Yeo & Yeo Becomes a PrimeGlobal Member

Yeo & Yeo is pleased to announce that the firm was admitted as the newest member in North America for PrimeGlobal, one of the five largest associations of independent accounting firms in the world. PrimeGlobal will provide Yeo & Yeo with significant expertise and resources to meet growing client needs, both internationally and domestically.

“Our objective is to provide excellent opportunities for idea sharing and business referral to our member firms, with the result that PrimeGlobal members are known for their visionary business practices,” said Michelle Arnold, PrimeGlobal’s Chief Regional Officer, North America. “We are pleased to welcome Yeo & Yeo to our association, and excited to offer the clients of our member firms around the globe an excellent resource in Michigan through PrimeGlobal.”

As a PrimeGlobal member, Yeo & Yeo will receive a wide range of tools and resources to help furnish superior accounting, auditing, and management services to clients around the globe.

“After vetting several associations in search of the ideal fit for Yeo & Yeo, we choose PrimeGlobal for its impressive level of operational organization and superior resources available to meet the needs of our professionals, clients, and communities,” said Thomas Hollerback, Yeo & Yeo’s CEO. “The accessibility to premium international and multi-state expertise will bring long-term advantages for our firm. We look forward to building relationships and collaborating with an impressive global network of member firms and professionals.”

PrimeGlobal is comprised of approximately 300 highly successful independent public accounting firms with combined annual revenue of more than $2.5 billion. PrimeGlobal’s independent member firms house a combined total of more than 2,000 partners, 20,000 employees, and 800 offices in more than 80 countries around the globe. Through PrimeGlobal, independent member firms offer the strength and capabilities of a large, worldwide organization with technical depth and geographic reach impossible for a local firm alone.

For more information about PrimeGlobal, visit www.primeglobal.net.

The coronavirus (COVID-19) pandemic has affected many Americans’ finances. Here are some answers to questions you may have right now.

My employer closed the office and I’m working from home. Can I deduct any of the related expenses?

Unfortunately, no. If you’re an employee who telecommutes, there are strict rules that govern whether you can deduct home office expenses. For 2018–2025 employee home office expenses aren’t deductible. (Starting in 2026, an employee may deduct home office expenses, within limits, if the office is for the convenience of his or her employer and certain requirements are met.)

Be aware that these are the rules for employees. Business owners who work from home may qualify for home office deductions.

My son was laid off from his job and is receiving unemployment benefits. Are they taxable?

Yes. Unemployment compensation is taxable for federal tax purposes. This includes your son’s state unemployment benefits plus the temporary $600 per week from the federal government. (Depending on the state he lives in, his benefits may be taxed for state tax purposes as well.)

Your son can have tax withheld from unemployment benefits or make estimated tax payments to the IRS.

The value of my stock portfolio is currently down. If I sell a losing stock now, can I deduct the loss on my 2020 tax return?

It depends. Let’s say you sell a losing stock this year but earlier this year, you sold stock shares at a gain. You have both a capital loss and a capital gain. Your capital gains and losses for the year must be netted against one another in a specific order, based on whether they’re short-term (held one year or less) or long-term (held for more than one year).

If, after the netting, you have short-term or long-term losses (or both), you can use them to offset up to $3,000 ordinary income ($1,500 for married taxpayers filing separately). Any loss in excess of this limit is carried forward to later years, until all of it is either offset against capital gains or deducted against ordinary income in those years, subject to the $3,000 limit.

I know the tax filing deadline has been extended until July 15 this year. Does that mean I have more time to contribute to my IRA?

Yes. You have until July 15 to contribute to an IRA for 2019. If you’re eligible, you can contribute up to $6,000 to an IRA, plus an extra $1,000 “catch-up” amount if you were age 50 or older on December 31, 2019.

What about making estimated payments for 2020?

The 2020 estimated tax payment deadlines for the first quarter (due April 15) and the second quarter (due June 15) have been extended until July 15, 2020.

Need help?

These are only some of the tax-related questions you may have related to COVID-19. Contact us if you have other questions or need more information about the topics discussed above.

The information contained in this post may not reflect the most current developments, as the subject matter is extremely fluid and constantly changing. Please continue to monitor Yeo & Yeo’s COVID-19 Resource Center for ongoing developments. Readers are also cautioned against taking any action based on information contained herein without first seeking professional advice.

As a result of the coronavirus (COVID-19) crisis, your business may be using independent contractors to keep costs low. But you should be careful that these workers are properly classified for federal tax purposes. If the IRS reclassifies them as employees, it can be an expensive mistake.

The question of whether a worker is an independent contractor or an employee for federal income and employment tax purposes is a complex one. If a worker is an employee, your company must withhold federal income and payroll taxes, pay the employer’s share of FICA taxes on the wages, plus FUTA tax. Often, a business must also provide the worker with the fringe benefits that it makes available to other employees. And there may be state tax obligations as well.

These obligations don’t apply if a worker is an independent contractor. In that case, the business simply sends the contractor a Form 1099-MISC for the year showing the amount paid (if the amount is $600 or more).

No uniform definition

Who is an “employee?” Unfortunately, there’s no uniform definition of the term.

The IRS and courts have generally ruled that individuals are employees if the organization they work for has the right to control and direct them in the jobs they’re performing. Otherwise, the individuals are generally independent contractors. But other factors are also taken into account.

Some employers that have misclassified workers as independent contractors may get some relief from employment tax liabilities under Section 530. In general, this protection applies only if an employer:

Filed all federal returns consistent with its treatment of a worker as a contractor,
Treated all similarly situated workers as contractors, and
Had a “reasonable basis” for not treating the worker as an employee. For example, a “reasonable basis” exists if a significant segment of the employer’s industry traditionally treats similar workers as contractors.

Note: Section 530 doesn’t apply to certain types of technical services workers. And some categories of individuals are subject to special rules because of their occupations or identities.

Asking for a determination

Under certain circumstances, you may want to ask the IRS (on Form SS-8) to rule on whether a worker is an independent contractor or employee. However, be aware that the IRS has a history of classifying workers as employees rather than independent contractors.

