News and Updates this Month from Perelson Weiner

On Friday, the federal government rolled out its Paycheck Protection Program ("PPP", formerly referred to as PPL in our communique). This program provides small businesses with less than 500 employees the opportunity to borrow up to $10 million and the opportunity to have some or all of the loan forgiven to the extent it is used for payroll, rents, and certain other recurring expenses of the business during an eight week period between February 15, 2020 and June 30, 2020.

As one can imagine, there has been a mad rush to apply for the loans which could very well transform into government grants to small businesses. 

Questions and confusion reigns with respect to who is eligible and how to calculate the amount of the loan. The attached Forbes article authored by Tony Nitti articulates these questions and the general consensus of practitioners.  Paycheck Protection Program Loans: Three Things The SBA And Banks Need To Agree On Now. 

We are also providing you with the attached example and a template that quantifies the amount of loan available to your business using the consensus of the practitioners and banks that we've communicated with.  

We encourage you to contact your banks and submit your PPP loan application.  Should you have any questions, please don't hesitate to contact us.  We are here to help.

Please do not hesitate to contact with any questions or concerns. www.pwcpa.com 212 605 3100

We are sharing some recent news regarding the Treasury Department and the IRS regarding the April 15th tax deadline. The AICPA has been in conversations with them to secure filing and payment relief for taxpayers and tax preparers in light of the uncertainty and challenges caused by the spread of the Coronavirus (COVID-19) pandemic.

While it has not been enacted yet, and may not, the AICPA anticipates that Treasury and the IRS will announce this week an extension of the April 15th deadline by as much as 90 days, and a waiver of penalties and interest for most taxpayers.

Additionally, Treasury and the IRS are aware of the major deadline for businesses today, and the challenges facing taxpayers and tax preparers in meeting that deadline.  They have indicated that they would be generous in determining reasonable cause abatement of any penalties for taxpayers and tax preparers who are unable to file in a timely manner.

Regardless of whether an extension is in the works, we'd appreciate receiving your tax information as soon as possible so we can help by processing what needs and can be done now.

You can also visit the AICPA Coronavirus Resource Center for frequent updates and resources to help you manage your business at this time. Please feel encouraged to call your Perelson Weiner partner with any questions.

In light of the burgeoning Coronavirus economic fallout, on Friday March 27th Congress passed and the President signed the Coronavirus Aid, Relief, and Economic Security Act ("CARES"). The law provides $2 Trillion of economic stimulus to both individuals and businesses through loans, grants, tax refunds and expense deferral.

We are prioritizing here those opportunities which can potentially provide the greatest and most immediate benefits: 

Small Business Loan Programs: 

PAYCHECK PROTECTION LOANS

For businesses with fewer than 500 employees, including sole proprietors and nonprofits, the CARES Act provides Small Business Act (SBA) loans that can be applied for through your bank.  Up to $10 million of Paycheck Protection Loans  can be used to provide working capital to cover payroll and certain other operating expenses. In some circumstances, the amount borrowed that is disbursed for certain expenses incurred in the first 8 weeks will be forgiven tax free.  Amounts in excess of that are repayable monthly over 10 years. An additional deferral of 6 months to one year is also available.  SEE EXHIBIT 1* below for more details. 

EXPANDED SBA'S DISASTER LOAN PROGRAM 

These loans are available between January 31, 2020 andDecember 31, 2020. Businesses that apply are also eligible for a one-time grant of up to $10,000 even if they do not ultimately qualify for the loans. More businesses will qualify under the new rules, as approval requirements have been relaxed and payments can be deferred. 

PW OBSERVATIONS: 

Please check the SBA website or speak to your banker regarding applying for the loans.  The SBA has already placed a streamlined loan application on its website with respect to COVID-19 ECONOMIC INJURY DISASTER LOAN (SEE EXHIBIT 1* below). We understand that the SBA is updating its website and will have an online application for the PPL within the next several days. There is no guidance yet about the time needed to process the loan applications; however in our discussions with bankers, it will take up to 3-4 weeks before guidance is provided to administer and disburse the loan proceeds. We are here to help and available to assist you in referring bankers or SBA representatives

Payroll Tax Credit and Deferral: 

EMPLOYEE RETENTION CREDITS 

For businesses (including sole proprietors and nonprofits) whose (1) operations are fully or partially suspended as the result of government order or (2) whose gross year-over-year quarterly receipts have decreased by more than 50%,  the CARES Act provides a refundable credit against the employer's 6.2% share of Social Security payroll taxes. For employer's who averaged less than 100 employees in 2019, a credit of up to $5,000 per employee is available on 50% of wages paid to an employee between 3/12/2020 and 12/31/2020. Thus the first $10,000 of wages per employee will yield a $5,000 payroll tax credit.   The credit is also available to employers who averaged more than 100 employees in 2019 but only on those employees furloughed that the employer continues to pay during the shut-down. Those  businesses who take small business loans described above are not eligible for this credit.  

