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SBA Implements PPP Changes for Small Businesses

In order to reach racial and gender equity and assist businesses in low and moderate-income, rural, urban and other underserved areas, the SBA has established a 14-day, exclusive PPP loan application period for businesses and nonprofits with fewer than 20 employees. The exclusive period ends at 5:00 pm EST on March 9, and the PPP program is slated to close on March 31, 2021.

The new rules:
• Allow sole proprietors, independent contractors, and self-employed individuals to receive more financial support by revising the PPP’s funding formula for these categories of applicants
• Eliminate an exclusionary restriction on PPP access for small business owners with prior non-financial fraud felony convictions, consistent with a bipartisan congressional proposal
• Eliminate PPP access restrictions on small business owners who have struggled to make federal student loan payments by eliminating federal student loan debt delinquency and default as disqualifiers to participating in the PPP; and
• Ensure access for non-citizen small business owners who are lawfully residing in the U.S. by clarifying that they may use an Individual Taxpayer Identification Number (ITIN) to apply for the PPP.

How to apply.

Taxpayers Should Double-Check Their Documents

Taxpayers who haven’t received a W-2 or Form 1099 should contact their employer, payer, or issuing agency and request the missing documents BEFORE filing their taxes or submitting their information to a tax preparer. This also applies to those who received an incorrect W-2 or Form 1099.

The IRS attempts to match business payments with earned wages and other receipts. Discrepancies can be a red flag that may come back to haunt a taxpayer if it is deemed that income has been hidden to avoid a tax liability.

The first step is to contact the issuing agency — the employer, business, unemployment department, or pension fund manager — for the missing or corrected forms. But if a form is not received in time to file a tax return, income can be estimated and filed as Form 4852.

Form 4852 is a substitute for Form W-2, Wage and Tax Statement or Form 1099-R, Distributions from Pensions, Annuities, Retirement or Profit-Sharing Plans, IRAs, Insurance Contracts, and other tax documents.

Estimates should be as accurate as possible, because if a missing document arrives after filing the return and the information differs from the estimate, an amended tax return must be filed, which adds to the cost of tax preparation services.

By the end of January, most taxpayers should have received income documents, including
• W-2: Wage and Tax Statement
• 1099-MISC: Miscellaneous Income
• 1099-INT: Interest Income
• 1099-NEC: Non-employee Compensation
• 1099-G: Government Payments such as unemployment compensation

Earning money from a side job?

Like many of us, you’ve probably dreamed of turning a hobby or pastime into a regular business. Or perhaps the current economic condition necessitated that you turn to a side job to earn extra money. You won’t have any unusual tax headaches if your new business is profitable. However, if you consistently generate losses, the IRS may step in and say it’s a hobby — an activity not engaged in for profit — rather than a business.

Under the hobby loss rules, you can claim certain deductions, such as state and local property taxes. Your deductions for business-type expenses such as rent or advertising from the activity are limited to your gross income, however. Furthermore, deductible hobby expenses must be taken on Schedule A of Form 1040 as miscellaneous itemized deductions subject to 2% of your adjusted gross income. Since miscellaneous itemized deductions are repealed from 2018 through 2025, deductible hobby expenses are effectively wiped out until 2026. This creates taxable income without offsetting deductions.

There are two ways to avoid the hobby loss rules. The first way is to show a profit in at least three out of five consecutive years. The second way is to run the activity in such a way as to show that you intend to make it profitable, rather than operate it as a mere hobby. IRS regulations say the hobby loss rules won’t apply if the facts and circumstances show you have a profit-making objective.

How can you prove that you have a profit-making objective? In general, you can do so by running the new venture in a businesslike manner. More specifically, the IRS and the courts will look to the following factors: how you run the activity; your expertise in the area; the time and effort you expend in the enterprise; whether there’s an expectation the assets used in the activity will rise in value; your success in carrying on other similar or dissimilar activities; your history of income or loss in the activity; the amount of occasional profits (if any) that are earned; your financial status; and whether the activity involves elements of personal pleasure or recreation.

Working from home? Know what’s deductible

If you’re self-employed and use part of your home for business, you may be able to deduct expenses allocable to the business use. The home office deduction is available for homeowners and renters. To qualify for the deduction, you must use the space in your home regularly and exclusively as your principal place of business. Any personal use of the space will disqualify you from claiming a home office deduction.

