Trends – Roth&Co

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As the emotional, physical and financial chaos of the past few weeks continues, so does the stress affecting your employees. Thanks to a little-known tax provision, you can now relieve some of that anxiety by providing cash gifts to your team that are tax-free to them, and fully deductible to you.

In general, an employer cannot give a “gift” to an employee. Regardless of intent, any payment from employer to employee is taxed to the employee as compensation. However, Section 139 — added to the Code after September 11th— says that during a federally declared disaster, an employer can reimburse or pay an employee for “reasonable and necessary personal, family, living, or funeral expenses.” These payments are tax-free to the employees, but fully deductible to the employer.

Beginning immediately, employers can assist employees in managing the COVID-19 crisis in the following ways:

Qualified Disaster Relief Payments

An employee’s medical expenses that are not compensated for by insurance, for example, the employee’s deductible and out-of-pocket expenses
The cost of over-the-counter medications and hand sanitizer
Funeral costs of an employee or a member of an employee’s family
The cost of enabling an employee to work from home throughout the pandemic, for example, the cost of a computer, cell phone, printer, supplies and increased utility costs of the employee
The cost of an employee’s child care or tutoring for family members that cannot attend school during the pandemic

Please note: Payments that are otherwise compensated for by insurance or that are intended to replace lost income do not qualify.

Interestingly, Section 139 does not require that employees complete a certain period of service to be eligible to receive these tax-free payments, nor is the employer required to maintain any formal plan or documentation. Nevertheless, it would be wise for employers to document their intention to make payments covered by Section 139, as well as the following:

Important Payment Information to be Documented by Employer

The amounts paid, and to whom
The start and end dates of any Section 139 “payment program”
A general list of the expenses that will be paid or reimbursed on behalf of the employees
Any maximum amount per-employee or in the aggregate that the employer will pay

You put your heart and soul into your business, and your employees have become your family. We understand how important it is for you to be a backbone for them and help in whatever way you can. We encourage you to take this opportunity to support your employees in a very practical way and be there when they need you most.

Wishing everyone happy and healthy YomTov.

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Last Thursday we partnered with Agudath Israel of America to present an important webinar titled Navigating Regulatory Changes, covering the latest “CARES” stimulus act as well as other relief initiatives and how they affect your business or organization. To the 1000+ people who joined us – thank you! For those who missed it, a full recording of the webinar is available here.

Below, we have prepared a summary of the presentation as well as responses to some of the many questions we received. This is a very brief outline of several complex bills. We recommend speaking with your accountant or attorney to determine the best course of action for your specific circumstances.

CARES ACT

Coronavirus Aid, Relief and Economic Security Act (“CARES Act”) was signed by President Trump this Friday. The $2 trillion stimulus bill intends to provide significant relief for small businesses and expanded unemployment benefits for individuals. Here are the highlights:

For Individuals and Families

The CARES Act will provide direct payments to individuals depending on income.

How much can we expect?

· $1,200 per single individual who earns up to $75,000 in adjusted gross income

· $2,400 for married couples who earn up to $150,000

· An additional payment of $500 per child under the age of 17.

The payment would scale down by income (a $5 deduction for every additional $100 earned above the maximum), phasing out entirely at $99,000 for singles and $198,000 for couples without children. Qualifying income levels will be based on 2019 federal tax returns if already filed, or on 2018 returns if not. Payments should be received within three weeks.

If you haven’t filed a 2018 or 2019 tax return, you should speak to a tax professional and consider filing; so that you can be eligible to receive the stimulus payment.

What other relief is available to me?

Make the most of your 401k:

· You are no longer required to take the annual minimum distribution from retirement accounts. This is to give investments a chance to recover and avoid taking a loss.

· You can now withdraw up to $100,000 this year without the usual 10 percent penalty, so long as you are doing so in response to the COVID-19 outbreak.

· For 180 days after the bill passes, with certification that you’ve been affected by the pandemic, you will be able to take out a loan of up to $100,000.

Take advantage of relaxed charitable giving rules:

Normally, you may donate up to 60% of your income for a full tax deduction. You can now donate up to 100% of your income without any tax deduction limitations.

Expanded Unemployment Benefits

Who is covered?

The CARES Act has substantially expanded benefits to include part-time workers, gig workers and the self-employed, who in the past have not been eligible. Covered individuals include those who are unemployed, partially unemployed or unable to work as a direct result of COVID-19. This includes illness, quarantine, loss of childcare, or loss of unemployment as a result of the virus.

What are the benefits?

Exact employment benefits are determined by the state’s unemployment insurance program. The CARES act entitles covered individuals to an additional $600 per week in addition to state benefits. The extra $600 payment will last for up to four months, covering weeks of unemployment through December 31, 2020.

How soon can I get it?

States have been incentivized to waive the one-week waiting period, but processing claims may take some time given the current climate.

How long will it last?

The CARES Act would provide all eligible individuals with an additional 13 weeks of payment following the end of state benefit programs; for the maximum of 39 weeks of benefits.

Some important notes:

· Parsonage is not currently covered by unemployment.

· Organizations who opted to self-insure will be required to reimburse 50% of each unemployment claim.

For Employers

Tax Credit to Support Workforce Retention

This provision will reimburse up to 50% of qualified wages, including health insurance, as a refundable tax credit against the employer’s share of payroll taxes for applicable employment taxes, up to $10,000 per employee per quarter.

