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.
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.
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
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
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.
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.
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:
- The listing of cash paid to each employee who worked during the covered period, including the “Salary/Hourly Wage Reduction” calculation, if necessary.
- Which employees received compensation at an annualized rate of more than $100,000 during any single pay period in 2019.
- 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.
- FTE Reduction Safe Harbor calculations if applied to cure an FTE shortfall.
- 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:
- 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.
- 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.
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:
- 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.
- 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.
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.
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 (https://www.sdttc.com/content/ttc/en.html)
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.
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 (sba.gov).
We stand ready to assist you to navigate through this challenging economic time.
Stay home, stay safe and take care.