DEFERRAL OF EMPLOYER PAYROLL TAXES

The CARES Act allows the employer's share of the 6.2% Social Security tax that would otherwise be due from the date the Act passes to December 31, 2020, to be paid half (50%) on December 31, 2021, with the other half (50%) due on December 31, 2022.  The same rule applies to a self-employed individual with respect to half (50%) of their self-employment tax. No deferral is permitted to the extent of any loan forgiveness under the Paycheck Protection Loan Program described above. 

PW OBSERVATIONS: 

Please  check with your payroll processing provider as to (1) how to apply the credits against the employer payroll taxes and/or obtain a refund of the credit and (2) how to administer the deferral of payroll taxes.  We are here to help and can assist where necessary in explaining details of the opportunities to you and payroll providers. 

Utilization of Business and Net Operating Losses: 

DEDUCTION OF BUSINESS LOSSES 

For individual taxpayers the Tax Cuts and Jobs Act of 2017 (TCJA) limited business losses available to offset other income to $250,000 and $500,000 for single and married filers respectively, with the excess carrying over to future years.  The CARES Act suspends this law for 2018, 2019 and 2020.  Returns filed for 2018 (or 2019) can now be amended to fully deduct the losses against other income and claim a refund. 

NET OPERATING LOSSES 

The CARES Act allows 2018, 2019, and 2020 NOLs to be carried back up to 5 years and carried forward without limitation.  The CARES Act thus reverses the TCJA which had eliminated net operating loss carrybacks and limited the amount of income that carryforwards could offset in any given year to 80% of taxable income. The carryback enables recovery of taxes paid in prior years which also had higher individual and corporate rates. 

QUALIFIED IMPROVEMENT PROPERTY 

The CARES Act makes a technical correction to TCJA with respect to qualified improvement property [QIP] which (1) shortens the depreciable life to 15 years from 39 years and (2) allows for 100% bonus depreciation expense.   This change is retroactive to January 1, 2018, so if you have QIP property you may amend prior years' returns and achieve a greater deduction much sooner.   

MODIFICATION OF LIMITATION ON BUSINESS INTEREST 

For 2019 and 2020, the CARES Act increases the amount of interest expense that businesses are allowed to deduct currently to 50% of taxable EBIDTA from 30%.

PW OBSERVATIONS: 

PW will amend returns to recover taxes paid in 2018 by identifying clients who were subject to loss limitations in 2018 and; any resulting NOLs will be carried back in order to obtain additional tax refunds. We are also identifying clients who may significantly benefit from claiming bonus depreciation on Qualified Improvement Property and will evaluate amending such returns as well.

Individual Relief Provisions: 

Delays, without interest or penalties, from April 15th to July 15th, 2020 the due dates for returns and payment of taxes and first quarter 2020 estimated payments. (New York State has officially adopted the revised federal due date; other states have or are in the process of conforming. Certain Federal and local returns do not conform to the extended federal due date; PW will appropriately identify those situations so as to avoid interest and penalties)

Provides for payments of advanced "tax credits" of up to $1,200 per individual U.S. citizens and residents and $500 per child.  Payments are only available to Married Filing Joint and Single taxpayers with adjusted gross incomes below $198,000 and $99,000, respectively and are phased out for incomes above $150,000 and $75,000, respectively.  The payments will be based on 2018 returns, and/or for non-filers on social security numbers, or 2019, to the extent the return was filed. (We can assist to true up the credit where necessary.)

Required Minimum Distributions (RMDs) are waived for 2020. (We are awaiting clarification as to whether RMD distributions already taken this year can be recontributed to avoid current taxable income.)

Cash charitable contributions made in 2020 are not limited to 60% of the contribution base (contributions to donor advised funds do not qualify)

For individuals medically or financially affected by the coronavirus, there is a waiver of early withdrawal penalties on the first $100,000 of retirement plan distributions, the ability to recontribute the distributions to the plan within three years of distribution without any tax, and the option to pay any tax on distributions that are not recontributed over three years.

PW OBSERVATIONS: 

We are monitoring state and local developments to see which federal tax provisions are adopted in whole or in part. Many states including New York base taxable income on federal adjusted gross income with modifications. Some states, such as New Jersey and Connecticut, are based on gross income.