Businesses should consult with us before filing Form SS-8 because it may alert the IRS that your business has worker classification issues — and inadvertently trigger an employment tax audit.

It may be better to properly treat a worker as an independent contractor so that the relationship complies with the tax rules.

Be aware that workers who want an official determination of their status can also file Form SS-8. Disgruntled independent contractors may do so because they feel entitled to employee benefits and want to eliminate self-employment tax liabilities.

If a worker files Form SS-8, the IRS will send a letter to the business. It identifies the worker and includes a blank Form SS-8. The business is asked to complete and return the form to the IRS, which will render a classification decision.

Contact us if you receive such a letter or if you’d like to discuss how these complex rules apply to your business. We can help ensure that none of your workers are misclassified.

Updated May 6, 2020, to include the new FAQ #43 extending safe-harbor repayment date.

The SBA’s Paycheck Protection Program (PPP) requires businesses to certify that “current economic uncertainty makes this loan request necessary.” New guidance was released April 23 that said companies that had other sources of liquidity might not qualify. Further, on May 5, the Treasury Department and SBA extended the PPP safe-harbor repayment date from May 7 to May 14.

The SBA’s original PPP loan application contained two vague, but critical, certifications the business must make. Specifically, the representative of the applicant was required to certify that:

“Current economic uncertaintymakes this loan request necessary to support the ongoing operations of the Applicant.”
“The funds will be used to retain workers and maintain payrollor make mortgage interest payments, lease payments, and utility payments, as specified under the Paycheck Protection Program Rule; I understand that if the funds are knowingly used for unauthorized purposes, the federal government may hold me legally liable, such as for charges of fraud.”

As of April 23, additional guidance was released requesting that companies that received or applied prior to the new guidance reaffirm their good faith by choosing to keep or return the funds by May 7, 2020. On May 5, the SBA issued new FAQ 43, extending the deadline for this safe harbor until May 14, 2020.

On April 23, Treasury issued FAQ – Question #31, which states, in part: “All borrowers must assess their economic need for a PPP loan under the standard established by the CARES Act and the PPP regulations at the time of the loan application. …Specifically, before submitting a PPP application, all borrowers should review carefully the required certification that ‘current economic uncertainty makes this loan request necessary to support the ongoing operations of the Applicant.’ Borrowers must make this certification in good faith, taking into account their current business activity and their ability to access other sources of liquidity sufficient to support their ongoing operations in a manner that is not significantly detrimental to the business.” FAQ 31 further states, “Any borrower that applied for a PPP loan prior to the issuance of this guidance and repays the loan in full by May 7, 2020, will be deemed by SBA to have made the required certification in good faith.”
- On May 5, Treasury and SBA released FAQ – Question #43 extending the repayment date for this safe harbor to May 14, 2020. Borrowers do not need to apply for this extension. This extension will be promptly implemented through a revision to the SBA’s interim final rule providing the safe harbor. SBA intends to provide additional guidance on how it will review the certification prior to May 14, 2020.
On April 28, Treasury Secretary Mnuchin announced the SBA “will review all loans in excess of $2 million, in addition to other loans as appropriate.”
On April 28, Treasury issued FAQ – Question #37, which makes it clear that the above-quoted statements in FAQ #31 apply to all businesses.
On April 29, Treasury also released FAQ Question #39, stating that the SBA will review files for PPP loans in excess of $2 million, in addition to other loans as appropriate, following the lender’s submission of the borrower’s loan forgiveness application. The outcome of SBA’s review of loan files will not affect SBA’s guarantee of any loan for which it complied with the lender obligations set forth in the PPP rules.

The deadline to return the funds to your SBA lender is extended to May 14, 2020. No action is needed if keeping the funds. If returning the funds, employers may be eligible for other available payroll tax relief credits.

Please note that pursuant to guidance the IRS issued late last week in IRS Notice 2020-32, taxpayers will not be able to deduct any expenses paid with PPP loans for which the taxpayer receives forgiveness. Given this new development, we recommend that clients consult with their Yeo & Yeo tax professional to plan for the tax impact related to this guidance.

If you have questions, please contact your Yeo & Yeo professional and visit Yeo & Yeo’s COVID-19 Resource Center, which is updated continuously, for additional information, updates, and many resources available to assist you.

The Families First Coronavirus Relief Act (FFCRA) and the Coronavirus Aid, Relief, and Economic Security Act (CARES Act) make two separate, but related, tax credits available to employers, including tax-exempt organizations, whose business is affected by the COVID-19 crisis.

The FFCRA provides small and mid-size businesses with fully refundable tax credits to reimburse them for the costs of paid sick and family leave wages to their employees for COVID-19-related leave.
The CARES Act encourages eligible employers to keep employees on their payroll by providing eligible employers with an employee retention tax credit. The CARES Act also permits employers to defer payment of their remaining 2020 Social Security payroll tax liabilities for up to two years.

The credits can help provide immediate cash flow. Read Yeo & Yeo’s COVID-19 Payroll Tax Relief Business Brief to learn about the provisions of both credits, eligibility, and the three ways to claim the credits.

Learn more about the COVID-19 Payroll Tax Relief Credits

Taking advantage of these credits can be a complex process for many employers, especially since guidance is still pending on specific aspects of the credits. Yeo & Yeo is closely monitoring the guidelines as they become available. Please contact us for assistance.

If you have outstanding loans to your children, grandchildren or other family members, consider forgiving those loans to take advantage of the current, record-high $11.58 million gift and estate tax exemption. Bear in mind that in 2026, the exemption amount will revert to $5 million ($10 million for married couples), indexed for inflation.

Under the right circumstances, an intrafamily loan can be a powerful estate planning tool because it allows you to transfer wealth to your loved ones free of gift taxes — to the extent the loan proceeds achieve a certain level of returns. But an outright gift is a far more effective way to transfer wealth, provided you don’t need the interest income and have enough unused exemption to shield it from transfer taxes.

Do intrafamily loans save taxes?

Generally, to ensure the desired tax outcome, an intrafamily loan must have an interest rate that equals or exceeds the applicable federal rate (AFR) at the time the loan is made. The principal and interest are included in the lender’s estate, so the key to transferring wealth tax-free is for the borrower to invest the loan proceeds in a business, real estate or other opportunity whose returns outperform the AFR.

