Unfortunately, the COVID-19 pandemic has forced many businesses to shut down. If this is your situation, we’re here to assist you in any way we can, including taking care of the various tax obligations that must be met.

Of course, a business must file a final income tax return and some other related forms for the year it closes. The type of return to be filed depends on the type of business you have. Here’s a rundown of the basic requirements.

Sole Proprietorships. You’ll need to file the usual Schedule C, “Profit or Loss from Business,” with your individual return for the year you close the business. You may also need to report self-employment tax. 

Partnerships. A partnership must file Form 1065, “U.S. Return of Partnership Income,” for the year it closes. You also must report capital gains and losses on Schedule D. Indicate that this is the final return and do the same on Schedules K-1, “Partner’s Share of Income, Deductions, Credits, Etc.”

All Corporations. Form 966, “Corporate Dissolution or Liquidation,” must be filed if you adopt a resolution or plan to dissolve a corporation or liquidate any of its stock.

C Corporations. File Form 1120, “U.S. Corporate Income Tax Return,” for the year you close. Report capital gains and losses on Schedule D. Indicate this is the final return.

S Corporations. File Form 1120-S, “U.S. Income Tax Return for an S Corporation” for the year of closing. Report capital gains and losses on Schedule D. The “final return” box must be checked on Schedule K-1.

All Businesses. Other forms may need to be filed to report sales of business property and asset acquisitions if you sell your business.

Employees and contract workers

If you have employees, you must pay them final wages and compensation owed, make final federal tax deposits and report employment taxes. Failure to withhold or deposit employee income, Social Security and Medicare taxes can result in full personal liability for what’s known as the Trust Fund Recovery Penalty.

If you’ve paid any contractors at least $600 during the calendar year in which you close your business, you must report those payments on Form 1099-NEC, “Nonemployee Compensation.”

Other tax issues

If your business has a retirement plan for employees, you’ll want to terminate the plan and distribute benefits to participants. There are detailed notice, funding, timing and filing requirements that must be met by a terminating plan. There are also complex requirements related to flexible spending accounts, Health Savings Accounts, and other programs for your employees.

We can assist you with many other complicated tax issues related to closing your business, including Paycheck Protection Plan (PPP) loans, the COVID-19 employee retention tax credit, employment tax deferral, debt cancellation, use of net operating losses, freeing up any remaining passive activity losses, depreciation recapture, and possible bankruptcy issues.

We can advise you on the length of time you need to keep business records. You also must cancel your Employer Identification Number (EIN) and close your IRS business account.

If your business is unable to pay all the taxes it owes, we can explain the available payment options to you. Contact us to discuss these issues and get answers to any questions.

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If you own a business, you may wonder if you’re eligible to take the qualified business income (QBI) deduction. Sometimes this is referred to as the pass-through deduction or the Section 199A deduction.

The QBI deduction:

• Is available to owners of sole proprietorships, single member limited liability companies (LLCs), partnerships, and S corporations, as well as trusts and estates.
• Is intended to reduce the tax rate on QBI to a rate that’s closer to the corporate tax rate.
• Is taken “below the line.” In other words, it reduces your taxable income but not your adjusted gross income.
• Is available regardless of whether you itemize deductions or take the standard deduction.

Taxpayers other than corporations may be entitled to a deduction of up to 20% of their QBI. For 2020, if taxable income exceeds $163,300 for single taxpayers, or $326,600 for a married couple filing jointly, the QBI deduction may be limited based on different scenarios. These include whether the taxpayer is engaged in a service-type of trade or business (such as law, accounting, health, or consulting), the amount of W-2 wages paid by the trade or business, and/or the unadjusted basis of qualified property (such as machinery and equipment) held by the trade or business.

The limitations are phased in. For example, the phase-in for 2020 applies to single filers with taxable income between $163,300 and $213,300 and joint filers with taxable income between $326,600 and $426,600.

For tax years beginning in 2021, the inflation-adjusted threshold amounts will be $164,900 for single taxpayers, and $329,800 for married couples filing jointly.

