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Amanda Duff

The Build Back Better Act

By Uncategorized
The House Ways and Means Committee has introduced the tax proposal connected to the budget reconciliation bill, the Build Back Better Act. While we are still digging through the almost 900 pages of legislation, here are some highlights of what is included and notably what is not included in this bill introduced on September 13th.
Increase in corporate tax rate. This provision replaces the flat corporate income tax with a graduated rate structure. The rate structure provides for a rate of 18 percent on the first $400,000 of income; 21 percent on income up to $5 million, and a rate of 26.5% on income thereafter.
Limitation on certain special rules for Section 1202 gains. The special 75% and 100% exclusion rates for gains realized from certain qualified small business stock will not apply to taxpayers with adjusted gross income equal or exceeding $400,000. The baseline 50% exclusion in 1202(a)(1) remains available for all taxpayers. The amendments made by this section apply to sales and exchanges after September 13, 2021, subject to a binding contract exception.
Increase in top marginal individual income tax rate to 39.6%. This marginal rate applies to married individuals filing jointly with taxable income over $450,000, to heads of households with taxable income over $425,000, to unmarried individuals with taxable income over $400,000, to married individuals filing separate returns with taxable income over $225,000, and to estates and trusts with taxable income over $12,500. Applicable to taxable years beginning after December 31, 2021.
Increase in capital gains rate for certain high income individuals to 25%. Applicable to gains recognized after September 13, 2021. There is an exception for gain recognized after this date subject to a binding contract prior to September 13th.
Surcharge on high income individuals, trusts, and estates of a tax equal to 3% of a taxpayer’s modified adjusted gross income in excess of $5,000,000 (or in excess of $2,500,000 for a married individual filing separately). Applicable to taxable years beginning after December 31, 2021
Reduction in the amount of the unified credit against estate and gift tax to the 2010 level of $5m adjusted for inflation. Applicable beginning January 1, 2022.
There is no mention of the elimination of Section 1031 deferred exchanges for real estate.
There is no mention of the elimination of the step up in the basis of assets at death.
There is no elimination of the SALT cap, but there is pressure to include relief on the deduction of state and local taxes.
This is a big step in the legislative process, there will be more to follow. You can read the Ways and Means press release here. 
Please contact your L&B advisor for more information.

CARES Act PPP Loan Forgiveness

By Accounting & Audit

On March 27, 2020, the Coronavirus Aid, Relief, and Economic Security (CARES) Act authorized $349 billion in forgivable federal loans (“PPP loans”) to small employers to provide incentive to keep employees with an additional $310 billion of funding on April 24, 2020. Most lenders are now accepting PPP loan forgiveness applications, and L&B is ready to provide assistance to your organization during the process.

PPP loans are structured similarly to most interest-bearing loans, but are forgivable either in full or in part if spent during a covered period on certain eligible costs. Covered periods can either be 8 or 24 weeks in length beginning at the loan disbursement date, and forgiveness applications must be completed within 10 months after the last day of the covered period. The unforgiven portion of the loan bears interest at a rate of 1% per annum over 2 years (if the loan was received before June 5, 2020) or 5 years (if the loan was received after June 5, 2020).

There are three types of PPP loan forgiveness applications: Form 3508S, Form 3508EZ, and Form 3805. Form 3508S is for borrowers with PPP loans equal to or less than $50,000. Form 3508EZ is for self-employed individuals, or organizations in which employee levels, salary, wages, or hours were not reduced during the covered period compared to employee levels, salary, wages, or hours of a comparison period elected by the borrower. The comparison periods are January 1, 2020 through February 29, 2020 or February 15, 2019 through June 20, 2019. Form 3805 is for all other borrowers.

To qualify for forgiveness, PPP loan proceeds must be used on certain payroll costs, rent, business mortgage interest, and utilities during the specified covered period. Non-payroll costs may not exceed 40% of total eligible PPP loan forgiveness. Additionally, to qualify for full forgiveness, organizations must have retained 100% of full-time equivalent employees over the course of the covered period and have not reduced the total wages or salary for any employees by more than 25% of their wages or salary compared to the first quarter of 2020. There are several safe harbors and exemptions available in the event a borrower had to reduce their employee levels, salary, wages, or hours.

The Small Business Administration has made public a list of appropriate documentation recommended to support the aforementioned items on the application, however, it is important to note that additional information may be requested from your organization’s lender. Sufficient recordkeeping is critical.

L&B is available to help prepare or review your PPP loan forgiveness application as well as to answer any general questions. For assistance related to the PPP loan forgiveness application, please contact your L&B professional at (858) 558-9200.

Tax Planning for Trusts and Estates

By Estates & Trusts

As 2020 comes to a close, it is important to consider estate and gift tax planning strategies and to closely review your estate plan.  The article outlines the tax changes from 2020 to 2021 and discusses income tax and estate and gift planning considerations.

Federal Estate Tax.

In 2020, the federal estate and gift tax exemption is $11,580,000. The exemption increases to $11,700,000 in 2021. The value of a person’s estate and/or lifetime gifts exceeding the exclusion amount is subject to a 40% estate and gift tax rate. Further, through a so-called “portability” provision, if a spouse dies after 2010 without exhausting his or her estate and gift tax exclusion amount, the surviving spouse may be able to use the deceased spouse’s remaining exclusion amount against his or her transfers during lifetime or at death by filing an estate tax return within two years of the decedents date of death and making the portability election.

