COVID-10 tax credits


COVID -19 payroll tax credits


Have you had employees who have come down with the COVID-19 and provided paid sick leave?

Is one of your employees having to take time off from work to take care of a child?


Please see if you can qualify for the Paid Sick Leave Credit or the Expanded FMLA credit.


Paid Sick Leave Credit

The EPSLA requires employers to provide employees with paid sick leave if the employee is unable to work (including telework) due to any of the following:

1. The employee is under a Federal, state, or local quarantine or isolation order related to COVID-19
2. The employee has been advised by a health care provider to self-quarantine due to concerns related to COVID-19
3. The employee is experiencing symptoms of COVID-19 and seeking a medical diagnosis
4. The employee is caring for an individual who is subject to a federal, state, or local quarantine or isolation order related to COVID-19, or has been advised by a healthcare provider to self-quarantine due to concerns related to COVID-19
5. The employee is caring for the child of such employee if the school or place of care of the child has been closed, or the child care provider of such child is unavailable, due to COVID–19 precautions
6. The employee is experiencing any other substantially similar condition specified by the U.S. Department of Health and Human Services.

An employee who is unable to work for reasons due to a COVID-19 circumstance described in (1), (2) or (3) above is entitled to paid sick leave for up to two weeks (up to 80 hours) at their regular rate of pay, or, if higher, the federal minimum wage or any applicable state or local minimum wage, up to $511 per day and $5,110 in the aggregate.

An employee who is unable to work due to a COVID-19 circumstance described in (4), (5) or (6) above is entitled to paid sick leave for up to two weeks (up to 80 hours) at two-thirds thier regular rate of pay or, if higher, the federal minimum wage or any applicable state or local minimum wage, up to $200 per day and $2,000 in the aggregate.

The employer is entitled to a fully refundable tax credit equal to the required paid sick leave.

This tax credit also includes the employer’s share of Medicare tax imposed on those wages and its allowable cost of maintaining health insurance coverage for the employee during the sick leave period (qualified health plan expenses).

The employer is not subject to the employer portion of social security tax imposed on those wages.


Expanded FMLA Credit

In addition to the paid sick leave credit, under the expanded FMLA, an employee who is unable to work (including telework) because of a need to care for a child whose school or place of care is closed or whose child care provider is unavailable due to COVID-19, as described in (5) above, is entitled to paid family and medical leave equal to two-thirds of the employee’s regular pay, up to $200 per day and $10,000 in the aggregate.

Up to 10 weeks of qualifying leave can be counted towards the family leave credit.

Employers are entitled to a fully refundable tax credit equal to the required paid family and medical leave (qualified family leave wages).

This tax credit also includes the employer’s share of Medicare tax imposed on those wages and its cost of maintaining health insurance coverage for the employee during the family leave period (qualified health plan expenses).

Employers are not subject to the employer portion of social security tax imposed on those wages.
Payment of Credits

Employers are entitled to receive a credit in the full amount of the qualified sick leave wages and qualified family leave wages, plus allowable qualified health plan expenses and the employer’s share of Medicare tax, paid for leave during the period beginning April 1, 2020, and ending December 31, 2020.

The credit is allowed against the taxes imposed on employers by section 3111(a) of the Internal Revenue Code and section 3221(a) of the code (the Railroad Retirement Tax Act Tier 1 rate) on all wages and compensation paid to all employees.

These credits are allowed for on the 941 quarterly return, Part 1, line 13c and 13d.

Talk with the company that processes your payroll.


#CreditforQuailifedSick #Payrolltaxcredit #Employee Retention Credit #Payroll

Material Participation 1.469-5(f)

Material Participation 1.469-5(f)

Rarely do you see such a broad statement in a Regulation.

(1)In general. Except as otherwise provided in this paragraph (f), any work done by an individual (without regard to the capacity in which the individual does the work) in connection with an activity in which the individual owns an interest at the time the work is done shall be treated for purposes of this section as participation of the individual in the activity.

Rental activity is different, so we need first to divide the world into rental activity and everything else.

All Rental activity is Passive is one mantra of the tax code.

But there is a different voice when it comes to rental activity being passive if a person can qualify as a Real Estate Professional (REP).

An individual who is qualified as a Real Estate Professional (REP) and meets the 2 tests below is able to qualify to show material participation in rental activities and take losses as non passive (losses that can reduce wages, dividends, etc.):

1. More than 50% of your time working is spent in the real estate business. 469(c)(7)(B)(i). The term “real property trade or business” is broadly defined as any real property development, redevelopment, construction, reconstruction, acquisition, conversion, rental, operation, management, leasing, or brokerage trade or business Sec. 469(c)(7)(C).

2. You must work at least 750 hours in the real estate business. 469(c)(7)(B)(ii). Be mindful that no time will qualify if you are an employee without a 5% ownership interest in the Company. 469(c)(7)(D)(ii).

