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Operating as usual
At the end of 2020, Congress passed, and President Trump signed, a new law that provides for additional relief related to the coronavirus (COVID-19) pandemic. This law, the Consolidated Appropriations Act, 2021 (CAA, 2021), includes a second draw of Paycheck Protection Program (PPP) loans (PPP Second Draw Loans). It also allows businesses to deduct ordinary and necessary expenses paid from the proceeds of PPP loans.
Background. In March 2020, the Coronavirus Aid, Relief and Economic Security (CARES) Act was enacted. The CARES Act authorizes the Small Business Administration (SBA) to make loans to qualified businesses under certain circumstances. The provision established the PPP, which provided up to 24 weeks of cash-flow assistance through 100% federally guaranteed loans to eligible recipients to maintain payroll during the COVID-19 pandemic and to cover certain other expenses. The Paycheck Protection Program Flexibility (PPPF) Act made substantial changes to the PPP, including decreasing the percentage that loan proceeds must be used on payroll costs from 75% to 60%, thereby increasing the percentage that may be used for nonpayroll costs such as rent, mortgage interest and utilities from 25% to 40%. Additionally, the PPPF Act permits borrowers to defer payments of principal, interest, and fees to 10 months after the last day of the covered period (the earlier of 24 weeks or December 31, 2020). The application period closed on August 8, 2020. The SBA began approving PPP forgiveness applications and remitting forgiveness payments to PPP lenders on October 2, 2020.
Paycheck Protection Program Second Draw Loans. The CAA, 2021 permits certain smaller businesses who received a PPP loan and experienced a 25% reduction in gross receipts to take a PPP Second Draw Loan of up to $2 million.
Eligible entities. Prior PPP borrowers must meet the following conditions to be eligible for the PPP Second Draw Loans:
Employ no more than 300 employees per physical location;
Have used or will use the full amount of their first PPP loan; and
Demonstrate at least a 25% reduction in gross receipts in the first, second, or third quarter of 2020 relative to the same 2019 quarter. Applications submitted on or after Jan. 1, 2021 are eligible to utilize the gross receipts from the fourth quarter of 2020.
Eligible entities include for-profit businesses, certain non-profit organizations, housing cooperatives, veterans' organizations, tribal businesses, self-employed individuals, sole proprietors, independent contractors, and small agricultural co-operatives.
Loan terms. Borrowers may receive a PPP Second Draw Loan of up to 2.5 times the average monthly payroll costs in the one year prior to the loan or the calendar year. However, borrowers in the hospitality or food services industries (NAICS code 72) may receive PPP Second Draw Loans of up to 3.5 times average monthly payroll costs. Only a single PPP Second Draw Loan is permitted to an eligible entity.
Gross receipts and simplified certification of revenue test. PPP Second Draw Loans of no more than $150,000 may submit a certification, on or before the date the loan forgiveness application is submitted, attesting that the eligible entity meets the applicable revenue loss requirement. Non-profits and veterans' organizations may use gross receipts to calculate their revenue loss standard.
Loan forgiveness. Like the first PPP loan, the PPP Second Draw Loan may be forgiven for payroll costs of up to 60% (with some exceptions) and nonpayroll costs such as such as rent, mortgage interest and utilities of 40%. Forgiveness of the loans is not included in income as cancellation of indebtedness income.
Application of exemption based on employee availability. The CAA, 2021 extends current safe harbors on restoring full-time employees and salaries and wages. Specifically, it applies the rule of reducing loan forgiveness for the borrower reducing the number of employees retained and reducing employees' salaries in excess of 25%.
Deductibility of expenses paid by PPP loans. The CARES Act was silent on whether expenses paid with the proceeds of PPP loans could be deducted. IRS took the position that these expenses were nondeductible. The CAA, 2021 provides that expenses paid both from the proceeds of loans under the original PPP and PPP Second Draw Loans are deductible.
Please contact our office with any further questions you might have on PPP loan forgiveness.
Very sincerely yours,
IRS LAUNCHES NEW WEBSITE TO PREVENT TAX-RELATED IDENTITY THEFT
IR 2020-27, 2/3/2020
In an Information Release, IRS has announced that it has launched a new website, Identity Theft Central, designed to improve online access to information on identity theft and data security protection for taxpayers, tax professionals and businesses.
The new website helps people get information they need on ID theft, scams and schemes.