What organizations are eligible?

· Businesses and nonprofits that were partially or fully suspended due to a mandatory government shut-down related to COVID-19.

· If a business remained opened during any quarter in 2020 but gross receipts for that quarter were less than 50% of what they were for the same quarter in 2019, the business will then be entitled to a credit for each quarter. This will continue until the business has a quarter where gross receipts exceed 80% of what they were for the same quarter of the previous year.

· Employers with over 100 employees are eligible to receive the credit if they continue to pay employees that are not providing services.

· Employers with fewer than 100 employees will receive the credit if they continue to pay employees whether they are or are not providing services

What wages are ineligible?

· Qualified wages do not include those paid under the Families First Coronavirus Response Act for sick leave or family medical leave, which are already subject to certain tax credits.

· If an employer takes out a payroll protection loan under Section 7(a) of the Small Business Act as amended by this Act, no employee retention credit will be available.

Deferral of Payroll Tax:

The CARES Act allows a 50% deferral of the employer’s share of the 6.2% Social Security tax that would otherwise be due from the date of the CARES Act’s enactment through December 31, 2020.

When will the deferred taxes become due?

A payment of 50% of the deferred payroll taxes will be due on December 31, 2021, and the remaining 50% by December 31, 2022.

Paycheck Protection Loan Program

The United States Small Business Administration will administer the SBA 7a loan program to eligible businesses to help pay operational costs such as payroll, rent, health benefits, insurance premiums and utilities. Subject to certain conditions, loan amounts are forgivable if employers retain employees.

What businesses are eligible?

· Small businesses, nonprofits, religious institutions and houses of worship, with up to 500 employees.

· Independent contractors, 1099 workers, self-employed individuals and sole proprietorships.

· Restaurants and hotels, are eligible as long as they employ 500 workers or less per location.

· Businesses that have more than 500 employees but are within the SBA size limits.

How much can I borrow?

Loan amounts can be up to 2.5 times average monthly payroll (between January 1, 2020 and February 29, 2020), mortgage payments and lease payments. The maximum loan amount is $10 million.

An advance grant of up to $10k can be requested 3 days after applying for the loan. Even if the business is denied the loan, the advance will not have to be paid back provided it is used for operational expenses such as payroll and rent payments.

What are the terms of the loan?

· Maximum interest rates of 4% with 10-year term.

· No personal guaranty or collateral is required.

How does loan forgiveness work?

· There is an additional application for loan forgiveness.

· Upon application, your company’s expenses for the eight-week period after the origination of the loan will be analyzed.

· Every dollar spent on payroll, utilities, rent, or interest on mortgage debt will be forgiven, up to the total amount borrowed.

Loan amount forgiven will be reduced if:

· Businesses lay off employees during the first eight weeks following the loan.

· Companies reduce wages of employees who make less than $100,000 per year by 25% or more.

· Businesses that have already let employees go before accepting the loan will not be subject to such penalties. If those businesses rehire employees after accepting the loan, they’ll receive additional credit to cover their wages.

Please note: As of Friday, March 27th, parsonage was not explicitly noted as a part of payroll. There is a possibility that it will be included in the future.

Economic Injury Disaster Loan Program

The SBA will directly provide loans up to $2 million to small businesses and non-profits that have been severely impacted by COVID-19, with interest rates of 2.75% for nonprofits and 3.75% for businesses.

HR 6201: FAMILIES FIRST CORONAVIRUS RESPONSE ACT

HR 6201 was signed by President Trump on March 18, 2020, ensuring that employees are eligible for two weeks of Paid Sick Leave and use of 12 weeks of Family and Medical Leave Act leave for several circumstances related to COVID-19. It will be in effect from April 1, 2020 until December 31, 2020.

How does it work?

Under HR 6201, employers can claim a Social Security tax credit to offset the cost of providing expanded FMLA and emergency paid leave to their employees. If the credit exceeds the employer’s accumulated Social Security tax for the calendar quarter, the excess will be issued in the form of a refund from the IRS.

Who is eligible?

· Employers with under 500 employees

· Employees who cannot work due to COVID-19 related illness, and/or quarantine, or due to an ill family member or a child without childcare.

What do these provisions provide?

· 10 days covered by Emergency Paid Sick leave for illness or quarantine, with a total of $5,110, or 2/3 of pay to care for ill family or because of loss of childcare, capped at $200/day and $10,000 total.

· 10 weeks covered by Family Medical Leave pays 2/3 of the employee’s regular rate of pay for the number of hours they would normally be scheduled to work, capped at $200/day and $10,000 total.

Please note: As of now there is no mechanism for business owners to collect PSL or FML.

For full details on EPSL and FMLA expansion please visit our website: https://rothandco.com/trend/current-tax-paid-leave-regulation-changes/

We will continue to keep you informed as more information becomes available. As always, we are here to help implement these changes. Please don’t hesitate to contact us with questions or concerns.

This material has been prepared for informational purposes only, and is not intended to provide, and should not be relied on for, legal or tax advice. If you have any specific legal or tax questions regarding this content or related issues, then you should consult with your professional legal or tax advisor.

