Corona Virus Business Resources
In these unprecedented times, staying informed on daily changes while still trying to operate a business is overwhelming. Visit the Corona Virus Resources page for regular updates including Families First Coronavirus Response Act Q&A from the DOL, SBA loan highlights, and more.
Addressing Massachusetts Tax on Forgiven PPP Income
As you know from our earlier emails to you regarding this matter, Massachusetts has not agreed to follow the Federal law regarding the non-taxability of PPP loan forgiveness. However, lobbying to do so continues. In the meantime, Massachusetts has recently clarified their stance on when the income is reported.
The Massachusetts Department of Revenue has interpreted the PPP loan forgiveness as being TAXABLE in the tax year when formal acknowledgement of loan forgiveness is received from the U.S. government. Unless our state legislators act, many PPP recipients will encounter Massachusetts taxability issues. If a business’s loan was not forgiven in 2020, they will report income in 2021 to the extent forgiven. However, as a result of lost 2020 revenue, the business could be faced with operating losses due to the use of the PPP funds to pay expenses. Massachusetts doesn’t allow operating loss carryovers, so businesses in essence won’t get the benefit of the expense deductions, but they will have to report the income.
Thus, the continuing lobbying is essential to have Massachusetts recognize and do something about this situation. In that regard, the Massachusetts Society of CPA’s sent the below messaging to all its members:
We believe the intent of the PPP loan program is to ensure our small businesses remain operational and people remain working. We understand that with March 15 quickly approaching the window to provide the most impactful relief is closing. We continue to convey that enacting the bill as soon as possible is critical.
If you agree, please reach out to your legislator to ask for their support regarding this matter. For your reference, below is a pdf containing a draft sample letter. Further for your convenience we have attached a link to determine your local State Legislator(s).
The March 15th filing deadline quickly approaches. With the need to assess the tax consequences due to loan forgiveness, coupled with the uncertainty of state taxability, Massachusetts is quickly running out of time to pass essential legislation.
Self-Employed Individuals: New COVID-19 Sick & Family Leave Tax Credit
The Families First Coronavirus Response Act (FFCRA) provides both companies and self-employed individuals with a refundable tax credits for either the cost of paid sick and family leave for employees or for self-employed’s lost time relative to COVID-19.
Eligible self-employed individuals are entitled to claim qualified sick and family leave equivalent credits on Form 7202 for leave taken between April 1, 2020 and December 31, 2020.
To be an eligible self-employed person, both of the following must be true:
- You regularly carried on a trade or business; and,
- You would have been:
- Eligible to receive qualified sick leave wages under the Emergency Paid Sick Leave Act if you had been an employee of an employer, other than yourself; and/or,
- o Eligible to receive qualified family leave wages under the Emergency Family and Medical Leave Expansion Act if you had been an employee of an employer, other than yourself.
Taxpayers must maintain appropriate documentation establishing their eligibility for the credits as an eligible self-employed individual; including, but not limited to, the date or dates for which leave is requested, a statement of the COVID-19 related reason the individual is requesting leave and written support for such reason, and a statement that the individual is unable to work, including by means of telework, for such reason.
The qualified family leave equivalent amount with respect to an eligible self-employed individual is an amount equal to the number of days (up to 50) during the taxable year that the self-employed individual can’t perform services for which that individual would be entitled to paid family leave, multiplied by the lesser of two amounts: 1) $200 or 2) 67 percent of the average daily self-employment income of the individual for the taxable year.
The qualified sick leave equivalent amount is equal to the number of days (up to 10) during the taxable year that the individual cannot perform services in any trade or business for sick, isolation, or COVID-19 symptom reasons, multiplied by the lesser of $511 or 100 percent of the average daily self-employment income of the individual for the taxable year.
PPP Loans – State Tax Uncertainty – Need for Tax Return Extensions
IF YOU RECEIVED A PAYCHECK PROTECTION PROGRAM (PPP) LOAN, YOUR RETURN MAY NEED A TAX FILING EXTENSION.
Following the enactment of the Consolidated Appropriations Act of 2021, the Internal Revenue Service revised its position such that the forgiveness of a PPP Loan does not create taxable income and expenses covered by the PPP Loan are fully deductible.
End of story…not quite. The different states across the country have been very slow in deciding how they will handle the deductibility of expenses and/or the forgiveness of income. Some states, like New York, have passed legislation or issued guidance mirroring the federal level treatment. Other states, like Rhode Island, have issued no specific guidance. And many states, Massachusetts included, have said either the forgiveness is taxable or the associated expenses are not deductible, BUT, there is legislation slowly moving through state houses across the country to align the state’s tax position with that of the Internal Revenue Service.