The website contains the following separate sections:
Taxpayer Guide to Identity Theft, including what to do if someone becomes a victim of identity theft
Identity Theft Information for Tax Professionals, including knowing responsibilities under the law
Identity Theft Information for Businesses, including how to recognize the signs of identity theft
The site also features videos on several topics, including a video message from IRS Commissioner Chuck Rettig, warning signs for phishing email scams (a common tactic used for identity theft), and steps for people to protect their computer and phone.
References: For identity theft issues, see FTC 2d/FIN ¶ T-10164.4.
How Democrats misled the nation about Trump’s tax cuts
By Post Editorial Board April 21, 2019 | 9:09pm
Gov. Andrew Cuomo
Gov. Andrew Cuomo Newsday via Getty Images
Say this for Democrats: They can be very effective — at least, when it comes to misleading Americans on taxes. That’s clear from the wide gap between the number of people who got tax cuts last year and the far smaller number who think they did.
As even The New York Times (yes, the anti-Trump Times) noted, Tax Policy Center figures show 65 percent of taxpayers got tax cuts last year, thanks to the 2017 Trump tax reforms; just 6 percent had to pay more.
Yet in early April, SurveyMonkey found only 40 percent of Americans believed they saw savings, and only 20 percent felt sure they had. An NBC/Wall Street Journal poll last month found even fewer, just 17 percent, thought their families would pay less.
Why are so many people under the wrong impression about their own taxes? As the Times put it, the gap “appears to flow from a sustained — and misleading — effort by liberal opponents of the law to brand [Trump’s tax reform] as a broad middle-class tax increase.” Give the paper credit for honesty.
Fact is, “Democrats did a very good job” at convincing people they wouldn’t benefit, the Tax Policy Center’s Howard Gleckman observed. “The reality has been unable to break that perception.”
Here in New York, as E.J. McMahon noted on these pages recently, Gov. Andrew Cuomo never stopped railing about the Trump tax cuts. He called them “an all-out direct attack on New York’s future,” suggesting they would effectively raise levies on middle-class families by as much as 25 percent.
Albany Dems are slapping minority kids
by not lifting the charter cap
Turns out “the vast majority” of New Yorkers actually “paid lower taxes in 2018 then they would have under the previous federal law,” wrote McMahon. Even Cuomo himself paid less: just $39,138 on his $211,289 income (18.5 percent), versus $41,765 on his slightly higher $212,776 income (19.6 percent) in 2017.
Add in the fact that the economy is strong — the job market’s hotter than it has been in years — and it’s hard to understate the benefits of the reforms passed by Republicans and signed by Trump.
Republicans just need to figure out how to overcome the deceitful messaging by the other side.
File Your Tax Return Even if You Can’t Pay What You Owe Now
The Tax Department offers an installment payment program and other payment options
New York State Taxpayer Rights Advocate Margaret Neri today reminded taxpayers not to delay filing their personal income tax return if they owe money but can’t immediately pay. The Tax Department can help taxpayers avoid or reduce penalties and added interest.
“We want to make it as easy as possible for taxpayers to pay what they owe,” said Taxpayer Rights Advocate Margaret Neri. “We understand that not everyone can pay what they owe right away. That’s why the Tax Department offers opportunities to set up a payment plan or make a one-time payment online after filing.”
Steps to delay payment
Taxpayers who can’t pay what they owe all at once are encouraged to follow these steps:
submit your completed tax return by the April 15 deadline to avoid penalties;
pay what you can afford now to reduce interest; and
request an Installment Payment Agreement (IPA).
An IPA is the Tax Department’s most convenient and popular payment option for outstanding tax debt. In the last five years, 381,000 taxpayers have taken advantage of this program to pay back $1.4 billion.
Individuals who can pay in full have another payment option—Quick Pay—that allows them to pay a bill or tax debt directly from their bank accounts. The online app can be accessed from home computers, a smartphone, or other mobile device. Since the Quick Pay app went live in 2018, nearly 134,000 taxpayers have made one-time payments totaling $105 million.
In addition, taxpayers can use Tax Department Online Services accounts to make payments from their bank account or by credit card. They can also respond to notices, update their information, and handle other tax-related tasks. Visit www.tax.ny.gov to set up an account or log in to an existing account.
New York State Taxpayer Rights Advocate
As a New York State taxpayer, you have rights protecting you from any unfairness in the administration and collection of taxes, as well as a variety of options to resolve tax issues.
The Office of the Taxpayer Rights Advocate (OTRA) will help you understand your rights, and find the best way for you to resolve your tax debt or problem.
