Posts

PPP Loan Update: Payroll Protection Program Flexibility Act

On June 82020, President Trump signed The Payroll Protection Program Flexibility Act into law, which allows the following changes to the PPP loan program. The SBA, in consultation with Treasury, will issue rules and guidance, a modified borrower application form, and a modified loan forgiveness application implementing the amendments to the PPP made in the new law. In addition confirms that June 30, 2020, remains the last date on which a PPP loan application can be approved, the new rules will implement the following changes:

Extended Covered Period

The covered period may be extended from 8 weeks to 24 weeks: businesses with existing PPP loans may elect to keep the 8 week covered period, or may extend the covered period to 24 weeks. New borrowers who are approved after June 3, 2020 will automatically have 24 weeks to use the loan proceeds.

Payroll Percentage

The percentage of the loan that is used to determine forgiveness that must go toward payroll costs was decreased from 75% to 60%. Prior to H.R. 7010, the requirement was only that 75% of the loan that was used had to be on payroll costs. This is an important point to note, but with the generous extension of the covered period, most businesses should easily reach 60% on payroll costs.

Full Time Equivalents and Restoring Wage Levels

You now have until December 31, 2020 to restore the level of FTEs and restore their wages. This was extended from the original date of June 30, 2020.

Additionally, there is an exemption added to the FTE reduction calculation if the borrower can document the inability to hire employees who were employed as of February 15, 2020 and the inability to hire other employees with similar qualifications as of December 31, 2020. If you are unable to hire other employees by December 31, 2020 due to compliance requirements with the CDC, OSHA, or the Secretary of Health and Human Services, you will also be allowed an exemption for these employees.

Loan Terms

All PPP loans issued after June 3, 2020 will have a loan term with of a minimum of 5 years. Borrowers that have a 2 year term with their PPP loan may renegotiate the terms to follow the terms for new loans if the lender and borrower mutually agree.

H.R. 7010 also allows the deferral of payment until the date the lender receives the forgiveness amount from the SBA, which will likely be longer than the initial deferral period of 6 months.

Deferral of Payroll Taxes

Employers can now defer all of its 2020 Social Security (50% to 2021 and 50% to 2022), even if the loan is forgiven before December 31, 2020. The original Act only allowed deferral until the loan was forgiven.

Taxability of PPP Loan

There is still a major issue with the taxability of the PPP loans.  Although the PPP states that the forgivable loan amount is not taxable, the IRS has taken the position that employers cannot deduct expenses like payroll and rent that are paid with PPP funds.  The IRS claims not allowing the deductions will prevent employers from receiving a “double tax benefit.”  Members of Congress have already spoken out that it was their intent to have the forgiven loan amount be tax free while still allowing the deductions.  Without a legislative fix to this issue, employers should plan for the additional tax ramifications from the PPP loan.

Still unclear? If you have any questions, please feel free to contact us and we’ll sit down and discuss!

IRS Steps in Against Identity Theft

By: Heather R Cunningham

Over the past several years, tax-related identify and refund fraud has become much more prevalent.  Identity thieves file tax returns using stolen social security numbers and claim false refunds.  They often file electronically and early in the year before the IRS is able to verify the information being submitted, and before the real taxpayers have a chance to file their returns.  Then, when the individual whose social security number has been falsely used attempts to file, their return is rejected because the IRS only allows one return to be filed per social security number.  Once this happens, the taxpayer is forced to file their return on paper, completing additional forms and procedures with the IRS to verify their identity, which delays the processing of their return and receipt of any refund.

The IRS is developing techniques to combat this tax-related fraud.  One way is by using a pilot program that began during 2015.  As part of this program, the IRS has started working with several large payroll companies to develop methods to help verify W-2 information.  The IRS developed a program which generates unique codes for the payroll companies to report on the W-2’s they prepare.  This unique code will then be entered into tax software when the individuals prepare their tax returns.  In order for that return to be accepted by the IRS the codes on the w-2 must match what was generated in the IRS’s system.  Since identity thieves will not have access to the w-2 codes when filing their false returns, the codes won’t match, the return will be rejected.

During the first year of implementation, the program was used for 1.5 – 2 million W-2’s.  The IRS plans to have it expanded to anywhere between 24 and 50 million W-2’s for the 2016 tax year.