With the uncertainty of when and what the states are going to do, if you have a PPP loan, we want to advise you that your return will probably require an extension of time to file, otherwise if we file with how the state laws currently stand, we may end up having to file amended returns later if legislation is enacted to align the state’s tax position with that of the Internal Revenue Service
As one panelist from the AM&AA Conference concluded in his Thursday, February 11, 2021, presentation on this state level issue that our Managing Partner attended, “We could wind up with every business return (in the country) going on extension as a result.”
As always, if you have any specific questions you would like to discuss with us, please do not hesitate to contact us directly.
Additional Tax Saving Ideas (12/2020)
• Enacted on March 27, 2020, the CARES Act established two retroactive provisions that can provide immediate cash flow relief to business owners. The first is the temporary removal of the limitation on net operating losses (NOLs). Under the Tax Reform of 2017 these losses had been limited to 80% of current year taxable income with the balance being carried forward, however, Taxpayers can now utilize their losses to completely offset taxable income. In addition, Taxpayers can now carryback losses originating in 2018 through 2020 back five years. This means you could offset 2015 income with current losses and because tax rates were higher prior to the 2017 Tax Cuts and Jobs Act, the carryback benefit is likely more advantageous than carrying the loss forward. The CARES Act also corrected a drafting error related to Qualified Improvement Property (QIP) made by a taxpayer to an interior portion of an existing building that is nonresidential real property. Under the Tax Reform of 2017 the statutory language did not explicitly provide for 100% first year bonus depreciation for such improvements, but now they are included in the definition of 15-year property, so taxpayers that made such qualified improvements in the past two years can now claim an immediate tax refund for the amount of bonus depreciation they missed.
• In terms of payroll tax relief, the major highlights are the Employee Retention Credit and the Paid Leave Credit. The Employee Retention Credit is a refundable tax credit equal to 50% of wages paid by an eligible employer whose business has been financially impacted by COVID-19, up to $10,000. The Paid Leave Credit reimburses employers for the cost of providing paid sick and family leave wages to their employees for leave related to COVID-19. Please note that various stipulations exist related to the Employee Retention Credit, most notably that the credit is not available if Payroll Protection Program (“PPP”) funding was received.
• If you are self-employed you might separately qualify for a payroll tax deferral. This deferral would allow payroll taxes to be paid over the next two years. Consult your payroll provider for maximizing these credits/deferrals in 2020.
• Another important reminder for the self-employed is the home office expenses deduction. Unfortunately, employees, even those required to work from home during the pandemic, cannot deduct home office expenses. However, if you are self-employed and your home office is your principal place of business, used regularly and exclusively for conducting business, you could deduct a variety of costs related to that space, such as utilities or repair/maintenance costs.
• If you have a traditional IRA, a partial or full conversion to a Roth IRA can allow you to turn tax-deferred future growth into tax-free growth. It also can provide estate planning advantages, by allowing your entire balance to grow tax-free for the benefit of your heirs. It is important to note that the converted amount is taxable in the year of conversion so this strategy might not be ideal for those individuals looking to minimize cash outflows in light of the current economic situation. However, the possibility of vast legislative changes under a new administration that will likely increase tax rates from the historically low levels currently in effect means that such a conversion would be more beneficial sooner rather than later. To the extent that your income from other sources is down, driving you into a lower tax bracket and you have the ability to pay the associated taxes, this strategy could be a timely opportunity to take advantage of future tax-free growth.
• The CARES Act also suspended the Required Minimum Distributions (RMDs) for 2020 therefor those who didn’t need the cash could opt to defer, if you already budgeted to pay tax on your RMD, rolling that distribution to a Roth IRA could be an option. As explained above once in the Roth IRA, future growth will be tax free.
• Building on the previous retirement planning discussion, the SECURE Act enacted December 20, 2019 removed the age limitation for IRA deductible contributions such that, those over the age of 70½ with earned income may want to consider putting additional funds away for retirement with the added benefit of reducing their 2020 tax.
Although we have listed several tax saving opportunities due to new legislation, overall tax planning needs to take into consideration many different opportunities that are available, while coordinating tax savings strategies to maximize the savings between both the current and upcoming year. As always, we are here to answer any tax planning questions you may have.