The federal estate and gift tax exemption is scheduled to sunset in 2026 to $5,000,000 (indexed for inflation). The new Biden Administration plans to reduce the exemption even sooner, as early as the beginning of 2021. Careful planning should be considered in order to take advantage of the current exemption before it is potentially cut in half.


Federal Gift Tax.

The annual exclusion for gifts remains at $15,000 per person for 2021. Direct payments for tuition and medical expenses are exempt from gift tax. Making annual exclusion gifts is one of the easiest ways to maximize wealth transfers to future generations.

A person is not limited as to the number of donees to whom he or she may make such gifts. Further, because the annual exclusion is applied on a per-donee basis, a person can leverage the exclusion by making gifts to multiple donors (family and non-family). Thus, if an individual makes $15,000 gifts to 10 donees, he or she may exclude $150,000 from tax. In addition, because spouses may elect to apply their exemptions to a single gift from either spouse (“gift-splitting”), married individuals may effectively double the amount of the exclusion to $30,000 per donee. A person may not carry over his or her annual gift tax exclusion amount to the next calendar year.

The annual gift tax exclusion applies to gifts of any kind of property, as long as the gift is of a present, rather than a future, interest. Gifts of appreciated property also could result in income tax savings to the giver, because the recipient would pay the capital gains tax on any sale. Therefore, before giving away appreciated property that is likely to be sold, consider the income tax cost to the recipient.

A special rule allows a contributor to utilize up to five annual gift tax exclusions simultaneously when funding a 529 plan. Thus, for 2020, he or she may fund the plan with up to $75,000 (5 × $15,000), then elect on his or her gift tax return to spread this gift over five years (2020 through 2024). By using five annual exclusions, the entire gift becomes gift-tax-free. However, the contributor must wait until 2025 to make another tax-free contribution to this plan, or any annual exclusion gifts to that individual.


Low Interest Rates.

The interest rate is currently at historically low rates. Consider taking advantage of the current low-interest rate environment by loaning or borrowing money. If you have existing family loans, consider restructuring them. In addition, grantor-retained annuity trusts and charitable lead trusts are just a couple estate planning vehicles that become even more beneficial in a low-interest environment.


Proposition 19

Under current California law, a property owner can transfer a primary residence and up to $1 million in assessed value of any other property to their children (and qualifying grandchildren) and the assessed value(s) would transfer with the property, thus avoiding property tax reassessement.

With the passing of Proposition 19, the avoidance of property tax reassessment will be drastically limited for property transfers made after February 15, 2021. Under the proposition, only $1 million of assessed value of a property owner’s primary residence can be transferred to a child without triggering reassessment. In addition, the property must be used as a primary residence in the hands of the child for this to work. If you have a property that you plan on keeping in the family for multiple generations (whether it be a primary residence, vacation home, or rental property), consider transferring the property to your child or to an irrevocable trust.


Trust Tax Rates

See below for the current tax rates versus the tax rates for 2021.

2020 Trust Tax Table

If taxable income is: Then income tax equals:

Not over $2,600                                  10% of the taxable income

Over $2,600 but not over $9,450        $260 plus 24% of the excess over $2,600

Over $9,450 but not over $12,950      $1,904 plus 35% of the excess over $9,450

Over $12,950                                      $3,129 plus 37% of the excess over $12,950


2021 Trust Tax Table

If taxable income is: Then income tax equals:

Not over $2,650                                  10% of the taxable income

Over $2,651 but not over $9,550        $265 plus 24% of the excess over $2,650

Over $9,551 but not over $13,050      $1,921 plus 35% of the excess over $9,550

Over $13,051                                      $3,146 plus 37% of the excess over $13,050


Capital Gains

The adjusted net capital gain of an estate or trust is taxed at the same rates that apply to individual taxpayers.

  • A 0% rate applies to adjusted net capital gain that, if it were ordinary income, would be subject to the 10% income tax rate
  • A 15% rate applies to adjusted net capital gain that, if it were ordinary income, would be subject to the 24% or 35% income tax rate
  • A 20% rate applies to adjusted net capital gain that, if it were ordinary income, would be subject to the 37% income tax rate


Investment Income Surtax

In 2021, a 3.8% surtax applies to the lesser of (1) undistributed net investment income (NII) or (2) any excess of adjusted gross income over $13,050. Any given item of NII is included in the NII of either the trust/estate or its beneficiary. Distributed NII is NII to the beneficiary as indicated on Schedules K-1, and undistributed NII is NII to the estate or trust.


Methods to Reduce Surtax Liability

The 3.8% surtax applies to income from a passive investment activity. To help reduce the amount of income subject to the surtax the following should be considered:

  • For complex trusts, compare the tax with and without distributions to beneficiaries to determine whether the trust or individual is in the lower tax bracket
  • Use Installment Method to spread out gain on sale over multiple years
  • Use like-kind exchanges to defer gains
  • Recognizes losses to offset gains



Some strategies that can be used to accelerate or defer income and/or deductions are looking at the:

  • Timing surrounding payment of state income taxes and property taxes, keeping in mind the new law limits the aggregate deduction for state and local taxes, including income taxes and property taxes, to $10,000 per year. Property taxes related to the production of income and investment holdings do not fall under this limitation and can be deducted in full.
  • Timing surrounding payment of other trust expenses (i.e. fiduciary, accounting, legal)
  • Revisiting the trust’s distribution strategy to see if more income can be passed out to beneficiaries taxed at a lower rate than the trust


Trust Agreements

Review your trust agreement and make sure it still makes sense given the current estate and gift tax regime and the potential changes to the regime in the coming years. Review and update beneficiaries, trustees, and the titling of assets, as needed.