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Every company has faced unprecedented challenges in adjusting to life following the widespread outbreak of the coronavirus (COVID-19). Small businesses face particular difficulties in that, by definition, their resources — human, capital and otherwise — are limited. If this describes your company, one place you can look to for some assistance is the Small Business Administration (SBA).

New loan, relaxed criteria

The agency has announced that it’s offering Economic Injury Disaster Loans under the Coronavirus Preparedness and Response Supplemental Appropriations Act, which was recently signed into law.

Here’s how it works: The governor of a state or territory must first submit a request for Economic Injury Disaster Loan assistance to the SBA. The agency’s Office of Disaster Assistance then works with the governor to approve the request. Upon completion of this process, affected small businesses within the state gain access to information on how to apply for loan assistance.

To speed the process, the SBA has relaxed its usual disaster-loan criteria. A state or territory now needs to certify that at least five small businesses have suffered substantial economic injury anywhere in the state. Previously, at least one of the companies had to be in each of the disaster-declared counties or parishes.

Along similar lines, once the submission process is completed, Economic Injury Disaster Loans will be available across the state. Under previous criteria, only businesses in counties identified as disaster areas could obtain financial assistance. Given the expected widespread and economically drastic effect of the coronavirus, most states will have likely garnered approval by the time you read this.

Amount, interest and terms

Economic Injury Disaster Loans offer up to $2 million in financial assistance to help small businesses mitigate their revenue losses. You could use the money to pay overhead costs such as utilities and rent, keep up with accounts payable and cover payroll.

For qualifying small businesses, the interest rate is 3.75%. Some nonprofits may also be eligible for this assistance. For them, the interest rate is 2.75%. The specific loan terms will vary according to each borrower’s ability to pay. The agency does say that it “offers loans with long-term repayments in order to keep payments affordable.”

Mitigate and manage

Bear in mind that these loans are just one form of assistance offered by the SBA. Your small business may qualify for other loans, and there might be training programs that benefit your company. Our firm can help you assess your financial situation in light of the coronavirus crisis and formulate a strategy for mitigating and managing your risks going forward.

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Businesses across the country are being affected by the coronavirus (COVID-19). Fortunately, Congress recently passed a law that provides at least some relief. In a separate development, the IRS has issued guidance allowing taxpayers to defer any amount of federal income tax payments due on April 15, 2020, until July 15, 2020, without penalties or interest.

New law
On March 18, the Senate passed the House’s coronavirus bill, the Families First Coronavirus Response Act. President Trump signed the bill that day. It includes:

Paid leave benefits to employees,
Tax credits for employers and self-employed taxpayers, and
FICA tax relief for employers.

Tax filing and payment extension

In Notice 2020-18, the IRS provides relief for taxpayers with a federal income tax payment due April 15, 2020. The due date for making federal income tax payments usually due April 15, 2020 is postponed to July 15, 2020.

Important: The IRS announced that the 2019 income tax filing deadline will be moved to July 15, 2020 from April 15, 2020, because of COVID-19.

Treasury Department Secretary Steven Mnuchin announced on Twitter, “we are moving Tax Day from April 15 to July 15. All taxpayers and businesses will have this additional time to file and make payments without interest or penalties.”

Previously, the U.S. Treasury Department and the IRS had announced that taxpayers could defer making income tax payments for 2019 and estimated income tax payments for 2020 due April 15 (up to certain amounts) until July 15, 2020. Later, the federal government stated that you also don’t have to file a return by April 15.

Of course, if you’re due a tax refund, you probably want to file as soon as possible so you can receive the refund money. And you can still get an automatic filing extension, to October 15, by filing IRS Form 4868. Contact us with any questions you have about filing your return.

Any amount can be deferred

In Notice 2020-18, the IRS stated: “There is no limitation on the amount of the payment that may be postponed.” (Previously, the IRS had announced dollar limits on the tax deferrals but then made a new announcement on March 21 that taxpayers can postpone payments “regardless of the amount owed.”)

In Notice 2020-18, the due date is postponed only for federal income tax payments for 2019 normally due on April 15, 2020 and federal estimated income tax payments (including estimated payments on self-employment income) due on April 15, 2020 for the 2020 tax year.

As of this writing, the IRS hasn’t provided a payment extension for the payment or deposit of other types of federal tax (including payroll taxes and excise taxes).

Contact us

This only outlines the basics of the federal tax relief available at the time this was written. New details are coming out daily. Be aware that many states have also announced tax relief related to COVID-19. And Congress is working on more legislation that will provide additional relief, including sending checks to people under a certain income threshold and providing relief to various industries and small businesses.

We’ll keep you updated. In the meantime, contact us with any questions you have about your situation.

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As we continue to face the global health crisis of COVID-19, Roth&Co is committed to supporting your organization in navigating these confusing times. Here is what you need to know regarding the recent tax and regulatory changes.

TAX FILING DEADLINE EXTENSION

On Friday, March 20th the IRS has announced that the deadline for filing tax returns is being moved from April 15 to July 15. All taxpayers and businesses will have this additional time to file and make payments without interest or penalties.

HR 6201: FAMILIES FIRST CORONAVIRUS RESPONSE ACT

HR 6201 was signed by President Trump on March 18, 2020, ensuring employees are eligible for two weeks of Paid Sick Leave and use of 12 weeks of Family and Medical Leave Act leave for several circumstances related to COVID-19. It will be in effect until December 31, 2020.