The excess of these investment returns over the interest expense is essentially a tax-free gift to the borrower. Intrafamily loans work best in a low-interest-rate environment, when it’s easier to outperform the AFR.

Why forgive a loan?

An intrafamily loan is an attractive estate planning tool if you’ve already used up your exemption or if you wish to save it for future transfers. But if you have exemption to spare, forgiving an intrafamily loan allows you to transfer the entire loan principal plus any accrued interest tax-free, not just the excess of the borrower’s returns over the AFR.

It can be a strategy for taking advantage of the increased exemption amount before it disappears at the end of 2025. Of course, if you need the funds for your own living expenses, loan forgiveness may not be an option.

What about income taxes?

Before you forgive an intrafamily loan, consider any potential income tax issues for you and the borrower. In most cases, forgiving a loan to a loved one is considered a gift, which generally has no income tax consequences for either party.

Although forgiveness of a loan sometimes results in cancellation of debt (COD) income to the borrower, the tax code recognizes an exception for debts canceled as a “gift, bequest, devise or inheritance.” There’s also an exception for a borrower who’s insolvent at the time the debt is forgiven. But be careful: If there’s evidence that forgiving a loan isn’t intended as a gift — for example, if the borrower doesn’t have the cash needed to make the loan payments but isn’t technically insolvent — the IRS may argue that the borrower has COD income.

We can assist you in determining whether forgiving loans is a good strategy and, if it is, help implement that strategy without triggering unwanted tax consequences.

CARES Act allocation for Michigan schools
Schools received a memo announcing Michigan’s allocation of the Elementary and Secondary School Emergency Relief (ESSER) Fund portion of the Coronavirus Aid, Relief, and Economic Security (CARES) Act in mid-April. On April 23, 2020, the U.S. Department of Education (USED) published initial ESSER guidance to support state education agency implementation.

On April 24, 2020, the Michigan Department of Education (MDE) released a memo stating they would apply to USED for the ESSER funding immediately. It is anticipated that the distribution of the USED funds will be based upon the fiscal year 2019-20 Title I, Part A funding formula and will be allowed to be used through September 30, 2022.

The ESSER funding is allowable for several uses not limited to, but including:

Coordination of preparedness and response efforts to prevent, prepare for and respond to coronavirus
Providing principals and other school leaders with the resources necessary to address the needs of their schools
Activities to address the unique needs of low-income children or students, children with disabilities, English learners, racial and ethnic minorities, students experiencing homelessness, and foster care youth, including how outreach and service delivery will meet the needs of each population.
Developing and implementing procedures and systems to improve the preparedness and response efforts
Training and professional development for staff on sanitation and minimizing the spread of infectious diseases
Purchasing supplies to sanitize and clean the facilities
Planning for and coordinating during long-term closures
Purchasing educational technology
Providing mental health services
Planning and implementing activities related to summer learning and supplemental afterschool program
Other activities that are necessary to maintain the operation and continuity of services

These will be one-time funds, and schools should allocate and spend the funds wisely.

Read the memo from MDE.

State Office Budget Presentation
The State Budget Office (SBO) provided information on April revenue and the anticipated May Revenue Estimating Conference. The SBO recommends that schools consider the following actions right now:

Mitigate expenses for the current fiscal year.
Hold off on large projects or contracts, if possible.
Start looking at various budget scenarios for the next fiscal year. At this time, recommendations have shown schools to anticipate three budget scenarios for fiscal 2021, including possible reductions of $500, $750, and $1,000 in per-pupil funding.

View the April 2020 SBO presentation on the budget and the ESSER funding.

We will watch the actual sales tax revenues during the upcoming months, the extent that federal funds will be freed up to mitigate the losses to the school aid fund, and how much of the state’s Budget Stabilization Fund the Governor and legislature will make available for state aid.

Contact your Yeo & Yeo professional if you have questions or need assistance.

I hope you and yours continue to do well. With Governor Whitmer extending the stay-at-home order, Yeo & Yeo offices will remain closed through May 1.

Nearly 100% of our professionals are safely working from home and are available via email, phone, online meetings and video conferencing to continue to serve you. We encourage you to use our client-friendly portals for the safe and secure transfer of documents.

Many of you are looking to understand how the CARES Act and new SBA relief programs apply to your business. Our COVID-19 Resource Center continues to offer new regulatory updates and resources, so please continue to check it every day. And if you need help navigating any of this, we’re here to help.

On a personal note, I want to share how proud and inspired I am by the way our professionals have risen to this challenge with flexibility, resilience and an unwavering commitment to care for our clients’ needs while balancing their personal and family situations. You – our valued clients – are truly at the heart of what we do.

I also want to recognize our first responders and frontline heroes, many of whom are our clients and friends — thank you for your bravery and selfless efforts for us.

Stay Safe. Stay Healthy.

The novel coronavirus (COVID-19) pandemic and the resulting economic fallout is dealing a crushing blow to charitable organizations. Indeed, during a time when food banks, disaster relief, and other nonprofit services are needed most by the public, their funding is suffering due to canceled fundraising events and other factors.

If philanthropy is an important part of your legacy, now is a good time to make as many donations as possible. Your gifts reduce your taxable estate, and the Coronavirus Aid, Relief, and Economic Security (CARES) Act has expanded charitable contribution deductions.

CARES Act incentives
Individual taxpayers can take advantage of a new above-the-line $300 deduction for cash contributions to qualified charities in 2020. “Above-the-line” means the deduction reduces adjusted gross income (AGI) and is available to taxpayers regardless of whether they itemize deductions.

The CARES Act also loosens the limitation on charitable deductions for cash contributions made to public charities in 2020, boosting it from 60% to 100% of AGI. No connection between the contributions and COVID-19 is required.

Place restrictions on contributions
Before making donations, it’s wise to take steps to ensure that they’re used to fulfill your intended charitable purposes. Outright gifts may be risky, especially large donations that will benefit a charity over a long period of time.

