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May

Details and Analysis of Former Vice President Biden’s Tax Proposals

By Huaqun Li - Garrett Watson - Taylor LaJoie

TAX FOUNDATION

Key Findings

  • Former Vice President Joe Biden would enact a number of policies that would raise taxes, including individual income taxes and payroll taxes, on high-income individuals with income above $400,000.
  • Biden’s plan would raise tax revenue by $3.8 trillion over the next decade on a conventional basis. When accounting for macroeconomic feedback effects, the plan would collect about $3.2 trillion over the next decade.
  • According to the Tax Foundation’s General Equilibrium Model, the Biden tax plan would reduce GDP by 1.51 percent over the long term.
  • On a conventional basis, the Biden tax plan would lead to 7.8 percent less after-tax income for the top 1 percent of taxpayers, 1.1 percent lower after-tax income for the top 5 percent, and around 0.6 percent less after-tax income for other income quintiles.

 

Plan Details

Repeal the TCJA components for high-income filers

Impose 12.4% Social Security payroll tax for wages above $400k

Increase the corporate income tax to 28%

Establish a corporate minimum tax on book income

Double the tax rate on GILTI

Conventional Revenue, 2021-2030 (Billions of Dollars)

$3,796

Dynamic Revenue, 2021-2030 (Billions of Dollars)

$3,223

Gross Domestic Product (GDP)

-1.51%

Capital Stock

-3.23%

Full-time Equivalent Jobs

-585,000

 

Summary of Former Vice President Biden’s Tax Proposal Estimates

Payroll tax and individual income changes:

  • Imposes a 12.4 percent Old-Age, Survivors, and Disability Insurance (Social Security) payroll tax on income earned above $400,000, evenly split between employers and employees. This would create a “donut hole” in the current Social Security payroll tax, where wages between $137,700, the current wage cap, and $400,000 are not taxed.[1]
  • Reverts the top individual income tax rate for taxable incomes above $400,000 from 37 percent under current law to the pre-Tax Cuts and Jobs Act level of 39.6 percent.
  • Taxes long-term capital gains and qualified dividends at the ordinary income tax rate of 39.6 percent on income above $1 million and eliminates step-up in basis for capital gains taxation.[2]
  • Caps the tax benefit of itemized deductions to 28 percent of value, which means that taxpayers in the brackets with tax rates higher than 28 percent will face limited itemized deductions.
  • Restores the Pease limitation on itemized deductions for taxable incomes above $400,000.
  • Phases out the qualified business income deduction (Section 199A) for filers with taxable income above $400,000.
  • Expands the Earned Income Tax Credit (EITC) for childless workers aged 65+; provides renewable-energy-related tax credits to individuals.

 

Business tax changes:

  • Increases the corporate income tax rate from 21 percent to 28 percent.[3]
  • Creates a minimum tax on corporations with book profits of $100 million or higher. The minimum tax is structured as an alternative minimum tax—corporations will pay the greater of their regular corporate income tax or the 15 percent minimum tax while still allowing for net operating loss (NOL) and foreign tax credits.[4]
  • Doubles the tax rate on Global Intangible Low Tax Income (GILTI) earned by foreign subsidiaries of US firms from 10.5 percent to 21 percent.
  • Establishes a Manufacturing Communities Tax Credit to reduce the tax liability of businesses that experience workforce layoffs or a major government institution closure; expands the New Markets Tax Credit and makes it permanent; offers tax credits to small business for adopting workplace retirement savings plans; expands several renewable-energy-related tax credits and deductions and ends subsidies for fossil fuels.

 

Other Changes Include:

An $8,000 tax credit for childcare; equalizing the tax benefits of defined contribution retirement plans; eliminating real estate industry tax loopholes; expanding the Affordable Care Act’s premium tax credit; sanctions on tax havens and outsourcing, among other proposals[5] which are not included in our analysis due to the lack of detailed information.   

 

Economic Effect

According to the Tax Foundation General Equilibrium Model, Biden’s tax plan would reduce the economy’s size by 1.51 percent in the long run. The plan would shrink the capital stock by 3.23 percent and reduce the overall wage rate by 0.98 percent, leading to 585,000 fewer full-time equivalent jobs.

 

Gross Domestic Product (GDP)

-1.51%

Capital stock

-3.23%

Wage rate

-0.98%

Full-time Equivalent Jobs

-585,000

Source: Tax Foundation General Equilibrium Model, November 2019.

 

Table 1. Economic Effect of Former Vice President Biden’s Tax plan

Revenue Effect

Based on the Tax Foundation General Equilibrium Model, we estimate that, on a conventional basis, Biden’s plan would increase federal tax revenue by $3.8 trillion between 2021 and 2030 relative to current law. Increasing the corporate tax rate to 28 percent would account for the largest revenue gain ($1.3 trillion over 10 years) in the plan. Adding other changes on the business side, such as the 15 percent corporate minimum tax and tax increases on international profits, Biden’s taxes on businesses account for about half of the revenue gains.

Higher taxes levied on taxpayers earning more than $400,000, including higher tax rates on ordinary income as well as capital gains and dividends, would raise another $1.2 trillion over 10 years. The payroll tax increase for high-income households would generate around $800 billion in additional revenue over 10 years.

Table 2 presents the conventional revenue score for each individual provision of the plan. We estimate the integrated revenue effects by stacking one provision after the other. The presented revenue effect for each provision is the difference between the newly stacked simulation and the simulation that includes all provisions listed above it. Note that some of Biden’s proposals, such as the higher marginal income tax rate on income above $400,000, raises revenue in the beginning of the 10-year window, but not at the end. This is because under current law, the lower 37 percent rate is already scheduled to revert to 39.6 beginning in 2026, meaning Biden’s proposal does not result in increased revenue in those years.

On a dynamic basis, we estimate that Biden’s tax plan would raise about 15 percent less revenue than on a conventional basis over the next decade. Dynamic revenue gains would total approximately $3.2 trillion between 2021 and 2030. That is because the relatively smaller economy would shrink the tax base for payroll, individual income, and business income taxes.

Conventional

2021

2022

2023

2024

2025

2026

2027

2028

2029

2030

2021-2030

1. Apply a Social Security payroll tax of 12.4% to earnings above $400,000

$72

$70

$72

$72

$76

$83

$87

$89

$92

$95

$808

2. Raise the rate on top ordinary income

$27

$29

$30

$31

$33

$0

$0

$0

$0

$0

$151

3. Reactivate the Pease limitation for income above $400,000

$10

$11

$11

$12

$12

$0

$0

$0

$0

$0

$56

4. Tax capital gains and dividends at 39.6 percent on income $1m+ and repeal step-up in basis

$17

$32

$49

$51

$56

$53

$57

$59

$63

$66

$503

5. Limit tax benefit of itemized deduction at 28% of the value

$24

$25

$26

$28

$29

$30

$33

$34

$35

$36

$301

6. Phase out qualified business income deduction for income above $400,000

$36

$38

$39

$41

$43

$0

$0

$0

$0

$0

$197

7. Raise the corporate income tax to 28%

$97

$106

$119

$133

$143

$142

$136

$142

$143

$144

$1,306

8. Impose a corporate minimum tax on book income

$24

$26

$29

$32

$35

$35

$33

$34

$35

$36

$318

9.  Double the tax rate on GILTI

$30

$33

$36

$40

$43

$28

$26

$25

$23

$20

$303

10. Miscellaneous credits

$-8

$-10

$-12

$-13

$-14

$-16

$-17

$-18

$-19

$-20

$-146

Total Conventional Revenue

$331

$359

$400

$426

$455

$355

$355

$365

$372

$378

$3,796

Total Dynamic Revenue

$303

$307

$333

$367

$387

$349

$300

$290

$294

$293

$3,223

Source: Tax Foundation General Equilibrium Model, November 2019.