If you would like to discuss these and other year-end tax planning ideas, please contact your L&B Advisor.


New Excise Tax for Private Foundations

By Non-Profit Organizations

In this article, we will provide an overview of the annual minimum distribution requirements and the new excise tax on investment income for private foundations.

Prior to 2019, private foundations had to pay an excise tax of 1 or 2 percent on their net investment income. Now, for tax years starting in 2020, the excise tax is a flat 1.39% of the foundation’s net investment income, with quarterly estimated tax payments still potentially required.  Private foundations who have had more than $1,000,000 of net investment income in any of the three prior tax years, must pay estimated taxes based on their current year tax, using the new 1.39% rate.

Net investment income includes interest, dividends, rents, royalties, and capital gains. It is important to note that if appreciated assets are donated to the foundation and sold by the foundation, the capital gain included in net investment income is the difference between the original donor’s cost basis and the sale price. Expenses directly related to investment income are deductible and reduce the net investment income subject to the tax. For foundations, revenue from contributions is not included in net investment income. In addition to the excise tax calculation, private foundations are required to make qualified charitable-purpose distributions each year. The minimum amount foundations are required to distribute is 5% of the fair market value of their assets that are not used for exempt purposes. Assets taken into account for the calculation of the required minimum distribution generally include cash, marketable securities, and other assets not held for a specific charitable purpose.

The amount required to be distributed is calculated based on the asset values for the current tax year, but foundations have until the end of the following year to distribute the full amount required. Any required distributions not made by then face a 30% excise tax in addition to still having to pay the required distribution amount remaining. On the flip side, if a foundation pays out more than the required distribution amount, the excess will carry forward to be applied against future required minimum distributions.

Qualifying distributions include amounts paid to accomplish the foundation’s charitable purpose, including making grants to other qualifying charitable organizations. Expenses related to investment income are not qualifying distributions.

If you have any questions regarding the distribution requirement or need assistance with excise tax calculations, please do not hesitate to contact your L&B professional at (858) 558-9200.

Technical Update 6/25/2020 – 5 Things PPP Borrowers Need to Do Now!

By COVID-19 Updates

For small and midsize businesses struggling because of the coronavirus, the Paycheck Protection Program (PPP), included as part of the Coronavirus Aid, Relief, and Economic Security (CARES) Act, provided much-needed funding to cover necessary expenses. One of the chief benefits of the loans made through this program is the potential for the loans to be completely forgiven if borrowers meet certain criteria.

The Paycheck Protection Plan Flexibility Act of 2020, enacted on June 5, further enhances the opportunity for loan forgiveness by expanding requirements on how the loans are spent and extending the period to use the funds to 24 weeks, with the ability to elect the 8-week period if funds were received prior to June 5, 2020.

Borrowers of PPP loans should consider taking the following steps to maximize the amount and accelerate the timing of loan forgiveness:

1. Decide how much time you need to spend the funds

One of the key provisions in the Paycheck Protection Program Flexibility Act is more time to use PPP funds. In the CARES Act, employers were limited to only an 8-week period to use the funds, but now they have up to 24 weeks, provided the covered period does not extend beyond Dec. 31, 2020. When choosing the covered period for the loan, borrowers should consider the changes that apply to both the 8- and 24- week periods and the benefits of each:

  • The extended 24-week period will allow businesses to incur more eligible payroll costs. Many businesses were struggling to meet this minimum during the 8-week period, typically because of reduced staffing levels.
  • Additionally, more funds spent on non-payroll costs are now eligible for forgiveness under both the 8- and 24-week period. Only 60% of the loan must be spent on payroll costs to achieve the maximum forgiveness, (lowered from the original 75% minimum). This change alone will allow many borrowers to achieve 100% forgiveness in the allowable 8-week period.
  • The ability to count more weeks of payroll costs will reduce the need to spend funds on non-payroll costs and ultimately reduce the documentation borrowers need to provide to their banks.
  • Businesses that choose the 8-week period will likely want to apply for forgiveness as soon as possible so they can make business decisions, such as any necessary payroll or staffing cuts, without impacting loan forgiveness.

2. Talk to your lenders

Regardless of the covered period a borrower chooses, it is critical to begin conversations about loan forgiveness procedures with lenders as soon as possible, particularly since lenders will be making the initial review before it goes to the Small Business Administration (SBA) for final approval. Borrowers should get clarity from their lender on the forgiveness process, including:

  • Will applications be accepted on the SBA’s paper forms or will an online submission be required?
  • Is the lender requiring borrowers to submit documentation via email, an online portal, or in some other way?
  • What formats are acceptable when submitting supporting documentation?
  • Will the lender provide a calculator that borrowers can use to analyze their expenditures and project the expected forgiveness amount?

3. Get your FTE counts and salary reduction amounts in order

Borrowers of PPP funds need to compile several counts of their full-time equivalent (FTEs) employees. This includes historical FTE counts that are not dependent on the covered period of the loan, and can thus be calculated and documented at any time, including before a loan is awarded. These historical FTE counts will be compared to a borrower’s average FTE count for the covered period.