Key Details:

1. Payroll Tax Credit for Employers

2. Emergency Paid Sick Leave for Employees

Covered Employers: Employers with fewer than 500 employees.
Covered Employees: All employees, except some exclusions for health care providers or emergency responders.

Covered Leave: When an employee is quarantined or isolated as ordered by a governmental agency, health care provider, or is experiencing symptoms of COVID-19. 2/3 pay is required for employees on leave for the purpose of caring for an individual in quarantine, or a child whose school is closed or child-care provider is no longer available due to COVID-19.

Duration of Leave: Full-time employees are entitled to 80 hours of paid sick leave. Part-time employees are entitled to sick leave equal to the hours worked on average over a typical two-week period.

Pay caps:
Illness or quarantine: Pay is capped at $511/day and $5,110 total
Providing family care: Pay is capped at $200/day and $2,000 total

Note: Employers cannot require employees to use other leave first.

Additional Tax Credits: An employer can claim additional refundable tax credits for the employer portion of Medicare taxes and nontaxable health insurance premiums as related to COVID-19.

3. Emergency FMLA Expansion for Employees

Covered Employers: Employers with fewer than 500 employees
Covered Employees: Any employee who has been employed for at least 30 calendar days (excluding health care providers or emergency responders)
Covered Leave Purposes: To care for a child under 18 if the child’s school or the childcare provider is unavailable due to the Coronavirus.

Duration: Up to 12 weeks of job-protected leave.

Compensation: After 10 days covered by Emergency Paid Sick leave, employers must pay two-thirds of the employee’s regular rate of pay for the number of hours they would normally be scheduled to work, capped at $200/day and $10,000 total.

4. Reinstatement to Position after Leave

The same reinstatement provisions apply under the traditional FMLA. However, restoration to position does not apply to employers with fewer than 25 employees if the job no longer exists because of the economic downturn caused by a public health emergency. The employer is required to make reasonable efforts to return the employee to an equivalent position, and contact a displaced employee if a similar position becomes available within a year of when they would have returned to work.

5. Exemptions for Businesses with Fewer than 50 Employees

Businesses with under 50 employees are subject to exemptions from Emergency FMLA and Emergency PSL if the requirements “would jeopardize the viability of the business.”

We will continue to keep you informed as more information becomes available. As always, we are here to help implement these changes. Please don’t hesitate to contact us with questions or concerns.

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While global health and governmental agencies grapple with how best to fight the new coronavirus (COVID-19), nonprofit organizations worldwide are scrambling to figure out what steps they should take and how they can be helpful in this time of uncertainty.

The U.S. Centers for Disease Control and Prevention (CDC) is taking aggressive public health measures to help protect the health of Americans and assist international partners. Leaders at nonprofit organizations can also play a pivotal role at this critical time.

COVID-19 is very dangerous, and we must take comprehensive and coordinated action to address it. Today, we must be diligent in our response as the outbreak continues to spread worldwide, including in the United States, and the economic consequences that follow.

What can nonprofit leaders do in this time of uncertainty and concern? We’d like to offer five steps or initiatives that leaders of all nonprofits and philanthropies can take or consider.

1. Seek out the right information. The best source of up-to-date information on everything related to COVID-19 is the CDC website. It is a trusted source with information provided by CDC scientists. Beyond CDC, look to your state and local public health departments.State and local health departments offer accurate and timely infectious disease information.

2. Dispel myths. We are living in an anxious time, and as leaders we must ensure not to create a panic. This is even more difficult in an era where anyone with a smart phone can share an opinion or create a storyline. Myths about the coronavirus, including all the remedies, protections, etc. will continue to proliferate. Social media, while it can be a powerful tool to provide timely updates and information, can also make the problem worse. As leaders, we can dispel many of the myths about the disease and use our platforms to get out the facts.

3. Put into action good public health practices. As employers, community partners and influencers, the nonprofit sector enjoys a tremendous amount of trust and respect. Ensure your employees, volunteers and ambassadors know what they can do to protect themselves, their communities and the people they serve. Putting into practice actions from staying home when sick to cleaning and disinfecting work areas and communal areas where services are provided can make a big difference.

4. Make a financial grant. If your organization is in the position to do so, make a financial grant to strengthen public health and the response efforts. While increased funding is becoming available for public health agencies, governments cannot do it alone, particularly as the response moves from containment to mitigation. A collective response is needed to meet the rapidly evolving needs of COVID-19 — from communications campaigns to strengthening state and local health labs to providing equipment and supplies as well as supporting those in quarantine or those who are at high-risk from the dangers of COVID-19. In any crisis situation, it takes an effort on the part of all sectors to mitigate the crisis and meet the needs of our communities and vulnerable populations.

5. Collaborate with peer organizations. Nonprofit organizations and philanthropies have greater positive impact and can accomplish more collectively than individually. By aligning diverse interests and resources and leveraging the strengths of your organization with another, we can work together to fight this outbreak and support those affected. If your organization is in a position to partner with another nonprofit, consider it. The nonprofit sector has been crucial in past emergency responses such as the Ebola and Zika outbreaks, and we can’t do it alone this time, either.

From the outset of the COVID-19 outbreak, there has been confusion, concern and anxiety about the infectious disease with good reason. We should treat it as we would other past outbreaks — recognize that it has not respected borders or politics and requires a collective effort of government, individual and organizations.

