Article by: Jeff Skolnick, CPA, M.S. Taxation

CONSOLIDATED APPROPRIATIONS ACT, 2021

You have probably heard by now that the new law passed is almost 5,600 pages and covers funding the government as well as many tax provisions. This writing is meant to cover Unemployment, Recovery Rebates, the Payroll Protection Program, Economic Injury Disaster Loans and Payroll sick and family leave. I will address additional aspects of the law in the very near future, but this should be more than enough to digest for today.

CONTINUED ASSISTANCE TO UNEMPLOYED WORKERS

Pandemic Unemployment Assistance

The Pandemic Unemployment Assistance program extends benefits to self-employed individuals, which would include independent contractors and sole proprietors who would not normally qualify for unemployment benefits. These individuals would have to self-certify that they were otherwise able to work but are unable to due to the coronavirus pandemic. It does not include those with the ability to work remotely with pay or individuals receiving sick leave or other paid leave benefits. According to the original law, these individuals would be covered for any weeks; they are unable to work because of the Pandemic between January 27, 2020, and December 31, 2020, limited to a total of 39 weeks. The weekly benefit amount is the weekly benefit amount authorized under the unemployment law of the State, where the covered individual was employed plus $600. The additional $600 is for a period of up to four months.

The new law changes this by extending the unemployment benefit period from December 31, 2020 to March 14, 2021. The $600 has been reduced to $300 for all weeks of unemployment beginning after December 26, 2020. Additionally, for those who have not exhausted their PUA benefits by March 14,2021, PUA will continue until the 50 weeks are exhausted or until any week beginning no later than April 4, 2021.

Recovery Rebates

The CARES Act contained a provision of $1,200 recovery rebates for individuals. These are considered refundable credits against a taxpayer’s 2020 income tax. These payments are limited by the Adjusted Gross Income (AGI) of the taxpayer. For single individuals with AGI under $75,000, they will receive the full $1,200. For single taxpayers with AGI greater than $75,000, the $1,200 amount is phased out by 5% of the amount AGI exceeds $75,0000 with the amount being reduced to $0 for taxpayers with AGI exceeding $99,000. For individuals filing as Head of Household, the $1,200 amount begins its phase out at $112,500 and is reduced to $0 for taxpayers with AGI greater than $136,500. Married taxpayers filing jointly are allowed a $2,400 rebate, which begins to phase out at $150,000 of AGI and is completely eliminated for taxpayers with AGI exceeding $198,000. There is also an additional $500 per child for qualifying dependent children under age 17. The government will electronically deposit or issue checks based on your most recently filed income tax return. If you have filed 2019, they will use 2019; if you have not yet filed, they will use your 2018 return. 

The new law changes the $1,200 payments to $600 ($1,200 for individuals filing a joint return) and $600 per qualifying dependent children under age 17. These payments will be based on your 2019 income tax filing. Individuals not required to file (they receive Social Security, Railroad Retirement or are a Specified Veterans Beneficiary) may provide information themselves or from the Commissioner of Social Security, Railroad Retirement Board or Secretary of Veterans Affairs.

Deferring Payroll Tax Obligations in Light of the Ongoing COVID-19 Disaster.

This was an executive order passed by President Trump in August of 2020 and defers payment of the 6.2% withholding on employees that earn under $4,000 bi-weekly or the equivalent amount with respect to other pay periods. The deferral is applicable to payroll checks from September 1, 2020 through December 31, 2020. The payments were originally to be deferred only and paid back between January 1, 2021 and April 30, 2021.

The new law allows these amounts to be paid beginning on January 1, 2021 through December 31, 2021.

Regulations or Guidance Clarifying Application of Education Expense Tax Deduction

Teachers are allowed up to a $250 tax deduction “above the Adjusted Gross Income (AGI) line on a tax return. An above the line deduction allows taxpayers who do not itemize their returns to benefit from the deduction and also slightly reduces AGI which is used in other areas of the return such as when computing a medical expense deduction (where expenses must exceed 7.5% of AGI before being considered a deduction).

The new law allows personal protective equipment (PPE), disinfectant and other supplies used for the prevention of the spread of COVID-19 to be counted for purposes of this deduction.

PAYROLL PROTECTION PROGRAM (PPP)

Clarification of Tax Treatment of Forgiveness of Covered Loans

The CARES Act provided if certain conditions were met, proceeds received under the PPP would be forgiven. Typically, an extinguishment of debt gives rise to taxable income. Let’s take an example where a taxpayer owes a credit card company $20,000 and settles the obligation for $8,000. The $12,000 extinguished becomes taxable income and the taxpayer would receive Form 1099-C showing the $12,000. Extinguished debt is not considered taxable income if there is an exception in the Internal Revenue Code. The CARES Act contained a provision classifying forgiven PPP funds as not taxable. The IRS issued Notice 2020-32 which stated that since forgiven PPP funds were not considered to be taxable income, then any expenses paid with those funds would not be considered deductions.

