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Individual Tax Returns

Tax Day Extension and Families First Coronavirus Response Act

Patrick & Raines Tax Update

904-396-5400 ♦ Office@CPAsite.com

When we rang in the New Year 2020, everything seemed so neat, even and balanced. Then shortly after Valentine’s Day, we began to realize that this might not be as great a year as we had thought. Now as we approach the end of the first quarter, we are surrounded by uncertainty.

Almost daily we have been seeing new announcements and new legislation being offered by both Congress and the Internal Revenue Service (IRS). In an effort to cut to the basic facts of those events, we are providing a brief summary of the initiatives to help those needing to file tax returns and those facing employment hardships for both businesses and their employees. The massive $2 trillion Congressional relief bill is on a path for enactment this month. More info will be coming after its passage and rules released for its implementation.

The Internal Revenue Service (IRS) has launched a new webpage at www.irs.gov/coronavirus, to provide up-to-date information.

In compliance with the stay-at-home orders issued, we are accepting your tax documents by mail, scan and email, fax or drop-off. We are open for business with limited staff and welcome your questions regarding your tax returns. All of our staff is working on a modified business model throughout this busy time.  Consequently, we may take a bit longer to respond to your phone calls and emails but we will respond as soon as possible.

We look forward to seeing you all healthy and safe in the coming weeks and months. We urge you to comply with all announced safe habits by maintaining a safe distance, practicing responsible personal hygiene, and contacting your health professional if needed.

Mark R. Patrick, CPA                 Timothy P. Raines, CPA

Tax Season Extended

Pursuant to an announcement by Secretary of the Treasury, Steven Mnuchin, the Internal Revenue Service (IRS) has extended the due date for both tax returns and any tax liabilities due. Any amounts due will not be subject to interest, penalties, or additions to tax as long as they are paid by July 15, 2020.

The IRS has also extended the time to pay the first quarter estimated taxes, normally due by April 15th. Those payments have also been extended to July 15, 2020 and will not be subject to interest and/or penalty.

This relief applies to all tax returns which includes individual (Form 1040), trust and/or estate (Form 1041), partnership (Form 1065), association (Form 990), and company or corporation (Forms 1120 and 1120-S). The forms to request an extension of time to file are not required to get the benefit of this automatic filing (and payment) extension.

If an additional extension of time to file is required beyond the due date of July 15, 2020 then Forms 4868 (for individuals) or 7004 (for business returns) must be filed to receive the extension of time to file until October 15th for individuals and corporations and September 15th for
S-corporations, partnerships and trusts/estate tax returns.

Under these provisions, the date for contributions to your IRA or HSA has also been extended to July 15, 2020. The date for the June 15th estimated tax payment has not changed. Required minimum distributions (RMDs) for those who delayed their first distribution must be withdrawn by April 1st (no change).

Find more details at:  https://www.irs.gov/newsroom/filing-and-payment-deadlines-questions-and-answers

Families First Coronavirus Response Act

Two (2) major provisions of the legislation were signed into law on March 18th: the Emergency Paid Sick Leave Act and Emergency Family and Medical Leave Expansion Act. Employers with fewer than 500 employees are subject to this Act which is totally funded by the U.S. government. The provisions of the new law will be effective through December 31, 2020. No unused portion of this provision will carryover to 2021 and no benefits are due on separation of service.

Under the Act, a total of 12-weeks of paid leave may be available. The first two weeks would be provided by the Emergency Paid Sick Leave Act based on certain criteria and the subsequent ten (10) weeks would be covered by the Emergency Family and Medical Leave Expansion Act (EFMLEA). They are not reliant upon each other and employees may qualify for the EFMLEA without a COVID-19 diagnosis, but the first ten (10) days would be unpaid under these provisions. An employer may still provide benefits, or may be able to pay benefits based on available vacation or personal time off (PTO).