Even if a charity is financially sound when you make a gift, there are no guarantees it won’t suffer financial distress, file for bankruptcy protection, or even cease operations down the road. The last thing you likely want is for a charity to use your gifts to pay off its creditors or for some other purpose unrelated to the mission that inspired you to give in the first place.

One way to help preserve your charitable legacy is to place restrictions on the use of your gifts. For example, you might limit the use of your funds to assisting a specific constituency or funding medical research. These restrictions can be documented in your will or charitable trust or in a written gift or endowment fund agreement.

In addition to restricting your gifts, it’s a good idea to research the charities you’re considering, to ensure that they use their funds efficiently and effectively. One powerful online research tool is the IRS’s Tax Exempt Organization Search. The tool provides access to information about charitable organizations, including Form 990 information returns, IRS determination letters, and eligibility to receive tax-deductible contributions.

Doing your part
During this time of national emergency, charitable organizations need your donations more than ever as demand on them is on the rise. Making gifts benefits your overall estate plan by reducing your estate’s size, and the CARES Act provides additional charitable giving incentives. Contact us for help in making charitable gifts through your estate plan.

Paycheck Protection Program to be Replenished

President Trump signed a $484 billion coronavirus bill into law that includes $370 billion of additional money for programs administered by the U.S. Small Business Administration (SBA), as well as more funding for hospitals and testing.

Paycheck Protection Program
Banks have said they process SBA Paycheck Protection Program (PPP) loans on a first-come, first-served basis, and many continued accepting applications after the program’s initial funds were exhausted. Small-business owners should check with their lender to determine where they stand in the process, and if anything further is required of them at this time.

If you applied for a PPP loan when the program was first introduced, and didn’t get an answer, you do not need to reapply for the second round. Many lenders are continuing to process loan applications that didn’t get funded the first time around. You may be near the front if you applied shortly after the program got up and running April 3, but that depends on whether your application is complete and accurate and how your lender may be prioritizing loan applications.

While it isn’t too late for business owners who haven’t yet applied, demand is incredibly high. Reach out to your lender as soon as possible. The program is open to virtually every small business that has been adversely affected by COVID-19, including sole proprietors, self-employed individuals, independent contractors and nonprofits.

For more information, contact us, read our FAQs on Payroll Protection Program.

Yeo & Yeo CPAs & Business Consultants, a leading Michigan accounting firm, has been named one of West Michigan’s Best and Brightest Companies to Work For by the Michigan Business & Professional Association (MBPA) for the sixteenth consecutive year. Yeo & Yeo and the other winning companies will be honored at the MBPA’s digital conference and awards celebration on May 12.

“Being recognized as one of the Best and Brightest Companies to Work For is an honor for us. We are very proud to be listed among prominent companies not only in the greater Kalamazoo area, but also those in many other large Michigan cities such as Grand Rapids and Mt. Pleasant,” says Carol Patridge, CPA, managing principal of Yeo & Yeo’s Kalamazoo office.

Yeo & Yeo is proud to offer more than 200 employees rewarding careers in the accounting industry. Yeo & Yeo develops future leaders through its award-winning CPA certification bonus program, in-house training department, professional development training and formal mentoring while sustaining work-life balance.

Ali Barnes, CPA, managing principal of Yeo & Yeo’s Alma office, says, “This recognition is a testament to our dedicated employees and the culture we have built. I’m happy to see employees reporting that they are engaged and enriched through their work.”

The annual competition is a program of the Michigan Business & Professional Association and identifies organizations that display a commitment to exceptional human resources practices and employee enrichment. An independent research firm evaluates organizations on a list of key metrics.

In these trying times of dealing with the Coronavirus pandemic, local governments find themselves on the front lines providing a wide variety of services for their residents. The federal government, through legislation such as the Families First Coronavirus Response Act (FFCRA) and the Coronavirus Aid, Relief, and Economic Security (CARES) Act, has provided a wide variety of resources to many segments of the population but notably excludes local governments from most of the aid programs. How are local governments expected to deal with rising costs associated with necessary services, while simultaneously planning for revenue reductions both present and future? This article is a summary of what we have learned to date, much of which came from a Treasury webinar that was held on April 20, 2020.

In terms of economic impacts that will affect local government revenue streams, the data is incomplete and conditions are changing fast, but some trends are emerging:

More than one million Michiganders have filed for unemployment since March 5.
Revenue shortfalls at the State level are expected to be about $2.6 billion for the current fiscal year and $3.1 billion for the 2020-21 fiscal year.
Sales tax collections are expected to be down 50% for April and May.
Constitutional revenue sharing payments scheduled to go out on April 30 are unaffected by recent events and should exceed January estimates due to increased sales tax collections in January and February. The June 30 payment will be based on March and April sales tax collections, so therefore it can be anticipated to be lower by possibly as much as 50%.
Statutory revenue sharing payments are based on State appropriations, so the April 30 payment should not be affected.
Local Community Stabilization Authority personal property tax reimbursements, as well as 911 fees disbursed to counties, are currently scheduled to be made in May. These payments are dependent on collections and can therefore be expected to decrease as well, but it is unclear at this time as to how much of a decrease to expect.

The CARES Act does provide some funding to the largest local units (over 500,000 in population), which only encompasses the State of Michigan and five large local governments in the State. The State of Michigan will also receive about $3.1 billion in aid under the Act but it is unclear whether any of that will be passed through to smaller local units. Other programs have received increased funding, but none of those will help address general revenue shortfalls. Those programs are as follows:

Transit programs
Community Development Block Grants
Community Services Block Grants
Federally Qualified Health Centers
Food and Nutrition Supports
Housing and Homelessness Supports
Low Income Home Energy Assistance
Election Security
Byrne Justice Grants

The Federal Emergency Management Agency (FEMA) has grant dollars available under its Public Assistance Grant Program to reimburse local governments for expenditures related to providing emergency protective measures. This program is administered through the Michigan State Police, and applications are due on April 30.

The Michigan Department of Treasury has established a website for COVID-19 resources at michigan.gov/treasury. In addition to these resources, the Michigan Municipal League, Michigan Association of Counties, and Michigan Townships Association also have COVID-19 pages on their websites.