OTRA, an independent office within the Tax Department, provides:
free assistance to resolve difficult or ongoing tax problems;
options to consider if a tax issue is causing undue economic harm; and
recommendations for administrative or legislative reforms.
tax.ny.gov Welcome to the official website of the NYS Department of Taxation and Finance. Visit us to learn about your tax responsibilities, check your refund status, and use our online services—anywhere, any time!
2017 TAX REFORM: IRS CLARIFIES INTEREST ON HOME EQUITY LOANS OFTEN STILL DEDUCTIBLE
In an Information Release, IRS has announced that in many cases, taxpayers can continue to deduct interest paid on home equity loans under the recently enacted Tax Cuts and Jobs Act (PL 115-97, 12/22/2017).
Background. Taxpayers may deduct interest on mortgage debt that is "acquisition debt". Acquisition debt means debt that is:
Secured by the taxpayer's principal home and/or a second home, and
Incurred in acquiring, constructing, or substantially improving the home.
This rule hasn't been changed by the Tax Cuts and Jobs Act.
Under pre-Tax Cuts and Jobs Act law, the maximum amount that was treated as acquisition debt for the purpose of deducting interest was $1 million ($500,000 for marrieds filing separately). This meant that a taxpayer could deduct interest on no more than $1 million of acquisition debt. Taxpayers could also deduct interest on "home equity debt". "Home equity debt", as specially defined for purposes of the mortgage interest deduction, meant debt that:
Was secured by the taxpayer's home, and
Wasn't "acquisition indebtedness" (that is, wasn't incurred to acquire, construct, or substantially improve the home).
Thus, the rule had allowed deduction of interest on home equity debt and enabled taxpayers to deduct interest on debt that wasn't incurred to acquire, construct, or substantially improve a home—i.e., on debt that could be used for any purpose. As with acquisition debt, the pre-Tax Cuts and Jobs Act rules limited the maximum amount of "home equity debt" on which interest could be deducted; here, the limit was the lesser of $100,000 ($50,000 for a married taxpayer filing separately), or the taxpayer's equity in the home.
Under the Tax Cuts and Jobs Act, for tax years beginning after Dec. 31, 2017 and before Jan. 1, 2026, the limit on acquisition debt is reduced to $750,000 ($375,000 for a married taxpayer filing separately). The $1 million, pre-Tax Cuts and Jobs Act limit applies to acquisition debt incurred before Dec. 15, 2017, and to debt arising from refinancing pre-Dec. 15, 2017 acquisition debt, to the extent the debt resulting from the refinancing does not exceed the original debt amount. (Code Sec. 163(h)(3)(F))
Under the Tax Cuts and Jobs Act, for tax years beginning after Dec. 31, 2017 and before Jan. 1, 2026, there is no longer a deduction for interest on "home equity debt". The elimination of the deduction for interest on home equity debt applies regardless of when the home equity debt was incurred. (Code Sec. 163(h)(3)(F))
New guidance. In IR 2018-32, IRS said that despite the newly-enacted restrictions on home mortgages under the Tax Cuts and Jobs Act, taxpayers can often still deduct interest on a home equity loan, home equity line of credit (HELOC), or second mortgage, regardless of how the loan is labelled.
IRS clarified that the Tax Cuts and Jobs Act suspends the deduction for interest paid on home equity loans and lines of credit, unless they are used to buy, build or substantially improve the taxpayer's home that secures the loan.
For example, interest on a home equity loan used to build an addition to an existing home is typically deductible, while interest on the same loan used to pay personal living expenses—such as credit card debts—is not. As under pre-Tax Cuts and Jobs Act law, for the interest to be deductible, the loan must be secured by the taxpayer's main home or second home (known as a qualified residence), not exceed the cost of the home and meet other requirements.
For anyone considering taking out a mortgage, the Tax Cuts and Jobs Act imposes a lower dollar limit on mortgages qualifying for the home mortgage interest deduction. The lower limits apply to the combined amount of loans used to buy, build or substantially improve the taxpayer's main home and second home.
IR 2018-32, provides the following examples:
Illustration 1: In January 2018, John takes out a $500,000 mortgage to purchase a main home with a fair market value of $800,000. In February 2018, he takes out a $250,000 home equity loan to put an addition on the main home. Both loans are secured by the main home and the total does not exceed the cost of the home. Because the total amount of both loans does not exceed $750,000, all of the interest paid on the loans is deductible. However, if John used the home equity loan proceeds for personal expenses, such as paying off student loans and credit cards, then the interest on the home equity loan would not be deductible.
