Answered questions regarding the economic stimulus payments and other important information.
Do I have to pay tax on my stimulus payment?
No. The stimulus is an advance payment of a special 2020 tax credit. So, it is nontaxable.
I owe back taxes. Will my rebate be reduced?
No. The IRS will not apply the stimulus payment to offset past-due taxes or other federal or state debt, except for delinquent child support owed by an individual.
My wife and I had a baby in 2020. Will we get an extra $500 tax rebate?
Yes, assuming you otherwise qualify, but not this year. On your 2020 tax return, which you will file next year, you will reconcile the rebate money that you received with your actual tax situation for the year. If you otherwise qualify, you will get an extra $500 refundable credit on your 2020 tax return.
I took a required minimum distribution from my traditional IRA in February. Now that Congress has waived RMDs for 2020, can I put it back into the IRA?
Yes, and it will be treated as a tax-free rollover as along as you return the funds to the IRA by July 15 and you don’t violate the one-rollover-every-12-months rule. Normally, you have 60 days to do a tax-free rollover, but IRS extended the time period for rollovers otherwise due between April 1 and May 15 of this year to July 15.
Businesses should take note of this easing in the federal stimulus law: Employers may defer payment of their 6.2% share of Social Security tax, otherwise required to be made from March 27 through the end of the year. Half of the deferred amount is due December 31, 2021 and the other half I due December 31, 2022. Self-employed individuals can defer payment of up to 50% of their SECA tax.
An important fact to note regarding this is that special rules apply to employers that receive paycheck protection program loans. Employers who get a PPP loan may defer deposit and payment of their share of Social Security tax, without penalty, through the date that the lender issues a decision to forgive the loan. Once the employer receives that decision, the employer is no longer eligible for the payroll tax deferral. The amount that was previously deferred will continue to be deferred through the end of 2021 and 2022.
The processing of paper returns I suspended until offices reopen amid the Covid-19 pandemic.
May 7, 2020
Dear Clients & Friends:
Re: Care Act Update; PPP Loan Forgiveness
You are receiving this letter because our records indicate you have applied and/or been approved for the Paycheck Protection Program loan.
On May 1, 2020, the IRS issued Notice 2020-32 which talks about the Paycheck Protection Program loans that are a part of the CARES Act. The IRS has effectively reminded us that if something sounds to good to be true it probably is.
Many small businesses have applied for and received PPP Loans. The guidance in the CARES Act says that if you use the money to pay wages to employees, pay health insurance, rent, utilities, etc. that the loan may be forgiven by the SBA. We have been advising clients to track how the PPP loan money is used so that at the end of eight weeks they are ready to complete the application for loan forgiveness. The CARES Act goes on to say that any part of the loan that is forgiven will be excluded from taxable income.
The IRS confirms this treatment in Notice 2020-32, but also goes on to say that the expenses paid with the money from the PPP loan that is forgiven will not be tax deductible. The IRS points out that in accordance with IRC Section 265, that any expenses directly associated with tax exempt income must be tracked to that income, and not used to offset other taxable income. The purpose of this code section is to prevent a double tax benefit.
I am fond of saying that the devil is always in the details. Thanks to this IRS notice, the devil appears earlier than usual. What will this mean to Businesses when they file their 2020 tax returns? It means that we will be paying taxes on the portion of PPP loan that is forgiven. For C-Corporations it means they will pay federal taxes of $21 for every $100 of loan forgiveness. For S-Corporations and Partnerships the owners will pay at whatever tax bracket they are in personally. For those in the 24% federal bracket, it will be $24 for every $100 of loan forgiveness. It will also be taxable for the state. State taxes will vary depending on the tax bracket the taxpayer is in.
Loan Forgiveness is still a good deal, just not as good as the CARES Act made it sound. The taxes discussed above related to the PPP loan forgiveness are not automatic. Year-end tax planning will be more important than ever in 2020 to successfully reduce or eliminate these taxes. Contact us if you have any questions about this information.
