two organizational forms have similarities and differences–which can make choosing between them and others, (like a C corporation) confusing at best. Each state might also have different rules that come into play. You’ll want to get some input from a respected accountant and/or attorney to help you decide what might be the best fit for your business.

Incorporating as an S-Corp or forming your company as an LLC both have distinct advantages for you and your business.

Yearly, more people start LLCs than S-Corps. When considering the LLC vs. S-Corp question, keep in mind that limited liability companies are a bit easier to start and to run, and generally they take less upkeep to remain compliant.

If you’re planning on selling stocks, if you want the most possible protection, and you’re planning on looking for investors, think about starting an S-Corp.

Conversely, if you don’t want to sell stocks, want less paperwork, but want the most flexibility, consider forming an LLC.

Posted in Taxes

CARES (Coronavirus Aid, Relief, and Economic Security) Act

* subject to change

Best/accurate info at sba.com or treasury.gov

Phase 3, March 27, 2020
$2 Trillion
Support loans and loan guarantees for large businesses and governments
Small business loans & grants
Unemployment insurance expansion
Issue one time checks (tax rebates)
Cut business taxes
Support state and local governments
Increase health related spending
Support the safety net
Increase disaster assistance
Increase education spending
Support transportation providers and industries
Reduce individual taxes
Free coronavirus testing
SBA LOAN PROGRAM

Businesses can’t receive loans from the same program twice in the same period and to cover the same costs. You can accept both an EIDL and PPP loan as long as the purpose for each loan and the costs that it covers are different.

PAYCHECK PROTECTION PROGRAM

  • Generally better for small business
  • Generally Best Option if Qualify
  • 4/2/2020 Treasury Secretary Steven Mnuchin Encourage EVERYBODY to apply over next week
    • Will immediately ask Congress for more money to sustain the program if the money runs out (phase 4)
    • Have an additional $6 Trillion dollars to put into economy
  • $350 Billion
  • 100% federally guaranteed loans to small businesses to maintain payroll
  • Covered period 2/15/2020-6/30/2020
  • Priority to
    • Veterans/military
    • Small businesses owned by disadvantaged individuals/minorities
    • Women
    • Businesses operating < 2 years
  • Apply at bank
    • The SBA requires the owner of the business to complete and sign the SBA Application.
      • Per FirstBank: “Please do not have your CPA or financial advisor attempt to complete this form for you. We cannot process your application if it is not signed directly by the business owner(s).”
    • Form changed during week last week. Some people having to apply twice.
  • Eligible Entity
    • Employer<500 employees
    • Sole proprietor
    • Independent contractor
    • Self-employed regularly caries on trade or business
    • In operations before Feb 15, 2020
  • Lenders looking for
    • Loan used to
      • Maintain payroll
        • OR
      • Make mortgage, lease, and utility payments
    • Independent Contractors
      • Payroll tax filings
      • 1099-MISCs
      • Income & Expense from sole proprietorship
    • How much can I borrow?
      • 5X borrower’s average monthly payroll costs, <$10 million
      • calculate their aggregate payroll costs using data either from the previous 12 months or from calendar year 2019
      • Included Payroll Cost
        • Employers
          • Annual Salaries <$100K/employee
            • exclusion of compensation in excess of $100,000 annually applies only to cash compensation, not to non-cash benefits,
          • Tips
          • Vacation, sick leave, etc.
          • Health care benefits including insurance premiums
          • Retirement benefits
          • State or local payroll taxes (no FICA)
          • Any amounts that an eligible borrower has paid to an independent contractor or sole proprietor should be excluded from the eligible business’s payroll
        • Sole Proprietors/Independent Contractors/Self-Employed
          • Compensation
          • NET earnings from self-employment
          • <$100K
        • Loan Forgiveness
          • May be forgiven IF borrowers MAINTAIN payrolls during crisis OR RESTORE payrolls afterward
          • How Much?
            • Only principal forgiven
            • Spend funds within 8 weeks following loan origination on:
              • Payroll costs
              • Mortgage Interest
              • Rent/Lease
              • Utilities
                • Electricity
                • Gas
                • Water
                • Transportation
                • Internet
              • Likely not more than 25% of the forgiven amount may be for non-payroll costs (mortgage interest, rent, utilities)
            • Reduction of Loan Forgiveness
              • If reduce
                • Number employees
                • More than 25% wages
              • What if I BRING BACK employees OR RESTORE wages?
                • Reduction in employment or wages that occur beginning February 15,2020 shall not reduce amount of loan forgiveness IF by June 30, 2020, “The borrower eliminate the reduction in employees or reduction in wages.”
                • “Re-Hiring: You have until June 30, 2020 to restore your full-time employment and salary levels for any changes made between February 15, 2020 and April 26, 2020.”
              • If NOT forgiven
                • interest rate = 1% over 2 year term
                • payments deferred 6 months
                • 10 yrs maturity

