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small or home-based business

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It’s my annual Taxes from A to Z series! If you’re wondering how to figure basis for cryptocurrency or whether you can claim home office expenses during COVID, you won’t want to miss a single letter.

O is for Ordinary and Necessary.

To claim a deduction for business expenses, Section 162 of the Tax Code requires that the expense is “ordinary and necessary.” According to the Internal Revenue Service (IRS), an ordinary expense is one that is common and accepted in your trade or business. The IRS defines a necessary expense as “one that is helpful and appropriate for your trade or business.”

No matter what the industry, that is the standard that the IRS will use. So, any time that you question whether something is deductible, as a first step, ask yourself is this “ordinary” and “necessary”?

  • An ordinary expense is one that is common and accepted in your industry. It’s the one time that you care about what your competitors are doing. No matter what your mother says, it does matter whether everyone else is doing it, too.
  • A necessary expense is one that is helpful and appropriate for your trade or business. You don’t have to prove that you couldn’t be in business without the expense – more or less, it needs to make good business sense.

Again, for an expense to be deductible, it needs to be both.

You can find the rest of the series here:

In April, I wrote an article about the Economic Injury Disaster Loan program (EIDL). Shortly afterward, the Small Business Administration (SBA) announced that the program was closed to all businesses except certain agricultural businesses. Now, there’s another change: the program has been re-opened to all eligible small businesses.

Specifically, SBA began accepting new EIDL and EIDL Advance applications from all eligible small businesses and U.S. agricultural businesses as of June 15, 2020.

The EIDL is an existing program administered through the Small Business Administration (SBA). However, the stimulus bill (also called the Coronavirus Aid, Relief, and Economic Security Act, or the CARES Act) has expanded the program. To be eligible, a business must have no more than 500 employees. 

The catch is that to qualify, you have must have suffered a substantial economic injury and be located in a presidentially-declared disaster area. However, on March 13, 2020, the President of the United States issued an emergency declaration under the Robert T. Stafford Disaster Relief and Emergency Assistance Act. In other words, the entire country has now been declared a disaster area. That means that virtually any small business in the United States can consider a loan.

There are two pieces to the EIDL that you might have heard about. One is the EIDL advance of up to $1,000 per employee (with a cap of $10,000 per business) designed to provide economic relief for companies currently experiencing a temporary loss of revenue. This loan advance will not have to be repaid. And, you don’t have to be approved for a loan to receive the advance (but the amount will be deducted from total loan eligibility).

The other piece is the “L” in EIDL: a loan. It’s a proper loan with a repayment piece. The upside is that the interest rates are favorable: 3.75% for small businesses and 2.75% for non-profits.

And unlike the PPP, you don’t have to seek out a lender. You can apply straight from the SBA (this link takes you to the application).

Also, unlike the strict 75/25 ratio for payroll in PPP loans, EIDL offers a bit more wiggle. Loans may be used to pay fixed debts, payroll, accounts payable and other bills that can’t be paid. But it’s not an unlimited ask: there is a cap on the amount you borrow. Initially, that cap was pretty generous ($2 million), but the SBA has reduced the cap to $150,000.

 For more details about the EIDL, check out this post.

As the COVID-19 crisis continues to roil the economy, all eyes seemed to be focused on the Paycheck Protection Program (PPP). But that’s not the only option for relief for struggling small businesses. One opportunity that’s often overlooked is the Employee Retention Credit or ERC. It’s found in the CARES Act, and like the PPP, it’s designed to help businesses keep employees on the payroll. 

Unlike the PPP, the ERC isn’t a loan: it’s a refundable tax credit. It’s calculated each calendar quarter for wages paid after March 12, 2020, and before January 1, 2021. That means the ERC is generally available for quarters 2, 3, and 4 for the 2020 year (and part of quarter 1). The amount of the credit is 50% of qualifying wages paid up to $10,000 per employee for all quarters. Qualifying wages may not exceed $5,000 – or 50% of $10,000 – for any employee for all calendar quarters.

That means no applications, no fees, and no waiting. It does, however, have some rules – after all, this is tax. I wrote about the ERC in April, and since then, the Internal Revenue Service (IRS) has changed the rules (I think they like to suggest they clarified them). Here’s what you need to know.

Generally, employers are eligible for the ERC if they:

  • Fully or partially suspend operation during any calendar quarter in 2020 due to orders from an appropriate governmental authority limiting commerce, travel, or group meetings (for commercial, social, religious, or other purposes) due to COVID-19; or
  • Experience a significant decline in gross receipts during the calendar quarter.