The resilience of our front line public health responders is amazing. The nonprofit community has the opportunity to support them and others affected by the COVID-19 outbreak by providing accurate information and working with the public health community to find innovative ways to offer support.

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The coronavirus (COVID-19) outbreak — officially a pandemic as of March 11 — has prompted global health concerns. But you also may be worried about how it will affect your business and its financial statements for 2019 and beyond.

Close up on financial reporting

The duration and full effects of the COVID-19 outbreak are yet unknown, but the financial impacts are already widespread. When preparing financial statements, consider whether this outbreak will have a material effect on your company’s:

Supply chain, including potential effects on inventory and inventory valuation,
Revenue recognition, in particular if your contracts include variable consideration,
Fair value measurements in a time of high market volatility,
Financial assets, potential impairments and hedging strategies,
Measurement of goodwill and other intangible assets (including those held by subsidiaries) in areas affected severely by COVID-19,
Measurement and funded status of pension and other postretirement plans,
Tax strategies and consideration of valuation allowances on deferred tax assets, and
Liquidity and cash flow risks.

Also monitor your customers’ credit standing. A decline may affect a customer’s ability to pay its outstanding balance, and, in turn, require you to reevaluate the adequacy of your allowance for bad debts.

Additionally, risks related to the COVID-19 may be reported as critical audit matters (CAMs) in the auditor’s report. If your company has an audit committee, this is an excellent time to engage in a dialog with them.

Disclosure requirements and best practices

How should your company report the effects of the COVID-19 outbreak on its financial statements? Under U.S. Generally Accepted Accounting Principles (GAAP), companies must differentiate between two types of subsequent events:

1. Recognized subsequent events. These events provide additional evidence about conditions, such as bankruptcy or pending litigation, that existed at the balance sheet date. The effects of these events generally need to be recorded directly in the financial statements.

2. Nonrecognized subsequent events. These provide evidence about conditions, such as a natural disaster, that didn’t exist at the balance sheet. Rather, they arose after that date but before the financial statements are issued (or available to be issued). Such events should be disclosed in the footnotes to prevent the financial statements from being misleading. Disclosures should include the nature of the event and an estimate of its financial effect (or disclosure that such an estimate can’t be made).

The World Health Organization didn’t declare the COVID-19 outbreak a public health emergency until January 30, 2020. However, events that caused the outbreak had occurred before the end of 2019. So, the COVID-19 risk was present in China on December 31, 2019. Accordingly, calendar-year entities may need to recognize the effects in their financial statements for 2019 and, if applicable, the first quarter of 2020.

Need help?

There are many unknowns about the spread and severity of the COVID-19 outbreak. We can help navigate this potential crisis and evaluate its effects on your financial statements. Contact us for the latest developments.

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If you’re the owner of an incorporated business, you probably know that there’s a tax advantage to taking money out of a C corporation as compensation rather than as dividends. The reason is simple. A corporation can deduct the salaries and bonuses that it pays executives, but not its dividend payments. Therefore, if funds are withdrawn as dividends, they’re taxed twice, once to the corporation and once to the recipient. Money paid out as compensation is taxed only once, to the employee who receives it.

However, there’s a limit on how much money you can take out of the corporation this way. Under tax law, compensation can be deducted only to the extent that it’s reasonable. Any unreasonable portion isn’t deductible and, if paid to a shareholder, may be taxed as if it were a dividend. The IRS is generally more interested in unreasonable compensation payments made to someone “related” to a corporation, such as a shareholder or a member of a shareholder’s family.

How much compensation is reasonable?

There’s no simple formula. The IRS tries to determine the amount that similar companies would pay for comparable services under similar circumstances. Factors that are taken into account include:

The duties of the employee and the amount of time it takes to perform those duties;
The employee’s skills and achievements;
The complexities of the business;
The gross and net income of the business;
The employee’s compensation history; and
The corporation’s salary policy for all its employees.

There are some concrete steps you can take to make it more likely that the compensation you earn will be considered “reasonable,” and therefore deductible by your corporation. For example, you can:

Use the minutes of the corporation’s board of directors to contemporaneously document the reasons for compensation paid. For example, if compensation is being increased in the current year to make up for earlier years in which it was low, be sure that the minutes reflect this. (Ideally, the minutes for the earlier years should reflect that the compensation paid then was at a reduced rate.)
Avoid paying compensation in direct proportion to the stock owned by the corporation’s shareholders. This looks too much like a disguised dividend and will probably be treated as such by IRS.
Keep compensation in line with what similar businesses are paying their executives (and keep whatever evidence you can get of what others are paying to support what you pay).
If the business is profitable, be sure to pay at least some dividends. This avoids giving the impression that the corporation is trying to pay out all of its profits as compensation.

Planning ahead can help avoid problems. Contact us if you’d like to discuss this further.

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In business, a failure to evolve may lead to failure. One way to keep your company rolling is to regularly adjust how you market products or services to customers and prospects.

A marketing strategy shouldn’t be a knee-jerk reaction to some enticing rumor or hot trend. Rather, it needs to be a carefully calculated effort that assesses profitability (not just revenue) and identifies a feasible price point for the products or services in question.

Evaluating targets

Consider each prospect, existing customer or targeted group as an investment. Estimate your net profit after subtracting production, sales and customer service costs.