However, just meeting these 2 tests is not sufficient.

The next objective is to satisfy just one of seven tests for material participation in each activity. (1)

You would think that if you had 750 hours in the real estate industry that would be sufficient, but no. Further, the material participation requirement applies to both rental and non rental (everything else) activity.

For example: Fred is a realtor and also has an ownership interest in a construction corporation. Fred only spent 20 hours a year working at the construction company. Those 20 hours would not be sufficient to catagorize the loss from the construction company as non passive (active). However, even if Fred had 600 hours working at the construction corporation, these hours may not count, if they are not the right type of hours.

Further, even if Fred has material participation as a Realtor and/or as a shareholder in the construction corporation, this would not mean he has met the material participation requirement for the rental properties he owns. Rental Properties require Fred, even after qualifying as a REP, to show material participation in the rental properties separately from other non rental business activities, (for example his construction corporation).

So now we have two issues to face:

What types of hours are acceptable?

No Trivial hours spent watering the office plants and dusting the office furniture in order to meet the material participation requirement is allowed. 1.469-5T(f)(2)(i)

No hours count for time spent as an Investor reviewing financial statements, preparing summaries, monitoring the finances and operations, etc.
Sometimes no hours count for Management if another person has more hours than Fred in Management and that other person gets compensated.(2).

So what hours are left? Chores. Specific tasks that Fred performs for the Corporation. Brown v. Commissioner T.C. Memo 2019-69

Let’s focus in on Chores.

Types of Chores:

1. Handling financing
2. Product development
3. Customer Retention

The Court in Montgomery v. Commissioner T.C. Memo 213-151 adds to the Chores list:

4. Office functions
5. Managing Payroll
6. Preparing official documents
7. Attending business meetings
Can’t all of these items 1 through 7 be considered Management? Yes – So how do you win this argument that these Chores are not Management?

A. There is another person performing the day-to-day Operations.
B. If the IRS argues this other person is not performing Management hours, thenyou will agree that Fred performed more Management hours than any other person. Therefore, now you count the hours as Management hours instead of Chore hours.

When you are keeping records to meet the Material Participation Test you have to keep in mind how these hours are being categorized. Fred could have the most detailed records ever on plant watering, and it will do no good.
Now the next issue is,

What relationship does Fred have to the Construction Corporation?
Is Fred a shareholder, an employee, an agent, a subcontractor, or does it matter?

As Bill Murray proclaimed in Meatballs, “It just doesn’t matter.” Well almost. Fred only has to have an ownership interest. Fred could be the 1st basemen for the NY Yankees and as long as he meets on the 7 material participation tests and has an interest in the activity, he is allowed to take the loss.

If Fred is trying to qualify as a REP to deduct his rental property losses as a employee of a real estate trade or business, then Fred needs to have a 5% ownership interest. Otherwise, if Fred is trying to meet the material participation
test for the construction corporation (non rental), then he only has to show any interest. So, he could have 1% interest in the construction corporation, and he does not need to be an employee.
1.469-5(f) talks about individuals. How do the Courts look at the issue of the relationship of the various parties to a Non Grantor Trust and material participation?

There are 2 types of Trusts to discuss here.

Grantor Trusts. The person who creates the Trust retains one or more powers over the Trust and thus the trust income is taxable to the grantor.

With the Grantor Trust the rules discussed above apply.

Non Grantor Trusts. The grantor is not the trustee nor beneficiary.

The Courts in Mattie K Carter Trust ruled as to counting as material participation the hours spent by the following as counting:

Employees of the Trust – YES
Trustees – YES (this is the only catagory the IRS agrees to)
Trustees working as employees of the Trust – YES
Trustee working as employees for entities owned by the Trust – YES
Agents – YES
Beneficiary – NO

Grouper. A different kind of fish.

If Fred is having trouble meeting the material participation requirements for each of his activities, then he can group one or more activities as one to meet one of the 7 possible material participation test for the group as a whole. Twenty hours working at the construction company is not sufficient, so Fred may group the construction company with his real estate activity.

To refresh, this is all being done to get the losses to flow through to offset wages, dividends and other income.

Items to consider:

Rental Groupers and Non rental Groupers don’t swim in the same pool.
A taxpayer may not group a rental real estate activity with any other activity of the taxpayer. 1.469-9(e)(3)(i).
Also once an activity is in a Group, then it is swimming with the other fish and is part of the Group. It is helpful to qualify for material participation, but imposes limits when you sell one of the activities inside the Group.
What if Fred buys a new business, say, a title company. He can elect to add the title company to the Group or to keep it separate. But if he wants to group the two activities, he has to file a Declaration about an Appropriate Economic Unit.