Starkey & Company, PA
April 27, 2020
Dear Clients & Friends,
We hope that you are doing well during this time. As most of you are aware, our office is remaining open during this time and we are here to answer any questions you may have. We are working diligently preparing tax returns and assisting our clients throughout the COVID-19 pandemic.
You are receiving this letter because our records indicate that you have applied and/or have been approved for the Paycheck Protection Program loan. The Paycheck Protection Program loan is designed to provide direct incentive for small businesses to keep their workers on payroll. The most appealing aspect of this loan is the forgiveness.
The loan will be fully forgiven if the funds are used for payroll costs, interest on mortgages, rent and utilities (at least 75% of the forgiven amount must be used on payroll). Forgiveness is based on the employer maintaining or quickly rehiring employees and maintaining salary levels. Forgiveness will be reduced if full-time headcount declines, or if salaries and wages decrease.
You will owe money when your loan is due if you use the loan amount for anything other than payroll costs, mortgage interest, rent, and utility payments over the 8 weeks after getting the loan. You will also owe money if you do not maintain your staff and payroll.
We are sure many of you are wondering how you can request loan forgiveness. You will need to submit an application to the lender that is servicing your loan. You will be required to include documents that verify the number of full-time equivalent employees and pay rates, as well as the payments on eligible mortgage, lease, and utility obligations. You must certify that the documents are true and that you used the forgiveness amount to keep employees and make eligible mortgage interest, rent, and utility payments. The lender must make a decision on the forgiveness within 60 days of receipt of the application and supporting documents. All payments are deferred for 6 months; however, interest will continue to accrue over this period.
It is important to start preparing now for your forgiveness application. Keeping good payroll records, compiling receipts and statements for utility payments, rent, and mortgage interest, keeping employee and/or shareholder insurance statements, and recording pension contributions on behalf of employees and/or shareholders.
We are here to assist you during this time. Please call the office if you have any questions regarding the information contained in this letter.
Robert G. Starkey, CPA
SBA Disaster Assistance in Response to Coronavirus
The United States Small Business Association is offering designated states and territories low-interest federal disaster loans for working capital to small businesses suffering substantial economic injury as a result of COVID-19. The SBA will issue, under its own authority, as provided by the Coronavirus Preparedness and Response Supplemental Appropriations Act that was recently signed by President Trump, an Economic Injury Disaster Loan declaration.
Delaware has been deemed an eligible area for SBA disaster loans.
Key facts about an Economic Injury Disaster Loan
- The SBA will make loans available statewide to small businesses and private, non-profit organizations to help alleviate economic injury caused by the Coronavirus.
- SBA’s Economic Injury Disaster Loans offer up to $2 million in assistance and can provide vital economic support to small businesses to help overcome the temporary loss of revenue they are experiencing.
- These loans may be used to pay fixed debts, payroll, accounts payable and other bills that can’t be paid because of the disaster’s impact.
- The interest rate is 3.75% for small businesses.
- The interest rate is 2.75% for non-profits.
- The SBA offers loans with long-term repayments in order to keep payments affordable, up to a maximum of 30 years. Terms are determined on a case by case basis, based upon each borrower’s ability to repay.
- The SBA’s Economic Injury Disaster Loans are just one piece of the expanded focus of the federal government’s coordinated response.
If you are a small business in the hospitality field, please refer to the prior blog regarding the Hospitality Emergency Loan Program (HELP). HELP is designed to provide financial relief for restaurants, bars and other hospitality industry businesses that employ thousands of Delawareans.
Governor Carney Announces HELP Program to Support Delaware Small Businesses
Small businesses contribute and stimulate our economy by offering employment opportunities and bringing growth and innovation to the community. Unfortunately, a number of small businesses will be impacted by the Coronavirus (COVID-19) outbreak and the lingering after-effects on our economy.
As you are aware, Restaurants have been told to only provide takeout and delivery services to encourage social distancing and limit the amount of time individuals are spending in public spaces. Restaurants, bars, hotels and other hospitality-level businesses, and their employees, are among those most seriously impacted by COVID-19 in Delaware. Governor Carney recently announced the Hospitality Emergency Loan Program (HELP) to provide financial relief for restaurants, bars and other hospitality industry businesses that employ thousands of Delawareans.