As we all know of someone who has been the victim of some form of identity theft, it is good to see the government taking steps to prevent it.

If you have questions or concerns, contact us or call us at 216.524.8900

Surviving an IRS Audit

by: Graham Blackburn

Throughout history, people have harbored a certain degree of anger and fear for tax collectors.  The modern day IRS is not too different.  It’s a massive organization tasked with implementing a tax system that is simultaneously complicated and impactful.  The dreaded IRS audit is the primary source of fear, but with a better understanding we can help alleviate some of that angst.

First off, it’s important to know that audit rates are declining.  In 2015, the IRS only audited 0.8% of individual taxes, or about 1.2 million returns, with higher income taxpayers more likely to be selected.  This marks an eleven year low.  Small businesses, S-Corporations and Partnerships are seeing similarly low audit rates.  Being selected for an audit does not mean you’ve done anything wrong.  Often selections are simply at random.

If you do happen to get audited, it’s helpful to understand the basics of what that means and what transpires when the IRS comes knocking.  Essentially, during an audit, the IRS has one of their agents review part or all of your tax return, in person or via mail.  They request information to support the reported figures, checking to ensure the validity.  Audits, or the potential for them, are the reason we’re told to retain reams of tax documents years after returns are filed.  As a general rule, the IRS can audit any return within the last three years.  However, if there is substantial error found on the return (>25% misrepresentation of income) the time-frame extends to six years.  In the event of an audit, our goal at Hobe & Lucas is to assist you in dealing with the IRS agent, aiming for a determination that there should be “no-change” to the tax return.

After dealing with the IRS in past instances, I have a few thoughts and recommendations:

  1. Remember that it’s going to test your patience. Generally, the larger an organization, the slower it will operate, and the IRS is one mighty large organization.  Resolution is not imminent.  Lengthy periods of silence from the IRS doesn’t necessarily mean there are problems.  It just tends to take them a long time to process information and correspond.
  2. Understand your appointed agent. It might be easy to think of IRS agents as a tax-collecting robots, but I think it’s important to realize that they are people with varied knowledge, motivations and personalities.  IRS agents have objectives and are actually trying to complete a difficult objective.
  3. Respond in a timely manner. Ignoring letters and requests won’t make them go away.  It’s best to correspond as soon as possible to stay in the good graces of the agent, even though it seems hypocritical given the IRS’s slow response time.
  4. Try to stay confident and positive. To understate the obvious, tax law is onerous.  Different individuals have varied interpretation of the law.  In an audit situation, the agent might challenge certain aspects of the return.  Defend your position if you believe it’s correct.

Overall, tax audits are fairly infrequent occurrences, but the fact is that some audits are unavoidable.  It’s unfortunate to be selected for audit, but the whole process is – manageable – and therefore nothing to fear. Hobe & Lucas tax personnel are experienced and knowledgeable in complicated tax issues and compliance with them, and we’re here to help. Give us a call 216.524.8900 or contact us.

The IRS v.s. Identity Theft and Scams

By Bob Casmer

By now almost everyone has either experienced for themselves, or heard stories about someone they know being the target of an identity theft or scam.  It is no surprise that as technology has evolved over the past several decades and our reliance upon computers and the internet to handle all phases of our financial activity has increased, so to have the criminals upped their game to try and obtain information about us and gain access to our bank and credit cards accounts.

One particular technique used by criminals to obtain such information is through the guise of them being with the IRS. Those three small letters can strike fear into the hearts of many people, which is exactly what these criminals are counting on.   These scammers will often try contacting people via the phone or through the internet, claiming to be with the IRS. They further claim the person they are contacting is seriously in trouble with the IRS, owes significant back taxes and penalties, and needs to do something immediately or they could be subject to liens, more fines, and even imprisonment.  

These scammers are counting on these people being so worried that they don’t question the validity of the request and willingly hand over their personal information.

First of all, the IRS will never just call you on the phone with no prior contact.  The chief way the IRS initiates any review or contact with someone is via mail.  Likewise, they will not contact you via email.  In fact, the IRS is extremely averse to sending and receiving any information or records/documents via email and normally will not accept anything emailed to them.  They always ask that you fax or mail hard copies of documents to them. Receiving an email asking that you click on attached links or respond back to them with personal information is usually a dead giveaway that you are being subjected to some form of identity theft or scam.  In such instances, do not ever click on or open any links, nor email or send back any personal information in response to such requests.