Businesses will need to wait until their covered period ends to finalize their FTE determination for that time. Projection of the average number of FTEs for the covered period is useful for analysis purposes, but may be a difficult task for businesses like restaurants that are likely uncertain about when they can put employees back to work. However, a new safe harbor has been added that will take into account situations where compliance with COVID-19 precautions prevented business from reaching their average pre-COVID FTE count. Additionally, employers now have more time to reduce or eliminate their calculated FTE reduction by re-hiring laid off employees by the earlier of the loan forgiveness application date or December 31,2020, instead of June 30, 2020

If borrowers reduced employees’ hourly rates or annual salaries during the covered period, they must document that the reduction did not exceed 25% of the wages/salary of the quarter preceding the loan date. If borrowers did not reduce the rate of pay, they do not need to perform this calculation, even if payments to employees decreased due to reduced hours.  Reductions in wage payments due to reduced hours are not a part of this calculation because the reduced hours generate a reduction in the number of FTEs.

Any reduction in pay rates or salaries that exceeds 25% will be treated as a decrease of the amount spent on expenses eligible for forgiveness. However, the 24-week covered period allows more time to recover from temporary wage or salary reductions. For example, if a full-time employee’s hourly rate was reduced from $20/hour in Q1 to $10/hour for an 8-week covered period, the reduction at the end of the 8 weeks in excess of 25% would be $5/hour, which for a typical 40-hour work week would equate to $1,600. But, if the business restores the wage rate to $20/hour for weeks 9-24, the new average rate for the covered period is over $15/hour, meaning the pay reduction does not exceed 25%, preventing any adjustment on account of wage and salary reduction.

4. Gather your documentation to submit to your lender

In addition to FTE counts, borrowers will need to supply supporting documentation for any other expenses that are being submitted on the loan forgiveness application. This includes payroll registers and payroll tax reports that provide cash payroll paid during the covered period and the first payroll paid after the covered period, if this includes pay for days worked during the covered period.  Your payroll vendor may have reports designed specifically to document PPP loan forgiveness amounts.

If additional payroll costs are needed to achieve 100% forgiveness, borrowers must include the receipts showing payment of health insurance premiums or claims paid for self-insured plans. If the entire loan proceeds are not accounted for with these documented payroll costs, then borrows should submit documentation showing the payment of non-payroll costs. Larger expenses like rent and interest on mortgages might achieve total forgiveness, eliminating the need for any additional documentation. If there are remaining funds that have not yet been documented as forgivable, then borrowers should continue to submit utility payments.

To minimize the back and forth with lenders, borrows should confirm if they need document submitted in a specific format.

5. Don’t forget about documents you need to maintain, but not submit to the lender

In addition to the documents that must be submitted with the application for forgiveness to the bank, borrowers must maintain certain additional documentation for six years after the date the loan is forgiven or repaid in full. This is required should the SBA chose to audit the loan forgiveness. These documents include:

  • PPP Schedule A Worksheet or its equivalent and documentation supporting:
    1. The listing of cash paid to each employee who worked during the covered period, including the “Salary/Hourly Wage Reduction” calculation, if necessary.
    2. Which employees received compensation at an annualized rate of more than $100,000 during any single pay period in 2019.
    3. FTE calculations for each employee including written offers of reemployments, firings for cause, voluntary resignations, and written requests by any employee for reductions in work schedule.
    4. FTE Reduction Safe Harbor calculations if applied to cure an FTE shortfall.
    5. Written explanation regarding the inability to return to pre-COVID-19 operation levels due to compliance with COVID-19 guidelines.
  • Identity of owner-employees and self-employed owners and how their maximum loan forgiveness was determined.
  • Copies of all records relating to the borrower’s PPP loan, including:
    1. Documentation submitted with the PPP loan application and documentation supporting the borrower’s certification as to the necessity of the loan request and its eligibility for a PPP loan.
    2. Documentation necessary to support the borrower’s loan forgiveness application, and documentation demonstrating the borrower’s compliance with PPP loan requirements.

PPP loans provide many businesses with a critical influx of cash needed to survive the ongoing pandemic, and recent changes to the loan program have increased flexibility for borrowers. However, loan forgiveness is a key element in maximizing the benefit of this loan program. Approved borrowers should act quickly to ensure their ability to have these loans forgiven.

Please reach out to your L&B advisor if you have questions or need assistance with your forgiveness application.

Technical Update 5/13/2020

By COVID-19 Updates
We are writing to update you on an important technical update with respect to the SBA Paycheck Protection Program (the “PPP”)

SBA PPP Certifications:    As hoped, the SBA this morning released some very helpful guidance, updating the FAQs to include new question 46.  This new guidance removes the uncertainty around loans under $2m, providing a safe harbor to the certification of the loan’s necessity.  However, for loans in excess of $2m, qualification remains an important question.  Further comfort has also been provided in the resolution of loans that are deemed to have not met this standard.  The SBA and Treasury have indicated that forgiveness will not be available, and the loan will have to be repaid and other administrative enforcement will not be pursued.

46. Question: How will SBA review borrowers’ required good-faith certification concerning the necessity of their loan request?