Property taxes being levied for the upcoming summer and winter tax seasons are not anticipated to be affected by the COVID-19 crisis, as the taxable values and millage rates are already set at this point in the tax calendar.

For the time being, local governments can take the following actions now to be as prepared as possible for rapidly changing conditions that will affect the financial health of their local unit:

Review all revenue streams to plan for potential reductions.
Begin conversations now about controlling costs and preparing for reductions in spending.
Keep up the basics of management and control.
The tax calendar hasn’t changed; communities will send tax notices on the same calendar as always, per statute.

As always, Yeo & Yeo is here to assist our clients in any way possible with this or any other issue you may have. Please do not hesitate to reach out if we can be of assistance.

Millions of eligible Americans have already received their Economic Impact Payments (EIPs) via direct deposit or paper checks, according to the IRS. Others are still waiting. The payments are part of the Coronavirus Aid, Relief, and Economic Security (CARES) Act. Here are some answers to questions you may have about EIPs.

Who’s eligible to get an EIP?

Eligible taxpayers who filed their 2018 or 2019 returns and chose direct deposit of their refunds automatically receive an Economic Impact Payment. You must be a U.S. citizen or U.S. resident alien and you can’t be claimed as a dependent on someone else’s tax return. In general, you must also have a valid Social Security number and have adjusted gross income (AGI) under a certain threshold.

The IRS also says that automatic payments will go to people receiving Social Security retirement or disability benefits and Railroad Retirement benefits.

How much are the payments?

EIPs can be up to $1,200 for individuals, or $2,400 for married couples, plus $500 for each qualifying child.

How much income must I have to receive a payment?

You don’t need to have any income to receive a payment. But for higher income people, the payments phase out. The EIP is reduced by 5% of the amount that your AGI exceeds $75,000 ($112,500 for heads of household or $150,000 for married joint filers), until it’s $0.

The payment for eligible individuals with no qualifying children is reduced to $0 once AGI reaches:

$198,000 for married joint filers,
$136,500 for heads of household, and
$99,000 for all others

Each of these threshold amounts increases by $10,000 for each additional qualifying child. For example, because families with one qualifying child receive an additional $500 Payment, their $1,700 Payment ($2,900 for married joint filers) is reduced to $0 once adjusted gross income reaches:

$208,000 for married joint filers,
$146,500 for heads of household,
$109,000 for all others

How will I know if money has been deposited into my bank account?

The IRS stated that it will send letters to EIP recipients about the payment within 15 days after they’re made. A letter will be sent to a recipient’s last known address and will provide information on how the payment was made and how to report any failure to receive it.

Is there a way to check on the status of a payment?

The IRS has introduced a new “Get My Payment” web-based tool that will: show taxpayers either their EIP amount and the scheduled delivery date by direct deposit or paper check, or that a payment hasn’t been scheduled. It also allows taxpayers who didn’t use direct deposit on their last-filed return to provide bank account information. In order to use the tool, you must enter information such as your Social Security number and birthdate. You can access it here: https://bit.ly/2ykLSwa

I tried the tool and I got the message “payment status not available.” Why?

Many people report that they’re getting this message. The IRS states there are many reasons why you may see this. For example, you’re not eligible for a payment or you’re required to file a tax return and haven’t filed yet. In some cases, people are eligible but are still getting this message. Hopefully, the IRS will have it running seamlessly soon.

The law providing relief due to the coronavirus (COVID-19) pandemic contains a beneficial change in the tax rules for many improvements to interior parts of nonresidential buildings. This is referred to as qualified improvement property (QIP). You may recall that under the Tax Cuts and Jobs Act (TCJA), any QIP placed in service after December 31, 2017 wasn’t considered to be eligible for 100% bonus depreciation. Therefore, the cost of QIP had to be deducted over a 39-year period rather than entirely in the year the QIP was placed in service. This was due to an inadvertent drafting mistake made by Congress.

But the error is now fixed. The Coronavirus Aid, Relief, and Economic Security (CARES) Act was signed into law on March 27, 2020. It now allows most businesses to claim 100% bonus depreciation for QIP, as long as certain other requirements are met. What’s also helpful is that the correction is retroactive and it goes back to apply to any QIP placed in service after December 31, 2017. Unfortunately, improvements related to the enlargement of a building, any elevator or escalator, or the internal structural framework continue to not qualify under the definition of QIP.

In the current business climate, you may not be in a position to undertake new capital expenditures — even if they’re needed as a practical matter and even if the substitution of 100% bonus depreciation for a 39-year depreciation period significantly lowers the true cost of QIP. But it’s good to know that when you’re ready to undertake qualifying improvements that 100% bonus depreciation will be available.

And, the retroactive nature of the CARES Act provision presents favorable opportunities for qualifying expenditures you’ve already made. We can revisit and add to documentation that you’ve already provided to identify QIP expenditures.

For not-yet-filed tax returns, we can simply reflect the favorable treatment for QIP on the return.

If you’ve already filed returns that didn’t claim 100% bonus depreciation for what might be QIP, we can investigate based on available documentation as discussed above. We will evaluate what your options are under Revenue Procedure 2020-25, which was just released by the IRS.

If you have any questions about how you can take advantage of the QIP provision, don’t hesitate to contact us.

At long last, Congress passed legislation to correct a drafting error related to real estate qualified improvement property (QIP). The correction is part of the Coronavirus Aid, Relief, and Economic Security (CARES) Act, which was signed into law on March 27, 2020. The correction retroactively allows real property owners to depreciate QIP faster than before. Here’s how it could lower your tax bill for 2018 and beyond.

Background

When drafting the Tax Cuts and Jobs Act (TCJA) in 2017, members of Congress made it clear that they intended to allow 100% first-year bonus depreciation for real estate QIP placed in service in 2018 through 2022. Congress also intended to give you the option of claiming 15-year straight-line depreciation for QIP placed in service in 2018 and beyond.

QIP is defined as an improvement to an interior portion of a nonresidential building that’s placed in service after the date the building was first placed in service. However, QIP doesn’t include any expenditures attributable to:

The enlargement of the building,
Any elevator or escalator, or
The building’s internal structural framework.