EMERGENCY EIDL (ECONCOMIC INJURY DISASTER LOAN) GRANTS & LOANS

                 Emergency Injury Disaster Loan (IEIDL)

  • Eligible Entity
    • Employer<500 employees
    • Individual who operates as Sole proprietor (with or without employees)
    • Individual who operates as Independent contractor
  • Up to $2 million can be provided to help meet financial obligations and operating expenses that could have been met if the disaster did not occur, think of this as working capital.
  • The interest rate on EIDLs
    • 75% interest rate for Small Businesses.
    • 75% interest rate for non profits.
  • First payment will be deferred and not become due until one year after the original disbursement. Interest does accrue doing this time.
  • Maximum term allowed = 30 years
  • If take this and then take out PPP loan, reduce PPP loan forgiveness

                Emergency Economic Injury Grants

  • Expands EIDL program adding special $10K effective grants
  • Covered period 1/31/2020-12/31/2020
  • Eligible Entity
    • Employer<500 employees
    • Individual who operates as Sole proprietor (with or without employees)
    • Individual who operates as Independent contractor
    • Must have been in operation on Jan 31, 2020
  • Loan but can be forgiven
  • Receive in 3 days
  • Limit on what spend on:
    • Paid sick leave direct result from COVID-19
    • Payroll to retain employees during business disruption or slowdown
    • Increased costs to obtain supplies due to interrupted supply chains
    • Rent or mortgage business payments
    • Repaying obligations cannot be met due to revenue losses
  • If spend on these things, not repay

Employee Retention Credit

    • For employers subject to closure due to COVID-19
    • Large companies
    • If can’t get PPP loan (like airlines)
    • Can’t claim if get PPP SBA Loan
    • 50% of payroll
    • For wages paid after 3/12/2020 through 12/31/2020
    • up to $10K/per employee ($5K credit per employee)
    • Eligible
      • Can’t operate fully or only partially
        • OR
      • Full open but 50% or more decline gross receipts
    • Form 7200

Employer Social Security Deposit Delay

    • Can’t defer if use SBA PPP loan forgiveness
    • Effective date 3/27/2020 through 12/31/2020
    • Due 12/31/2021 & 12/31/2022

Recovery Rebate for Individuals

    • Direct payments
    • Based on 2018 or 2019 returns
    • $1,200 to individual
    • $500 per child (under 17 yrs)
    • Getting in 2 weeks (trying to do in 2 weeks)
    • Phase out for AGI
    • IRS will mail notice when payment made

Net Operating Loss Carryback

    • NOL Carryback eliminated by TCJA, but CARES temporarily reinstated

Charity deduction now above the line instead of below the line

    • Only works if not itemizing
    • $300 limit
    • Only 2020

Access to Pension/Retirement Funds

    • No penalty for early withdrawal up to $100K
    • Allows immediate access
    • Can take 401K loans

Student Loans

    • Exclusion available for employers paying tuition as fringe benefit is expanded
    • For small employers, not attractive

Distilled Spirits Hand Sanitizer

    • 2020 – excise tax not apply if spirits used for hand sanitizer
Posted in IRS, Taxes, Tips

Survive and Thrive COS

Survive & Thrive COS provides funding in the form of low-interest loans of up to $25,000, to support resiliency and continue building healthy businesses and nonprofits.   There are no stipulations for what the money can be used.

ELIGIBILITY

  • For profit and nonprofit, privately held small businesses that:
    • maintain a place of business in El Paso County
    • incorporated with the State of Colorado
    • demonstrate economic injury and a need for the loan
  • Small business with the equivalent of 2 to 25 FT
  • Applications are open only to small businesses most impacted by the COVID-19 pandemic, including, but not limited to:
    • food industry
    • cafes
    • hair & nail salons
    • barbershops
    • home childcare providers
    • retail shops
    • Independently owned franchises

TERMS

  • Installments are provided monthly over three months.
  • Repayment occurs over three years
  • Payments are not required for the first year
  • No interest the first year
  • Interest rates are tiered over the loan period to 1% the second year and 2% the third year

 APPLICATION PROCESS

  • Submit:
    • Balance Sheet
    • P&L
    • Character Reference
  • If application initially approved, member of the Loan Review Committee will reach out for a 30-minute interview.
  • Loan decisions will be made every Monday beginning April 6, 2020 and will continue for the following 90 days, or until funds run out.
  • The first check will be distributed by the end the week that a decision is made.

For answers to questions, contact:  surviveandthrivecos@exponentialimpact.com.

 

Posted in Colorado, Tips

IRS Accepting Email & Digital Signatures

The IRS is now accepting email and digital signatures on tax documents to make it easier for tax professionals and taxpayers to communicate with the agency during the coronavirus pandemic.

Posted in IRS, Taxes