Illustration 2: In January 2018, Mary takes out a $500,000 mortgage to purchase a main home. The loan is secured by the main home. In February 2018, she takes out a $250,000 loan to purchase a vacation home. The loan is secured by the vacation home. Because the total amount of both mortgages does not exceed $750,000, all of the interest paid on both mortgages is deductible. However, if Mary took out a $250,000 home equity loan on the main home to purchase the vacation home, then the interest on the home equity loan would not be deductible.
Illustration 3: In January 2018, Bob takes out a $500,000 mortgage to purchase a main home. The loan is secured by the main home. In February 2018, he takes out a $500,000 loan to purchase a vacation home. The loan is secured by the vacation home. Because the total amount of both mortgages exceeds $750,000, not all of the interest paid on the mortgages is deductible. Only a percentage of the total interest paid is deductible.
References: For qualified residence interest deduction, see FTC 2d/FIN ¶ K-5470; United States Tax Reporter ¶ 1634.052.
PREVIOUSLY RELEASED 2018 RETIREMENT PLAN LIMITATIONS UNCHANGED BY TAX REFORM ACT
IRS has stated that the Tax Cut and Jobs Act (PL 115-97, 12/22/17) did not affect the 2018 tax year dollar limitations for retirement plans previously announced by IRS in late 2017.
New guidance. In IR 2018-19, IRS indicated that the recently enacted Tax Cut and Jobs Act made no changes to the section of the tax law limiting benefits and contributions for retirement plans. Accordingly, the qualified retirement plan limitations for tax year 2018 previously announced in IR 2017-177, and detailed in Notice 2017-64, 2017-45 IRB 486 (see below), remain unchanged.
In IR 2018-19, IRS also noted that the tax law specifies that contribution limits for IRAs, as well as the income thresholds related to IRAs and the Code Sec. 25B saver's credit, are to be adjusted for changes in the cost of living using procedures that are used to make cost-of-living adjustments that apply to many of the basic income tax parameters. However, although the Tax Cut and Jobs Act made changes to how these cost of living adjustments are computed, after taking the applicable rounding rules into account, the amounts for 2018 previously announced in the news release and the notice remain unchanged.
The following plan limits are in effect for 2018:
Elective deferrals. The Code Sec. 402(g)(1) limit on the exclusion for elective deferrals described in Code Sec. 402(g)(3) is $18,500. This limitation affects elective deferrals to Code Sec. 401(k) plans, Code Sec. 403(b) plans, and the Federal Government's Thrift Savings Plan.
Defined contribution plans. The limit on the annual additions to a participant's defined contribution account under Code Sec. 415(c)(1)(A) is $55,000.
Defined benefit plans. The limitation on the annual benefit under a defined benefit plan under Code Sec. 415(b)(1)(A) is $220,000. For participants who separated from service before Jan. 1, 2018, the 100% of average high-three-years' compensation under Code Sec. 415(b)(1)(B) is computed by multiplying the participant's compensation limitation, as adjusted through 2017, by 1.0197.
RIA observation: This figure was originally reported in Notice 207-64 as 1.0196. However, IRS subsequently issued a revised version that adjusted the figure to 1.0197 (see Weekly Alert ¶ 2 11/02/2017).
Annual compensation limit. The maximum amount of annual compensation that can be taken into account for various qualified plan purposes, including Code Sec. 401(a)(17), Code Sec. 404(l), Code Sec. 408(k)(3)(C), and Code Sec. 408(k)(6)(D)(ii), is $275,000.
ESOP 5-year distribution period. The dollar amount under Code Sec. 409(o)(1)(C)(ii) for determining the maximum account balance in an employee stock ownership plan (ESOP) subject to a 5-year distribution period is $1,105,000, while the dollar amount used to determine the lengthening of the five-year distribution period is $220,000.
Government plans subject to the grandfather rule. The annual compensation limitation under Code Sec. 401(a)(17) for eligible participants in certain governmental plans that, under the plan as in effect on July 1, '93 allowed COLAs to the plan's compensation limit under Code Sec. 401(a)(17) to be taken into account, is $405,000.
Government, etc. deferred compensation plans. The limit on deferrals under Code Sec. 457(e)(15), concerning deferred compensation plans of state and local governments and tax-exempt organizations, is $18,500.
Gratuitous transfers of employer securities. The limitation under Code Sec. 664(g)(7) concerning the qualified gratuitous transfer of qualified employer securities to an employee stock ownership plan is $50,000.