You may choose one of two methods for calculating your deduction—the simplified method or the regular method. The simplified method allows you to claim $5 per square foot for a maximum of 300 square feet. This gives you a home office deduction of no more than $1,500. No other deductions are allowed. You are still permitted, however, to claim any mortgage interest or property taxes on Schedule A, if you itemize deductions.

The regular method requires a bit more recordkeeping. Generally, when using the regular method, deductions for a home office are based on the percentage of your home devoted to business use. So, if you use a whole room or part of a room for conducting your business, you need to figure out the square footage of the business use compared to the square footage of your entire home. This percentage is then used to calculate the percentage of deductible expenses such as mortgage interest, insurance, utilities, repairs and depreciation.

You may choose to use either the simplified method or the regular method for any taxable year. Once you choose, you cannot change your mind for that year. You can, however, use the simplified method one year and the regular method in another. If you use the simplified method for one year and use the regular method for any subsequent year, you must calculate the depreciation deduction for the subsequent year using the appropriate optional depreciation table.

During 2020, many employees were sheltering in place and forced to work from home. The current rules for deducting home office expenses do not apply to employees since deductions for employee business expenses have been suspended until 2026.

Changes coming to NM CRS

The New Mexico Taxation and Revenue Department is redesigning its Combined Reporting System (CRS) to create separate returns for withholding, gross receipts, and compensating taxes. The changes are expected to be phased in starting in July 2021.

The first phase will create forms that are intended to make it easier for taxpayers to manage their accounts. It also is expected to increase internal automation and expedite the processing of refunds.

According to the department, the Combined Reporting System was originally intended to streamline filing for business taxpayers, but in practice, it often has resulted in returns and payments posting incorrectly, and taxpayers and the Department having to amend or manually adjust returns and payments.

The redesigned system will have separate returns for each of the gross receipts and compensating tax programs, as well as separate returns for wage and non-wage withholding. The department also plans to update its Taxpayer Access Point (TAP) e-filing portal for a more intuitive, user-friendly interface.

TRD Cabinet Secretary Stephanie Schardin Clarke said in a press release, “We understand that change is hard and that some taxpayers will be skeptical. Despite its shortcomings, users have become accustomed to the Combined Reporting System and know what to expect. There will be a learning curve.”

Webinars will be scheduled by the department for anyone interested in the project, and training will be offered in a variety of formats once the redesign is complete.

Find more information on the TRD website.

Protect yourself: Cyberthieves are everywhere

Everyone knows that having strong locks, a security alarm and perhaps a security guard will help protect your business from a physical break in. But what about the sneaky cyberthieves you can’t see coming? There are several things you must implement to protect yourself, your livelihood and your client or customer data. Here are a few essential tips:

  • Encrypt your data. Software programs are available to help you do this.
  • Use strong passwords and change them often. The longer the password, the better.
  • Back up your files often, daily if possible. Using the cloud is a great option.
  • Avoid public WiFi. If you do one thing, forbid all use of public WiFi for work activities.
  • Provide alternatives such as a mobile virtual private network (VPN) for employees to use when they’re not in the office.
  • Install antivirus software and use firewalls to protect you from unwanted intrusions.
  • Keep your operating systems up to date with the latest security features.
  • Develop policies for suspicious emails. This means educating your employees on how to recognize phishing and other suspicious emails.

 

Cyberattacks have become common, and there is no better investment for your business than a good security plan. If you aren’t confident you can create one on your own, hire an expert.

 

Business benefits of the Jan. 2021 coronavirus relief bill

The U.S. Congress addressed some of the financial impacts businesses have suffered due to emergency health orders, and it created provisions in the Jan. 2021 relief bill to help. Here are a few:

  • Repealed the provision that reduced PPP forgiveness by the amount of any EIDL advances.
  • Allowed a second draw or “double-dip” of PPP loans for significantly-impacted small businesses that have already obtained a PPP loan.
  • Allowed the deduction of expenses paid with forgiven PPP debt.
  • Provided additional categories of non-payroll expenses that are allowable under PPP forgiveness.
  • Allowing PPP loan recipients to claim the Employee Retention Credit.
  • Extending the Employee Retention Credit.

This article provides more information.

Preparing for your tax appointment

Nothing makes a tax preparer happier than a prepared client. Here are a few tips for going to your tax appointment with everything you need.

Look at last year’s tax return for income and expense reminders. Make sure you have all the 1099s from your bank reporting your interest and dividend income. If you opened new bank accounts, make sure you have those statements as well.