If you get a phone call from a supposed IRS representative with no prior correspondence from them, it is likely a scam.  Do not give out any information over the phone, and be sure to ask the supposed agent for their name and IRS badge number.  A real IRS agent is required to give you that information anytime they talk with a taxpayer.  You can also ask for a call-back number and see how they respond.  If you have any doubts or suspicions, don’t give out personal or banking information.

It is very easy to contact the IRS yourself through their website at IRS.gov or by phone, to check and find out if the phone call or email, or even a suspicious letter you got, was actually legitimate.  You can also contact us at 216.524.8900 and let us know what you received.  We can help you quickly discern if you were the target of an identity theft scam.

Delays in Tax Refunds are Possible Again This Tax Season

By: Mario Ciclone

The IRS has informed that delays in tax refunds will be primarily due to the continued increase in cases of identity theft and income tax fraud. One common type of identity theft and tax fraud is someone attempting to file a tax return using your social security number and claiming a false refund.

Many states, like Ohio, are working to mitigate the risk of fraud by requiring random taxpayers to take an identity quiz before they receive their refund. The taxpayers are required to answer personal questions to verify his or her identity. Once passed, the return gets processed along with the refund. A taxpayer who fails the quiz multiple times is advised to contact the Ohio Department of Taxation.

We have received many questions from clients over the past year as they were receiving these letters from the Ohio Department of Taxation. If you are selected to complete the identity confirmation quiz, please be advised that it is a legitimate request. Failing to take the quiz will result in your tax return not getting processed timely.

Have questions?  Contact us! 216.524.8900

One Final Refresher on the Affordable Care Act Requirements for 2015

by: Kevin Stedman

Our original post on the Affordable Care Act was written in September 2015 and covered many FAQ’s and scenarios for businesses that may have to comply.  The following is an update to that post:

Beginning this month, Internal Revenue Code (IRC) Section 6056 requires Applicable Large Employers (ALEs) to file information returns with the Internal Revenue Service (IRS) to report applicable healthcare information. An ALE must file Form 1095-C, Employer-Provided Health Insurance Offer and Coverage, for each full-time employee, and the related Form 1094-C, Transmittal of Employer-Provided Health Insurance Offer and Coverage Information Returns. In addition, employers of all sizes will have a reporting requirement under IRC Section 6055 if the employer self-insures. These reporting requirements help administer the employer shared responsibility mandate and the individual mandate added as a part of the Patient Protection and Affordable Care Act.

Who Needs to File?

  • Employers with 50 or Full Time More Employees
  • Small Employers with Fewer Than 50 Employees That Are Members of a Controlled or Affiliated Service Group who have collectively more than 50 Full Time Employees
  • Employers with Employer-Sponsored Self-Insured Plans

What Are the Filing Deadlines?

Form 1095-C – March 31, 2016.

Form 1094-C (and copies of each Form 1095-C) – May 31, 2016, or by June 30, 2016 if filing electronically.

What Are the Fines and Penalties for Not Complying with the Reporting Requirements?

Employers who fail to report will be subject to fines. The penalty is $100 per violation, up to a maximum of $1.5 million per year. However, employers that report within 30 days of the deadline will be fined $30 per violation. Those that file within five months of the deadline will be fined $60 per violation. The penalties will increase to $250 per violation next year, with a maximum of $3 million per year, with $50 per violation if filed within 30 days, and $100 per violation if filed after 30 days.  Entities that intentionally disregard the reporting requirements face a penalty of $250 per violation this year and $500 per violation in 2016, with no cap on the potential liability.

What Actions Should an Employer Take to Prepare?

Given the complexity of information required to be reported and the potential size and impact of the penalties, employers need to ensure that adequate procedures are in place for determining and documenting each employee’s full-time or part-time status month-by-month, as well as procedures to collect information about health coverage and enrollment month-by-month.  For those employers in which the reporting requirements apply, make sure you have discussed your responsibilities with your plan administrator or payroll vendor and that there is a plan for the applicable forms to be prepared and filed.