Year-end planning tip

Some taxpayers may be able to achieve significant savings with respect to this deduction, by deferring income or accelerating deductions at year end so that they come under the dollar thresholds (or be subject to a smaller phaseout of the deduction) for 2020. Depending on your business model, you also may be able to increase the deduction by increasing W-2 wages before year end. The rules are quite complex, so contact us with questions and consult with us before taking steps.

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If your small business is planning for payroll next year, be aware that the “Social Security wage base” is increasing.

The Social Security Administration recently announced that the maximum earnings subject to Social Security tax will increase from $137,700 in 2020 to $142,800 in 2021.

For 2021, the FICA tax rate for both employers and employees is 7.65% (6.2% for Social Security and 1.45% for Medicare).  

For 2021, the Social Security tax rate is 6.2% each for the employer and employee (12.4% total) on the first $142,800 of employee wages. The tax rate for Medicare is 1.45% each for the employee and employer (2.9% total). There’s no wage base limit for Medicare tax so all covered wages are subject to Medicare tax.

In addition to withholding Medicare tax at 1.45%, an employer must withhold a 0.9% additional Medicare tax from wages paid to an employee in excess of $200,000 in a calendar year.

Employees working more than one job

You may have employees who work for your business and who also have a second job. They may ask if you can stop withholding Social Security taxes at a certain point in the year because they’ve already reached the Social Security wage base amount. Unfortunately, you generally can’t stop the withholding, but the employees will get a credit on their tax returns for any excess withheld.

Older employees 

If your business has older employees, they may have to deal with the “retirement earnings test.” It remains in effect for individuals below normal retirement age (age 65 to 67 depending on the year of birth) who continue to work while collecting Social Security benefits. For affected individuals, $1 in benefits will be withheld for every $2 in earnings above $18,960 in 2021 (up from $18,240 in 2020).

For working individuals collecting benefits who reach normal retirement age in 2021, $1 in benefits will be withheld for every $3 in earnings above $46,920 (up from $48,600 in 2020), until the month that the individual reaches normal retirement age. After that month, there’s no limit on earnings.

Contact us if you have questions. We can assist you with the details of payroll taxes and keep you in compliance with payroll laws and regulations.

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Many companies are struggling as a result of shutdowns and restructurings during the COVID-19 crisis. To add insult to injury, some have also fallen victim to arson, looting or natural disasters in 2020.

Lenders and investors want to know how your business has weathered these adverse conditions and where it currently stands. While stakeholders understand that it’s been a tough year for many sectors of the economy, they may presume the worst if you’re late issuing your financial statements. Here are some assumptions people could make when your financial statements are late.

Your business is failing

No one wants to be the bearer of bad news. Deferred financial reporting can lead lenders and investors to presume that the company isn’t going to recover from the economic downturn — and that a bankruptcy filing may be in the works.

Even if your 2020 results have fallen below historical levels or what was forecast at the beginning of the year, issuing your financial statements on time can help reassure stakeholders. They want to know that you’re on top of what’s happening and you’re taking steps to recover.

Management is ineffective

Some stakeholders may assume that your management team is hopelessly disorganized and can’t pull together the requisite data to finish the financials. Late financials are common when the accounting department is understaffed or a major accounting rule change has gone into effect. Both are very real possibilities today.

Delayed statements may also signal that management doesn’t consider financial reporting a priority. This lackadaisical mindset implies that no one is monitoring financial performance throughout the year.

Internal controls are weak

A strong system of internal controls is your company’s first line of defense against fraud. A key component of strong internal controls is management review and internal audits.

If financial statements aren’t timely or prioritized by the company’s owners, unscrupulous employees may see it as a golden opportunity to steal from the company. Fraud is more difficult to hide if you insist on timely financial statements and take the time to review them.

Let’s work together

Sometimes delays in financial reporting happen because management realizes that the company has violated its loan covenants — and they’re worried that the bank will call the loan when they review the financials. In today’s unprecedented conditions, however, many lenders are willing to temporarily waive covenant violations and even restructure debt — if the company can show a good faith effort to preserve cash flow, make timely loan payments and revise its business model, if possible.

We can help you prepare timely financial reports — and forecast how your business will perform in the coming months. Being proactive and forthcoming can help preserve goodwill with lenders and investors. Contact us for more information.