 

Table 2. Conventional and Dynamic Revenue Effect of Former Vice President Biden’s Tax Plans (Billions of Dollars)

Distributional Effect

On a conventional basis, Biden’s tax plan would make the tax code more progressive. The proposed changes to individual income taxes affect the distribution of the tax burden differently after 2025, as the individual income tax provisions in the Tax Cuts and Jobs Act (TCJA) expire. To show this difference, we present the distribution change for both 2021 and 2030.

In 2021, on a conventional basis, taxpayers in the top 1 percent would see their after-tax incomes reduced by around 13.0 percent due to higher taxes on income above $400,000. However, taxpayers in other income quintiles would also see a reduction in their after-tax income. The reduction in income for the bottom four income quintiles is mainly due to the increased tax burden on labor from higher corporate income taxes. The Tax Foundation’s General Equilibrium Model assumes that the corporate tax is borne by both capital and labor and evenly split between two in the long run. However, the labor share of the corporate income tax change is gradually phased in over five years.[6]

The conventional distribution table for 2030 is similar to the conventional distribution for 2021. One notable difference is the change in after-tax income for the top 1 percent in 2030 is smaller than in 2021. This is because several individual income tax provisions, such as the 37 percent top marginal income tax rate, expire starting in 2026. This means that some of Biden’s tax increases on high-income households would not increase their tax burden in 2030 compared to current law in that year. Biden’s plan would reduce the after-tax income for the top 1 percent by about 7.8 percent in 2030, compared to 13 percent in 2021. After-tax income for all taxpayers shrinks by 1.7 percent, lower than the 2.5 percent decline in 2021.

On a dynamic basis, the Tax Foundation’s General Equilibrium Model estimates that the plan would reduce after-tax incomes by around 2.6 percent across all income groups over the long run. The lower four income quintiles would see a decrease in after-tax incomes of at least 1.4 percent. Taxpayers in between the 95th and 99th percentiles would see their after-tax income fall by 1.9 percent, while taxpayers in the 99th percentile and up would have a more significant reduction in their after-tax income at 8.9 percent.

 

Income Group

Conventional, 2021

Conventional, 2030

Dynamic, long run

0% to 20%

-0.5%

-0.7%

-1.6%

20% to 40%

-0.4%

-0.5%

-1.4%

40% to 60%

-0.5%

-0.6%

-1.4%

60% to 80%

-0.5%

-0.6%

-1.4%

80% to 100%

-4.2%

-2.7%

-3.5%

80% to 90%

-0.6%

-0.6%

-1.4%

90% to 95%

-0.9%

-0.7%

-1.5%

95% to 99%

-1.8%

-1.1%

-1.9%

99% to 100%

-13.0%

-7.8%

-8.9%

 TOTAL

-2.5%

-1.7%

-2.6%

Source: Tax Foundation General Equilibrium Model, November 2019.

 

Table 3. Distributional Effect of Former Vice President Biden’s Tax Plan

Conclusion

Former Vice President Joe Biden’s tax plan has three major components: imposing a “donut hole” payroll tax on earnings over $400,000, repealing the TCJA’s income tax cuts for taxpayers with taxable income above $400,000, and increasing the corporate income tax rate to 28 percent. This plan would shrink the size of the economy by 1.51 percent due to higher marginal tax rates on labor and capital.

This plan would raise about $3.8 trillion revenue over the next decade on a conventional basis, and $3.2 trillion after accounting for the reduction in the size of the U.S. economy. The plan would lead to lower after-tax income for all income levels, but especially for taxpayers in the top 1 percent.

 

Bottom of Form

Modeling Notes

We use the Tax Foundation General Equilibrium Tax Model to estimate the impact of tax policies.[7] The model can produce both conventional and dynamic revenue estimates of tax policy. Conventional estimates hold the size of the economy constant and attempt to estimate potential behavioral effects of tax policy. Dynamic revenue estimates consider both behavioral and macroeconomic effects of tax policy on revenue.

The model can also produce estimates of how policies impact measures of economic performance such as GDP, wages, employment, the capital stock, investment, consumption, saving, and the trade deficit. Lastly, it can produce estimates of how different tax policy impacts the distribution of the federal tax burden.

In our revenue estimate, we assume the long-run capital gains realization elasticity is -0.79.[8] Individuals respond more drastically to the change of capital gains tax rate at the beginning years of tax change, with a transitory elasticity of -1.2 and -1.0 for the first two years.

In modeling the repeal of step-up in basis on capital gains tax, we assume Biden’s plan would lead to taxing capital gains at death, which means that death would be treated as a realization event for capital gains.


[1] For more details, see Garrett Watson and Colin Miller, “Analysis of Democratic Presidential Candidate Payroll Tax Proposals,” Tax Foundation, Feb. 11, 2020, https://taxfoundation.org/2020-payroll-tax-proposals/

[2] See generally, Scott Eastman, “Unpacking Biden’s Tax Plan for Capital Gains,” Tax Foundation, July 31, 2019, https://taxfoundation.org/joe-biden-tax-proposals/.

[3] For more details, see Erica York, “Analysis of Democratic Presidential Candidates Corporate Income Tax Proposals,” Tax Foundation, Feb. 19, 2020, https://taxfoundation.org/2020-corporate-tax-proposals/.

[4] See generally, Garrett Watson, “Biden’s Minimum Book Income Tax Proposal Would Create Needless Complexity,” Tax Foundation, Dec. 13, 2019, https://taxfoundation.org/joe-biden-minimum-tax-proposal/.

[5] Amir El-Sibaie, Tom VanAntwerp, and Erica York, “Tracking the 2020 Presidential Tax Plans,” Tax Foundation, Nov. 20, 2019, https://taxfoundation.org/2020-tax-tracker/.

[6] For a more detailed assumption on how the Tax Foundation’s General Equilibrium Model distributes the capital and labor burden of a corporate income tax change, see Huaqun Li and Kyle Pomerleau, “The Distributional Impact of the Tax Cuts and Jobs Act over the Next Decade,” Tax Foundation, June 28, 2018, https://taxfoundation.org/the-distributional-impact-of-the-tax-cuts-and-jobs-act-over-the-next-decade/.

[7] Stephen J. Entin, Huaqun Li, and Kyle Pomerleau, “Overview of the Tax Foundation’s General Equilibrium Model,” Tax Foundation, April 2018 update, https://files.taxfoundation.org/20180419195810/TaxFoundaton_General-Equilibrium-Model-Overview1.pdf.

[8] Following research from both the Joint Committee on Taxation (JCT) and the Congressional Budget Office (CBO). See Tim Dowd, Robert McClellland, and Athiphat Muthitacharoen, “New Evidence on the Elasticity of Capital Gains: Working Paper 2012-09,” Congressional Budget Office, June 15, 2012, https://cbo.gov/publication/43334.

 

 

 

Taxpayers should be aware of Coronavirus-related scams


Taxpayers should be on the lookout for IRS impersonation calls, texts and email phishing attempts about the coronavirus or COVID-19 Economic Impact Payments. These scams can lead to tax-related fraud and identity theft.

 

Here’s what taxpayers should know:

  • The IRS will not call, email or text you to verify or request your financial, banking or personal information.
  • Watch out for websites and social media attempts to request money or personal information. The official website is IRS.gov.
  • Don't open surprise emails that look like they’re coming from the IRS or click on attachments or links.
  • Taxpayers should not provide personal or financial information or engage with potential scammers online or over the phone.
  • Forward suspicious emails to phishing@irs.gov, then delete.
  • Go to IRS.gov for the most up-to-date information.