More desirable customers will purchase a sizable volume with enough frequency to provide a steady income stream over time rather than serve as just a one-time or infrequent buyer. They also will be potential targets for cross-selling other products or services to generate incremental revenue.

Bear in mind that you must have the operational capacity to fulfill a given prospect’s demand. If not, you’ll have to expand your operations to take on that customer, costing you more in resources and capital.

Also, be wary of becoming too dependent on a few large customers. They can use this status as leverage to lowball you. Or, if they decide to pull the plug, it could be financially devastating.

Naming your price

Another key factor to consider in adjusting your marketing strategy is how much you’ll charge. It’s a tricky balance: Setting your price low may help to attract customers, but it can also minimize or even eliminate your profit margin.

In addition, think about what kind of payment terms you’re prepared to offer. Sitting on large accounts receivable can strain your cash flow. Establishing a timely payment schedule with customers is critical to sustaining your operations and supporting the bottom line.

If you must make a major cash outlay for setting up a new customer, such as for new equipment, consider offering initial pricing that includes a surcharge for a specified period. For example, if the normal product price is $1.00 each, you might want to arrange for the customer to pay $1.10 each until you have recovered the cost of the equipment, plus carrying charges.

Taking the risk

If your company has been around for a while, you know that marketing is risky business. An unsuccessful campaign can not only waste dollars in the short term, but also hurt morale and even trigger bad PR if it’s particularly misguided. The costs of doing nothing, however, may be even greater. We can assist you in evaluating the potential profitability of your marketing initiatives, as well as calculating viable price points for your products or services.

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The rules for reporting leasing transactions are changing. Though these changes have been delayed until 2021 for private companies (and nonprofits), it’s important to know the possible effects on your financial statements as you renew leases or enter into new lease contracts. In some cases, you might decide to modify lease terms to avoid having to report leasing liabilities on your balance sheet. Or you might opt to buy (rather than lease) property to sidestep being subject to the complex disclosure requirements.

Updated standard

In 2016, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2016-02, Leases. The effective date for calendar year-end public companies was January 1, 2019. Last fall, the FASB deferred the effective date for private companies and not-for-profit organizations from 2020 to 2021.

The updated guidance requires companies to report long-term leased assets and leased liabilities on their balance sheets, as well as to provide expanded footnote disclosures. Increases in debt could, in turn, cause some companies to trip their loan covenants.

Updated lease terms

The updated standard applies only to leases of more than 12 months. To avoid having to apply the new guidance, some companies are switching over to short-term leases.

Others are incorporating evergreen clauses into their leases, where either party can cancel at any time after 30 days. An evergreen lease wouldn’t technically be considered a lease under the accounting rules — even if the lessee renewed on a monthly basis for 20 years. This might not be the best approach from a financial perspective, however, because the lessor would likely charge a higher price for the transaction. There’s also a risk that short-term and evergreen leases won’t be renewed at some point.

Lease vs. buy

The updated standard is also causing organizations to reevaluate their decisions about whether to lease or buy equipment and real estate. Under the previous accounting rules, a major upside to leasing was how the transactions were reported under Generally Accepted Accounting Principles (GAAP). Essentially, operating leases were reported as a business expense that was omitted from the balance sheet. This was a major upside for organizations with substantial debt. Under the updated guidance, lease obligations will show up as liabilities, similar to purchased assets that are financed with traditional bank loans. Reporting leases also will require expanded footnote disclosures.

The changes in the lease accounting rules might persuade you to buy property instead of lease it. Before switching over, consider the other benefits leasing has to offer. Notably, leases don’t require a large down payment or excess borrowing capacity. In addition, leases provide significant flexibility in case there’s an economic downturn or technological advances render an asset obsolete.

Decision time

When deciding whether to lease or buy a fixed asset, there are a multitude of factors to consider, with no universal “right” choice. Contact us to discuss the pros and cons of leasing in light of the updated accounting guidance. We can help you take the approach that best suits your

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Grantor and non-grantor trusts are taxed differently.

Non-grantor trusts are treated as separate entities (like a C-Corporation). But grantors of grantor trusts maintain significant rights to the trust’s assets and income. Because of that, they’re treated as if they are direct owners of the trust assets (like a sole proprietorship).

A grantor trust is any trust in which the grantor is treated as owner of any portion of the trust. This is determined by a list of powers. Some of the most common powers are:

Power to revoke
Power to substitute assets or borrow from trust without adequate security
Power to distribute income from trust to Grantor or Grantor’s spouse
Power to add beneficiaries

There are many other powers that can cause a trust to be a grantor trust; a grantor only needs one of these powers for the trust to be a grantor trust.

How Grantor Trust income is taxed

When Trust has only 1 Grantor: 3 options

The payer issues a 1099 (or K-1) to the trust with the trust TIN. The trust files form 1041 with no income reported. The trust issues a grantor letter to the grantor reporting all the income the trust earned. The grantor reports this income on his 1040

Example: Reuven transferred $10M to The Reuven Family Trust; TIN 45-6789100; a Grantor Trust. The funds are invested in a Charles Schwab Brokerage account. The account is held in the name and TIN of the Trust. At year end, a 1099B is issued in the name and TIN of the trust. The trust files a 1041. No income is reported on the 1041 and a statement is attached stating that the income is taxable to the Grantor. A Grantor letter specifying the income earned by the trust is filed with the 1041 and issued to the a Grantor. The Grantor uses this to report the income on his 1040.