Answer: When submitting a PPP application, all borrowers must certify in good faith that “[c]urrent economic uncertainty makes this loan request necessary to support the ongoing operations of the Applicant.” SBA, in consultation with the Department of the Treasury, has determined that the following safe harbor will apply to SBA’s review of PPP loans with respect to this issue: Any borrower that, together with its affiliates, received PPP loans with an original principal amount of less than $2 million will be deemed to have made the required certification concerning the necessity of the loan request in good faith. SBA has determined that this safe harbor is appropriate because borrowers with loans below this threshold are generally less likely to have had access to adequate sources of liquidity in the current economic environment than borrowers that obtained larger loans. This safe harbor will also promote economic certainty as PPP borrowers with more limited resources endeavor to retain and rehire employees. In addition, given the large volume of PPP loans, this approach will enable SBA to conserve its finite audit resources and focus its reviews on larger loans, where the compliance effort may yield higher returns. Importantly, borrowers with loans greater than $2 million that do not satisfy this safe harbor may still have an adequate basis for making the required good-faith certification, based on their individual circumstances in light of the language of the certification and SBA guidance. SBA has previously stated that all PPP loans in excess of $2 million, and other PPP loans as appropriate, will be subject to review by SBA for compliance with program requirements set forth in the PPP Interim Final Rules and in the Borrower Application Form. If SBA determines in the course of its review that a borrower lacked an adequate basis for the required certification concerning the necessity of the loan request, SBA will seek repayment of the outstanding PPP loan balance and will inform the lender that the borrower is not eligible for loan forgiveness. If the borrower repays the loan after receiving notification from SBA, SBA will not pursue administrative enforcement or referrals to other agencies based on its determination with respect to the certification concerning necessity of the loan request. SBA’s determination concerning the certification regarding the necessity of the loan request will not affect SBA’s loan guarantee.

BE-10 Reports: As an update to our message yesterday, the due date for this report is May 29th, but an extension of time to file is available until June 30th.

Thank you again for your patience and support.  Please reach out to your L&B advisor or to me directly if you have any questions.

Technical Update 5/12/2020

By COVID-19 Updates

We are writing to update you on some important technical considerations with respect to the CARES Act, and a periodic foreign filing deadline quickly approaching.

SBA PPP Loans:  May 14, 2020 is an important date in the administration of the PPP and loans that have already been funded.  While the general focus has turned to forgiveness of the loans, there is a new concern over borrowers’ original qualification for the program.  The Treasury has been vocal in their response to public companies that have taken out PPP loans.  Under pressure, many of those companies have returned the funds.  Further, the SBA has updated their FAQs on the topic which have seemingly narrowed the determination of whether a borrower can certify their need for the loan.  Questions 31 and 37 have been presented here:

  1. Question: Do businesses owned by large companies with adequate sources of liquidity to support the business’s ongoing operations qualify for a PPP loan?

Answer: In addition to reviewing applicable affiliation rules to determine eligibility, 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. Although the CARES Act suspends the ordinary requirement that borrowers must be unable to obtain credit elsewhere (as defined in section 3(h) of the Small Business Act), borrowers still must certify in good faith that their PPP loan request is necessary. Specifically, before submitting a PPP application, all borrowers should review carefully the required certification that “[c]urrent 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. For example, it is unlikely that a public company with substantial market value and access to capital markets will be able to make the required certification in good faith, and such a company should be prepared to demonstrate to SBA, upon request, the basis for its certification.

  1. Question: Do businesses owned by private companies with adequate sources of liquidity to support the business’s ongoing operations qualify for a PPP loan?

Answer: See response to FAQ #31.

The SBA has extended the “safe harbor” date to May 14, 2020 to return funds and be deemed to have made the required certification in good faith.  If you have questions or concerns about your eligibility and certification under the PPP we urge you to talk to your lender and your legal advisor.  There may be additional guidance in the next couple of days to help with your analysis.  It is advisable to document your need for the funds to support your certification.

PPP Forgiveness:   The covered period to measure the amount of a PPP loan that can be forgiven is the 8-week period beginning with the receipt of funds.  The magic formula is a minimum of 75% of the funds used for payroll and related benefits, and a maximum of 25% on rent, mortgage interest or utilities to obtain full forgiveness.  The loan forgiveness is reduced if your headcount is less during the covered period than in the baseline periods of February 15, 2019 to June 30, 2019 or between January 1, 2020 to February 29, 2020.

A more detailed discussion and a summary of the data needed to measure the forgiveness can be found here.

Finally, while the forgiveness is not taxable, the IRS has determined that the related expenses will not be deductible.  An unpopular position to be sure, but it will take Congress to settle the conflict.  Stay tuned for Phase 4 of the stabilization program for the answer!

BE-10 Reports:  This year the benchmark surveys, known as the BE-10, are required to be filed.  These are reports are due every 5 years and must be submitted to the BEA to reflect ownership, including financial information, of foreign businesses (including affiliates of U.S. companies) or real estate.  The requirement to file is for those taxpayers owning 10% or more of the voting interest in the foreign company or affiliate. Additionally, if you own any foreign property that you hold out for rent, you meet the requirement to file these reports.

If you think you meet one of these requirements, have any questions, or have received correspondence from the BEA regarding a filing of the BE-10, please reach out to your L&B advisor.

L&B Operations:  Our team is 95% remote, but our office remains open and we are maintaining core functions onsite.  We are managing mail flow and express deliveries received at the office but have deferred all face to face client interactions.  We are available by phone or video conference at your convenience.

Our highest priority is to protect the health of our employees and clients while continuing to deliver outstanding service.  If we have any changes to our daily operations, we will immediately inform you.

Thank you again for your patience and support.  Please reach out to your L&B advisor or to me directly if you have any questions.

Operations Update 4/15/2020

By COVID-19 Updates

We are writing to update you on the actions Lindsay & Brownell is taking with respect to the COVID-19 (Coronavirus) situation. Our highest priority is to protect the health of our employees and clients while continuing to deliver outstanding service.

Tax Day!  This is easily the strangest April 15 that we as tax accountants have experienced.  We want to assure you that our team is committed to providing you with the highest quality tax, accounting, advisory and reporting services.  We appreciate your support in our efforts to execute and deliver projects at pace, even though we have an extended runway.

Just to remind everyone, all federal and California returns and payments otherwise due between April 1, 2020 and June 30, 2020 have been postponed to July 15, 2020.  Most other states have also followed the IRS lead.