 

Here’s what people should know about the Economic Impact Payments:

  • The IRS will automatically deposit Economic Impact Payments into the bank account taxpayers provided on their 2019 or 2018 tax return for a direct deposit of their tax refund.
  • Those without a direct deposit account on file may be able to provide their banking information online through a new secure tool, Get My Payment.
  • Anyone who is eligible for an Economic Impact Payment and doesn’t provide direct deposit information will receive a payment mailed to the last address the IRS has on file.
  • The IRS does not charge a fee to issue the payment.

 

Scammers may:

  • Ask an individual to sign over their Economic Impact Payment check to them.
  • Ask for verification of personal or banking information.
  • Suggest that they can get someone tax refund or Economic Impact Payment faster by working on their behalf.
  • Issue a bogus check, often in an odd amount, then tell a person to call a number or verify information online in order to cash it.

 

Official IRS information about the COVID-19 pandemic and Economic Impact Payments can be found on the Coronavirus Tax Relief page on IRS.gov. The IRS encourages people to share this information with family and friends. Many people who normally don’t normally file a tax return may not realize they’re eligible for an Economic Impact Payment.

 

 

 

How Will We Pay For All The Coronavirus Relief?

Howard Gleckman

Tax Policy Center

 

Congress is about to add nearly another $500 billion to the more than $2 trillion it already spent to fund coronavirus relief. And it likely will approve trillions more in future stimulus in the coming months. Perhaps it is a good time to start thinking about how the federal government is going to repay this new debt.

The federal income tax won’t be able to handle it, at least not by itself. When we look back at the changes COVID-19 made to society and the economy, we may think about this as the time when the US began to look to sources of tax revenue that once seemed unthinkable.

 

Thinking the unthinkable

Consumption taxes such as value-added taxes or carbon taxes—loved by many economists but not by the public or most politicians—may get a hard look. So will a wealth tax—at least a one-time levy on existing wealth. What was considered a fringe idea of the far political left now may attract more attention from mainstream policymakers. And lawmakers may also look at new ways to tax assets of the wealthy at death.

No broad-based tax hikes will (or should) be enacted until the economy returns to something resembling normal—probably in 2021 or beyond. But it isn’t too soon to start thinking about where the money will come from.

 

Most of the current spending and some of the tax cuts are absolutely essential when more than 26 million people lose their jobs in five weks and tens of thousands of businesses close—in part under government orders. Yet the cost of this economic relief is staggering.

 

We began this year with a budget deficit of more than $1 trillion and a federal debt of $18 trillion, despite years of relatively healthy economic growth. Then COVID-19 hit.

 

A $4 trillion deficit

The budget deficit this year likely will top $4 trillion and could approach 20 percent of the nation’s total economic output. As a share of Gross Domestic Product (GDP), we have seen deficits of that size only once in modern history—in the middle of World War II.  

 

While nearly all the spending and most of the tax cuts in the relief bills are scheduled to expire by the end of next year, the fiscal damage will have been done. The Committee for a Responsible Federal Budget projectsthat cumulative deficits from 2020-2025 will top $11 trillion, or about 8.4 percent of GDP.

 

The federal debt is likely to exceed the size of the economy, not only this year but for the foreseeable future.  And that’s if all the tax cuts in the relief bills are temporary (which is unlikely). And, of course, this estimate excludes the costs of future relief and stimulus bills (which are inevitable).

 

If interest rates remain low, even this level of debt won't crowd out private borrowing very much. Still, someday, somehow, we may have to repay much of this accumulated debt. The question is how.

 

Filling the hole

Assume that, eventually, Congress needs to fill the fiscal hole it is digging in 2020. And that it does so by raising taxes by at least the roughly $2.5 trillion it has spent so far. Over the next decade, that would equal a tax hike of about 1 percent of GDP (or at least what GDP would have been before the economy crashed)—one that approaches a 10 percent increase in individual and corporate income taxes.

 

Congress could begin by repealing the entire Tax Cuts and Jobs Act. But it still would be $1 trillion short. Only the World War II tax hike of 1942 (a staggering 5.04 percent of GDP) and the temporary Vietnam-era surtax in 1968 exceeded 1 percent of GDP.   

 

Here’s another way to think about it:

Former vice-president Joe Biden, the likely Democratic presidential nominee, proposed raising taxes by about $4 trillion over 10 years, or about 1.5 percent of GDP, according to Tax Policy Center estimates. That’s really big.

 

But while Biden wants that new revenue to pay for spending on programs such as infrastructure improvements, and housing and college assistance, COVID-19 puts his agenda in a new light. If the economics or politics pushes him to repay just the last six week’s worth of new government spending, he’d eat up two-thirds of his revenue proposals.     

 

And there would still be the matter of the $18 trillion in debt the federal government ran up before the pandemic.

 

All that is to say that the hole we have dug for ourselves is likely too deep to fill with just income tax hikes. Future policymakers will have to look elsewhere. The only question is: Where?     

 

 

 

Trump’s Payroll Tax Holiday Won't Help the COVID-19 Economy. Another Republican Has A Better Idea

Howard Gleckman

Tax Policy Center

 

President Trump continues to promote a payroll tax holiday as a piece of the next coronavirus relief bill. The President has not been specific about the size of the tax cut or whether it would apply to the employer or employee share. But reducing payroll taxes fails as either relief to cash-constrained businesses and individuals or as economic stimulus. A freshman Republican senator may have a better idea for boosting the sagging economy.

 

There are 26 million reasons why cutting employee payroll taxes is especially flawed today. That’s the number of workers who lost their jobs in just the first five weeks of the pandemic. Many face an immediate cash flow crisis: They don’t have money to pay the rent, the utilities, or even their health insurance premiums.

 

It won’t help the jobless

It should go without saying, but if you have lost your job, a payroll tax cut does you no good at all. And even among those who are working, such a tax cut would be highly regressive. High-income workers would get far more dollars than low-wage workers.

 

At the same time, liquidity-constrained businesses need cash to keep the lights on and, perhaps, keep a few workers on the job. But cutting payroll taxes now would not help business cash flow very much since the recently enacted Coronavirus Air, Relief, and Economic Security (CARES) Act already allows many firms to defer paying their payroll taxes until 2021 and 2022.

 

And at this stage of the current slowdown, it is hard to see how a payroll tax cut would create much stimulus. With people still unwilling or unable to shop, such a tax cut is unlikely to boost consumer demand, even among those still working. It might help them pay bills, but there are better ways to do that such as the CARES Act rebate checks now going out.

 

Nothing new

An actual payroll tax holiday as stimulus is hardly a new idea.

 

In 2011 and 2012, Congress and President Obama reduced the employee share of the payroll tax from 6.2 percent to 4.2 percent.  Since this share of payroll taxes was supposed to fund Social Security, Congress replaced the money with general revenues.

 

But there is an important timing difference between Trump’s idea and Obama’s plan. While Obama’s had its own flaws, at least his tax cut came as the economy began to rebound. Thus, it helped boost consumption a bit. Trump’s would come at a time when it would have little or no effect on consumer spending.

 

While Republicans generally opposed Obama’s effort, Trump aides have been beating the drum for a payroll tax cut since well before the pandemic.  The Hill GOP has been largely silent.

 

A better idea

But some Republicans have been floating other, more productive, ideas. Sen. Josh Hawley (R-MO) has an interesting one (two, actually). One is a temporary universal basic income. The other is a temporary wage subsidy for employers.

 

While he says he’d provide a “refundable payroll tax rebate”  he does not mean a rebate for payroll taxes. Instead, he’d create a refundable tax credit to subsidize a share of an employer’s payroll cost. The government would reimburse employers for their labor costs up to the median wage ($949 per week, or about $49,300, according to the Bureau of Labor Statistics). It is unclear whether Hawley wants the government to also pay a share of employee benefits and associated payroll taxes, or how long it would go on, or how he’d prevent firms from gaming the plan.