In late April, the IRS updated its website-based guidance to clarify the treatment of employers who are shut down (wholly or partially) as a result of COVID-19. According to the FAQs, mere statements from a governmental official, including comments made during press conferences or media interviews, do not rise to the level of a governmental order. Additionally, the declaration of a state of emergency by a governmental authority is not sufficient if it does not limit commerce, travel, or group meetings. And, a declaration that does not affect the employer’s operations does not rise to the level of a governmental order for purposes of the ERC. 

The IRS also noted that an employer that voluntarily suspends operation of a trade or business or reduces hours and is not subject to any governmental orders is ineligible for the ERC based on the governmental order criteria. But the employer may still be eligible for the ERC if the business experiences a significant decline in gross receipts – remember, that’s the “OR” piece in the qualification above.

A significant decline in gross receipts is figured by determining the first calendar quarter in 2020 in which gross receipts are less than 50% of gross receipts for the same calendar quarter in 2019. The decline is enough: the employer does not need to prove that any significant decrease in gross receipts is related to COVID-19.

Just last week, the IRS updated its website-based guidance again – this time to clarify what constitutes wages for purposes of calculating the ERC. Qualifying wages include payments, as well as a portion of the cost of employer-provided health care. But what happens when an employee is not working due to COVID-19, but still is receiving employer-provided health care coverage? 

The IRS clarified that an employer with 100 employees or less may treat health plan expenses as qualified wages even if the employees are not working and are not being paid for the time they are not working (FAQ 64). However, an employer with more than 100 employees may not include health plan expenses if the employees are receiving wages; only the portion of health plan expenses allocable to the time that the employees are not providing services are treated as qualified wages (FAQ 65).

So, for example, let’s say you had 10 employees in 2019 and are now subject to a governmental order that suspends operations. You pay your employees half of their regular wages, and you continue to pay your employees’ health care coverage. Those health plan expenses may be treated as qualified wages for purposes of the ERC.

In contrast, if you had 1000 employees in 2019, it’s a little different. If you pay your employees half of their regular wages as well as their health care expenses, the health plan expenses allocable to the time that employees are not providing services may be treated as qualified wages. But health plan expenses allocable to the time for which the employees are receiving wages for providing services are not qualified wages.

If it’s a little confusing, that’s because while there is no cap on the number of employees, the average number of employees in 2019 affects how the credit is calculated. Check out the examples on the IRS FAQ page for more details.

And… there’s one more update (FAQ 79). Earlier, it was clear that there was a prohibition on taking a PPP loan and claiming the ERC. Now, the IRS has declared that an employer that applied for a PPP loan, received payment, and repays the loan by May 14, 2020, will be treated as though the employer had not received PPP for purposes of the ERC. That makes the employer eligible for the credit if the employer otherwise meets the criteria. 

Disagree with the updates? You may not be alone. Earlier this month, Congressional officials, including Senators Grassley (R-IA) and Wyden (D-OR) previously expressed frustration with the IRS’ position regarding ERC and health care expenses. Treasury Mnuchin eventually conceded the point and promised the update.

While you might not have the Senators’ clout, you might be able to argue about it later (I said might – definitely check with your tax or legal professional). The website does have the following helpful language:

This FAQ is not included in the Internal Revenue Bulletin, and therefore may not be relied upon as legal authority. This means that the information cannot be used to support a legal argument in a court case.

For now, you report the credit on Form 941, Employers QUARTERLY Federal Tax Return. The current form has a helpful note regarding the timing of the credit, but it’s not fully updated. The IRS has released a draft version of the updated form 941 (plus instructions). If you wish, you can submit comments to the IRS about the draft form or instructions at IRS.gov/FormsComments.

Things are happening at a rapid-fire pace these days. Keep checking back for details.

Over a month ago, I wrote an article about the home office deduction that attracted very little notice. I figured folks were either overwhelmed with COVID-19 coverage, or the article didn’t apply to them. More recently, I realized that I was wrong: taxpayers assumed the article didn’t apply to them.

Since then, I’ve received tweets, comments, and emails from workers asking about the deduction because they’re sure that it applies to them. They are, after all, working from home through no reason of their own. They cannot physically return to the office or other workplace. And their employer may require them to work from home as a condition of their employment. In other words, for many, it’s work from home or lose a paycheck.

Those all feel like excellent reasons to be able to deduct the cost of the internet and other home office expenses. But they are not enough. As a result of the Tax Cuts and Jobs Act (TCJA), for the tax years 2018 through 2025, you cannot deduct home office expenses if you are an employee. 

To be clear, there is no hardship exemption or coronavirus waiver. It’s a very bright-line rule: employees who work from home can no longer claim the home office deduction. The reason you are working from home does not matter.