Due to a drafting error, however, the intended first-year bonus depreciation break for QIP never made it into the actual statutory language of the TCJA. The only way to fix the mistake was to make a so-called technical correction to the statutory language.

Congress Fixes the Error

The CARES Act finally makes that correction. As a result, QIP is now included in the Internal Revenue Code’s definition of 15-year property. In other words, it can be depreciated over 15 years for federal income tax purposes.

In turn, that classification makes QIP eligible for first-year bonus depreciation. In other words, real estate owners can now claim 100% first-year bonus depreciation for QIP that’s placed in service in 2018 through 2022.

Important: The technical correction has a retroactive effect for QIP that was placed in service in 2018 and 2019. Before the correction, QIP placed in service in those years generally had to be treated as nonresidential real property and depreciated over 39 years using the straight-line method.

15-Year Depreciation vs. 100% First-Year Bonus Depreciation

Claiming 100% first-year bonus depreciation for QIP expenditures makes sense if your primary objective is to minimize taxable income for the year the QIP is placed in service. But should that be your primary objective? The rules are complex. But there are three reasons you might choose to depreciate QIP over 15 years, rather than claim 100% first-year bonus depreciation:

1. You may qualify for a lower tax rate on the gain from depreciation when you sell the property. When you sell property for which you’ve claimed 100% bonus depreciation for QIP expenditures, any taxable gain up to the amount of the bonus depreciation is treated as high-taxed ordinary income rather than capital gain. Under the current federal income tax regime, ordinary income recognized by an individual taxpayer can be taxed at rates as high as 37%.

In contrast, if you depreciate QIP over 15 years using the straight-line method, the current maximum individual federal rate on long-term gain attributable to that depreciation is “only” 25%. The gain is so-called “unrecaptured Section 1250 gain,” which is basically a special category of long-term capital gain. Higher income individuals may also owe the 3.8% net investment income tax on both ordinary income gain and long-term gain attributable to real estate depreciation.

The point is, claiming 100% bonus depreciation for QIP expenditures on a property can cause a higher tax rate on part of your gain when you eventually sell the property. Of course, if you don’t anticipate selling for many years, this consideration is less important.

2. Depreciation deductions may be more valuable in future years, if Congress increases tax rates or you’re in a higher tax bracket. When you claim 100% first-year bonus depreciation for QIP expenditures, your depreciation deductions for future years are reduced by the bonus depreciation amount. If tax rates go up, you’ve effectively traded more valuable future-year depreciation write-offs for a less-valuable first-year bonus depreciation write-off. Of course, there’s no certainty about where future tax rates are headed.

3. Claiming 100% bonus depreciation may lower your deduction for qualified business income (QBI) from a so-called “pass-through” entity, such as a sole proprietorship, partnership, limited liability company or S corporation. An individual taxpayer can claim a federal income tax deduction for up to 20% of qualified business income (QBI) from an unincorporated business activity. However, the QBI deduction from an activity can’t exceed 20% of net income from that activity for the year, calculated before the QBI deduction.

Net income from the activity of renting out nonresidential rental property will usually count as QBI. But claiming 100% first-year bonus depreciation for QIP expenditures for the property will lower the net income and potentially result in a lower QBI deduction.

In addition, the QBI deduction for a year can’t exceed 20% of your taxable income for that year, calculated before the QBI deduction and before any net capital gain (net long-term capital gains in excess of net short-term capital losses plus qualified dividends). So, moves that reduce your taxable income — such as claiming 100% bonus depreciation for QIP expenditures — can potentially have the adverse side effect of reducing your allowable QBI deduction.

Important: The QBI deduction may be a use-it-or-lose it proposition, because it’s scheduled to expire after 2025. And it could disappear sooner, depending on political developments. If you forgo claiming bonus depreciation, your QBI deduction may be higher — and the foregone depreciation isn’t lost. You’ll just deduct it in later years when write-offs also might be more valuable because tax rates are higher.

Amended Return Opportunity

The CARE Act’s technical correction retroactively affects how you can depreciate QIP that was placed in service in 2018 and 2019. Your QIP depreciation options are better than before the correction. So, you may benefit from amending your 2018 or 2019 federal income tax returns already filed. Contact your tax advisor to determine the right course of action based on your situation.

The coronavirus (COVID-19) pandemic has shut down many sectors of the U.S. economy, causing widespread job losses. Over 10 million Americans applied for unemployment benefits in March, according to the U.S. Department of Labor. And far more claims are expected in April. Some economists predict that the unemployment rate could rise to Depression-era levels of 10% to 15% before the crisis ends (compared to 3.5% in February 2020).

To help curb layoffs, Congress has created a new federal income tax credit for employers that keep workers on their payrolls. The credit amount equals 50% of eligible employee wages paid by an eligible employer in a 2020 calendar quarter. It’s subject to an overall wage cap of $10,000 per eligible employee. Here are the details.

Eligible Employers

Eligible employer status for the 50% employee retention credit is determined on a 2020 calendar quarter basis. The credit is available to employers, including nonprofits, whose operations have been fully or partially suspended during a 2020 calendar quarter as a result of an order from an appropriate governmental authority that limits commerce, travel or group meetings due to COVID-19.

The credit can also be claimed by employers that have experienced a greater-than-50% decline in gross receipts for a 2020 calendar quarter compared to the corresponding 2019 calendar quarter. However, the credit is disallowed for quarters following the first calendar 2020 quarter during which gross receipts exceed 80% of gross receipts for the corresponding 2019 calendar quarter.

To illustrate, suppose ACE, a limited liability company (LLC), reports the following quarterly gross receipts for 2019 and 2020:

	First Quarter	Second Quarter	Third Quarter
2019 Gross Receipts	$210,000	$230,000	$250,000
2020 Gross Receipts	$180,000	$100,000	$230,000
2020 as % of 2019	86%	43%	92%

In this example, ACE had a greater-than-50% decline in gross receipts for the second quarter of 2020. So, ACE is an eligible employer for purposes of the 50% employee retention credit for the second and third quarters of 2020. For the fourth quarter of 2020, ACE is ineligible for the credit because its gross receipts for the third quarter of 2020 exceeded 80% of gross receipts for the third quarter of 2019.