 

But it is an interesting idea that has gotten some traction elsewhere in the world.  For example, Denmark  is directly reimbursing companies for up to 75 percent of their cost of retaining workers.

 

Improving the CARES Act

Unlike Trump’s plan to cut payroll taxes, Hawley’s would pay employers to keep workers on the payroll, or bring back those who have been laid off. At the right time, it may also be an improvement over the CARES Act that, among other things, created a less generous worker retention tax credit.  

 

The CARES Act also raises unemployment benefits, an excellent way to target assistance to those who need it most. But once the economy begins to rebound, it might be better to subsidize firms that bring their employees back to work than to pay people to not work.

 

Hawley’s idea may be premature. Today, many hard-pressed firms may not have the resources to pay even the 20 percent of payroll that Hawley’s bill would require. And without customers, it seems implausible they’d rehire workers to sit around, even with an 80 percent government subsidy.

But Hawley’s tax rebate for payroll costs is a far better idea than Trump’s poorly thought-out payroll tax holiday.

 

 

Working From Home? Probably The “New Normal”

Thomas Fox is president of Tech Experts

 

I hope that you and your family (and pets) are safe and sound and doing as well as can be expected. This is an extraordinary time for all of us, and the very embodiment of the ancient Chinese aphorism “may you live in interesting times.” We surely do.

 

Our team is mixed between working in the office and working from home, and everyone is doing a great job. We initially saw a huge increase in our ticket volume as our client’s teams prepared to work from home but that’s tapered off in the last week to a pretty normal level of activity.

 

If you had to wait for help, please accept my personal apology for the inconvenience – while we have plans to handle client disasters, I never anticipated something as far-reaching as the current pandemic.

 

The “new normal”

If the politicians and experts are to be believed, many of the changes we’ve had to make to slow the spread of this virus are going to be around for quite a while, at least until we have an effective vaccine for COVID-19. From an IT perspective, that means more of your team will probably be working remotely. And that presents a new kind and new level of security exposure for your company.

 

The majority of our clients have their team members working from home by remoting into their desktops at the office, and that works fine. We have a great solution to enable this functionality (please email us at support@mytechexperts.com if you have team members who need to be set up for remote work).

 

However, if one of your team member’s work location changes permanently to their home that solution no longer works. We’d need to deploy a VPN (virtual private network) to connect their home computer to your corporate network, which opens up a can of worms for sure.

 

Some of the considerations for permanent work from home team members include:

Securing the home computer – just like a computer at the office, a home computer being connected to your corporate network will need anti-virus, monitoring and management software and advanced threat protection.

 

Blacklisted applications – there are some software applications we don’t install on office computers for security or data privacy reasons. When your team members are working from home, these same restrictions should be in place.

 

Threat management – on your corporate network we use tools to prevent team members from connecting to harmful or time-wasting sites. The security risk is the same regardless of the employee’s location so we’d need to implement similar restrictions.

 

While we haven’t worked through all of the details and requirements, our best guidance right now is that permanent work from home employees will need a computer dedicated to your business. The restrictions and security requirements necessary to protect your network would be very difficult to implement on a home computer.

 

By all means, please reach out if you have questions or would like to discuss transitioning some of your team members to permanently work from home.

 

Conferencing and web meetings

If you need audio conferencing to gather your team virtually, please let us know. We can assign you a dial-in conference line with unlimited users at no charge. Your team would simply dial your conference line, enter a four-digit PIN, and be connected. Email support@mytechexperts.com to have a dial-in conference line configured for your company.

 

Clients who use our 3cx phone system have web-conferencing licensing built in. You can read more about the system here: https://www.3cx.com/user-manual/webmeeting/

We’re happy to assist with usage or configuration questions.

 

Increased threat from phishing emails and viruses

Sadly, cybercrooks love a crisis because it gives them a believable reason to contact you with a phishing scam. We’ve seen an alarming uptick in phishing emails and other virus delivery methods since a majority of our client’s team has shifted to working from home. Be on high alert.

 

What can we do for you?

The lockdown and abrupt change to working from home is disorienting, and I think we’re all still trying to get used to it. Please reach out if there is anything we can do for you or your business to make things easier.
           

 

 

Three new credits are available to many businesses hit by COVID-19

 

WASHINGTON — The Internal Revenue Service today reminds employers affected by COVID-19 about three important new credits available to them.

 

Employee Retention Credit:

The employee retention credit is designed to encourage businesses to keep employees on their payroll. The refundable tax credit is 50% of up to $10,000 in wages paid by an eligible employer whose business has been financially impacted by COVID-19.

 

The credit is available to all employers regardless of size, including tax-exempt organizations. There are only two exceptions: State and local governments and their instrumentalities and small businesses who take small business loans.

 

Qualifying employers must fall into one of two categories:

  1. The employer's business is fully or partially suspended by government order due to COVID-19 during the calendar quarter.
  2. The employer's gross receipts are below 50% of the comparable quarter in 2019. Once the employer's gross receipts go above 80% of a comparable quarter in 2019, they no longer qualify after the end of that quarter.

 

Employers will calculate these measures each calendar quarter.

 

Paid Sick Leave Credit and Family Leave Credit:

The paid sick leave credit is designed to allow business to get a credit for an employee who is unable to work (including telework) because of Coronavirus quarantine or self-quarantine or has Coronavirus symptoms and is seeking a medical diagnosis. Those employees are entitled to paid sick leave for up to 10 days (up to 80 hours) at the employee's regular rate of pay up to $511 per day and $5,110 in total.

 

The employer can also receive the credit for employees who are unable to work due to caring for someone with Coronavirus or caring for a child because the child's school or place of care is closed, or the paid childcare provider is unavailable due to the Coronavirus. Those employees are entitled to paid sick leave for up to two weeks (up to 80 hours) at 2/3 the employee's regular rate of pay or, up to $200 per day and $2,000 in total.

Employees are also entitled to paid family and medical leave equal to 2/3 of the employee's regular pay, up to $200 per day and $10,000 in total. Up to 10 weeks of qualifying leave can be counted towards the family leave credit.

 

Employers can be immediately reimbursed for the credit by reducing their required deposits of payroll taxes that have been withheld from employees' wages by the amount of the credit.

 

Eligible employers are entitled to immediately receive a credit in the full amount of the required sick leave and family leave, plus related health plan expenses and the employer's share of Medicare tax on the leave, for the period of April 1, 2020, through Dec. 31, 2020. The refundable credit is applied against certain employment taxes on wages paid to all employees.

 

How will employers receive the credit?

Employers can be immediately reimbursed for the credit by reducing their required deposits of payroll taxes that have been withheld from employees' wages by the amount of the credit.

 

Eligible employers will report their total qualified wages and the related health insurance costs for each quarter on their quarterly employment tax returns or Form 941 beginning with the second quarter. If the employer's employment tax deposits are not sufficient to cover the credit, the employer may receive an advance payment from the IRS by submitting Form 7200, Advance Payment of Employer Credits Due to COVID-19.

 

Eligible employers can also request an advance of the Employee Retention Credit by submitting Form 7200.

 

The IRS has also posted Employee Retention Credit FAQs and Paid Family Leave and Sick Leave FAQs that will help answer questions.

 

Updates on the implementation of the Employee Retention Credit and other information can be found on the Coronavirus page of IRS.gov.

 

 

 

COVID-19 paid leave tax credits for small and midsize businesses

 

Small and midsize employers can claim two new refundable payroll tax credits.  The paid sick leave credit and the paid family leave credit are designed to immediately and fully reimburse eligible employers for the cost of providing COVID-19 related leave to their employees.

 

Here are some key things to know about these credits.