This was never the intent of Congress and the new law specifically allows expenses paid with forgiven PPP funds as deductions.

SIMPLIFIED FORGIVENESS APPLICATION

Recipients of loans of not more than $150,000 shall be forgiven by submitting a one-page certification regarding compliance with the loan terms.

PAYROLL PROTECTION PROGRAM (ROUND 2)

The law introduces a second round of PPP funding referred to as Second Draw Loans.

The eligibility requirements differ from the original PPP requirements:

• Entity cannot employ more than 300 people
• Must demonstrate at least a 25% reduction in gross receipts of the entity during any quarter in 2020 when compared to the same quarter in 2019
• There are different rules for entities that were in business for only part of 2019 or were established after 2019 but prior to February 15, 2020

The maximum loan amount is the lower of 2.5 times monthly payroll or $2,000,000. There is an exception for hotels (except Casinos), motels and restaurants. These entities have a maximum of the lower of 3.5 times monthly payroll of $2,000,000.

Forgiveness is the same as round 1 of PPP. Payroll costs must be at least 60% of the total forgiven amount.

Additional Eligible Expenses

This second round of PPP will allow the same expenses as the first round (payroll costs, rent, mortgage interest and utilities) but additionally will allow the following:

covered operations expenditure means a payment for any business software or cloud computing service that facilitates business operations, product or service delivery, the processing, payment, or tracking of payroll expenses, human resources, sales and billing functions, or accounting or tracking of supplies, inventory, records, and expenses.

covered property damage cost means a cost related to property damage and vandalism or looting due to public disturbances that occurred during 2020 that was not covered by insurance or other compensation

covered supplier cost means an expenditure made by an entity to a supplier of goods for the supply of goods that—

“(A) are essential to the operations of the entity at the time at which the expenditure is made; and

‘‘(B) is made pursuant to a contract, order, or purchase order—

‘‘(I) in effect at any time before the covered period with respect to the applicable covered loan; or

‘‘(ii) with respect to perishable goods, in effect before or at any time during the covered period with respect to the applicable covered loan.

Emergency Economic Injury Disaster Loans (EIDLs)

EIDLs were part of the CARES Act. The definition of businesses that are eligible for EIDLs is the same as entities eligible for the Paycheck protection program. These loans are intended to provide small businesses with funds to cover costs in response to the coronavirus crisis. Borrowers request up to a $10,000 emergency advance, which is paid within 3 days after the application is submitted. These funds can be used for paid sick leave for employees unable to work due to the direct effect of the coronavirus, payroll costs during business disruptions or substantial slowdowns, increased material costs incurred because materials are unavailable from the applicant’s original source due to interrupted supply chains, rent or mortgage payments and repaying obligations that cannot be met due to revenue losses. These loans were only available through December 31, 2020. The new law extends this date to December 31, 2021.

EXTENSION OF CREDITS FOR PAID SICK AND FAMILY LEAVE

The Act allows a 100% credit of the qualified sick leave wages. Below is a summary of qualified sick and family leave wages from the U.S. Department of Labor’s website. The new law extends the Families First Coronavirus Response Act from December 31, 2020 to March 31, 2021.

“The Families First Coronavirus Response Act (FFCRA or Act) requires certain employers to provide employees with paid sick leave or expanded family and medical leave for specified reasons related to COVID-19. The Department of Labor’s (Department) Wage and Hour Division (WHD) administers and enforces the new law’s paid leave requirements. These provisions will apply from the effective date through March 31, 2021.

Generally, the Act provides that employees of covered employers are eligible for:

Two weeks (up to 80 hours) of paid sick leave at the employee’s regular rate of pay where the employee is unable to work because the employee is quarantined (pursuant to Federal, State, or local government order or advice of a health care provider), and/or experiencing COVID-19 symptoms and seeking a medical diagnosis; or

Two weeks (up to 80 hours) of paid sick leave at two-thirds the employee’s regular rate of pay because the employee is unable to work because of a bona fide need to care for an individual subject to quarantine (pursuant to Federal, State, or local government order or advice of a health care provider), or to care for a child (under 18 years of age) whose school or child care provider is closed or unavailable for reasons related to COVID-19, and/or the employee is experiencing a substantially similar condition as specified by the Secretary of Health and Human Services, in consultation with the Secretaries of the Treasury and Labor; and

Up to an additional 10 weeks of paid expanded family and medical leave at two-thirds the employee’s regular rate of pay where an employee, who has been employed for at least 30 calendar days, is unable to work due to a bona fide need for leave to care for a child whose school or childcare provider is closed or unavailable for reasons related to COVID-19.”