The Division of Small Businesses will administer the HELP program, which works to provide businesses with no-interest loans that are capped at $10,000 per business per month to help small businesses cover rent, utilities and other unavoidable bills. The loans can not be used for personnel expenses and will have a 10-year term with payments deferred for nine months.
In order to be eligible for the HELP loans, the business must have been in operation for at least a year, have an annual revenue below $1.5 million and be in certain hospitality-connected industries as described above.
Assistance is also available for Delaware workers impacted by the Coronavirus. Governor Carney approved a number of changes to Delaware’s unemployment benefits program for the hospitality industry. The goal is for benefits to be available within a week of applying, part-time income may still be earned while collecting benefits as long as the worker can demonstrate their decreased hours and earnings, and the Department will not classify tipped workers as minimum wage earners as long as their tips are reported as wages.
Our office is here to assist you during this process. As a small business, we understand the impact of this situation and want to assist our clients throughout the process. Delawareans with questions about COVID-19 or their exposure risk can call the Division of Public Health Coronavirus Call Center at 1-866-408-1899 or 711 for individuals who are hearing impaired.
U.S. Treasury Department and IRS Deferring Tax Deadline and Payments Due to Covid-19 Outbreak
We are sure that many of you have been concerned about how the Coronavirus outbreak is affecting your tax situation. We ensure you that our staff is still working diligently to complete your tax returns and file a timely extension when necessary. The AICPA and the U.S. Treasury Department have issued guidance regarding how the President’s emergency declaration will affect your tax situation. To keep you abreast of the latest changes, we will be updating our blog on our website as well as our Facebook page regarding any updates related to this situation. While our office is remaining fully staffed, we are mindful of limiting the office traffic. If you wish to come in to speak with one of our staff members, please call our office ahead of time to make sure that our conference room is available.
Following President Donald Trump’s emergency declaration, the U.S. Treasury Department and Internal Revenue Service issued guidance allowing all individual and other non-corporate tax filers a 90-day reprieve to file and pay their tax liability typically due on April 15 until July 15, 2020, without penalties or interest. The guidance also allows corporate taxpayers a similar deferment of up to $10 million of federal income tax payments that would typically be due on April 15 until July 15, 2020 without penalties or interest. It is important to note that we will still be able to file an extension on July 15 for those taxpayers who have paid in their tax liability but have not filed their tax return yet. We are continuing to work as we normally would and ask that our clients continue to bring their tax documents in despite the extended deadline.
As for how each state is handling the filing deadline and payments due, this could change over time. The AICPA has released a chart with the different state decisions. The chart can be found here – https://www.aicpa.org/content/dam/aicpa/advocacy/tax/downloadabledocuments/coronavirus-state-filing-relief.pdf. Delaware has not issued a deferment at this time and their offices remain open during the State of Emergency.
As always, thank you for your continued patronage. Please don’t hesitate to call us if you have any questions or concerns.
Delaware First-Time Homebuyer Credit
Did you know that Delaware offers a credit to first-time homebuyers and that the credit is taken at the federal level?
The Delaware State Housing Authority (create link to website) created the Delaware First-Time Homebuyer Tax Credit under authority granted by Congress in the 1984 Tax Reform Act as a means of providing housing assistance to low and moderate-income homebuyers.
The DE Tax Credit is a non-refundable federal income tax credit designed to assist persons of low to moderate-income to better afford homeownership. The DE Tax Credit holder is eligible to claim a portion of the annual interest paid on the mortgage as a special tax credit, not to exceed $2,000, during each year that they owe amounts on their mortgage loan and occupy the home as their principal residence.
With the DE Tax Credit, you can reduce your federal income tax liability by 35% of interest paid up to $2,000 for that year.
Applicants who receive a DE Tax Credit may be subject to a Recapture Tax if they sell the residence within nine years.