Eligible Wages

The 50% employee retention credit is available to cover eligible wages paid between March 13, 2020, and December 31, 2020. For an eligible employer that had an average of 100 or fewer full-time employees in 2019, all employee wages are eligible for the credit (subject to the overall $10,000 per-employee wage cap), regardless of whether employees are furloughed due to COVID-19.

For an employer that had more than 100 full-time employees in 2019, only wages of employees who are furloughed or given reduced hours due to the employer’s closure or reduced gross receipts are eligible for the credit (subject to the overall $10,000 per-employee wage cap).

For purposes of the 50% employee retention credit, eligible wages are increased to include qualified health plan expenses allocable to those wages.

Important: The amount of wages eligible for the credit is capped at a cumulative total of $10,000 for each eligible employee. The $10,000 cap includes allocable health plan expenses.

For example, Alpha Co. is an eligible employer that pays $10,000 in eligible wages to an employee (Art) in the second quarter of 2020. The 50% employee retention credit is allowed for the wages. The credit equals $5,000 (50% × $10,000).

Alpha pays another employee (Bart) $8,000 in eligible wages in the second quarter of 2020 and another $8,000 in the third quarter of 2020. The 50% employee retention credit for wages paid to Bart in the second quarter is $4,000 (50% x $8,000). The credit for wages paid to Bart in the third quarter is limited to $1,000 (50% x $2,000) due to the $10,000 wage cap. Any additional wages paid to Bart are ineligible for the credit due to the $10,000 wage cap.

Additional Rules and Restrictions

The 50% employee retention credit is not allowed for:

Emergency sick leave wages or emergency family leave wages that small employers (those with fewer than 500 employees) are required to pay under the Families First Coronavirus Response Act (FFCRA). Those mandatory leave payments are covered by federal payroll tax credits granted by the FFCRA.
Wages taken into account for purposes of claiming the pre-existing Work Opportunity Credit under Internal Revenue Code (IRC) Section 21.
Wages taken into account for purposes of claiming the pre-existing employer credit for paid family and medical leave under IRC Sec. 45S.

In addition, the 50% employee retention credit isn’t available to a small employer that receives a potentially forgivable Small Business Administration (SBA) guaranteed Small Business Interruption Loan issued pursuant to the Paycheck Protection Program under the CARES Act. That program has been funded with $349 billion, so far. In general, a small employer for purposes of the Paycheck Protection Program is one that has fewer than 500 employees — including a sole proprietorship, self-employed person or private nonprofit organization. Businesses in certain industries can have more than 500 employees if they meet SBA size standards for those industries. For additional information on the Paycheck Protection Program, visit the SBA website or contact your CPA.

Need Help?

No employer wants to lay off employees during these difficult times, but sometimes it’s the only way to stay afloat. The 50% employee retention credit rewards employers that can afford to keep workers on the payroll during the crisis. For more information about this tax saving opportunity, contact your tax advisor.

Technically, an eligible employer’s allowable 50% employee retention credit for a calendar quarter is offset against the employer’s liability for the Social Security tax component of federal payroll taxes. That component equals 6.2% of the first $137,700 of an employee’s 2020 wages.

But the credit is a so-called “refundable” credit. That means an employer can collect the full amount of the credit even if it exceeds the aforementioned federal payroll tax liability.

The allowable credit can be used to offset all of an employer’s federal payroll tax deposit liability, apparently including federal income tax, Social Security tax and Medicare tax withheld from employee paychecks. If an employer’s tax deposit liability isn’t enough to absorb the credit, the employer can apply for an advance payment of the credit from the IRS. Your tax advisor can help you submit the correct form to the IRS.

The following example shows the mechanics of the refundable credit: Beta Corporation is an eligible employer. Beta paid $20,000 of eligible wages and is, therefore, entitled to a 50% employee retention credit of $10,000. The company has an upcoming quarterly federal payroll tax deposit obligation of $8,000, which includes taxes withheld from its employees on wage payments made during that quarter. Beta can keep the entire $8,000 as part of its allowable 50% employee retention credit — and then the company can file a request for an advance payment of the remaining $2,000 credit.

The Coronavirus Aid, Relief, and Economic Security (CARES) Act includes several changes that encourage charitable giving during the coronavirus (COVID-19) crisis. This is welcome news for certain public charities, including churches, educational organizations, hospitals, medical research organizations and food banks. Here’s an overview of the tax rules for deducting charitable contributions — and how they’ve temporarily changed for 2020.

Background on Deductions for Individuals

The tax law allows individuals who itemize to claim a federal income tax deduction for making qualified contributions to certain public charities. However, from 2018 through 2025, the Tax Cuts and Jobs Act (TCJA) nearly doubled the standard deduction to $12,000 for single filers and $24,000 for joint filers. (These amounts are adjusted annually for inflation. For 2020, they are $12,400 for singles and $24,800 for joint filers.)

The TCJA also reduces or eliminates several itemized deductions. As a result, millions of taxpayers who previously itemized deductions claimed the standard deduction for 2018 and 2019, thereby eliminating the tax benefit from their charitable donations.

On the flipside, the TCJA also encourages charitable giving by increasing the income-based limits on charitable deductions of cash for individuals from 50% to 60% of adjusted gross income (AGI). If the aggregate amount of an individual’s contributions for the year exceeds 60% of AGI, then the excess is carried forward and is treated as a deductible charitable contribution in each of the five succeeding tax years.

Background on Deductions for Businesses

Businesses also may be eligible for a federal income tax deduction for charitable contributions. Under tax law, a corporation’s charitable deduction for cash contributions generally can’t exceed 10% of its taxable income, as computed with certain modifications. If a corporation’s charitable contributions for a year exceed the 10% limitation, the excess is carried over and deducted for each of the five succeeding years in order of time, to the extent the sum of carryovers and contributions for each of those years does not exceed 10% of taxable income.

A donation of food inventory to a charitable organization that will use it for the care of the ill, the needy or infants is deductible in an amount up to:

The food inventory’s basis, plus
Half the gain that would be realized on the sale of the food (not to exceed twice the basis).