Should you have any questions on your responsibilities or need assistance in preparing these forms, please reach out to your Hobe & Lucas representative by calling 216.524.8900.  You can also refer to our previous blog post.

Small Business Owners: Avoid these payroll tax pitfalls

by: Yvonne Chmielewski

If you are a business owner, you have payroll taxes. As the Internal Revenue Service has intensified its payroll tax compliance program focusing on small businesses, it is not wise to take this responsibility lightly.

What taxes should you pay? Every employer must account for federal income tax, federal and state unemployment tax, social security, and Medicare. There also may be additional taxes depending in what state you operate. We cannot overstress the importance of accurately calculating, reporting and depositing these monies from your employees’ paychecks.

Here are the top pitfalls of employer payroll taxes:

  • Incorrectly paying unemployment taxes
  • Borrowing monies withheld from employees’ paychecks to cover cash flow
  • Making late deposits
  • Incorrectly classifying employees as independent contractors (1099’s)
  • Confusing depositing with reporting

Why are we mentioning these common pitfalls? The answer is simple. Because the consequences can be severe and could lead to high penalties and possible jail time:

Payroll tax penalties can add up quickly and generate potentially huge tax liabilities. The penalties that can be assessed on delinquent payroll tax deposits or filings can dramatically increase a small business’ payroll tax bill. Whether the small business is operated as a sole proprietorship, corporation, S-corporation or LLC, the tax penalties assessed can cause a business owner to lose his/her business. There are three major penalties that can be assessed–failure to file, failure to deposit and failure to pay.

The IRS pursues you for payroll taxes owed. In addition to the penalties above, the IRS can access the Trust Fund Recovery Penalty (TFRP) that can hold a responsible person accountable for 100% of the unpaid trust fund taxes. A person is liable for the TFRP if two statutory requirements are met: (1) the person is “responsible” — had the duty to account for, collect, and pay over the trust fund taxes to the government; and (2) the person “willfully” failed to collect or pay over trust fund taxes to the government. The IRS is able to “pierce” the corporate veil and pursue individual shareholders (even corporate officers) provided those individuals meet the requirements to be assessed the TFRP.

You could lose your business. As mentioned above, you have to remember that as an employer you are withholding taxes from your employees and that you are entrusted to pay those taxes to the IRS on behalf of those employees. The IRS takes a business owner’s trust obligation very seriously. The IRS has the power to padlock your doors. They have the further power to seize your inventory, machinery and equipment. They can also seize your funds and bank accounts through their levying authority. As a business owner, you should react immediately to any notices concerning your payroll taxes. Failure to do so can cost you your business.

Not filing or paying can be considered a federal crime. If the IRS cannot satisfy a small business’ payroll tax debt through its ordinary methods, it has the power to refer a business owner’s case to the Criminal Investigation Division and then on to the Department of Justice if it can be proven that there was intent not to file or pay the payroll taxes.

How can you avoid these pitfalls and make sure you are withholding the correct amounts? Work with a payroll company who knows the guidelines and regulations. GreenSmart Payroll Solutions, an affiliated company backed by Hobe and Lucas, offers customized and flexible payroll services combining all the capabilities of national payroll firms, but backed by a certified professional accounting firm you trust. Trust us to handle your tax payments, withholding and filings accurately and on time while providing the reporting you need to run your business.

Don’t wait until 2016, give us a call at 216.524.8900 to discuss your individual situation or fill out our contact form.

Get a Handle on Bitcoin Tax Issues

It’s not time to put your dollar bills into memory capsules yet, but the use of convertible virtual currencies — including the Bitcoin — appears to be on the upswing. In addition to announcements that Bitcoins will be accepted by some high-profile companies, such as Overstock.com, Microsoft, and PayPal, 80,000 other firms have reportedly jumped on the bandwagon. The trend hasn’t taken root yet in most of mainstream America, but many people think that day may be coming soon.

Unfortunately, Bitcoins have gotten a bad rap for price volatility, illegal use, vulnerability to technical glitches, and cyber theft. In fact, the market value of a Bitcoin has plunged from a high of more than $1,100 in 2013 to roughly $249 to $288 in March and early April of 2015.