Coverage
•  Employers receive 100% reimbursement for required paid leave.

•  Health insurance costs are also included in the credit.

•  Employers do not owe their share of social security tax on the paid leave and get a credit for their share of Medicare tax on the paid leave.

•  Self-employed individuals receive an equivalent credit.

 

Fast funds

•  Reimbursement will be quick and easy.

•  The credit provides a dollar-for-dollar tax offset against the employer’s payroll taxes 

•  The IRS will send any refunds owed as quickly as possible.

 

To take immediate advantage of the paid leave credits, businesses should use funds they would otherwise pay to the IRS in payroll taxes. If those amounts are not enough to cover the cost of paid leave, employers can request an expedited advance from the IRS by submitting  Form 7200, Advance Payment of Employer Credits Due to COVID-19.

 

For details about these credits and other relief, visit Coronavirus Tax Relief on IRS.gov.

 

Share this tip on social media -- #IRSTaxTip: COVID-19 paid leave tax credits for small and midsize businesses. https://go.usa.gov/xvGyC

 

 

 

Treasury will let employers claim retention tax credit and provide insurance to furloughed workers

By Michael Cohn

 

The Treasury Department is bowing to requests from lawmakers on both sides of the aisle and allowing employers to remain eligible for claiming the Employee Retention Credit on their tax returns while continuing to provide health insurance to their furloughed employees.

 

Earlier this week, three leaders of Congress’s tax-writing committees asked the IRS to reverse recent guidance that effectively denied the Employee Retention Credit in the CARES Act to employers who continue providing health insurance to their furloughed employees unless they continue paying other wages (see our story). The new item said employees aren’t eligible for the tax credit if they aren’t paying wages to their employees, but they’re still paying for health coverage -- a common situation for many employees who have been furloughed.

 

Senate Finance Committee Chairman Charles Grassley, R-Iowa, ranking member Ron Wyden, D-Ore., and House Ways and Means Committee Chairman Richard E. Neal, D-Mass., sent a letter Monday to Treasury Secretary Steven Mnuchin asking him to change the guidance.

 

A Treasury official, Frederick Vaughan, principal deputy assistant secretary in the Office of Legislative Affairs, responded in a letter Thursday agreeing to the request. “The department has taken your views under consideration and will be revising the applicable guidance,” he wrote.

 

Grassley applauded the decision to reverse course. “This is good news for small businesses and workers across the country,” he said in a statement. “This decision will encourage employers to help employees keep their health insurance while temporarily furloughed due to the shutdown. The decision also aligns Treasury’s policy with the original congressional intent behind the employee retention tax credit.”

 

Grassley, Wyden and Neal have also been asking Mnuchin to reverse another recent piece of IRS guidance, Notice 2020-32, that bars small businesses from deducting their expenses under the Paycheck Protection Program even if their loans are forgiven. They sent a separate letter this week about that matter. Vaughan responded in a separate letter Thursday, saying the Treasury will take their views into consideration and follow up with them.

 

Grassley isn’t ready to let the matter slide for long. “We still need to fix the issue of deducting business expenses related to the application for PPP loans,” he said, in a statement. “It’s fully my intention for that issue to get resolved quickly, whether administratively or legislatively, so small businesses maintain as much liquidity as possible during this difficult period.”

 

He and several of his colleagues have already introduced legislation that would require a change in the Treasury Department’s and the IRS’s position and clarify the small-business expense deductions under the Paycheck Protection Program.

 

 

 

Senators introduce bill to allow tax deductions for forgiven PPP loans

By Michael Cohn

 

A bipartisan group of lawmakers introduced legislation Wednesday to enable small businesses to deduct their expenses even if they have received a loan from the federal government’s Paycheck Protection Protection Program that was later forgiven.

 

The U.S. Small Business Administration’s Paycheck Protection Program was included as part of the CARES Act that Congress passed in April in response to the novel coronavirus pandemic. It aimed to provide funding to small businesses, giving them SBA-backed loans that the federal government would ultimately forgive as long as they kept their employees on the payroll for eight weeks.

 

The program has been a source of controversy, however, as many small businesses were shut out of the program and much of the money went to larger companies. The initial $349 billion in funding for the PPP quickly ran out, and Congress needed to approve an additional $320 billion in funding last month.

 

Last Thursday, the IRS issued a notice that said small businesses couldn’t deduct these expenses (see story). It indicates that no tax deduction is allowed for an expense that’s otherwise deductible if the payment of the expense results in forgiveness of a PPP-covered loan.

However, several lawmakers, including Senate Finance Committee chairman Chuck Grassley, R-Iowa, and ranking member Ron Wyden, D-Ore. (pictured), wrote letters to Treasury Secretary Steven Mnuchin this week pointing out that the notice and other IRS guidance related to the Employee Retention Credit in the CARES Act runs contrary to congressional intent (see our story). On Wednesday, some of the same lawmakers introduced a bill that would effectively nullify the IRS notice.


Grassley, Wyden, along with Sen. John Cornyn, R-Texas, Marco Rubio, R-Fla., and Tom Carper, D-Del., introduced the Small Business Expense Protection Act, which would clarify the PPP so small businesses could still deduct the expenses they have paid with a forgiven PPP loan from their taxes. Under the bill, the receipt and forgiveness of coronavirus assistance through the PPP would not affect the deductibility of ordinary business expenses.

 

“When we developed and passed the Paycheck Protection Program, our intent was clearly to make sure small businesses had the liquidity and the help they needed to get through these difficult times,” Grassley said in a statement. “Unfortunately, Treasury and the IRS interpreted the law in a way that’s preventing businesses from deducting expenses associated with PPP loans. That’s just the opposite of what we intended and should be fixed. This bill will do just that.”

 

He and the other senators noted that the goal of the PPP was to maximize small businesses’ ability to maintain liquidity, retain their employees and recover from the pandemic as soon as possible.

 

“Treasury's guidance barring deductions for expenses paid by PPP loans is a gut punch for businesses struggling to stay afloat,” said Wyden in a statement. “It defies common sense for Treasury to provide help on the front end, but then take it away on the back end. Our bipartisan bill would fix this mistake and ensure businesses feel confident using PPP funds to keep their workers employed.”

 

The Small Business Expense Protection Act is supported by the American Institute of CPAs. The AICPA expressed its support in a letter Wednesday thanking the lawmakers.

 

“It is clear that Congress intended to allow a full deduction for PPP related expenses,” said the letter. “This important legislation helps ensure that small business taxpayers affected by the ongoing pandemic will receive the full intended benefits of the CARES Act.”

 

AICPA vice president of taxation Edward Karl expanded on the letter. “We’re grateful to Senators Cornyn, Wyden, Grassley, Carper and Rubio for their leadership on this issue and their support for small business across the country,” he said in a statement. “Small businesses are the backbone of the American economy and right now they are struggling. This bill honors the intent of the CARES Act and the PPP.”

 

According to the Small Business Administration, more than 2 million loans totaling over $175 billion have been made to small businesses since the second round of PPP loan processing began on April 27, surpassing the number of all loans made in the first round of PPP loans. The average loan size in Round 2 was estimated at $79,000, and almost 500,000 of the loans were made by lenders with less than $1 billion in assets and non-banks. Since this program started, the SBA has processed more than 3.8 million loans, providing more than half a trillion dollars of economic support.

 

 

 

Inside the coronavirus-related employer tax credits and penalty relief

By Mark Watson

 

The Families First Coronavirus Response Act and the Coronavirus Aid, Relief, and Economic Security, or CARES Act, provide refundable tax credits to certain employers that continue to pay their employees during the COVID-19 pandemic. The Internal Revenue Service is also providing employers eligible for these credits with relief from the penalty for failing to timely deposit employment taxes.