Emergency Paid Sick Leave Act (E-PSL)

Full and part-time employees who are unable to work or telework for reasons related to COVID-19 (the coronavirus) will be eligible for up to 80 hours of additional emergency paid sick leave regardless of how long they have worked for an employer. Six (6) different scenarios determine the maximum amount of payment:

  1. For individuals subject to a quarantine or isolation order related to the COVID-19, the pay is the greater of the regular rate or the applicable minimum wage, and capped at $511 per day for a maximum benefit of $5,110. Part-time employees’ pay would be based on the average hours worked over the last six (6) months, or hours normally scheduled if employment is for less than six (6) months.
  2. If an employee has been advised by a health care provider to self-quarantine due to COVID-19 concerns, the pay is the greater of the regular rate or the applicable minimum wage, and capped at $511 per day for a maximum benefit of $5,110. Part-time employees’ pay would be based on the average hours worked over the last six (6) months, or hours normally scheduled if employment is for less than six (6) months.
  3. If someone chooses to obtain a medical diagnosis because of experiencing systems of COVID-19 (such as cough, fever, tiredness, or difficulty breathing in severe cases), the pay is the greater of the regular rate or the applicable minimum wage, and capped at $511 per day for a maximum benefit of $5,110. Part-time employees’ pay would be based on the average hours worked over the last six (6) months, or hours normally scheduled if employment is for less than six (6) months.
  4. If an employee is caring for or assisting another individual who is subject to an order (described in 1 or 2 above) then the pay is at two-thirds (2/3) of the greater of the employee’s regular rate or applicable minimum wage but capped at $200 per day for a maximum benefit of $2,000.
  5. If a parent is caring for their child because of school or daycare closure, or because the childcare provider is unavailable due to COVID-19, then the pay is at two-thirds (2/3) of the greater of the employee’s regular rate or applicable minimum wage but capped at $200 per day for a maximum benefit of $2,000.
  6. For employees experiencing any other substantially similar condition specified by Human Health Services, the pay is at two-thirds (2/3) of the greater of the employees’ regular rate or applicable minimum wage but capped at $200 per day for a maximum benefit of $2,000. This provision has not yet been fully defined and we are still not sure what would qualify.

As a condition of the Act, the employer may not require the employee to find a replacement to cover his/her scheduled hours. Employees may first use their own accumulated sick pay; however, the employer cannot require anyone to do so. These laws are effective for employers of fewer than 500 employees, and those with fewer than 50 employees have some options to elect out.

Emergency Family and Medical Leave Expansion Act (EFMLEA)

This provision is generally available to employees with at least 30 days of employment (whereas the E-PSL is available even if only employed one (1) day). There is only one qualifying criteria for this provision:

If someone is unable to work or telework due to a need to care for a child under the age of 18 because the school or childcare provider is closed as a result of a COVID-19 restrictions announced by government authority.

The first 10 days of leave may be unpaid (unless qualified under the E-PSL provisions) or if the employee elects to use their accumulated vacation or PTO days. The EFMLEA is an additional extension of time after the first 10 days, for a maximum of ten (10) weeks. The amount of the leave pay is limited to $200 per day with a maximum of $10,000.

Other Provisions

There were other provisions of the Act which are administered at the state level and you should monitor your state’s actions to provide the following:

  • Expanded food assistance
  • Expanded unemployment benefits
  • Healthcare plans, including high deductible health plans, to provide for COVID-19 testing at no cost to the person

Conclusion

There are many initiatives and programs in process that are still being finalized by the Administration, the IRS and the states. We continue to wait for guidance how the application of the new law will be administered.

 

 

The efforts of our governmental support will continue to evolve. This summary is based on the best information available at the time of its editing. As always, contact Patrick & Raines, CPAs if you have any questions about these provisions or other tax related event.

 

COVID-19 and P&R

This update is as of 3/21/20. Be aware that information may change as we receive new directives from authorities.

We are well aware of the daily swirl of announcements, advice, edicts, rumors, hopes and fears for the last 75 days or so. While we don’t yet know the depth of its impact on our lives, lifestyles, job security or financial stability, we would like to offer some clarity and direction on the small part that our team plays in the short term support that we can offer to you.