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Most salespeople would tell you that there are few better feelings in life than closing a deal. This is because guiding a customer through the sales process and coming out the other side with dollars committed isn’t a matter of blind luck. It’s a craft — based on equal parts data mining, psychology, intuition and other skills.

Many sales staffs have been under unprecedented pressure this year. The COVID-19 pandemic triggered changes to the economy that made many buyers cut back on spending. Now that the economy is slowly recovering, sales opportunities may be improving. Here are four steps your salespeople can follow to improve the odds that those chances will come to fruition:

1. Qualify prospects. Time is an asset. Successful salespeople focus most or all their time on prospects who are most likely to buy. Viable prospects typically have certain things in common:

• A clear need for the products or services in question,
• Sufficient knowledge of the products or services,
• An identifiable decision-maker who can approve the sale,
• Adequate financial standing, and
• A need to buy right away or soon.

If any of these factors is missing, and certainly if several are, the salesperson will likely end up wasting his or her time trying to make a sale.

2. Ask the right questions. A salesperson must deeply understand a prospect’s motivation for needing your company’s products or services. To do so, inquiries are key. Salespeople who make great presentations but don’t ask effective questions tend to come up short.

An old rule of thumb says: The most effective salespeople spend 80% of their time listening and 20% talking. Actual percentages may vary, but the point is that a substantial portion of a salesperson’s “talk time” should be spent asking intelligent, insightful questions that arise from pre-call research and specific points mentioned by the buyer.

3. Identify and overcome objections. A nightmare scenario for any salesperson is spending a huge amount of time on an opportunity, only to have an unknown issue come out of left field at closing and kill the entire deal. To guard against this, successful salespeople identify and address objections during their calls with prospects, thereby minimizing or eliminating unpleasant surprises at closing. They view objections as requests for information that, if handled correctly, will educate the prospect and strengthen the relationship.

4. Present a solution. The most eloquent sales presentation may be entertaining, but it will probably be unsuccessful if it doesn’t satisfy a buyer’s needs. Your product or service must fix a problem or help accomplish a goal. Without that, what motivation does a prospect have to spend money? Your salespeople must be not only careful researchers and charming conversationalists, but also problem-solvers.

When you alleviate customers’ concerns and allow them to meet strategic objectives, you’ll increase the likelihood of making today’s sales and setting yourself up for tomorrow’s. Our firm can help you identify optimal sales strategies and measure the results.

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If you file a joint tax return with your spouse, you should be aware of your individual liability. And if you’re getting divorced, you should know that there may be relief available if the IRS comes after you for certain past-due taxes.

What’s “joint and several” liability?

When a married couple files a joint tax return, each spouse is “jointly and severally” liable for the full tax amount on the couple’s combined income. That means the IRS can come after either spouse to collect the entire tax — not just the part that’s attributed to one spouse or the other. Liability includes any tax deficiency that the IRS assesses after an audit, as well as penalties and interest. (However, the civil fraud penalty can be imposed only on spouses who’ve actually committed fraud.)

When are spouses “innocent?”

In some cases, spouses are eligible for “innocent spouse relief.” This generally involves individuals who didn’t know about a tax understatement that was attributable to the other spouse.

To be eligible, you must show that you were unaware of the understatement and there was nothing that should have made you suspicious. In addition, the circumstances must make it inequitable to hold you liable for the tax. This relief may be available even if you’re still married and living with your spouse.

In addition, spouses may be able to limit liability for a tax deficiency on a joint return if they’re widowed, divorced, legally separated or have lived apart for at least one year.

How can liability be limited?

In some cases, a spouse can elect to limit liability for a deficiency on a joint return to just his or her allocable portion of the deficiency. If you make this election, the tax items that gave rise to the deficiency will be allocated between you and your spouse as if you’d filed separate returns.

The election won’t provide relief from your spouse’s tax items if the IRS proves that you knew about the items when you signed the tax return — unless you can show that you signed it under duress. Also, liability will be increased by the value of any assets that your spouse transferred to you in order to avoid the tax.

What is an “injured” spouse?