In the case of a C corporation, the deduction can’t exceed 15% of the corporation’s income. In the case of a taxpayer other than a C corporation, the deduction can’t exceed 15% of aggregate net income of the taxpayer for that tax year from all trades or businesses from which those contributions were made, computed without regard to the taxpayer’s charitable deductions for the year.

CARES Act Changes

The CARES Act makes four significant liberalizations to the rules governing charitable deductions:

For 2020, individuals will be able to claim an above-the-line deduction of up to $300 for cash contributions made to certain public charities. This rule effectively allows a limited charitable deduction to taxpayers who claim the standard deduction (rather than itemizing deductions) on their 2020 federal income tax returns.
For 2020, the limitation on charitable deductions for individuals that’s generally 60% of AGI doesn’t apply to cash contributions made to certain public charities. Instead, an individual’s qualifying contributions can be as much as 100% of AGI for 2020. No connection between the contributions and COVID-19 activities is required. This provision will benefit individuals who claim itemized deductions on their 2020 federal income tax return.
The limitation on charitable deductions for corporations that’s generally 10% of modified taxable income doesn’t apply to qualifying contributions made in 2020. Instead, a corporation’s qualifying contributions can be as much as 25% of modified taxable income. No connection between the contributions and COVID-19 activities is required.
For contributions of food inventory made in 2020, the deduction limitation increases from 15% to 25% of taxable income for C corporations and, for other taxpayers, from 15% to 25% of the net aggregate income from all businesses from which the contributions were made.

These CARES Act changes are for contributions made by individuals and businesses during the 2020 tax year only. For charitable contributions made after December 31, 2020, the prior (pre-CARES Act) rules will apply.

Reap the Benefits

Have you been thinking about donating to a charity in the wake of the COVID-19 crisis? Philanthropic individuals are usually motivated by doing good, not tax benefits. But the favorable changes to the charitable contribution rules for individuals and businesses provide a well-deserved bonus. Contact your tax advisor if you’d like to discuss your charitable-giving strategy for 2020.

Nonprofit organizations receive contribution revenue that comes in the form of funds with donor restrictions or without donor restrictions. Contributions with donor restrictions must be used for either a particular period or for a purpose that is narrower in scope than the organization’s general mission or programs. Some restrictions are temporary, while some are permanent.

Tracking these restrictions is an imperative process that allows the organization to demonstrate to the donor and auditor that the funds were spent according to the donor’s wishes. Additionally, this allows the organization to accurately present the amount of net assets remaining at year-end that are not available for general use.

Nonprofit organizations use several methods – here are four of the most common.

Fund accounting. Some organizations choose to use fund accounting and record all the activity for contributions with donor restrictions in a separate, restricted fund. Any unspent funds at year-end will remain in the fund and be recognized as net assets with donor restrictions. If your organization employs this method, you likely receive restricted contributions from multiple sources or for multiple purposes and will want to employ the next method as well.
Program codes. It will likely be necessary to use special codes to directly associate the expenses with the revenues for a restricted funding source. For example, you receive contribution A for $50,000, which is restricted for a special program. You would credit your contribution revenue account of 4000-001, where 001 is the program code that uniquely identifies this revenue as contribution A. When funds are spent, you would record expenses of (for example) $30,000 to various expense accounts ending with -001. At year-end, a profit and loss statement for program code 001 would show net assets of $20,000, which are restricted for program 001. Contribution B for $100,000 might get coded to 4000-002, and so on.
QuickBooks classes. Organizations that use QuickBooks sometimes use the classing system to track donor restrictions. This method will work only if you are sure to categorize all applicable revenues and expenses into classes. Should you forget to do so, any unclassified transactions will show up in the unclassified column when a profit and loss statement by class is run. This can create questions and cleanup at year-end and is not an ideal process.
Excel spreadsheets. In general, this is the least ideal method. Several problems can result with this method, one of which is potential double-counting of expenses. Any expenses listed to satisfy the restrictions of contribution A could also be listed to satisfy contribution B or C, which would not be appropriate. When using this method, it will be difficult for your auditor to have confidence that the spending was not double-counted.

On the flip side, there is also an opportunity for the spending to be incomplete or otherwise incorrect in an Excel spreadsheet since it is a manual process and you must remember to transfer any spending to it. Errors are possible due to changes in the general ledger. Since the Excel is not linked to your accounting system, a voided check or reclassification would need to be updated in the spreadsheet. The possibility of mis-keyed information exists as well. Limiting the opportunity to commit human error is vital when designing a system of internal controls, and a great deal of human error is possible with this method.

This method will cause the most headaches for both you and your auditor when auditing restricted contributions as it usually means more time and effort spent by both parties. It is also the least reliable documentation to have in future years after the audit is complete.

However, Excel spreadsheets can be essential in certain situations, such as endowment tracking. Some organizations have an endowment fund that may have been in existence for more than 50 years. Over the years, there likely have been contributions to the endowment and investment gains. The organization may even be using the investment accounts at its financial institution to invest unrestricted funds as well. Additionally, you may have switched banks multiple times over the years, your bank may have been acquired several times, and your nonprofit may have gone through several CFOs and CEOs who don’t have a lot of history with the organization. A spreadsheet for endowment funds can be vital to supporting the different components of the endowment, such as corpus and spendable earnings and showing any other unrestricted funds that may be invested with these at the bank.

At year-end, many organizations choose to supplement the above methods by making a physical or electronic file with the donor award, general ledger detail specific to the program code, and backup for the spending to have a complete record of how the contribution was spent. Consideration as to the significance and materiality of the contribution should be considered when using this method.

Sound internal control design is key to ensuring the above methods are implemented accurately. A qualified individual should review the recording of all contributions to ensure the presence or absence of donor restrictions are properly recorded. Further, the review should also ensure that expenses used to satisfy donor restrictions are following the donor’s wishes. This review should be conducted by someone separate from the individual responsible for recording the transactions to ensure the ideal separation of duties.

If you would like more information on methodologies for tracking donor restrictions, contact me via email at micevr@yeoandyeo.com or call 269.329.7007, or contact your Yeo & Yeo professional.