The TCJA did not change the home office expense rules for self-employed persons and independent contractors. To be clear, you are not self-employed just because you are working from home. If you are receiving a paycheck from an employer, and those wages will be reported on a W-2, you are an employee. Working from home is not enough, on its own, to cause a switch to a 1099.  And while you certainly may receive a form W-2 and a form 1099 in the same tax year, you should not receive a form W-2 and a form 1099 for the same work from the same employer.

If you are self-employed – even as a gig worker – you can continue to deduct qualifying home office expenses. Typically, you would report the home office deduction on federal form 8829, Expenses for Business Use of Your Home, which is filed along with your Schedule C, Profit or Loss From Your Business, on your 1040.

To qualify for the home office deduction, the part of your home attributable to business must be “exclusively and regularly for your trade or business” and that part of your home must be your principal place of business; a place where you meet or deal with patients, clients, or customers in the normal course of your trade or business; or a separate structure used in connection with your trade or business. In other words, to be deductible, your home office must be your actual office and not just at your home for convenience. And more importantly, if you use part of your home as a workspace, it must be space that is used solely for business.

A dedicated space doesn’t mean that you have to have a separate room. You can have a dedicated space – a table in the corner that’s just used for your office work – in a room used for other things. You just need to calculate the space and figure the deduction appropriately.

If you have more than one business location, including your home, that doesn’t disqualify you: you just need to make sure that you meet the criteria for the home office deduction. Again, to deduct the expenses for the business use of your home under the principal place of business test, your home must be your principal place of business for that trade or business.

In a gig economy, you might also have more than one business. The same home office can be the principal place of business for two or more separate business activities. But you can’t combine the tests: whether your home office is the principal place of business for more than one business must be determined separately for each of your trades or businesses.

Calculating the deduction used to take a bit more math. For years, the rule was that you must figure the amount of space attributable to your business and compare it with the total and use that amount to figure the deduction. So, if your home office space is 200 square feet and your home is 2000 square feet, you would claim 10% (200/2000) of your home-related expenses (insurance, taxes, mortgage interest, etc.) as a home office deduction. That’s still an option.

However, since the 2013 tax year, there’s also a simplified option for the home office deduction. With the simplified option, you may claim a standard deduction of $5 per square foot of home used for business up to a maximum of 300 square feet. Using the same numbers as above, if your home office is 200 square feet, the simplified option for the home office deduction would allow you to claim $1,000 (200 square feet x $5) as a home office deduction.

But remember: those rules don’t apply if you’re an employee in 2020: you cannot deduct home office expenses if you are an employee. It’s one of several changes on Schedule A. Those changes were intended to be absorbed or mitigated by the doubling of the standard deduction.

A lot of taxpayers didn’t mind so much when the law changed in 2017, but now they do. If this bugs you, don’t shoot the messenger. Instead, contact your Congressional official: 

The loss of the home office deduction for employees has some taxpayers wondering whether it makes sense to quit their day jobs and become self-employed. That’s an individual decision, but if you’re focusing simply on the home office piece, the numbers probably don’t support that kind of shift. For more to consider when it comes to business-related decisions in light of tax reform, check out this article.

As COVID-19 continues to impact the United States, the federal government is taking action to ease the burden on taxpayers. There are programs in place to help businesses through the pandemic. One of those programs is the Economic Injury Disaster Loan program (EIDL). 

The EIDL isn’t new. It’s an existing program administered through the Small Business Administration (SBA). However, the stimulus bill (also called the Coronavirus Aid, Relief, and Economic Security Act, or the CARES Act) has expanded the program. To be eligible for the program, a business must have no more than 500 employees. 

Here’s what else you need to know:

How do I count employees? The Small Business Administration (SBA) calculates all individuals employed on a full-time, part-time, or other basis. You can find out more in the Regulations here

Are there any exceptions to the 500 employee rule? There are some exceptions. Some notable exceptions include restaurants and hospitality businesses that may qualify if they have 500 or fewer employees per location. And, additionally, under the CARES ACT, some industries, including religious organizations, may have a cap based on receipts rather than employee size. You can find out more on the SBA website.

Okay, does it matter what I do for a living? Yes. You can’t apply for a business that is engaged in illegal activities, lobbying, significant gambling (more than 1/3 of your revenue), or if you engage in “live performances of a prurient sexual nature or derive directly or indirectly more than de minimis gross revenue through the sale of products or services, or the presentation of any depictions or displays, of a prurient sexual nature.” Also, the owners can’t be more than 60 days delinquent on child support obligations. 

What about nonprofits? Yes. Nonprofits are eligible. This also includes faith-based organizations regardless of whether they provide secular social services. This includes churches who qualify for 501(c)(3) status – even if they have not applied to the IRS to receive tax-exempt status.  