 

Qualified Leave Wages Credits

The FFCRA established two refundable tax credits — the qualified sick leave wages credit and the qualified family leave wages credit — in an effort to provide “eligible employers” with the funds necessary to pay “qualified sick leave wages” and “qualified family leave wages” to their employees during the period April 1, 2020, to Dec. 31, 2020. The credits are allowed against the eligible employer’s portion of Social Security tax due on all wages paid during the period April 1, 2020, to Dec. 31, 2020. If the amount of the credit exceeds the employer’s Social Security tax liability, then the excess is treated as an overpayment and refunded to the employer.

 

Eligible employers claim the qualified leave wages credits on Form 941, but they can benefit more quickly from the credits by reducing their federal employment tax deposits. In other words, eligible employers can retain federal employment taxes that they otherwise would have deposited in an amount up to the level of qualified leave wages credits for which they are entitled.

 

Eligible employers are businesses and tax-exempt organizations that have fewer than 500 employees, and are required under the FFCRA to pay qualified sick leave wages and qualified family leave wages. Qualified sick leave wages are wages an eligible employer is required to pay to an employee who is unable to work or telework because of either the employee’s personal health status as a result of COVID-19 or the employee’s need to care for others as a result of COVID-19. Qualified family leave wages are wages an eligible employer is required to pay to an employee who is unable to work or telework because the employee is caring for a child whose school or place of care is closed, or whose child care provider is unavailable, due to COVID-19.

 

The qualified sick leave wages credit is generally equal to the amount of qualified sick leave wages paid plus the amount of qualified health plan expenses allocable to the qualified sick leave wages paid plus the employer’s portion of Medicare tax due on the qualified sick leave wages paid. However, the maximum amount that can be treated as qualified sick leave wages paid to any one employee is limited, and the limit depends on why the employee receiving the wages is on sick leave. If the employee is on sick leave because of their own health status, the limit is $511 per day up to a total of $5,111. If the employee is on sick leave because they are caring for others, the limit is $200 per day up to a total of $2,000.

 

The qualified family leave wages credit is generally equal to the amount of qualified family leave wages paid plus the amount of qualified health plan expenses allocable to the qualified family leave wages paid plus the employer’s portion of Medicare tax due on the qualified family leave wages paid. However, the maximum amount that can be treated as qualified family leave wages paid to any one employee is limited to $200 per day up to a total of $10,000.

 

Employee Retention Credit

The CARES Act also established a refundable tax credit — the Employee Retention Credit — for “eligible employers” that pay “qualified wages” to their employees between March 13, 2020, and Dec. 31, 2020. The credit is equal to 50 percent of qualified wages paid, limited to a maximum credit of $5,000 per employee, and is allowed against the eligible employer’s portion of Social Security tax due on all wages paid during the period March 13, 2020, to Dec. 31, 2020. If the amount of the credit exceeds the employer’s Social Security tax liability, then the excess is treated as an overpayment and refunded to the employer.

 

Eligible employers claim the Employee Retention Credit on Form 941, but they can benefit more quickly from the credit by reducing their federal employment tax deposits. In other words, eligible employers can retain federal employment taxes that they otherwise would have deposited in an amount up to the amount of the Employee Retention Credit for which they are entitled.

 

Eligible employers generally are businesses and tax-exempt organizations that either:

  • Fully or partially suspended operations during 2020 due to a “stay-at-home” order; or,
  • Experience a significant decline in gross receipts during 2020

 

However, employers that receive a Paycheck Protection Program loan are not eligible employers and, thus, they may not claim the Employee Retention Credit.

 

Qualified wages are generally wages paid by an eligible employer to employees between March 13, 2020, and Dec. 31, 2020, and during the period the employer experienced either a full or partial suspension of operations due to a “stay-at-home” order; or a significant decline in gross receipts.

 

Relief from penalty for failure to deposit employment taxes

An employer’s failure to timely deposit federal employment taxes is generally subject to a penalty. However, the IRS recently announced in Notice 2020-22 that an employer that is eligible for the Qualified Leave Wages Credits and/or the Employee Retention Credit will not be subject to a penalty for failing to deposit employment taxes if:

  • The amount of the employment taxes the employer fails to timely deposit is less than or equal to the amount of the employer’s anticipated Qualified Leave Wages Credits and/or the Employee Retention Credit; and
  • The employer did not seek payment of an advanced credit by filing Form 7200, “Advanced Payment of Employer Credits Due to Covid-19.”

 

As a result, an employer may reduce, without penalty, the amount of a deposit of employment taxes by the following amounts paid in the calendar quarter prior to the required deposit:

  • Qualified leave wages;
  • Qualified health plan expenses allocable to qualified leave wages;
  • The employer’s share of Medicare taxes paid on the qualified leave wages; and,
  • Qualified retention wages.

 

 

 

Did Adding Trump’s Name Slow Down The Mailing of Stimulus Checks? Of Course It Did

By C. Eugene Steuerle

 

Did the Treasury Department’s decision to put President Trump’s name on the coronavirus stimulus checks slow the mailing of those checks? Of course it did, despite Administration claims to the contrary.

 

The decision surrounding Trump’s name triggered a series of time-consuming steps. The White House consulted with top Treasury officials who, in turn, talked to top IRS officials, who, after some delay because of the political sensitivity of the matter, communicated with the agency’s  staffers who had to carry out the operation. These civil servants had to redesign the basic check, mock up the display of the president’s name, and rejigger computer software needed to produce the checks. Then they had to have the redesign reviewed at the IRS, Treasury, and, likely, the White House to both insure against technical  glitches and make sure the president was satisfied.

 

Did this take time? Of course, it did. Does it matter a lot? Well, that’s a different question.

It certainly took attention from other, more important, matters. Senior Trump Administration officials, including the Treasury Secretary and the Commissioner of the IRS, were spending time   on marketing the president rather than on, say, reviving the economy or preventing occurrences of tax fraud likely to accompany any rush to get the payments out.

 

Did it slow down the payment of checks to people? Here’s how  a Treasury spokesperson carefully answered that question:

“Economic Impact Payment checks are scheduled to go out on time and exactly as planned — there is absolutely no delay whatsoever…In fact, we expect the first checks to be in the mail early next week which is well in advance of when the first checks went out in 2008 and well in advance of initial estimates.”

Nothing in that statement says that the additional process did not slow down the mailing of the checks relative to when they could have been mailed out. The comparison with 2008 is irrelevant.

 

Meanwhile, the IRS released another statement, to wit:

Thanks to hard work and long hours by dedicated IRS employees, these payments are going out on schedule, as planned, without delay, to the nation.”

Well, the same calculations take place in all aspects of life as well.

 

Consider the brag about checks going “out on time” or “on schedule.” If I tell my wife I will be home by 7 PM and then take an extra walk around town but still get home by 7 PM, did my stroll delay my arrival?  Of course, it did. In fact, it is likely that IRS expected to be ahead of the original “schedule” before it had to add the president’s name to those checks.

 

Think of it this way: Suppose the IRS staff worked all night to add the president’s name to the checks. That all-night session may have avoided delay relative to the prior schedule. But, if the staff didn’t have to add his name, working that extra night could have been devoted to getting the checks out earlier.

 

Maybe figuring out the extent of any delay isn’t at the heart of the issue. There are more important matters to worry about in these days of COVID-19. Even if somehow all this extra effort caused no delay, it’s demeaning to ask career professionals in places like IRS to devote their time and attention to promoting the president’s reelection. This request has nothing to do with helping the taxpayers they pledge and, as the IRS release indicated, “work hard” to  serve. Worse yet, this accommodation of the president’s wishes reinstates a bad precedent for political interference in the operations of the IRS. These actions have real consequences, none of them good.