In addition to innocent spouse relief, there’s also relief for “injured” spouses. What’s the difference? An injured spouse claim asks the IRS to allocate part of a joint tax refund to one spouse. In these cases, one spouse has all or part of a refund from a joint return applied against certain past-due taxes, child or spousal support, or federal nontax debts (such as student loans) owed by the other spouse. If you’re an injured spouse, you may be entitled to recoup your refund share.

Whether, and to what extent, you can take advantage of the above relief depends on your situation. If you’re interested in trying to obtain relief, there’s paperwork that must be filed and deadlines that must be met. We can assist you with the details.

Also, keep “joint and several liability” in mind when filing future tax returns. Even if a joint return results in less tax, you may want to file a separate return if you want to be responsible only for your own tax.

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To say that most small to midsize businesses have at least considered taking out a loan this year would probably be an understatement. The economic impact of the COVID-19 pandemic has lowered many companies’ revenue but may have also opened opportunities for others to expand or pivot into more profitable areas.

If your company needs working capital to grow, rather than simply survive, you might want to consider a mezzanine loan. These arrangements offer relatively quick access to substantial funding but with risks that you should fully understand before signing on the dotted line.

Equity on the table

Mezzanine financing works by layering a junior loan on top of a senior (or primary) loan. It combines aspects of senior secured debt from a bank and equity-based financing obtained from direct investors. Sources of mezzanine financing can include private equity groups, mutual funds, insurance companies and buyout firms.

Unlike bank loans, mezzanine debt typically is unsecured by the borrower’s assets or has liens subordinate to other lenders. So, the cost of obtaining financing is higher than that of a senior loan.

However, the cost generally is lower than what’s required to acquire funding purely from equity investment. Yet most mezzanine instruments do enable the lender to participate in the borrowing company’s success — or failure. Generally, the lower your interest rate, the more equity you must offer.

Flexibility at a price

The primary advantage of mezzanine financing is that it can provide capital when you can’t obtain it elsewhere or can’t qualify for the amount you’re looking for. That’s why it’s often referred to as a “bridge” to undertaking ambitious objectives such as a business acquisition or desirable piece of commercial property. But mezzanine loans aren’t necessarily an option of last resort; many companies prefer their flexibility when it comes to negotiating terms.

Naturally, there are drawbacks to consider. In addition to having higher interest rates, mezzanine financing carries with it several other potential disadvantages. Loan covenants can be restrictive. And though some lenders are relatively hands-off, they may retain the right to a significant say in company operations — particularly if you don’t repay the loan in a timely manner.

If you default on the loan, the lender may either sell its stake in your company or transfer that equity to another entity. This means you could suddenly find yourself with a co-owner who you’ve never met or intended to work with.

Mezzanine financing can also make an M&A deal more complicated. It introduces an extra interested party to the negotiation table and can make an already tricky deal that much harder.

Explore all options

Generally, mezzanine loans are best suited for businesses with clear and even aggressive growth plans. Our firm can help you fully explore the tax, financial and strategic implications of any lending arrangement, so you can make the right decision.

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IRS Issues Guidance Stating Expenses Paid with PPP Funds are NOT Deductible for 2020 Tax Year

As this unprecedented year draws to a close, the administration has again issued late guidance regarding the proper treatment of Paycheck Protection Plan loans. Late on Wednesday, November 18, 2020 the IRS issued Revenue Ruling 2020-27.

This guidance clearly states that eligible expenses paid with PPP proceeds are not deductible in 2020 if the borrower “has a reasonable expectation of forgiveness during 2020 or 2021”.  In simple terms, if we can expect the loan to be forgiven in 2020 or 2021 then we can not deduct the expenses covered by the loan. This has the same impact as making the forgiven amount taxable in 2020.

This rule applies whether you submit the PPP application for forgiveness in 2020 or wait until 2021.

The IRS also issued Revenue Procedure 2020-51, outlining the correct treatment for when the actual forgiveness differs from the expected amount. This further confirms the IRS position and treatment that the forgiveness should be recognized as if it occurred in 2020.

These late notices reinforce the criticality of 2020 tax planning to develop strategies to minimize your overall tax liability and address additional taxes due related to the recognition of PPP funds in 2020.

Please contact us immediately to address your 2020 tax planning strategies. Additionally, if you have any questions regarding these notices and their treatment, please do not hesitate to contact us.