Gather all your W-2s for both you and your spouse if married. If you have income from other sources, such as an S corporation, partnership, estate or trust, make sure you have all your K-1s.
Do you claim dependents? Each dependent must have a Social Security number. Bring those documents with you so your preparer has the correct information. Incorrect Social Security numbers delay processing of your return. If you are entitled to the earned income tax credit, you will have to provide proof that your dependents are really yours to claim. School or medical records will help substantiate that your dependents live with you.

If you don’t itemize your deductions, there isn’t much in the way of expenses to deduct. The standard deduction covers all expenses except for cash contributions to a charity. You can claim up to $300 without itemizing. Otherwise, make sure you have your mortgage interest statement, property tax bill and an itemized list of medical expenses and charitable contributions.

§179 vs. bonus depreciation: Either choice brings large deductions

Eventually all business owners will need to purchase or replace assets. When this happens, they need to determine how the cost of those assets will be recovered. Typically, the cost of business assets is recovered over their expected life through depreciation. If your goal is to recover that cost faster, you can either expense it under §179 or bonus depreciation.

Only certain property qualifies for the §179 deduction. That property includes tangible personal property, certain computer software and certain qualified real property, such as interior improvements, HVAC or alarm systems or roofs. The property must be acquired by purchase, meaning it cannot be a gift to you or property that you already own and convert to business use.

Under §179, businesses can deduct up to $1,040,000 of qualified equipment immediately, with a limit of $2,590,000, after which the deduction begins to phase out on a dollar-for-dollar basis. The deduction is limited to your taxable income from the business; however, any amount that can’t be deducted because of this limitation is carried over indefinitely to later years.

You can choose which purchases to cover under the §179 deduction and which to save as future tax breaks. You can even split the deduction for individual purchases (for example, claiming half the cost of a new car upfront while spreading out the rest of the purchase over time). One notable drawback to the §179 deduction is that if the business use drops to less than 50%, some or all of your previous deduction must be recaptured.

Bonus depreciation, on the other hand, has slightly different rules. First, there are no income limits or limits on how much you can spend on assets and write off. If you are a larger business planning to make large purchases of new or used assets, this option may look better for you.

Essentially, bonus depreciation allows you to deduct 100% of the cost of an asset in one year. Qualifying property for bonus depreciation must have a class life of 20 years or less and can include a wide variety of interior, non-load-bearing building improvements. Unlike §179, bonus depreciation does not apply to roofs, HVAC, fire protection systems, alarm systems and security systems.

One significant difference between bonus depreciation and §179 is that if you place several assets with the same class life, you must elect bonus depreciation for all or none of them. Electing §179 allows you to choose. The 100% bonus depreciation amount remains in effect from Sept. 27, 2017, until Jan. 1, 2023. After that, first-year bonus depreciation goes down 20 percent each year and is set to completely expire after 2026. There is no statutory end to §179.

While on the surface it may not look like there’s much difference between the two, the method you choose depends on several factors, such as your income, the type of property you purchase and when it’s placed in service.

CARES Act eases rules for business losses

In 2017, the Tax Cuts and Jobs Act (TCJA) provided that net tax losses from businesses in excess of an inflation-adjusted $500,000 for joint filers, or an inflation-adjusted $250,000 for other taxpayers, are to be treated as net operating loss (NOL) carryforwards in the following tax year. This new rule eliminated the ability for a business owner with a loss to carry back the loss to a prior year, thus delaying any tax benefit.

Earlier this year, the CARES Act liberalized this rule by retroactively postponing the limits, so they now apply to tax years beginning in calendar years 2021 through 2025. This means the $500,000 limitation (or $250,000 for single taxpayers) on excess business losses for non-corporate taxpayers does not apply until Jan. 1, 2021. As a result, affected taxpayers may be able to fully deduct business losses arising in 2018, 2019 and 2020. The CARES Act also eliminated the TCJA rule that limited a loss to 80% of taxable income. Companies are now permitted to fully offset their taxable income in such taxable years with NOL carryforwards without regard to the year in which such NOL arose. NOLs from taxable years beginning after Dec. 31, 2017, that are carried forward to taxable years beginning after Dec. 31, 2020, will be subject to the 80% limitation that was enacted as part of TCJA.

In summary, the CARES Act reinstates loss carrybacks for NOLs arising in 2018, 2019 and 2020 (taxable years beginning after Dec. 31, 2017, and before Jan. 1, 2021) to the five taxable years preceding the taxable year in which the loss arose. Taxpayers generally have 120 days after March 27, 2020, the date of enactment of the CARES Act, to either carry back their 2018 NOLs or relinquish the carryback period and carry such amounts forward.