I work for myself. Am I eligible? Yes. Sole proprietorships, independent contractors, gig-economy workers, and self-employed individuals are also eligible for the EIDL program.

I feel like you’ve written about this before. Am I wrong? There’s a similar loan program that’s available for payroll expenses, the Paycheck Protection Program (you can read about those PPP loans here). But this one is a little different. Keep reading.  

You said that this program existed before now. So what’s the catch? The catch is that to qualify, you have must have suffered a substantial economic injury and be located in a presidentially-declared disaster area. However, on March 13, 2020, the President of the United States issued an emergency declaration under the Robert T. Stafford Disaster Relief and Emergency Assistance Act. In other words, the entire country has now been declared a disaster area. That means that virtually any small business in the United States can consider a loan.

How much can I get? The maximum loan amount is $150,000 (it was previously $2 million). Loans are based on your “actual economic injury” as determined by the SBA, less any recoveries such as insurance proceeds. If you decide that you need more money, you can, under some circumstances, ask for an increase in the loan amount within the two years following your initial loan approval.

That sounds like it will take some time. I need money now. Any help? If you need it, you can ask for an emergency grant advance of up to $1,000 per employee, capped at $10,000 per business – the SBA says that you can get your advance in as little as three days. The loan advance will be forgiven if it is spent on paid leave, maintaining payroll, mortgage, or lease payments.

So what can I use the money for? It’s pretty broad. You can use the money for payroll, rents or mortgages, or other operational costs. As with the PPP, you can’t double-dip: no using funds for qualified sick and family leave wages if you’re taking a tax credit for those costs under the Families First Coronavirus Response Act. 

Are there any restrictions on the money? A few. Notably, you can’t use an EIDL to refinance pre-existing debt or pay dividends.

Do I have to prove that my credit is already maxed, or that I couldn’t get a loan anywhere else? No.

What does it cost? There are no upfront fees or early payment penalties charged by the SBA – but your accountant or other tax professional may charge fees to help you prepare the application.

What about collateral? Loans of $25,000 or less require no collateral.

Personal guaranty? Waived for loans up to $200,000 through December 31, 2020. 

What kind of records do I have to provide? It’s a loan, so you have to provide some financials. Fortunately, here’s no first year tax return required (whew) since loans can be based on your credit score. But you do have to agree to let the SBA to review your tax records.

So, long story short, I have struggled with getting a loan before because I got into a little legal trouble years ago. Does that disqualify me? Not necessarily. But the business would be excluded from the program if one of the owners who holds at least 20% of the equity of the company is currently incarcerated, on probation, on parole; subject to an indictment, criminal information, arraignment, or other means by which formal criminal charges are brought in any jurisdiction; or, has within the last FIVE years, been convicted or pleaded guilty or nolo contendere (no contest) to a felony, or been placed on pretrial diversion, parole or probation (including probation before judgment) for a felony. 

What is the interest rate? The interest rate for EIDLs due to COVID-19 is 3.75% for small businesses and 2.75% for nonprofits.

How long is the program available?  You must apply no later than December 16, 2020, in most states. 

Can I apply for more than one kind of loan? If you have already received an EIDL loan (between January 31, 2020, and April 3, 2020), you can still apply for a PPP loan so long as you use them for different expenses. You can also refinance an EIDL loan into a PPP loan but note that if you do get a PPP loan, the $10,000 grant will be subtracted from the PPP forgiveness amount

I know that PPP loans can be forgiven. What about EIDL (other than the advance you’ve already mentioned)? The short answer is no, outside of that advance. But an EIDL loan may be forgiven if it is refinanced under a PPP loan depending on the date the EIDL loan was taken out.

Other than the forgiveness amounts, what’s the real difference between the PPP and the EIDL? Size and use. The EIDL is a loan intended to cover six months of operational expenses. In comparison, the PPP is a loan to primarily help you cover payroll for eight weeks. Also, the EIDL loan application is – allegedly – much more straightforward.

Okay, I’m in. Where can I sign up? You can start on the SBA website.

What if I can’t do this on my own? I highly recommend that you consult with your tax, banking, or legal professional.

I’m not sure about a loan. What else can I do to keep my employees on the payroll? If a loan doesn’t appeal to you, other options are available. One of those provisions is the Employee Retention Credit or ERC, which is designed to help businesses keep employees on the payroll. You can read more here.

As COVID-19 continues to impact the United States, the federal government is taking action to ease the burden on taxpayers. Most recently, Congress passed a massive stimulus package that was signed into law by the President. The stimulus bill (also called the Coronavirus Aid, Relief, and Economic Security Act, or the CARES Act) has several moving pieces for taxpayers, including those stimulus checks for taxpayers. But the law also offers some provisions intended to help businesses.