What we do know:

  • The IRS has issued formal guidance under Notice 2020-18 that they will automatically extend the April 15th filing deadline until July 15th. That means that no income tax payments or extension will be due on the historical due date. No late filing fees, late payment penalties, or late payment interest will be assessed either by not filing, not extending, or not paying any income tax or 2020 estimated tax payment normally due on April 15, 2020.
  • If you owe tax on April 15th, whether you have filed your return, have extended it, or done neither, there will be no “late payment penalty,” “late filing penalty,” nor any interest accrued if you file your return and paid your tax in full by July 15th.
  • If you do not file your return by July 15th, you will need an extension to avoid late filing penalties for the period from July 16th through the day that you do file or October 15th, whichever is later.
  • If you do not pay your 2019 income taxes in full by July 15th, you will be assessed a late payment penalty, plus accrued interest on the amount unpaid from July 16th through the date paid.
  • If you do not make your first quarter 2020 estimated tax payment by July 15th, it will be deemed to be paid late and will be subject to an underestimated tax payment penalty on your 2020 federal income tax return.
  • This notice has no effect on any federal tax due other than income taxes, and does not apply to any tax to be paid or return due to be filed on any day other than April 15th.
  • It does not address extending the due dates for other tax related activities, such as HSA, IRA, or other retirement plan amounts deductible in 2019, but paid by April 15th.
  • As always, there is penalty relief for anyone with extraordinary circumstances.

This automatic extension of time to pay is limited to $1,000,000 of income tax liability except for C corporations, which is $10,000,000.

We are making every effort to ensure that this situation will not affect the timeliness or quality of the work we are doing. With this in mind, we have set in motion a business continuity plan for Patrick & Raines to protect our clients and employees.  This plan will likely remain in effect through April 15th, although we will adapt as the unique global situation unfolds. We are committed to meeting whatever deadline arrangements are established. We would not be surprised to hear of more changes in the coming days, and, as of the date this memo is drafted, the State of Florida has not yet made an announcement as to any due date modifications they may make.

Please help us by getting your tax work to us as soon as you can. Also, ensure your information is as clear, concise and complete as you can, so that we do that work efficiently.

If you have a refund due, we encourage you to file as early so you can get your money back quickly. If you expect to owe tax, let’s get that return completed early so you can be prepared to pay the amount due on July 15th. Your 2020 estimated taxes likely will be based on the 2019 income tax return, so you will need to know that amount by June 15th to determine that second estimated tax payment.

At a base level, it is business as normal as we will continue to work on your tax returns, transaction processing and financial statement work. As you are aware, our firm has been paperless for over 15 years. We already communicate extensively through telephone, email, and increasingly using Zoom (video conferencing & screen sharing technology); primarily deliver completed tax returns electronically through our encrypted email app; and capture signatures using the RightSignature app. These are all great tools! If you need help sending us your documents electronically or using any of the technology mentioned in this memo, please reach out to us.  Further, most of our staff is equipped to securely work remotely as much as practical, so we are expanding our utilization of that capacity to protect their health and offer the maximum flexibility.

Our normal offices hours are still Monday through Friday, 8:30 AM to 5:00 PM, but we prefer to scale back in-person meetings in the office indefinitely. Whenever possible, we request meetings be done via phone calls in lieu of an in-person meeting, or online using Zoom video conferencing. If you feel that an in-person meeting is necessary, call the front desk to coordinate, but please know that we are want to prioritize the protection of your health as well as ours. We are monitoring CDC updates, as well as those from the IRS and State of Florida. We are continually cleaning/disinfecting our offices, common areas, and conference rooms, and employees are practicing all CDC-recommended measures (thorough hand washing, use of hand sanitizer, and social distancing whether at or outside of work). We encourage you to take a calm, yet diligent approach. We will update you with any further changes or best practices in dealing with any compliance changes. 