 

 

 

Checks are deeply rooted in our history, but change is possible

By Alyssa Callahan

 

If your company makes payments, you’ve probably Googled cost-effective ways to simplify the process at least once. Perhaps your clients make hundreds of payments a day. Or maybe you serve small- to mid-sized businesses looking to ease the manual burden on their small-but-plucky accounts payable team.

One of the biggest arguments against checks is that they’re just plain old, invented to support even older banking processes. Of course, the term “old” is relative, so what does it mean when we’re talking about check history? You might be surprised.


Checks used to make a lot of sense

Checks developed alongside banks, with the concept for payment withdrawals based on recorded instruction appearing in history as early as 300 B.C. in India or Rome, depending on who you ask. Paper-based checks made their debut in the Netherlands in the 1500s, and took root in North America about a century before the Declaration of Independence was signed. The oldest surviving checkbook in the U.S. dates back to the late 1700s, and the register even has a notation for a check made out to Alexander Hamilton for legal services.

 

So, yes, checks are old.

 

What started as a safe and strategic way to transfer money — one that protected merchants’ safety and livelihoods — ingrained itself in business dealings for hundreds of years. It’s challenging to phase out something like that entirely, even if checks are difficult to adapt to today’s electronic processes.

 

Hanging onto the past

Each business that holds onto its check process has a reason. Perhaps their AP team’s veteran employees are more comfortable with the familiarity of checks. They may wish to preserve business relationships with suppliers that prefer checks. Some businesses are very likely interested in switching to electronic processes because check payments are expensive, but they hold back due to the perceived process upheaval.

 

These concerns aren’t unfounded. They’re built upon years, even generations, of business experience. So while plenty of news outlets claim that checks will phase out “soon,” we should more realistically expect that they’ll be incorporated into, not eradicated from, modern business practices. At least for now.

 

Time for a change

While banks have made efforts to simplify the payee’s ability to cash checks electronically, only a few have attempted to tackle the time-consuming issues that their customers face. They also lack ways to incorporate outdated check processes with the newer ACH and credit card processes their customers are also expected to support.

 

If checks are here to stay, do companies need to resign themselves to endless signature hunts, letter-stuffing parties, and post office visits? No. Checks have the spectacular ability to evolve as modern needs arise. After all, the first printed checks in the U.S. didn’t have the standardized MICR (magnetic ink character recognition) format that we use today.

 

Change happens slowly and in easily digestible segments. So although checks aren’t going away any time soon, they’re overdue for another evolution.

 

A middle ground exists, where business owners can upgrade their processes without causing major supplier or employee upset. Payment automation solutions have been growing in recognition for over a decade. The most successful providers have acknowledged the gray area with checks and incorporated them into their simplified electronic payment workflows. These alternatives reduce AP workloads without forcing suppliers to accept payment types that don’t work for them.

 

Checks have come a long way since their conceptual days, and their flexibility means we probably won’t see the last of them anytime soon. We are, however, in the midst of their shift into the electronic world, and AP teams are all the happier for it.

 

 

 

Inside the coronavirus-related employer tax credits and penalty relief

By Mark Watson

 

The Families First Coronavirus Response Act and the Coronavirus Aid, Relief, and Economic Security, or CARES Act, provide refundable tax credits to certain employers that continue to pay their employees during the COVID-19 pandemic. The Internal Revenue Service is also providing employers eligible for these credits with relief from the penalty for failing to timely deposit employment taxes.

 

Qualified Leave Wages Credits

The FFCRA established two refundable tax credits — the qualified sick leave wages credit and the qualified family leave wages credit — in an effort to provide “eligible employers” with the funds necessary to pay “qualified sick leave wages” and “qualified family leave wages” to their employees during the period April 1, 2020, to Dec. 31, 2020. The credits are allowed against the eligible employer’s portion of Social Security tax due on all wages paid during the period April 1, 2020, to Dec. 31, 2020. If the amount of the credit exceeds the employer’s Social Security tax liability, then the excess is treated as an overpayment and refunded to the employer.

 

Eligible employers claim the qualified leave wages credits on Form 941, but they can benefit more quickly from the credits by reducing their federal employment tax deposits. In other words, eligible employers can retain federal employment taxes that they otherwise would have deposited in an amount up to the level of qualified leave wages credits for which they are entitled.

 

Eligible employers are businesses and tax-exempt organizations that have fewer than 500 employees, and are required under the FFCRA to pay qualified sick leave wages and qualified family leave wages. Qualified sick leave wages are wages an eligible employer is required to pay to an employee who is unable to work or telework because of either the employee’s personal health status as a result of COVID-19 or the employee’s need to care for others as a result of COVID-19. Qualified family leave wages are wages an eligible employer is required to pay to an employee who is unable to work or telework because the employee is caring for a child whose school or place of care is closed, or whose child care provider is unavailable, due to COVID-19.

 

The qualified sick leave wages credit is generally equal to the amount of qualified sick leave wages paid plus the amount of qualified health plan expenses allocable to the qualified sick leave wages paid plus the employer’s portion of Medicare tax due on the qualified sick leave wages paid. However, the maximum amount that can be treated as qualified sick leave wages paid to any one employee is limited, and the limit depends on why the employee receiving the wages is on sick leave. If the employee is on sick leave because of their own health status, the limit is $511 per day up to a total of $5,111. If the employee is on sick leave because they are caring for others, the limit is $200 per day up to a total of $2,000.

 

The qualified family leave wages credit is generally equal to the amount of qualified family leave wages paid plus the amount of qualified health plan expenses allocable to the qualified family leave wages paid plus the employer’s portion of Medicare tax due on the qualified family leave wages paid. However, the maximum amount that can be treated as qualified family leave wages paid to any one employee is limited to $200 per day up to a total of $10,000.

 

Employee Retention Credit

The CARES Act also established a refundable tax credit — the Employee Retention Credit — for “eligible employers” that pay “qualified wages” to their employees between March 13, 2020, and Dec. 31, 2020. The credit is equal to 50 percent of qualified wages paid, limited to a maximum credit of $5,000 per employee, and is allowed against the eligible employer’s portion of Social Security tax due on all wages paid during the period March 13, 2020, to Dec. 31, 2020. If the amount of the credit exceeds the employer’s Social Security tax liability, then the excess is treated as an overpayment and refunded to the employer.

 

Eligible employers claim the Employee Retention Credit on Form 941, but they can benefit more quickly from the credit by reducing their federal employment tax deposits. In other words, eligible employers can retain federal employment taxes that they otherwise would have deposited in an amount up to the amount of the Employee Retention Credit for which they are entitled.

 

Eligible employers generally are businesses and tax-exempt organizations that either:

  • Fully or partially suspended operations during 2020 due to a “stay-at-home” order; or,
  • Experience a significant decline in gross receipts during 2020

 

However, employers that receive a Paycheck Protection Program loan are not eligible employers and, thus, they may not claim the Employee Retention Credit.

 

Qualified wages are generally wages paid by an eligible employer to employees between March 13, 2020, and Dec. 31, 2020, and during the period the employer experienced either a full or partial suspension of operations due to a “stay-at-home” order; or a significant decline in gross receipts.

 

Relief from penalty for failure to deposit employment taxes

An employer’s failure to timely deposit federal employment taxes is generally subject to a penalty. However, the IRS recently announced in Notice 2020-22 that an employer that is eligible for the Qualified Leave Wages Credits and/or the Employee Retention Credit will not be subject to a penalty for failing to deposit employment taxes if:

  • The amount of the employment taxes the employer fails to timely deposit is less than or equal to the amount of the employer’s anticipated Qualified Leave Wages Credits and/or the Employee Retention Credit; and
  • The employer did not seek payment of an advanced credit by filing Form 7200, “Advanced Payment of Employer Credits Due to Covid-19.”