One of those provisions that has gotten a lot of attention is the Paycheck Protection Program or PPP. The program is precisely what it sounds like: nearly $350 billion in (potentially) forgivable loans to keep workers on the payroll. 

The coverage has made the loans sound overwhelming. But, for some, it’s just a matter of breaking down the details. For example, to be eligible, a business must meet some essential criteria:

  • Have no more than 500 employees;
  • Principal place of business is physically in the United States; and
  • Operational as of February 15, 2020.

So far, so good, right? Here are some answers to more questions about the program:

How do I count employees? The Small Business Administration (SBA) calculates all individuals employed on a full-time, part-time, or other basis. You can find out more in the Regulations here.

Are there any exceptions to the 500 employee rule? Yes. Some exceptions apply. Specifically, restaurants and hospitality businesses may qualify if they have 500 or fewer employees per location. You can find out more on the SBA website.

Okay, I get it. Exceptions for the hospitality industry. Otherwise, does it matter what my business does or what I do for a living? Yes, it matters. You can’t apply for a business that is engaged in illegal activities, lobbying, significant gambling (more than 1/3 of your revenue), or if you engage in “live performances of a prurient sexual nature or derive directly or indirectly more than de minimis gross revenue through the sale of products or services, or the presentation of any depictions or displays, of a prurient sexual nature.” Also, the owners can’t be more than 60 days delinquent on child support obligations, or household employers.

What about farming? There was a provision that would have excluded farmers and agricultural businesses and instead direct them to Farm Service Agency (FSA) loan programs. However, that’s been changed.

I work for myself. Can I get a loan? Yes. Sole proprietorships, independent contractors, gig-economy workers, and self-employed individuals are also eligible for a PPP loan. 

How much can I get? You can borrow up to your average total monthly payroll costs during the one year immediately before the loan multiplied by 2.5, or 250% of average monthly payroll expenses. The cap is $10 million.

Even for highly compensated individuals? Payroll costs are capped at $100,000 (annualized) for each employee. The $100,000 limit does not include healthcare, retirement benefits, and state and local taxes.

What are payroll costs? Payroll costs include what you’d think: salary, wages, commissions, or similar compensation, as well as tips, for employees in the United States. It also includes payment for leave (including vacation, parental, family, medical, or sick leave but not those that you get a credit for under the Families First Coronavirus Relief Act); severance packages; employee group health care benefits; and state and local taxes on compensation. If you’re an independent contractor or sole proprietor, it refers to your wage, commissions, income, or net earnings.

What about payroll taxes? Payroll costs do not include federal employment taxes imposed or withheld between February 15, 2020 and June 30, 2020, including Federal Insurance Contributions Act (FICA) and Railroad Retirement Act taxes, as well as income taxes withheld from employees (but you probably already guessed that).

Do payroll costs include the money I pay to independent contractors? No.

So what can I use the money for? You can use the money for employee salaries, paid sick or medical leave, insurance premiums, and mortgage, rent, and utility payments. You can also use the funds for family, medical, and sick leave. But you can’t double-dip: no using PPP for qualified sick and family leave wages if you’re taking a tax credit for those costs under the Families First Coronavirus Response Act. 

How much will this cost? There are no standard 7(a) fees on the loan. There may be fees charged by your tax or other professionals to assemble and submit the application. 

What about collateral? Nope.

Personal guaranty? Nope.

So, long story short, I have struggled with getting a loan before because I got into a little legal trouble years ago. Does that disqualify me? Not necessarily. But the business would be excluded from the program if one of the owners who holds at least 20% of the equity of the company is currently incarcerated, on probation, on parole; subject to an indictment, criminal information, arraignment, or other means by which formal criminal charges are brought in any jurisdiction; or, has within the last FIVE years, been convicted or pleaded guilty or nolo contendere (no contest) to a felony, or been placed on pretrial diversion, parole or probation (including probation before judgment) for a felony. When looking at ownership, affiliation rules apply (downloads as a PDF).

What is the interest rate? The interest rate is 1%, and loan payments for any non-forgivable bits will be deferred for six months. 

Wait, what’s that part about it being forgiven? Does this mean I don’t have to pay it back? The loan can be forgiven if all employees are kept on the payroll for eight weeks, AND the loan proceeds are used as intended – that means payroll, rent, mortgage interest, or utilities. 

For real? Yes. That’s the best part.

With no strings? Of course, there are strings. For example, no more than 25% of the loan forgiveness can be related to non-payroll costs. And since the whole point is to encourage businesses to hold onto employees, the amount of the loan available for forgiveness will be decreased if full-time headcount declines, or if salaries and wages fall. You’ll want to pay attention to the details.