Also, say 5 years from now Fred wants to take the title company and group it with the Construction company. He can do that but must file a Declaration.
1. A declaration that the regrouping (combining 2 or more existing groups) makes up an appropriate economic unit.

2. A statement on what the material change in the facts and circumstances were that made the original grouping inappropriate.

Even when Fred first acquires the title company and wants to group it with the construction corporation, he has this issue of its addition making an appropriate economic unit.
1. The similarities and differences in the types of trades or businesses,
2. The extent of common control,
3. The extent of common ownership,
4. The geographical location, and
5. The interdependencies between or among activities, which may include the extent to which the activities:
A. Buy or sell goods between or among themselves,
B. Involve products or services that are generally provided together,
C. Have the same customers,
D. Have the same employees, or
E. Use a single set of books and records to account for the activities.
This is a general discussion. See your tax advisor before using this information to make a decision in your specific situation.

1. Material Participation Test Under the Temporary Regulations
Temp. Regs. Sec. 1.469-5T(a) provides that a taxpayer can establish material participation in an activity by satisfying one of seven tests:

1. The individual participates in the activity for more than 500 hours during such year;

2. The individual’s participation in the activity for the taxable year constitutes substantially all of the participation in such activity of all individuals (including individuals who are not owners of interests in the activity) for such year;

3. The individual participates in the activity for more than 100 hours during the taxable year, and such individual’s participation in the activity for the taxable year is not less than the participation in the activity of any other individual (including individuals who are not owners of interests in the activity) for such year;

4. The activity is a significant participation activity (within the meaning of ) for the taxable year, and the individual’s aggregate participation in all significant participation activities during such year exceeds 500 hours;

5. The individual materially participated in the activity (determined without regard to this paragraph (a)(5)) for any five taxable years (whether or not consecutive) during the ten taxable years that immediately precede the taxable year;
6. The activity is a personal service activity (within the meaning of ), and the individual materially participated in the activity for any three taxable years (whether or not consecutive) preceding the taxable year; or
7. Based on all of the facts and circumstances (taking into account the rules in ), the individual participates in the activity on a regular, continuous, and substantial basis during such year.(ii)Certain management activities. An individual’s services performed in the management of an activity shall not be taken into account in determining whether such individual is treated as materially participating in such activity for the taxable year under paragraph (a)(7) of this section unless, for such taxable year –

2. (A) No person (other than such individual) who performs services in connection with the management of the activity receives compensation described in section 911(d)(2)(A) in consideration for such services; and

(B) No individual performs services in connection with the management of the activity that exceed (by hours) the amount of such services performed by such individual.

Tax Cuts and Job Act 199A Calculating the 20% deduction

The hurdles in obtaining  the deduction under the Tax Cut and Job Act.

If you pass all of the limits below you still have an umbrella limit of 20% of (taxable income- capital gains).

In addition to the umbrella limit there are three bucket tests.

I.   Everyone who has taxable income under 157,500 single and 315,000 married.   20% of the Qualified Business Income (net income from your business).

So for example in this bucket it is the lessor of 20% of TI or 20% of QBI.

 

II.  Specific Service and Trade Business.   Lawyers, Doctors, Consultants who make over the 157,500 single and 315,000 married.  Phase out until 207,500 for single and 415,000 for married.  After the phase out of 207,000 and 4150,000 no deduction.

 

III.  Non Specific Service and Trade Business over 157,500 single and 315,000 married.    Lessor of:

20% of QBI

or

the greater of 50% of wages vs 25% of wages + 2.5% of assets.

For example a roofer does not have that much in the way of equipment.  So I think 50% of wages is most likely to be the greater number.  Of course you should do the 25% + 2.5% of asset test.

So it comes down to the lessor of

20% of QBI

50% of wages.

 

IF you are an employee of a S corp you should consider taking a year end bonus to increase your 50% number. Or consider hiring your spouse if you are a Sole proprietor or and LLC.

For example  your QBI (net income ) is 100,000

So 20% of $100,000 is $20,000.  But what if you wages are only 5,000.  Then 20% of 5,000 is 1,000 and so you end end with just 1,000 as the 20% qualif

Now for example, you pay yourself  a bonus of 23,000.    Let’s see what happens.

100,000 -23,000 = 77,000 x .2 = 15,400.

compared to 23,000 + 5,000 = 28,000 X 5 =14,000  So now the QBD is 14,000( the lessor of 15,400  or 14,000)

Okay so the 14,000 X your tax rate (IRS and state) is for example .35 = 4,900.

What is the payroll cost of the additional salary ?   23,000 X .153 = 3,519

So you save roughly 1,400.

The use of the salary bonus works best when the employee is over the SS limit already.

So for example maybe  you have already paid yourself from the company over the social security limit, or your spouse works for the government and makes over 128,400 for 2018.  Then the business is only paying the employer side and the benefit of the bonus is improved.