If you have a specific question about your situation, please don’t hesitate to reach out to your L&B advisor for assistance.

Remote workforce:   We all wish we had invested in Zoom last year!  Our team is 95% remote working, but our office remains open and continues to maintain core functions onsite.  We will be managing mail flow and express deliveries received at the office but have deferred all face to face client interactions.  We are available by phone or video conference at your convenience.

If we have any changes to our daily operations, we will immediately inform you.

Thank you again for your patience and support.

Tax Update 4/10/2020

By COVID-19 Updates

Property Tax Payments

Today is the due date for the second installment of your 2019 -2020 property tax payments.  The Assessor’s office has provided the following guidance for late payment relief.

Many taxpayers have asked if we can postpone the April 10th tax deadline. However, state law governs when property taxes are due and payable. The second installment of property taxes is still due no later than April 10, 2020. 

For those who are directly impacted by the coronavirus and are unable to pay on time, they can file a penalty cancellation request. All such requests will be reviewed on a case-by-case basis after April 10. This will require documentation showing why they were unable to pay their property taxes by April 10, the delinquent date. Requests will be approved as allowed by law.

You can pay on line at the Assessor’s website, here  (

Federal Update

Based on the most recent IRS guidance released yesterday, Notice 2020-23, the postponement to July 15, 2020 applies to all taxpayers that have a filing or payment deadline falling on or after April 1, 2020, and before July 15, 2020.  Thus, the postponement now includes returns and payments for public charities, private foundations, estates, all foreign disclosures, and second quarter estimated tax payments.

Please note that payroll filings for the first quarter and related payments are generally still required to be completed by April 30.

State Update

Most states have aligned with the federal deferral of the filing and payment dates to July 15.  However, 5 states for individual income tax changed to other filing and payments deadline for coronavirus pandemic: IA (7/31), HI, (7/20), ID (6/15), MS (5/15), VA (filings 5/1, 6/1 payments)] and Puerto Rico (6/15).   In addition, not all states have deferred interest or timing of 2020 estimated tax payments.  Your L&B professional will work with you to manage multi state issues, please reach out with questions.

SBA Loan Programs

As part of the CARES Act, there are incentive programs for businesses, including nonprofit organizations to maintain their employees and payroll.  We can assist with determining the best program for your circumstances, please let us know if we can help.  We can also guide you through the application and implementation of these programs.  Time is of the essence to take advantage of the opportunities.

Today the Paycheck Protection Program application window opens for the self-employed.  More information is available here (

We stand ready to assist you to navigate through this challenging economic time.

Stay home, stay safe and take care.

CARES Act Update 3/30/2020

By COVID-19 Updates
On March 27, 2020, President Trump signed into law the Coronavirus Aid, Relief and Economic Security (CARES) Act, which provides relief to taxpayers affected by the novel coronavirus (COVID-19). The CARES Act is the third round of federal government aid related to COVID-19. We have summarized the top provisions in the new legislation below, with more detailed alerts on individual provisions to follow. Click here for a link to the full text of the bill.


2020 Recovery Refund Checks for Individuals

The CARES Act provides eligible individuals with a refund check equal to $1,200 ($2,400 for joint filers) plus $500 per qualifying child. The refund begins to phase out if the individual’s adjusted gross income (AGI) exceeds $75,000 ($150,000 for joint filers and $112,500 for head of household filers). The credit is completely phased out for individuals with no qualifying children if their AGI exceeds $99,000 ($198,000 for joint filers and $136,500 for head of household filers).

Eligible individuals do not include nonresident aliens, individuals who may be claimed as a dependent on another person’s return, estates, or trusts. Eligible individuals and qualifying children must all have a valid social security number. For married taxpayers who filed jointly with their most recent tax filings (2018 or 2019) but will file separately in 2020, each spouse will be deemed to have received one half of the credit.

A qualifying child (i) is a child, stepchild, eligible foster child, brother, sister, stepbrother, or stepsister, or a descendent of any of them, (ii) under age 17, (iii) who has not provided more than half of their own support, (iv) who has lived with the taxpayer for more than half of the year, and (v) who has not filed a joint return (other than only for a claim for refund) with the individual’s spouse for the taxable year beginning in the calendar year in which the taxable year of the taxpayer begins.

The refund is determined based on the taxpayer’s 2020 income tax return but is advanced to taxpayers based on their 2018 or 2019 tax return, as appropriate. If an eligible individual’s 2020 income is higher than the 2018 or 2019 income used to determine the rebate payment, the eligible individual will not be required to pay back any excess rebate. However, if the eligible individual’s 2020 income is lower than the 2018 or 2019 income used to determine the rebate payment such that the individual should have received a larger rebate, the eligible individual will be able to claim an additional credit generally equal to the difference of what was refunded and any additional eligible amount when they file their 2020 income tax return.

Individuals who have not filed a tax return in 2018 or 2019 may still receive an automatic advance based on their social security benefit statements (Form SSA-1099) or social security equivalent benefit statement (Form RRB-1099). Other individuals may be required to file a return to receive any benefits.

The CARES Act provides that the IRS will make automatic payments to individuals who have previously filed their income tax returns electronically, using direct deposit banking information provided on a return any time after January 1, 2018.


Charitable Contributions

Above-the-line deductions: Under the CARES Act, an eligible individual may take a qualified charitable contribution deduction of up to $300 against their AGI in 2020. An eligible individual is any individual taxpayer who does not elect to itemize his or her deductions. A qualified charitable contribution is a charitable contribution (i) made in cash, (ii) for which a charitable contribution deduction is otherwise allowed, and (iii) that is made to certain publicly supported charities.