Control employee. The employee compensation amount used in the definition of "control employee" for purposes of the auto commuting rule of Reg. § 1.61-21(f)(5)(i) is $110,000. And, the compensation amount under Reg. § 1.61-21(f)(5)(iii) is $220,000.
Premiums on longevity annuity contracts. The dollar limitation on premiums paid with respect to a qualifying longevity annuity contract under Reg. § 1.401(a)(9)-6, Q&A-17(b)(2)(i), is $130,000.
Systemically important plan. The threshold used to determine whether a multi-employer plan is a systemically important plan under Code Sec. 432(e)(9)(H)(v)(III)(aa) is $1,087,000,000.
Highly compensated employee. The dollar limit used in defining a highly compensated employee under Code Sec. 414(q)(1)(B) is $120,000.
Key employee in top-heavy plan. The dollar limit under Code Sec. 416(i)(1)(A)(i) relating to the definition of a key employee in a top-heavy plan is $175,000.
Catch-up contributions. The dollar limit under Code Sec. 414(v)(2)(B)(i) for catch-up contributions to an applicable employer plan other than a plan described in Code Sec. 401(k)(11) (SIMPLE 401(k) plan) or Code Sec. 408(p) (SIMPLE IRA) for individuals aged 50 or over is $6,000. The dollar limit under Code Sec. 414(v)(2)(B)(ii) for catch-up contributions to an applicable employer plan described in Code Sec. 401(k)(11) or Code Sec. 408(p) for individuals aged 50 or over is $3,000.
Simplified employee pensions (SEPs). The compensation limit under Code Sec. 408(k)(2)(C) (amount of compensation above which an employee who meets other requirements must be able to participate in the employer's SEP plan) is $600.
SIMPLE accounts. The maximum amount of compensation an employee may elect to defer under Code Sec. 408(p)(2)(E) for a SIMPLE plan is $12,500.
Limits for making deductible contributions by active plan participants to traditional IRAs. In general, an individual who isn't an active participant in certain employer-sponsored retirement plans, and whose spouse isn't an active participant, may make an annual deductible cash contribution to an IRA up to the lesser of:
An inflation-adjusted statutory dollar limit, or
100% of the compensation that's includible in his gross income for that year.
For 2018, the statutory dollar limit is $5,500, plus an additional $1,000 for those age 50 or older. If the individual (or his spouse) is an active plan participant, the deduction phases out over a specified dollar range of modified adjusted gross income (MAGI).
For taxpayers filing joint returns, the otherwise allowable deductible contribution phases out ratably for MAGI between $101,000 and $121,000.
For single taxpayers and heads of household, the otherwise allowable deductible contribution phases out ratably for MAGI between $63,000 and $73,000. For married taxpayers filing separate returns, the otherwise allowable deductible contribution phases out ratably for MAGI between $0 and $10,000.
For a married taxpayer who is not an active plan participant but whose spouse is such a participant, the otherwise allowable deductible contribution phases out ratably for MAGI between $189,000 and $199,000.
Limits for making contributions to Roth IRAs. Individuals may make nondeductible contributions to a Roth IRA, subject to the overall limit on IRA contributions. The maximum annual contribution that can be made to a Roth IRA is phased out for taxpayers with MAGI over certain levels for the tax year. For taxpayers filing joint returns, the otherwise allowable contributions to a Roth IRA phases out ratably for 2018 for MAGI between $189,000 and $199,000. For single taxpayers and heads of household, it phases out ratably for MAGI between $120,000 and $135,000. For married taxpayers filing separate returns, the otherwise allowable contribution phases out ratably for MAGI between $0 and $10,000.
Saver's credit. For tax years beginning in 2018, an eligible lower-income taxpayer can claim a nonrefundable tax credit for the applicable percentage (50%, 20%, or 10%, depending on filing status and AGI) of up to $2,000 of his qualified retirement savings contributions, as follows:
Joint filers: $0 to $38,000, 50%; $38,000 to $41,000, 20%; and $41,000 to $63,000, 10% (no credit if AGI is above $63,000).
Heads of households: $0 to $28,500, 50%; $28,500 to $30,750, 20%; and $30,750 to $47,250, 10% (no credit if AGI is above $47,250).
All other filers: $0 to $19,000, 50%; $19,000 to $20,500, 20%; and $20,500 to $31,500, 10% (no credit if AGI is above $31,500)
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