How Bitcoins will ultimately affect business and consumer transactions is still evolving, including the federal income tax consequences of using and holding Bitcoins. The IRS issued a broad ruling last year, but further guidance is needed.

Background

The origins of the Bitcoin can be traced back to 2009, when a computer programmer (or group of people) known as Satoshi Nakamoto issued the first Bitcoins.

Bitcoins have an equivalent value in real currency. They can be digitally traded between users and may be purchased for, or exchanged into, real currency, such as dollars or euros. However, Bitcoins are not legal tender anywhere in the world. The most common ways to obtain Bitcoins are through virtual currency ATMs or online exchanges, which may charge nominal transaction fees.

Once you obtain Bitcoins, you’re able to use them to pay for goods or services by using Bitcoin wallet software installed on a computer or mobile device. When Bitcoins are used for purchases, the software digitally posts the transactions to the global public ledger, ensuring that the same unit of virtual currency can’t be used multiple times.

One reason some merchants accept Bitcoins is to avoid transaction fees charged by credit card companies and online payment providers, such as PayPal. They are also popular in some foreign countries where national currencies are susceptible to inflation, corruption, capital controls, or international sanctions.

Because the Bitcoin supply is finite and capped at 21 million units, some investors are holding Bitcoins in the hope they will appreciate in value over time. But the Financial Industry Regulatory Authority (FINRA), a non-government organization that regulates the financial services profession, advises that investing in Bitcoins is highly speculative, and investors should not risk more than they can afford to lose.

Note that some of the remaining supply is being reserved for Bitcoin “miners.” These are people who provide computing power to verify and record virtual currency payments into the global public ledger. All Bitcoins are expected to be mined by 2140.

Tax Implications

The IRS’s initial guidance on Bitcoins was provided in Notice 2014-21. It generally affirms that Bitcoins are not legal tender and are to be treated as “property” under the federal tax laws. Because the IRS says the general principles for property transactions apply, gain or loss is recognized every time that Bitcoins are used to purchase goods or services. This can result in a recordkeeping nightmare. What’s more, there’s no de minimis exception under the current rules. As you might expect, this treatment discourages frequent Bitcoin transactions.

The loss recognition element for Bitcoin transactions is especially troublesome. Loss deductions are allowed only when losses are incurred for business purposes or when investment transactions are entered into for profit. In addition, whether Bitcoins are held for investment or personal reasons may be difficult to determine, and further guidance is needed.

Taxpayers must also track Bitcoins carefully to minimize tax on their gains. Each Bitcoin purchase should be kept in a separate online wallet. If a taxpayer uses an account with multiple wallet addresses and that account is later combined into a single wallet, it may be extremely difficult to determine the initial basis of Bitcoins that are used in a later transaction.

At the same time, Bitcoin holders must properly account for basis. The value of Bitcoins has been extremely volatile since its inception. The default rule for tracking basis in securities is the first-in, first-out method (FIFO), but taxpayers may be able to use alternative methods. The IRS hasn’t yet ruled on the application of FIFO or the other basis identification methods for Bitcoins.

The character of gain or loss on a Bitcoin transaction depends on whether or not it is a capital asset in your hands. If it qualifies as a capital asset, the transaction is netted with your other capital gains and losses at tax return time, subject to the same general rules. Thus, the maximum long-term capital gains rate on Bitcoins may be 15 percent, or 20 percent for upper-income investors, and a gain may result in the imposition of an extra 3.8 percent surtax if net investment income exceeds an annual threshold.

For employers, payments made with Bitcoins are subject to information reporting in the same way as other payments made in property. Information reporting is required for Bitcoin payments of $600 or more, and Forms 1099 must then be issued to independent contractors. Bitcoins are added to regular U.S. currency for amounts counting toward the $600 threshold.

An Evolution

It’s important to remember that the tax rules for Bitcoins and other virtual currencies aren’t written in stone. This area of tax law will likely continue to evolve.

The IRS is treating Bitcoins as property for tax purposes, at least for now, but many tangential issues remain unresolved. Expect to hear more from the federal government on this subject in the near future. Until then, tread carefully when using Bitcoins and keep the records required by the IRS as stated above.

If needed, contact us for additional guidance.