Our lives have changed quickly with this unforeseen health, and evolving economic event. This is a new one, but the human race has faced pestilences and afflictions like this in the past. We need to come together, using common sense, being careful, and making our best effort to head off what could be a worst-case scenario. Our faith based approach with a positive spirit and continual prayer is where we find a renewed sense of human love and compassion for family, friends, clients, co-workers and neighbors. 

Our very best wishes for your good health and wellbeing.

The whole P&R team

Tax Efficient Sale of Your Business

So you’ve decided: you reached the point in your business growth to turn that lifetime of sweat equity into cash, financing your dreams of traveling around the world…or at least around a few golf courses.

You’re convinced it’s worth millions, but when that first offer comes, you find at best, after a broker’s commission and income taxes, you’ll see a third or more evaporate before you even find a broker to invest those few remaining bucks.

Consider these suggestions to make your business sale as tax efficient as possible:

  • Allocate as much of the transaction to the sale of goodwill, not toward non-compete agreements or asset sales. This tactic maximizes the portion of the sale to be taxed at lower capital gains rates.
  • Consider selling under an installment agreement: you hold a note from the buyer for a few years instead of taking the total sale amount in cash. This approach defers the income tax over the life of the note by keeping your annual income down.

Holding a note also pays you a rate of interest somewhat higher than you would get at a bank. It might even get you a better price, because the buyer can likely better afford to pay more over time than in a lump sum. The buyer could also save some closing costs over bank financing.

  • If you aren’t ready to quit working, and you agree to an asset sale instead of a stock sale, keep the business alive for a few more years. You can continue taking a salary and add a robust retirement plan or other fringe benefits to shelter some of the sales-deferred proceeds.

In a few years, you can withdraw from that plan when your taxable income may be lower. If you agree to stay on to help the buyer for a few years, this strategy also works well by taking that compensation through your old corporate shell instead of as a W-2 employee from the buyer.

  • For a larger business, look into selling all or part of your stock to an ESOP (Employee Stock Ownership Agreement). Selling to an ESOP can make some or all of your sales proceeds tax-deferred.

ESOPs keep your business going and your employees incentivized to make it succeed in the future. Banks generally love to fund loans to these plans for the purchase, giving you liquidity from the sale or an infusion into the business at a small financial cost (other than some dilution of your ownership share).

Each sale is different and some financial retirement planning can be very worthwhile before committing totally to that first asset purchase agreement shoved in front of you. A few hours talking to some business profit consultants and financial planning advisors could yield large tax savings and/or better proceeds at closing.

Our Patrick & Raines CPAs professionals can serve as your advisory team quarterback, coordinating the work of your wealth manager, banker, insurance agent, business broker and…CPA!

Contact us at Office@CPAsite.com or 904-396-5400.

 

What businesses need to know about the tax treatment of bitcoin and other virtual currencies

What is cryptocurrency, and will it affect you?

Over the last several years, virtual currency has become increasingly popular. Bitcoin is the most widely recognized form of virtual currency, also commonly referred to as digital, electronic or crypto currency.

While most smaller businesses aren’t yet accepting bitcoin or other virtual currency payments from their customers, more and more larger businesses are. And the trend may trickle down to smaller businesses. Businesses also can pay employees or independent contractors with virtual currency. But what are the tax consequences of these transactions?

Bitcoin 101

Bitcoin has an equivalent value in real currency and can be digitally traded between users. It also can be purchased with real currencies or exchanged for real currencies. Bitcoin is most commonly obtained through virtual currency ATMs or online exchanges.

Goods or services can be paid for using “bitcoin wallet” software. When a purchase is made, the software digitally posts the transaction to a global public ledger. This prevents the same unit of virtual currency from being used multiple times.

Tax impact

Questions about the tax impact of virtual currency abound. And the IRS has yet to offer much guidance.

The IRS did establish in a 2014 ruling that bitcoin and other convertible virtual currency should be treated as property, not currency, for federal income tax purposes. This means that businesses accepting bitcoin payments for goods and services must report gross income based on the fair market value of the virtual currency when it was received, measured in equivalent U.S. dollars.