What happens when the loan is forgiven? Is that income? A loan that is forgiven is typically treated as taxable income, but this is not the case for the PPP. The amount of any forgiven PPP loan will be excluded from gross income.

How long is the program available? Lenders may begin processing loan applications as soon as April 3, 2020. The Paycheck Protection Program will be available through June 30, 2020. There is some talk that it could be extended (since the money – $349 billion – is going quickly), but that’s the scoop for now.

So can I apply now? It depends on who you are. Small businesses and sole proprietors could apply as of April 3, 2020. Starting April 10, 2020, independent contractors and self-employed individuals can apply.

Can I apply for two PPP loans? No.

Let’s say that my business is healthy, but I need to prop up my shore home. Can I say that my business is failing and just use the money for something else? Like a new boat dock?  No, if you’re caught using loan proceeds for things not related to payroll costs, you’ll have to pay it back. And if the behavior is willful, you could be on the hook for bigger problems, like fraud charges. 

Okay, I’m totally using the money for the right reasons. Where can I sign up? Officially, you can sign up for a PPP loan at any lending institution that is approved to participate through the existing SBA 7(a) lending program, or through any federally insured depository institution, federally insured credit union, and Farm Credit System institution that is participating. However, rumor has it that some banks aren’t excited about issuing loans to new customers: consider one that you have an existing relationship with – or a local bank. Check the SBA tool for a lender near you.

This doesn’t sound that bad… but I’ve been hearing horror stories about the applications. What gives? I’m just serving up the best bits. The devil is in the details. This is a real loan, so there are some restrictions, and you must provide supporting documentation. Check with your lender or tax professional for more information.

And you knew I was going to ask this, but where can I find the official details in writing? Check the SBA website for the application and details. You can also find the text of the PPP Interim Final Rule here (downloads as a PDF).

Are there other loan programs available? Yes, if you don’t want a PPP loan, consider the Economic Injury Disaster Loan program (EIDL). You can read more here.

I’m not sure about a loan. What else can I do to keep my employees on the payroll? If a loan doesn’t appeal to you, other options are available. One of those provisions is the Employee Retention Credit or ERC, which is designed to help businesses keep employees on the payroll. You can read more here.

As COVID-19 continues to impact the United States, the federal government is taking action to ease the burden on taxpayers. Most recently, Congress passed a massive stimulus package that was signed into law by the President. The stimulus bill (also called the Coronavirus Aid, Relief, and Economic Security Act, or the CARES Act) has several moving pieces for taxpayers, including those stimulus checks for taxpayers. But the law also offers some provisions intended to combat rising unemployment: 6.6 million Americans filed for unemployment benefits last week. 

One of those provisions is the Employee Retention Credit or ERC. It’s found in the CARES Act in Section 2301. The ERC is designed to help businesses keep employees on payroll. 

The credit is available to employers, no matter the size of the business. Unlike some of the other relief, there is no cap on the number of employees. The average number of employees in 2019 will, however, affect how the credit is calculated. If you have more than 100 full-time employees, you would include wages paid to employees when they are not providing services due to a government order related to COVID-19. If you have 100 or fewer full-time employees, all employee wages qualify for the credit, even if the employee is not providing services.

Most employers are eligible for this relief, including corporations, LLCs, S corporations, partnerships, and sole proprietors who pay wages. But there are three significant exceptions:

  1. State and local governments (and their agents) are not eligible for the credit;
  2.  Self-employed individuals are not eligible for the credit for their self-employment services or earnings; and
  3. Small businesses that take out a Small Business Interruption Loan (SBIL) under the Paycheck Protection Program (PPP) are not eligible for the credit. I’ve seen a lot of questions about this to be clear, the language in the Act says that “If an eligible employer receives a covered loan under paragraph (36) of section 7a) of the Small Business Act (15 USC 636a)), as added by section 1102 of this Act, such employer shall not be eligible for the credit under this section.” So, no double-dipping: if you take out a SBIL under the PPP, you don’t qualify for the ERC (try saying that three times quickly).

To qualify, employers must fall into one of two categories:

  1. Your business is wholly or partially suspended by government order due to COVID-19 (like a stay-at-home or non-essential business order) during the quarter; or
  2. Your gross receipts for 2020 are below 50% of the comparable quarter in 2019. 

The ERC is calculated each calendar quarter for wages paid after March 12, 2020, and before January 1, 2021. That means, the ERC is generally available for quarters 2, 3, and 4 for the 2020 year (and part of quarter 1). However, once your numbers creep back above 80% of receipts compared to the same quarter a year ago, you will no longer qualify after the end of that quarter (but you can still claim the ERC for that quarter).