Please do not hesitate to contact with any questions or concerns. www.pwcpa.com 
212 605 3100

Perelson Weiner LLP Certified Public Accountants
299 Park Avenue,
New York, New York 10171-0002

EXHIBIT 1 – PPL

Addendum Paycheck Protection Loans

For businesses with fewer than 500 employees, including sole proprietors and nonprofits, the CARES Act provides Small Business Act (SBA) loans from February 15, 2020 through June 30, 2020 (the “covered period”). These loans are referred to as Paycheck Protection Loans (PPL) and are designed to keep people employed. 

The loans are repayable over ten years, subject to a 6 month to one-year deferral from date of loan.

No guarantees or collateralization is required of the business or its owners.

As discussed below the loans can be forgiven to the extent that in the first eight weeks of receiving the loan, the proceeds are expended on payroll costs, rent, mortgage interest, and/or utility payments.

The interest rate on the PPL cannot exceed 4%. Any portion of the loan that is not forgiven is generally repayable monthly with interest over a ten-year term subject to a deferment discussed below.

The maximum loan is limited to the lesser of:

• $10 million

• The sum of the average monthly “payroll costs” for the one-year period ending on the date the loan was made, multiplied by 2.5, plus any SBA disaster loan funded after January 31, 2020 that has been refinanced into a paycheck protection loan.

“Payroll costs” include:

• Wages, commissions, salaries, or similar compensation to an employee or independent contractor,

• Cash tips,

• Paid time off, including vacation, parental, family, medical or sick leave,

• Dismissal and/or separation pay,

• Group healthcare benefits, including insurance premiums,

• Retirement benefits, and

• State or local taxes assessed on the compensation of employees.

“Payroll costs” exclude:

•  Annual compensation for an employee greater than $100,000,

• Payroll taxes,

• Payments to an employee whose principal place of residence is outside the U.S., and

• Sick leave or family medical leave under the Coronavirus Relief Act where the employer receives a credit.

LOAN FORGIVENESS AND REPAYMENT PROVISIONS:

The CARES Act has a provision allowing for tax-free forgiveness of Paycheck Protection Loans to the extent the funds are used for payroll costs, rent, mortgage interest, and/or utility payments by the borrower during the first eight weeks after the loan date. Qualifying mortgages, leases and utility service must have commenced prior to February 15, 2020.

To seek forgiveness, a borrower must submit to the lender an application that includes documentation verifying the number of employees and pay rates, and cancelled checks showing mortgage, rent, or utility payments. Forgiveness amounts will be reduced for any employee cuts or reductions in wages.

PW Observation: It is unclear whether the loan proceeds can be deposited into general funds or whether they should be segregated to disburse “Payroll costs”, rent, mortgage interest, and/or utility payments. We suggest prudence dictates segregation.

Repayment of the remaining principal, interest and any fee balances can be deferred for at least 6 months and not more than a year. Borrowers may apply for deferral and lenders must allow for such deferral for at least 6 months.

 As noted above, Economic Injury Disaster Loans obtained after January 31, 2020 may be refinanced with proceeds of a PPL. In such cases the maximum available loan amount is increased by the amount of disaster loans being refinanced. The refinanced loan proceeds become subject to all the conditions and limitations of the Paycheck Protection Program explained above.

In the article below Harness Wealth, an advisory firm that helps clients identify financial opportunities, asked Danielle McCarthy, CPA, MST,  to speak about the difference between Tax Planning and Tax Preparation.

Please tell us about Perelson Weiner and your work there.

Perelson Weiner LLP, is a New York City based Certified Public Accounting firm that is dedicated to making a difference for its clients through our involvement in our clients’ personal and professional lives. As CPAs and trusted advisors, we are extensively involved in our clients’ personal, professional, business, philanthropic and estate planning aspects of their lives. The Firm was recently recognized by Forbes as one of America’s Top Recommended Tax and Accounting Firms.

I started with Perelson Weiner approximately three years ago as a Manager in the Tax Department and I have over 10 years of experience providing tax and advisory services to high net worth individuals and entrepreneurs. I have extensive experience working with a diverse clientele, including hedge fund and private equity managers to families with legacy wealth. I truly enjoy what I do and it brings me great pride knowing I have become a trusted advisor to my clients.

What is “tax planning”? What does long-term tax planning look like?

Tax planning is effectively managing a taxpayer’s financial situation to minimize the tax burden at the federal and state level for both the near and long-term.

Tax planning could be simple, such as making sure a taxpayer has enough withholdings to avoid tax estimate underpayment penalties, to incredibly complex scenarios, for example planning for a capital liquidation event. Long-term planning often involves ongoing discussions with clients about their long-term goals and what they hope to achieve with their wealth. It often includes working with families to capitalize on the increased estate tax exemption.