This above-the-line charitable deduction may not be used to make contributions to a non-operating private foundation or to a donor advised fund.

Modification of limitations on cash contributions: Currently, individuals who make cash contributions to publicly supported charities are permitted a charitable contribution deduction of up to 60% of their AGI. Any such contributions in excess of the 60% AGI limitation may be carried forward as a charitable contribution in each of the five succeeding years.

The CARES Act temporarily suspends the AGI limitation for qualifying cash contributions, instead permitting individual taxpayers to take a charitable contribution deduction for qualifying cash contributions made in 2020 to the extent such contributions do not exceed the excess of the individual’s contribution base over the amount of all other charitable contributions allowed as a deduction for the contribution year. Any excess is carried forward as a charitable contribution in each of the succeeding five years. Taxpayers wishing to take advantage of this provision must make an affirmative election on their 2020 income tax return.

This provision is useful to taxpayers who elect to itemize their deductions in 2020 and make cash contributions to certain public charities. As with the aforementioned above-the-line deduction, contributions to non-operating private foundations or donor advised funds are not eligible.

For corporations, the CARES Act temporarily increases the limitation on the deductibility of cash charitable contributions during 2020 from 10% to 25% of the taxpayer’s taxable income. The CARES Act also increases the limitation on deductions for contributions of food inventory from 15% to 25%.


Compensation, Benefits, and Payroll Relief

The law temporarily increases the amount of and expands eligibility for unemployment benefits, and it provides relief for workers who are self-employed. Additionally, several provisions assist certain employers who keep employees on payroll even though the employees are not able or needed to work. The cornerstone of the payroll protection aid is a streamlined application process for SBA loans that can be forgiven if an eligible employer maintains its workforce at certain levels. Additionally, certain employers affected by the pandemic who retain their employees will receive a credit against payroll taxes for 50% of eligible employee wages paid or incurred from March 13 to December 31, 2020. This employee retention credit would be provided for as much as $10,000 of qualifying wages, including health benefits. Eligible employers may defer remitting employer payroll tax payments that remain due for 2020 (after the credits are deducted), with half being due by December 31, 2021, and the balance due by December 31, 2022. Employers with fewer than 500 employees are also allowed to give terminated employees access to the mandated paid federal sick and child care leave benefits for which the employer is 100% reimbursed by the government through payroll tax credits if the employer rehires the qualifying employees.

Any benefit that is driven off the definition of “employee” raises the issue of partner versus employee. The profits interest member that is receiving a W-2 may not be eligible for inclusion in the various benefit computations.

Eligible individuals can withdraw vested amounts up to $100,000 during 2020 without a 10% early distribution penalty, and income inclusion can be spread over three years. Repayment of distributions during the next three years will be treated as tax-free rollovers of the distribution. The bill also makes it easier to borrow money from 401(k) accounts, raising the limit to $100,000 from $50,000 for the first 180 days after enactment, and the payment dates for any loans due the rest of 2020 would be extended for a year.

Individuals do not have to take their 2020 required minimum distributions from their retirement funds. This avoids lost earnings power on the taxes due on distributions and maximizes the potential gain as the market recovers.

Two long-awaited provisions allow employers to assist employees with college loan debt through tax free payments up to $5,250 and restores over-the-counter medical supplies as permissible expenses that can be reimbursed through health care flexible spending accounts and health care savings accounts.


Deferral of Net Business Losses for Three Years

Section 461(l) limits non-corporate taxpayers in their use of net business losses to offset other sources of income. As enacted in 2017, this limitation was effective for taxable years beginning after 2017 and before 2026, and applied after the basis, at-risk, and passive activity loss limitations. The amount of deductible net business losses is limited to $500,000 for married taxpayers filing a joint return and $250,000 for all other taxpayers. These amounts are indexed for inflation after 2018 (to $518,000 and $259,000, respectively, in 2020). Excess business losses are carried forward to the next succeeding taxable year and treated as a net operating loss in that year.

The CARES Act defers the effective date of Section 461(l) for three years, but also makes important technical corrections that will become effective when the limitation on excess business losses once again becomes applicable. Accordingly, net business losses from 2018, 2019, or 2020 may offset other sources of income, provided they are not otherwise limited by other provisions that remain in the Code. Beginning in 2021, the application of this limitation is clarified with respect to the treatment of wages and related deductions from employment, coordination with deductions under Section 172 (for net operating losses) or Section 199A (relating to qualified business income), and the treatment of business capital gains and losses.


Section 163(j) Amended for Taxable Years Beginning in 2019 and 2020

The CARES Act amends Section 163(j) solely for taxable years beginning in 2019 and 2020. With the exception of partnerships, and solely for taxable years beginning in 2019 and 2020, taxpayers may deduct business interest expense up to 50% of their adjusted taxable income (ATI), an increase from 30% of ATI under the TCJA, unless an election is made to use the lower limitation for any taxable year. Additionally, for any taxable year beginning in 2020, the taxpayer may elect to use its 2019 ATI for purposes of computing its 2020 Section 163(j) limitation. This will benefit taxpayers who may be facing reduced 2020 earnings as a result of the business implications of COVID-19. As such, taxpayers should be mindful of elections on their 2019 return that could impact their 2019 and 2020 business interest expense deduction. With respect to partnerships, the increased Section 163(j) limit from 30% to 50% of ATI only applies to taxable years beginning in 2020. However, in the case of any excess business interest expense allocated from a partnership for any taxable year beginning in 2019, 50% of such excess business interest expense is treated as not subject to the Section 163(j) limitation and is fully deductible by the partner in 2020. The remaining 50% of such excess business interest expense shall be subject to the limitations in the same manner as any other excess business interest expense so allocated. Each partner has the ability, under regulations to be prescribed by Treasury, to elect to have this special rule not applied. No rules are provided for application of this rule in the context of tiered partnership structures.