When a business uses virtual currency to pay wages, the wages are taxable to the employees to the extent any other wage payment would be. You must, for example, report such wages on your employees’ W-2 forms. And they’re subject to federal income tax withholding and payroll taxes, based on the fair market value of the virtual currency on the date received by the employee.

When a business uses virtual currency to pay independent contractors or other service providers, those payments are also taxable to the recipient. The self-employment tax rules generally apply, based on the fair market value of the virtual currency on the date received. Payers generally must issue 1099-MISC forms to recipients.

Finally, payments made with virtual currency are subject to information reporting to the same extent as any other payment made in property.

Deciding whether to go virtual

Accepting bitcoin can be beneficial because it may avoid transaction fees charged by credit card companies and online payment providers (such as PayPal) and attract customers who want to use virtual currency. But the IRS is targeting virtual currency transactions in an effort to raise tax revenue, and it hasn’t issued much guidance on the tax treatment or reporting requirements. So bitcoin can also be a bit risky from a tax perspective.

To learn more about tax considerations when deciding whether your business should accept bitcoin or other virtual currencies — or use them to pay employees, independent contractors or other service providers — contact one of the P&R accounting team at Office@CPAsite.com or 904-396-5400.

© 2018

Putting your child on your business’s payroll for the summer may make more tax sense than ever

If you own a business and have a child in high school or college, hiring him or her for the summer can provide a multitude of benefits, including tax savings. And hiring can make more sense than ever due to changes under the Tax Cuts and Jobs Act (TCJA).

How it works

By shifting some of your business earnings to a child as wages for services performed, you can turn some of your high-taxed income into tax-free or low-taxed income. For your business to deduct the wages as a business expense, the work done must be legitimate and the child’s wages must be reasonable.

Here’s an example: A sole proprietor is in the 37% tax bracket. He hires his 20-year-old daughter, who’s majoring in marketing, to work as a marketing coordinator full-time during the summer. She earns $12,000 and doesn’t have any other earnings.

The father saves $4,440 (37% of $12,000) in income taxes at no tax cost to his daughter, who can use her $12,000 standard deduction (for 2018) to completely shelter her earnings. This is nearly twice as much as would have been sheltered last year, pre-TCJA, when the standard deduction was only $6,350.

The father can save an additional $2,035 in taxes if he keeps his daughter on the payroll as a part-time employee into the fall and pays her an additional $5,500. She can shelter the additional income from tax by making a tax-deductible contribution to her own traditional IRA.

Family taxes will be cut even if an employee-child’s earnings exceed his or her standard deduction and IRA deduction. Why? The unsheltered earnings will be taxed to the child beginning at a rate of 10% instead of being taxed at the parent’s higher rate.

Avoiding the “kiddie tax”

TCJA changes to the “kiddie tax” also make income-shifting through hiring your child (rather than, say, giving him or her income-producing investments) more appealing. The kiddie tax generally applies to children under age 19 and to full-time students under age 24. Before 2018, the unearned income of a child subject to the kiddie tax was generally taxed at the parents’ tax rate.

The TCJA makes the kiddie tax harsher. For 2018-2025, a child’s unearned income will be taxed according to the tax brackets used for trusts and estates, which for 2018 are taxed at the highest rate of 37% once taxable income reaches $12,500. In contrast, for a married couple filing jointly, the 37% rate doesn’t kick in until their taxable income tops $600,000. In other words, children’s unearned income often will be taxed at higher rates than their parents’ income.

But the kiddie tax doesn’t apply to earned income.

Other tax considerations

If your business isn’t incorporated or a partnership that includes nonparent partners, you might also save some employment tax dollars. Contact the P&R team to learn more about the tax rules surrounding hiring your child, how the kiddie tax works or other family-related tax-saving strategies. You can reach us at Office@CPAsite.com or 904-396-5400.

© 2018

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