How to Apply
- The homebuyer must apply for the DE Tax Credit through a participating lender. The homebuyer should apply for the DE Tax Credit at the same time he or she makes a formal application for a mortgage loan.
- Homebuyer must purchase a home within Delaware.
- The applicant cannot have had an ownership interest in a Principal Residence at any time during the three-year period prior to the date the mortgage to which the DE Tax Credit relates is executed.
- Homebuyer’s household income and the purchase price must not exceed the maximum limits set by the Program.
- Homebuyer must intend to occupy the home as his or her primary residence.
- Homebuyer must use an approved lender and sign DE Tax Credit affidavit when they purchase their home.
Our office has experience with the Delaware First-Time Homebuyer Credit. Whether you are looking for more information regarding the Credit or need assistance with preparing your tax return utilizing the Credit, we are here to help. Please call our office today to set up an appointment.
We frequently get asked how long our individual and business clients should keep their records and copies of tax returns. Here is our advice:
Most of the time our individual clients ask us which records are important. Here is a list of the most common records you need to keep:
- Records of income received
- Expense items, especially work-related expenses
- Home improvement, sales, and refinances
- Investment purchases and sales information
- The tax basis of gifted and inherited property
- Specific uses of loan proceeds
- Significant, unreimbursed medical expenses
- Charitable contributions
- Interest and taxes paid
- Records of nondeductible IRA contributions
The tax law requires all businesses to keep records to support the gross income, deductions, and credits claimed on their income tax returns.
All businesses should have a permanent set of books which summarize individual deposits, disbursements, and items of adjustment. These records should be retained indefinitely. Permanent records also include those needed to prove the basis (cost) of depreciable assets.
Additionally, supporting documents may be needed to validate the journal entries if your returns are examined by the IRS. The general rule is that supporting documents should be retained at least until the statute of limitations for a tax year have passed.
Our recommended retention periods are:
- 7 years for: bank deposit slips, bank statements, cancelled or substitute checks, credit card receipts, employment tax returns, expense records, inventory records, paid invoices and tax returns
- Contracts, corporate stock records, and financial statements should be permanent records of the business.
- Depreciation schedules should be kept for the life of the asset plus 7 years
- Employee records should be kept for the period of employment plus 7 years
- Investment records should be kept for the ownership period plus 7 years
- Journal and general ledger documents should be kept for the life of the business plus 7 years
- Minutes of meetings should be kept for the life of the company plus 7 years
- Real estate records should be kept for the ownership period plus 7 years
- Home purchase and improvement records should be kept for the ownership period plus 7 years
For more information on record retaining, contact one of our staff members today.
On December 19, 2019, the President signed the SECURE Act. The SECURE Act stands for Setting Every Community Up for Retirement Enhancement and is a bill that includes significant provisions aimed at increasing access to tax-advantaged accounts and preventing older Americans from outliving their assets.
The most important points of the SECURE Act are:
- The Act will make it easier for small business owners to set up “safe harbor” retirement plans that are less expensive and easier to administer.
- Many part-time workers will be eligible to participate in an employer retirement plan.
- The Act pushes back the age at which retirement plan participants need to take RMDs from 70 1/2 to 72 and allows traditional IRA owners to keep making contributions indefinitely.
- The Act does mandate that most non-spouses inheriting IRAs take distributions that end up emptying the account in 10 years.
- The Act allows 401(k) plans to offer annuities.
- The Act will provide a maximum credit of $500 per year to employers who create a 401(k) or SIMPLE IRA plan with automatic enrollment.
- The Act will enable businesses to sign up part-time employees who work either 1,000 hours throughout the year or have three consecutive years with 500 hours of service.
- The Act will allow the use of tax-advantaged 529 plan accounts for qualified student loan repayments (up to $10,000 annually).
- The Act will permit penalty-free withdrawals of $5,000 from 401(k) accounts to defray the costs of having or adopting a child.
For more information regarding the SECURE Act, contact one of our knowledgeable staff members today.