The amount of the credit is 50% of qualifying wages paid up to $10,000 per employee for all quarters. So, if you pay your employee $6,000 in qualified wages in Q2, your available credit is $3,000. If you pay your employee an additional $6,000 in Q3, your available credit is $2,000 in Q3 (not $3,000) because of the overall limit of $10,000 on wages for all calendar quarters. Qualifying wages may not exceed $5,000 – or 50% of $10,000 – for any employee for all calendar quarters.

Wages include actual payments, as well as a portion of the cost of employer-provided health care. Qualified health plan expenses will be allocated pro- based on the number of employees and timing of benefits.

Qualified wages don’t include those wages attributed to a credit for sick or family leave. And you can’t include wages paid to employees for whom you will take a work opportunity tax credit (WOTC) during the respective quarter.

Here’s the good part: If you have qualified wages eligible for the ERC, you can reduce your required deposits of payroll taxes by the amount of the credit.

And remember: the credit is refundable. That means that you may get a refund if the amount of the credit is more than the federal employment taxes that you owe. And, so long as you meet the criteria, you do not have to repay the credit or the refunds.

If you don’t have sufficient employment taxes to cover the cost of qualified sick and family leave wages and the ERC, you can file Form 7200, Advance Payment of Employer Credits Due to COVID-19 (downloads as a PDF) to request an advance payment from the IRS. You will need to reconcile your advance credit payments and reduced deposits on your employment tax return.

You can file the form for an advance payment at any time before the end of the month following the quarter in which you paid the wages. That means, if necessary, you can file Form 7200 several times during each quarter. 

I know it sounds confusing, but you don’t have to file Form 7200 at all. If you can reduce your employment tax deposits to account for the credits – and don’t need an advance – you can simply reconcile your advance credit payments and reduced deposits on your employment tax return.

Also, you can’t file a corrected Form 7200. If you make an error, simply fix it when you file your respective payroll tax returns.

As with all tax matters, you’ll want to keep good records to support your credit. Keep all records of employment taxes, including any Forms 7200, for at least 4 years. 

Things are happening at a rapid-fire pace these days. Keep checking back for details.

There’s so much happening now. Here’s where you can find information on how COVID-19 is affecting tax returns and, of course, those stimulus checks.

Got questions about stimulus checks? I’ve got answers. There are separate pieces for high school seniors and college students, as well as seniors (seniors piece is updated here).

IRS has pushed filing deadlines to July 15. Not all state and local tax authorities are following the feds. If you’re looking for updates on local and state tax authority closings and extensions, you’ll find those here.

If you’re looking for a summary of the CARES Act, you can find it here.

All local Social Security offices will be closed to the public for in-person service starting Tuesday, March 17, 2020. According to the Social Security Administration, “This decision protects the population we serve—older Americans and people with underlying medical conditions—and our employees during the Coronavirus (COVID-19) pandemic.” You can find out more here.

IRS is closing down some operations. The upside is that they’re offering some relief, too. You can find those details here.

Finally, if you’d like to help out, there are many organizations offering services during the crisis.

PLEASE DON’T LEAVE QUESTIONS IN THE COMMENTS! I may not see them. Best to ask here.

Still confused about the business expense deduction for meals and entertainment under the Tax Cuts and Jobs Act (TCJA)? In the months following the new law, taxpayers and tax professionals alike weren’t sure what the new limits and restrictions would mean for businesses. In October of 2018, the Internal Revenue Service (IRS) offered transitional guidance on the rules. At the time, the IRS indicated that it would provide additional guidance, and now it has issued proposed regulations on the business expense deduction for meals and entertainment.

Under prior law, the rule was that you could deduct 50% of entertainment, amusement, or recreation expenses directly related to your trade or business. Under the TCJA, the meals deduction remained but there is no deduction for any item generally considered to constitute entertainment, amusement, or recreation. 

The TCJA did not change the definition of entertainment. Where things get tricky, though, is whether providing food and beverages might constitute entertainment, especially if they were tied to an activity considered to be entertainment.

Today In: Taxes

Under the transitional guidance issued in Notice 2018-76 (downloads as a PDF), taxpayers may deduct 50% of meals so long as the expense is ordinary and necessary to carry on a trade or business. Just as before, the costs may not be lavish or extravagant under the circumstances (context matters). And, the taxpayer or an employee of the taxpayer must be present when the food or beverages are served (you can’t just offer up a smorgasbord and walk away).

The proposed regulations largely incorporate the guidance in Notice 2018-76 with a few additional clarifications. 