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Hang in there and stay safe,

Jeff Skolnick, CPA, M.S. Taxation

Article by: Jeff Skolnick, CPA, M.S. Taxation

There are various entity types available for business. Your business may be structured as a sole proprietorship, partnership, S corporation or C corporation.  As I’ve mentioned before there are also LLCs and also LLPs (limited liability partnerships) but these are generally taxed as one of the first four entities I mentioned and are usually formed for legal liability, not tax issues.

Believe it or not when discussing the tax treatment of health insurance deductions for the owners, each of the four entities has a different tax treatment I’ve always found it a bit strange, but nonetheless the law is the law. I am now going to explain the treatment under each structure type.

C corporation. The treatment of health insurance paid for the owner(s) of a C corporation is very straightforward and simple. It is deducted as an expense of the corporation no different than health insurance premium payments paid for any employee. The owner gets no deduction on their personal income tax return and they do not have to report payments made on their behalf as income. They are treated exactly the same as any other employee of the corporation.

S corporation. The treatment of health insurance paid on behalf of S corporation shareholders if they own 2% or less of the company is exactly the same as it is for owners of a C corporation. If, however, the shareholder owns more than 2% of the corporation, then there is a different treatment. For these individuals premiums paid on their behalf are treated as wages to the shareholder for income tax purposes, but are not however, subject to Social Security, Medicare or FUTA taxes. The amount reported as compensation is the total amount paid for the shareholder, spouse and dependents.

There are limitations on this deduction. The first limitation is the deduction is not available for calendar months the shareholder or spouse are eligible to participate in another employer-subsidized health insurance plan. The second limitation is that in order to deduct the expense on his/her personal return “above the line” he/she must have taxable social security wages from the S corporation equal to or greater than the medical deduction. Above the line means the taxpayer is able to deduct the medical insurance before Adjusted Gross Income (AGI). The advantage to this is that the taxpayer receives the deduction whether or not they itemize their deductions.

I mentioned that wages added because of medical insurance premiums paid are not subject to payroll taxes but there must be payroll wages subject to these taxes in order to get the deduction. This means the shareholder must have wages outside of those added for medical insurance, paid to him/her by the S corporation in order to receive the deduction. For example, let’s say we have a 100% owner of an S corporation. Additionally, let’s say medical expenses paid on behalf of this shareholder, spouse and dependents is $18,000. The $18,000 added to the shareholder’s wages would not be subject to payroll taxes and therefore, the shareholder would have to have additional wages equal to or greater than $18,000 from the business in order to receive the deduction.

The health insurance plan must be owned and paid by the S corporation or the S corporation must reimburse the shareholder or pay the insurance company for a policy in the shareholder’s name in order for the taxpayer to receive the above the line deduction.

Payments made to a more than 2% shareholder’s HSA plan are also treated as wages and added to the shareholders wages.

Partnership. Payments made by a partnership on behalf of a partner that provides services to the partnership are treated as guaranteed payments. Guaranteed payments are deducted by the partnership and reported as income by the partner on his/her tax return. Guaranteed payments are subject to self-employment tax thereby satisfying the rule that the individual taking and “above the line” deduction on their personal income tax return has paid social security tax on an amount of income equal to or greater than the medical insurance premiums being deducted. The health insurance policy must be established under the name of the partnership or must be a direct reimbursement to the partner for a premium being paid. If this condition is not met, the partner will not receive an “above the line” deduction. Similar rules apply in the case of HSA payments. The payments for partners that provide services are included as a guaranteed payments. If the partner is not providing services, then it is considered a distribution (not deductible by the partnership, not included as income by the recipient, however keep in mind, since the partnership did not deduct the expense the partnership income will be higher and lastly, the partner can deduct the HSA contribution on their individual tax return).

Sole proprietorship. Sole proprietors can deduct premiums paid on behalf of themselves, their spouse, dependents and nondependent children under age 27. The individual must not be eligible to participate in a subsidized plan (one which an employer pays a portion of) from an employer of the individual or their spouse. The sole proprietor must have earned income from their business equal to or greater than the medical insurance being deducted. Once again, the government wants to make sure that in order to allow an “above the line” deduction, social security tax must have been paid on income equal to or greater than the medical insurance premiums being deducted.

The policy may be in the name of the business or the individual.

As you can see, the type of entity that you operate your business under can have a significant impact on how and when medical insurance premiums are deducted. I caution you here, as I do with many complicated areas of taxation. If you are an owner of a business and you would like to take an above the line deduction, please seek the help of a tax professional familiar with these rules.

Join me, Every Monday at 12:30pm (EST) here: https://www.facebook.com/jeffcpaworld/

If you’d like to book an appointment with me, please click on the link below:

Hang in there and stay safe,

Jeff Skolnick, CPA, M.S. Taxation