The payer issues a 1099 (or K-1) to the trust but uses the Grantors SSN. The income is reported directly on the grantors 1040 and no 1041 is filed.

Example: Reuven transferred $10M to The Reuven Family Trust; TIN 45-6789100; a Grantor Trust. The funds are invested in a Charles Schwab Brokerage account. The account is held in the name of the trust but with the SSN of the grantor Reuven.. At year end, a 1099B is issued to The Reuven Family Trust with Reuven’s SSN. Reuven uses this 1099B to report the income on his 1040.

Payer issues 1099(or K-1) to the trust using the trust TIN. The trust issues a 1099 to the grantor. The Grantor reports this income on his 1040. No 1041 Filed. (not typically done)

Example: Reuven transferred $10M to The Reuven Family Trust; TIN 45-6789100; a Grantor Trust. The funds are invested in a Charles Schwab Brokerage account. The account is held in the name and TIN of the Trust. At year end, a 1099B is issued in the name and TIN of the trust. The trust then issues a 1099 to Reuven specifying all the income earned by the trust to Reuven. The trust does not file a 1041. Reuven uses the 1099 he received from the trust to report the income on his 1040.

When Trust has more than 1 Grantor: 2 Options

The payer issues a 1099 (or K-1) to the trust with the trust TIN. The trust files form 1041 with no income reported. The trust issues a grantor letter to the grantor reporting all the income the trust earned. The grantor reports this income on his 1040
Payer issues 1099(or K-1) to the trust using the trust TIN. The trust issues a 1099 to the grantor. The Grantor reports this income on his 1040. No 1041 Filed. (not usually done)

A non-grantor trust is any trust that is not a grantor trust.

How Non-Grantor trust income is taxed

As a separate tax entity, a non-grantor trust is required to have its own TIN and must file a 1041 and issue K-1s to the Beneficiaries
There are 2 basic types of non-grantor trusts. Complex and simple trusts.
Non-grantor trusts must pay taxes on income received, which is typically at much higher rates than for individuals.
Distributions to beneficiaries are deducted from the taxable income of the trust and K-1s are issued to the beneficiaries for the amount of the distribution. The beneficiaries report this income on their 1040.
The major difference between a complex trust and a simple trust is that a simple trust must distribute all its income to the Beneficiaries while a complex trust does not need to. So a simple trust would have no taxable income, pays no taxes, issues K-1s to the beneficiaries and the Beneficiaries report all the trust income on their 1040. A complex trust pays taxes on the portion of income it did not distribute and issues K-1s to its beneficiaries for the distributions.

Example: Reuven transferred $10M to The Reuven Family Trust; TIN 45-6789100; a Non-Grantor Complex Trust. The funds are invested in a Charles Schwab Brokerage account. The account is held in the name and TIN of the Trust. The trust distributed $100,000 to Levi ( a beneficiary) in the current tax year. At year end, a 1099B is issued in the name and TIN of the trust. The trust files a 1041. Income and deductions are reported and taxed on the return. The trust deducts $100,000 from its taxable income for the distribution to Levi. A K-1 is issued to Levi with $100,000 of taxable income. Levi uses this to report the income on his 1040.

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If you own a home, the interest you pay on your home mortgage may provide a tax break. However, many people believe that any interest paid on their home mortgage loans and home equity loans is deductible. Unfortunately, that’s not true.

First, keep in mind that you must itemize deductions in order to take advantage of the mortgage interest deduction.

Deduction and limits for “acquisition debt”

A personal interest deduction generally isn’t allowed, but one kind of interest that is deductible is interest on mortgage “acquisition debt.” This means debt that’s: 1) secured by your principal home and/or a second home, and 2) incurred in acquiring, constructing or substantially improving the home. You can deduct interest on acquisition debt on up to two qualified residences: your primary home and one vacation home or similar property.

The deduction for acquisition debt comes with a stipulation. From 2018 through 2025, you can’t deduct the interest for acquisition debt greater than $750,000 ($375,000 for married filing separately taxpayers). So if you buy a $2 million house with a $1.5 million mortgage, only the interest you pay on the first $750,000 in debt is deductible. The rest is nondeductible personal interest.

Higher limit before 2018 and after 2025

Beginning in 2026, you’ll be able to deduct the interest for acquisition debt up to $1 million ($500,000 for married filing separately). This was the limit that applied before 2018.

The higher $1 million limit applies to acquisition debt incurred before Dec. 15, 2017, and to debt arising from the refinancing of pre-Dec. 15, 2017 acquisition debt, to the extent the debt resulting from the refinancing doesn’t exceed the original debt amount. Thus, taxpayers can refinance up to $1 million of pre-Dec. 15, 2017 acquisition debt, and that refinanced debt amount won’t be subject to the $750,000 limitation.

The limit on home mortgage debt for which interest is deductible includes both your primary residence and your second home, combined. Some taxpayers believe they can deduct the interest on $750,000 for each mortgage. But if you have a $700,000 mortgage on your primary home and a $500,000 mortgage on your vacation place, the interest on $450,000 of the total debt will be nondeductible personal interest.