For example, the proposed regulations make clear that the 50% deduction for food and beverages remains in place. They also make clear that entertainment expenses are not deductible, even if the two are mixed and even if the expense is related to or associated with the active conduct of a trade or business. To help you sort it out, the proposed regulations include the following examples:

  • Taxpayer A invites B, a business associate, to a baseball game to discuss a proposed business deal. A purchases tickets for A and B to attend the game. The baseball game is entertainment, and thus, the cost of the tickets is an entertainment expenditure and is not deductible by A.
  • Assume the same facts as above except that A also buys hot dogs and drinks for A and B. The cost of the hot dogs and drinks, which are purchased separately from the game tickets, is not an entertainment expenditure. Therefore, A may deduct 50% of the expenses associated with the hot dogs and drinks purchased at the game if they otherwise meet the deductibility requirements.

The proposed regulations also provide that the amount charged for food or beverages on a bill, invoice, or receipt must reflect the venue’s usual selling cost for those items if they were to be purchased separately from the entertainment, or must approximate the reasonable value of those items. And as before, unless food or beverages provided at or during an entertainment activity are purchased or stated separately, the entire amount is a nondeductible entertainment expenditure. Yep, that means that you may not, on your own, decide on an allocation.

Again, some examples:

  • Taxpayer C invites D, a business associate, to a basketball game. C purchases tickets for C and D to attend the game in a suite, where they have access to food and beverages. The cost of the basketball game tickets, as stated on the invoice, includes the food or drinks. The basketball game is entertainment, and the cost of the game tickets is a nondeductible entertainment expense. The cost of the food and beverages, which are not purchased separately from the game tickets, is not stated separately on the invoice. Thus, the value of the food and drink is considered entertainment. C may not deduct the cost of the tickets or the food and drinks associated with the basketball game.
  • Assume the same facts as above except that the invoice for the basketball game tickets separately states the cost of the food and beverages and reflects the venue’s usual selling price if purchased separately. The basketball game is still entertainment, and the value of the game tickets, other than the cost of the food and beverages, is a nondeductible entertainment expense. However, the cost of the food and beverages, stated separately on the invoice for the game tickets, is not an entertainment expenditure, and C may deduct 50% of the expenses associated with the food and beverages provided at the game if they meet the other deductibility requirements.

One change in the proposed regulations involves the requirement in Notice 2018-76 that the food and beverages be provided to a business contact, which was described in the notice as a “current or potential business customer, client, consultant, or similar business contact.” The proposed regulations make clear that the food or beverages must be provided to a “person with whom the taxpayer could reasonably expect to engage or deal in the active conduct of the taxpayer’s trade or business such as the taxpayer’s customer, client, supplier, employee, agent, partner, or professional adviser, whether established or prospective.” Since employees are included in the list, that means the 50% deductibility rule applies to employer-provided meals as well as to situations in which a taxpayer provides meals to both employees and non-employee business associates at the same event.

That’s a big change. Under prior law, expenses for food or beverages that were excludable from employee income as de minimis fringe benefits were not subject to the 50% deduction limitation: they could be fully deducted. Following the TCJA, expenses for food or beverages excludable from employee income are also subject to the 50% deduction limitation unless another exception applies.

Some meals continue to be deductible in full as exceptions to the 50% rule. They include: 

  1. Expenses for food and beverages if the costs are treated as compensation to the recipient;
  2. Expenses for food and drinks if the costs are treated as income to a person other than an employee as compensation for services;
  3. Expenses incurred by a taxpayer in connection with the performance of services for another person (whether or not the other person is an employer) under a reimbursement or other expense allowance arrangement;
  4. Expenses for food or beverage paid or incurred for recreational, social, or similar activities primarily for the benefit of employees like company parties or annual picnics (but events that discriminate in favor of highly compensated employees, officers, shareholders or others who own a 10% or greater interest in the business are not considered paid or incurred primarily for the benefit of employees).
  5. Expenses for food and beverages made available to the general public (general public includes customers, clients, and visitors, but does not include employees, partners, or independent contractors); and
  6. Expenses for food and beverages that are sold to customers in a bona fide transaction for adequate and full consideration in money or money’s worth (customer includes anyone who is sold food or beverages in a bona fide sale, including employees if they pay fair market value prices).

The proposed regulations apply to taxable years that begin on or after the date of publication of a Treasury decision adopting these rules as final regulations in the Federal Register. Until then, you can rely on the proposed regulations for entertainment expenditures and food or beverage expenses paid or incurred after December 31, 2017. In addition, you can rely on the guidance in Notice 2018-76 until these proposed regulations are finalized.

The IRS will hold a public hearing on the proposed regulations on April 7, 2020.