Net Operating Losses Carryback Allowed for Taxable Years Beginning in 2018 and Before 2021

The CARES Act provides for an elective five-year carryback of net operating losses (NOLs) generated in taxable years beginning after December 31, 2017, and before January 1, 2021. Taxpayers may elect to relinquish the entire five-year carryback period with respect to a particular year’s NOL, with the election being irrevocable once made. In addition, the 80% limitation on NOL deductions arising in taxable years beginning after December 31, 2017, has temporarily been pushed to taxable years beginning after December 31, 2020. Several ambiguities in the application of Section 172 arising as a result of drafting errors in the Tax Cuts and Jobs Act have also been corrected. As certain benefits (i.e., charitable contributions, Section 250 “GILTI” deductions, etc.) may be impacted by an adjustment to taxable income, and therefore reduce the effective value of any NOL deduction, taxpayers will have to determine whether to elect to forego the carryback. Moreover, the bill provides for two special rules for NOL carrybacks to years in which the taxpayer included income from its foreign subsidiaries under Section 965. Please consider the impact of this interaction with your international tax advisors. However, given the potential offset to income taxed under a 35% federal rate, and the uncertainty regarding the long-term impact of the COVID-19 crisis on future earnings, it seems likely that most companies will take advantage of the revisions. This is a technical point, but while the highest average federal rate was 35% before 2018, the highest marginal tax rate was 38.333% for taxable amounts between $15 million and $18.33 million. This was put in place as part of our progressive tax system to eliminate earlier benefits of the 34% tax rate. Companies may wish to revisit their tax accounting methodologies to defer income and accelerate deductions in order to maximize their current year losses to increase their NOL carrybacks to earlier years.


Alternative Minimum Tax Credit Refunds

The CARES Act allows the refundable alternative minimum tax credit to be completely refunded for taxable years beginning after December 31, 2018, or by election, taxable years beginning after December 31, 2017. Under the Tax Cuts and Jobs Act, the credit was refundable over a series of years with the remainder recoverable in 2021.


Technical Correction to Qualified Improvement Property

The CARES Act contains a technical correction to a drafting error in the Tax Cuts and Jobs Act that required qualified improvement property (QIP) to be depreciated over 39 years, rendering such property ineligible for bonus depreciation. With the technical correction applying retroactively to 2018, QIP is now 15-year property and eligible for 100% bonus depreciation. This will provide immediate current cash flow benefits and relief to taxpayers, especially those in the retail, restaurant, and hospitality industries. Taxpayers that placed QIP into service in 2019 can claim 100% bonus depreciation prospectively on their 2019 return and should consider whether they can file Form 4464 to quickly recover overpayments of 2019 estimated taxes. Taxpayers that placed QIP in service in 2018 and that filed their 2018 federal income tax return treating the assets as bonus-ineligible 39-year property should consider amending that return to treat such assets as bonus-eligible. For C corporations, in particular, claiming the bonus depreciation on an amended return can potentially generate NOLs that can be carried back five years under the new NOL provisions of the CARES Act to taxable years before 2018 when the tax rates were 35%, even though the carryback losses were generated in years when the tax rate was 21%. With the taxable income limit under Section 172(a) being removed, an NOL can fully offset income to generate the maximum cash refund for taxpayers that need immediate cash. Alternatively, in lieu of amending the 2018 return, taxpayers may file an automatic Form 3115, Application for Change in Accounting Method, with the 2019 return to take advantage of the new favorable treatment and claim the missed depreciation as a favorable Section 481(a) adjustment.


Effects of the CARES Act at the State and Local Levels

As with the Tax Cuts and Jobs Act, the tax implications of the CARES Act at the state level first depends on whether a state is a “rolling” Internal Revenue Code (IRC) conformity state or follows “fixed-date” conformity. For example, with respect to the modifications to Section 163(j), rolling states will automatically conform, unless they specifically decouple (but separate state ATI calculations will still be necessary). However, fixed-date conformity states will have to update their conformity dates to conform to the Section 163(j) modifications. A number of states have already updated during their current legislative sessions (e.g., Idaho, Indiana, Maine, Virginia, and West Virginia). Nonetheless, even if a state has updated, the effective date of the update may not apply to changes to the IRC enacted after January 1, 2020 (e.g., Arizona). A number of other states have either expressly decoupled from Section 163(j) or conform to an earlier version and will not follow the CARES Act changes (e.g., California, Connecticut, Georgia, Missouri, South Carolina, Tennessee (starting in 2020), Wisconsin). Similar considerations will apply to the NOL modifications for states that adopted the 80% limitation, and most states do not allow carrybacks. Likewise, in fixed-dated conformity states that do not update, the Section 461(l) limitation will still apply resulting in a separate state NOL for those states. These conformity questions add another layer of complexity to applying the tax provisions of the CARES Act at the state level. Further, once the COVID-19 crisis is past, rolling IRC conformity states must be monitored, as these states could decouple from these CARES Act provisions for purposes of state revenue.


For additional information please review the Wolters Kluwer Tax Briefing found here.

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