“Home equity loan” interest

“Home equity debt,” as specially defined for purposes of the mortgage interest deduction, means debt that: is secured by the taxpayer’s home, and isn’t “acquisition indebtedness” (meaning it wasn’t incurred to acquire, construct or substantially improve the home). From 2018 through 2025, there’s no deduction for home equity debt interest. Note that interest may be deductible on a “home equity loan,” or a “home equity line of credit,” if that loan fits the tax law’s definition of “acquisition debt” because the proceeds are used to substantially improve or construct the home.

Home equity interest after 2025

Beginning with 2026, home equity debt up to certain limits will be deductible (as it was before 2018). The interest on a home equity loan will generally be deductible regardless of how you use the loan proceeds.

Thus, taxpayers considering taking out a home equity loan— one that’s not incurred to acquire, construct or substantially improve the home — should be aware that interest on the loan won’t be deductible. Further, taxpayers with outstanding home equity debt (again, meaning debt that’s not incurred to acquire, construct or substantially improve the home) will currently lose the interest deduction for interest on that debt.

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At Roth&Co, we strive for excellence. We are dedicated to making sure our clients get top-of-the-line service and results. While we spend the bulk of our time buried in tax filings and spreadsheets, we never forget the people at the heart of our work and believe that it takes a positive, friendly, family-like environment to bring out our best.

Firmwide, we work to ensure that our commitment to warmth is more than just some paint on a pillar. Each birthday is celebrated with music, party hats and our fancy prize wheel. New staff members make their rounds with a snack cart as a fun way to meet their new coworkers. We celebrate RothDay with an out-of-office trip to relax and have a good time together. Chanukah donuts, chulent and kugel on Fridays during busy seasons, Superbowl parties and small gestures around the office are the norm and contribute to our warm and upbeat atmosphere.

Personally, I make every effort to demonstrate that my door, literally and figuratively, is always open. It starts with a friendly smile and an authentic “Hello, how are you?” If I know someone is ill or otherwise struggling, I check in and offer help, a listening ear or a walk around the block. Genuine connection is simple – it could be done through a good joke, shared news, or a nice compliment – but it makes all the difference. As Maya Angelou once said: “I’ve learned that people will forget what you said, people will forget what you did, but people will never forget how you made them feel.”

With over 28 years at Roth&Co, I’ve watched us grow from a team of 18 to over 120 – without losing our close-knit atmosphere. I’m so proud of our Roth&Co family and couldn’t be more pleased to be representing our core value of Warmth. Thank you for the little things you do every day to make our firm a great place to work.

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If you’re a parent, or if you’re planning on having children, you know that it’s expensive to pay for their food, clothes, activities and education. Fortunately, there’s a tax credit available for taxpayers with children under the age of 17, as well as a dependent credit for older children.

Recent tax law changes

Changes made by the Tax Cuts and Jobs Act (TCJA) make the child tax credit more valuable and allow more taxpayers to be able to benefit from it. These changes apply through 2025.

Prior law: Before the TCJA kicked in for the 2018 tax year, the child tax credit was $1,000 per qualifying child. But it was reduced for married couples filing jointly by $50 for every $1,000 (or part of $1,000) by which their adjusted gross income (AGI) exceeded $110,000 ($75,000 for unmarried taxpayers). To the extent the $1,000-per-child credit exceeded a taxpayer’s tax liability, it resulted in a refund up to 15% of earned income (wages or net self-employment income) above $3,000. For taxpayers with three or more qualifying children, the excess of the taxpayer’s Social Security taxes for the year over the taxpayer’s earned income credit for the year was refundable. In all cases, the refund was limited to $1,000 per qualifying child.

Current law. Starting with the 2018 tax year, the TCJA doubled the child tax credit to $2,000 per qualifying child under 17. It also allows a $500 credit (per dependent) for any of your dependents who aren’t qualifying children under 17. There’s no age limit for the $500 credit, but tax tests for dependency must be met. Under the TCJA, the refundable portion of the credit is increased to a maximum of $1,400 per qualifying child. In addition, the earned threshold is decreased to $2,500 (from $3,000 under prior law), which has the potential to result in a larger refund. The $500 credit for dependents other than qualifying children is nonrefundable.

More parents are eligible

The TCJA also substantially increased the “phase-out” thresholds for the credit. Starting with the 2018 tax year, the total credit amount allowed to a married couple filing jointly is reduced by $50 for every $1,000 (or part of a $1,000) by which their AGI exceeds $400,000 (up from the prior threshold of $110,000). The threshold is $200,000 for other taxpayers. So, if you were previously prohibited from taking the credit because your AGI was too high, you may now be eligible to claim the credit.

In order to claim the credit for a qualifying child, you must include the child’s Social Security number (SSN) on your tax return. Under prior law, you could also use an individual taxpayer identification number (ITIN) or adoption taxpayer identification number (ATIN). If a qualifying child doesn’t have an SSN, you won’t be able to claim the $1,400 credit, but you can claim the $500 credit for that child using an ITIN or an ATIN. The SSN requirement doesn’t apply for non-qualifying-child dependents, but you must provide an ITIN or ATIN for each dependent for whom you’re claiming a $500 credit.

The changes made by the TCJA generally make these credits more valuable and more widely available to many parents.

If you have children and would like to determine if these tax credits can benefit you, please contact us or ask about them when we prepare your tax return.

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