Under the Tax Cuts and Jobs Act, the maximum federal tax rate is 37%. This does not include the 3.8% “Obamacare” tax on net investment income. When factoring in certain state (and city) taxes, over 50% of a client’s taxable income could go towards paying federal and state tax liabilities. Additionally, the federal estate tax has a maximum tax rate of 40%. Without proper planning, the amount left to one’s heirs could be greatly diminished.

For our high net worth clients, we often have discussions about whether a Donor Advised Fund (DAF) or a private foundation is more in line with their charitable goals. Both are beneficial, but taxpayers who want to involve their family with charitable giving or exert more control over decisions are more inclined to establish a private foundation. It’s important to note that long-term tax planning is truly a team effort. Working together with attorneys, wealth advisors, and executive level employees most often results in the optimal tax structuring of a taxpayer’s financial situation.

Which types of people and situations would benefit most from tax planning?

Any taxpayer would benefit from tax planning, but the most opportunities arise for those taxpayers who have a more sophisticated financial picture. Taxpayers who have an interest in pass-through entities (partnerships or S-Corporations) or are beneficiaries of trusts are just some types of taxpayers who could benefit greatly from proper tax planning.

We regularly complete analyses of whether it’s beneficial for a trust to make a distribution to a beneficiary (thereby passing out income to the recipient) or to have the income remain within the trust and to be taxed at the trust level.

The trust income tax brackets are much more compressed than those of individual taxpayers, meaning a trust reaches the maximum 37% federal income tax bracket much quicker than an individual taxpayer. If a trust’s income will be taxed at 37% for federal income tax purposes, but the beneficiary is in a lower tax bracket (say 32% for federal income tax purposes), there is an opportunity to minimize the tax impact on that income.

It’s also important to know that a trust could make a distribution 65 days after year-end and have it “count” as a distribution for the preceding tax year. We recently completed this analysis for a client, which resulted in substantial federal and state tax savings.

What if I just file my taxes once a year? What opportunities or deadlines am I missing out on?

Taxpayers could lose out on tax planning opportunities by dealing with taxes only when tax season comes around. Why give Uncle Sam more when there are ways to manage and to plan for a taxpayer’s financial and tax situation more effectively? At Perelson Weiner, we are in constant contact with our clients about personal situations that arise as well as updating them on the new tax laws (the last few years have been very busy with all the changes created from the Tax Cuts and Jobs Act).

Under the Tax Cuts and Jobs Act, one of the most talked about provisions pertains to Qualified Opportunity Funds (QOFs). The tax benefits associated with investing capital gains in a QOF could be very favorable to taxpayers. A taxpayer could defer capital gains (either long-term or short-term) during the tax year if the funds are invested in a QOF. However, taxpayers have 180 days from the date of sale to invest in a QOF to obtain the beneficial provisions of the law.

If the taxpayer waits until the following April to complete or even to begin thinking about their taxes, they potentially lose out on this tax opportunity. This is just one example of the benefits a CPA or being in contact with your CPA on an ongoing basis can bring to a taxpayer.

What are some tax planning steps an individual can take on their own?

Tax planning does not have to be intimidating. If a taxpayer is comfortable managing their own investment portfolio, they might be able to self-review their unrealized losses regularly and determine whether it’s worthwhile to realize losses and mitigate any recognized gains. Taxpayers could also decide to “bundle” charitable contributions in a given tax year in order to maximize itemized deductions.

With the $10,000 cap on state and local tax deductions under the Tax Cuts and Jobs Act, many taxpayers found it was more beneficial to take the increased standard deduction rather than itemize deductions. Bundling charitable contributions is one way in which a taxpayer could increase their itemized deductions.

As a result of the Tax Cuts and Jobs Act, business owners taxes became increasingly ripe with opportunity for proactive tax planning. With the Qualified Business Income (199A) Deduction and certain state “workarounds” on the $10,000 State and Local Tax limitation, CPAs can speak to the ways to approach these planning opportunities and assist clients in enacting them.

In what ways can a CPA be helpful?

For taxpayers with a diverse portfolio, CPAs look at the entire picture and determine ways in which a taxpayer could minimize their tax burden, not only for income taxes, but for estate and gift tax purposes as well. At Perelson Weiner, we take an active approach in maintaining client relationships.

For example, I’ve had clients tell me they’re expecting their first child and that gives me a chance to talk about some of the opportunities available, such as having a wealthy grandparent directly pay the medical expenses (there are no gift tax consequences for the grandparent if the bill is paid directly to the medical institution) or discussing the benefits (and state by state differences) of opening up a College Savings Plan (529).

CPAs and financial advisors are available to help taxpayers achieve their financial goals and proper tax planning is one way for this to be accomplished. At Perelson Weiner, we are trusted advisors to our clients and we strive to always make a positive influence in their lives.