Of course the IRS could ask what your spouse did for the company for 23,000 salary.

This is just a general discussion.  See your tax preparer for any questions.

Depreciation recapture on conversion of business asset to personal use

Recapture of deprecation for business property
converted to personal use.

Do you have to recapture the 179 depreciation and special depreciation allowance (bonus depreciation) on a simply conversion from business use to personal use? Let’s discuss the issue of recapture.

Here is an example. Bob, an airplane pilot, has an office in his home and buys a computer. He is self employed and is using the computer 100% for business in the first year and take 179 or special allowance depreciation in the first year. In year three he decides to change his focus, and gets a job with an airline as an employee and only flies for his own clients part time. Now he uses the computer 10% of the time for business. The other 90% he uses the computer to do emails with family and friends.

So we have a self employed individual who starts a company and takes full advantage of code section 179 and special depreciation allowance provisions of the tax code. The businessman is allowed to do this because the property is being used more than 50% for the business purpose vs. personal use.

What happens to all the bonus deprecation and 179 deduction when the property is converted back to personal use. Not sold, not disposed of, but simply now used for personal use.

The issue comes down to whether the property is “listed property”. If the property is listed property, then on the conversion there is a recapture of depreciation taken in prior years.

If the property is not listed property, then the mere conversion from business to personal use creates no recapture. But if after the conversion, the property now being used personally is sold, then there could be recapture of the 179 or bonus depreciation. There is a difference between how the computer is being used vs. the sale of the computer.

What is listed property?

26 US Code §280F(d)(4) defines it as:

(4) Listed property
(A) In general Except as provided in subparagraph (B), the term “listed property” means—
(i) any passenger automobile,
(ii) any other property used as a means of transportation,
(iii) any property of a type generally used for purposes of entertainment, recreation, or amusement, and
(iv) any other property of a type specified by the Secretary by regulations.

Here is an exception for companies transporting people or property:

(B) Exception for property used in business of transporting persons or property
Except to the extent provided in regulations, clause (ii) of subparagraph (A) shall not apply to any property substantially all of the use of which is in a trade or business of providing to unrelated persons services consisting of the transportation of persons or property for compensation or hire.

Not looking so good for Bob at this point is it? But hold on, see that provision under (iv) about regulations.

If you look at Regulation §1.280F-6(b), “listed property” is further defined as

(b)Listed property –

(1)In general. Except as otherwise provided in paragraph (b)(5) of this section, the term listed property means:

(i) Any passenger automobile (as defined in paragraph (c) of this section),

(ii) Any other property used as a means of transportation (as defined in paragraph (b)(2) of this section),

(iii) Any property of a type generally used for purposes of entertainment, recreation, or amusement, and

(iv) Any computer or peripheral equipment (as defined in section 168(i)(2)(B)), and

(v) Any other property specified in paragraph (b)(4) of this section.
(b)(5) there is another exception!!! Let’s take a look at (b)(5),

(5)Exception for computers. The term listed property shall not include any computer (including peripheral equipment) used exclusively at a regular business establishment. For purposes of the preceding sentence, a portion of a dwelling unit shall be treated as a regular business establishment if (and only if) the requirements of section 280A(c)(1) are met with respect to that portion.

Bob is using his computer at his regular business establishment. And he is also okay having used his home office as his regular business establishment.

So good news for Bob. His computer is not listed property and no recapture on the simple conversion. If however he sold the computer in year 3 at a gain, then yes he would have to get out his MACRS depreciation schedule and calculated the recapture. He would report the excess depreciation on his year 3 tax return as ordinary income on form 4797.

How much is the recapture when listed property is converted from business use to personal use?

IRC §280F(b)(2)(A) says it is the difference between the “excess depreciation”.

(2) Recapture
(A) Where business use percentage does not exceed 50 percent If-
(i) property is predominantly used in a qualified business use in a taxable year in which it is placed in service, and
(ii) such property is not predominantly used in a qualified business use for any subsequent taxable year,
then any excess depreciation shall be included in gross income for the taxable year referred to in clause (ii), and the depreciation deduction for the taxable year referred to in clause (ii) and any subsequent taxable years shall be determined under section 168(g) (relating to alternative depreciation system).
(B) Excess depreciation For purposes of subparagraph (A), the term “excess depreciation” means the excess (if any) of-
(i) the amount of the depreciation deductions allowable with respect to the property for taxable years before the 1st taxable year in which the property was not predominantly used in a qualified business use, over
(ii) the amount which would have been so allowable if the property had not been predominantly used in a qualified business use for the taxable year in which it was placed in service.

See you own tax preparer for your specific issue, as this is a generic discussion.

A final thought. Now that we have a better understanding of depreciation recapture, how did we capture it in the first place?