As a result, an employer may reduce, without penalty, the amount of a deposit of employment taxes by the following amounts paid in the calendar quarter prior to the required deposit:

  • Qualified leave wages;
  • Qualified health plan expenses allocable to qualified leave wages;
  • The employer’s share of Medicare taxes paid on the qualified leave wages; and,
  • Qualified retention wages.

 

 

 

Trump finds skeptics instead of allies for prize payroll tax cut

By Laura Davison

 

President Donald Trump has fixed his sights on getting a payroll tax cut in the next coronavirus stimulus bill, but it’s unclear whether he can get Republicans — much less Democrats — to go along with such a high-cost item that likely would have only a modest impact on the economy.

 

Trump has been pushing a payroll tax reduction for months and on Sunday used it to draw a line in the sand as lawmakers begin haggling over another round of rescue legislation for a reeling U.S. economy.


But Trump hasn’t laid out his vision for the size and duration of any payroll tax cut. That would make a big difference for workers — including those who haven’t faced adverse effects from the coronavirus slowdown — who would see anywhere from a few dollars to several hundred in bi-weekly paychecks depending on their income.

 

The 30 million people who’ve lost their jobs wouldn’t get a direct benefit, and economists say a payroll tax cut likely isn’t enough by itself to boost consumer spending — a prime driver of the economy — and spur companies to begin rehiring.

 

Politically, any payroll tax cut is a heavy lift. Democrats, predictably, are opposed to the president’s proposal. But Republicans in Congress have also been slow to publicly endorse Trump’s repeated request for the tax rollback. Senate Majority Leader Mitch McConnell hasn’t highlighted the idea and Senate Finance Chairman Chuck Grassley has said it’s too soon to decide what should be in a bill.

 

McConnell and other Republicans already are signaling they want to put the brakes on additional steps by the government that would only add to a budget deficit that is forecast to balloon to $3.7 trillion this year.

Larry Kudlow, Trump’s top economic adviser, reiterated on Sunday that this was a key priority for the president who wanted to lower costs on employers and employees.

 

“This is a tax cut that is clearly geared toward lower- and middle-income people,” said Grover Norquist, the president of Americans for Tax Reform. “It lowers the costs of employment.”

 

A payroll tax cut would also help Trump achieve a political goal: a second round of tax cuts, this time geared to the middle class. He teased the idea ahead of the 2018 midterm election, but never released a plan.

 

Trump could also use a payroll tax rollback to eliminate one of the taxes funding the Affordable Care Act, a 0.9 percent Medicare tax on those earning at least $200,000. Repealing that tax would likely face strong resistance from Democrats who would resist moves to undercut President Barack Obama’s health care law for a tax cut on high earners.

 

For every percentage point cut to the tax, a worker earning between $50,000 and $75,000 would see an average $382 more in their paycheck spread over a year, according to Kyle Pomerleau, an economist at the American Enterprise Institute. A full repeal of the employee portion payroll tax would amount to a $2,922 tax cut over 12 months, or $112 extra in biweekly paychecks.

 

Workers earning between $200,000 and $500,000 would see an average tax cut of about $12,033 over the course of a year with a full employee-side payroll tax repeal, Pomerleau said.

 

Even with that money circulating, individuals who get the extra cash would likely be hesitant to spend the cash influx in an uncertain economy. Those willing to spend it would have fewer opportunities to do so while much of the economy is shut down.

 

Despite $1,200 stimulus checks for low- and middle-income adults and generous unemployment benefits, consumer spending is expected to drop significantly. Economists surveyed by Bloomberg predicted that consumer spending would decline at a 25.1 percent annualized rate in the second quarter, according to the median response.

 

“I don’t see consumer spending increasing until the virus is under control,” Nicole Kaeding, an economist with the National Taxpayers Union, said. “To the extent that individuals are concerned about a second wave in the fall or concerned about the security of their own employment, they might rather save than spend.”

 

If Trump were to get the maximum cut — eliminating the full 15.3 percent payroll taxes funding Social Security and Medicare that is split between employees and employers — that would cost roughly $650 billion from now until the end of the year, according to Marc Goldwein, a senior policy director at the Committee for a Responsible Federal Budget.

 

“If you suspend payroll tax in the near term, people would see a modest increase in their paycheck if they’re employed and they would probably be saving that extra money,” Goldwein said. “It won’t provide a boost to GDP in the near term.”

— With assistance from Scott Lanman and Anita Sharpe

 

 

 

Rich Americans seize historic chance to pass on wealth tax-free

By Ben Steverman

 

Rich Americans are taking advantage of an unprecedented opportunity, made possible by the coronavirus pandemic, to transfer money to their children and grandchildren tax-free.

Thanks to the 2017 Republican tax overhaul, it was already easier than ever to avoid the U.S. estate and gift tax, a 40 percent levy on the biggest fortunes. Now, plunging interest rates and volatile equity markets are creating a once-in-a-lifetime chance that’s keeping wealth advisers busy even as they work from home.

 

“Our phone is kind of ringing off the hook,” said Jordan Waxman, managing partner of Nucleus Advisors. “There really hasn’t been a better time to plan.”

 

Key interest rates set by the Internal Revenue Service for estate-planning purposes have never been as low as they are starting this month. For example, the so-called Section 7520 rate, determined each month based on a formula, fell to 0.8 percent in May from 1.2 percent in April. It had been well above 2 percent for most of last year. The previous low for the rate, which applies to many popular trust strategies, was 1 percent in January 2013.

The simplest way for the rich to take advantage of the low rates is to loan cash or other assets to family members. Heirs can borrow millions of dollars, then invest the money and profit from any upside.
 

Beneficiaries can lock in today’s ultra-low rates for years or even decades. The IRS-required rate on “mid-term” loans of three to nine years is 0.58 percent in May. The rate on longer-term loans — which can last 20 years or more — is 1.15 percent.

 

Sophisticated strategies

David Stein, a partner on the private client and tax team at Withersworldwide, said many people he helps are deciding to take out longer-term loans, preferring to pay a bit more in interest to guarantee a historically low rate for decades.

 

Falling rates enhance other sophisticated estate planning strategies, especially those that rely on loans to trusts. The advantage of these techniques, as well as simpler loans, is that they don’t eat into any of the U.S.’s estate and gift tax exemption — the amount that Americans can transfer to heirs without triggering the tax. The 2020 exemption, which was doubled as part of the 2017 tax law, is $11.6 million for individuals and more than $23 million for married couples.

 

An especially popular tool is the grantor retained annuity trust, or GRAT, which lets beneficiaries profit from any future investment gains — with no risk of losing money — as long as those returns are higher than the IRS-required interest rate. The lower the rates, the easier for heirs to make money.

 

Low rates aren’t the only reason advisers say they’re preoccupied re-arranging client estate plans. While volatile markets have dented many portfolios, low valuations also make it possible to transfer assets to heirs without using up as much of the gift-tax exemption.

 

Waxman said his “docket is very busy” arranging for third-party appraisals of private businesses and real estate. The goal is to give, lend or sell the assets — at prices reflecting the economic slowdown — to trusts or other structures benefiting future generations.

 

November elections

There’s also the threat that tax laws could change if President Donald Trump is defeated in the November elections. Former Vice President Joe Biden, the Democrats’ presumptive nominee, has proposed closing estate-tax loopholes.

 

Americans will inherit an estimated $764 billion in 2020, and pay an average tax of just 2.1 percent on that income, according to a study by New York University law professor Lily Batchelder earlier this year.

“If you think Trump is a one-term president, you would be doing even more of these transfers now,” said Megan M. Burke, an accounting professor at Marist College.

 

So far, the super-wealthy aren’t so hurt by the crisis that they worry about giving away too much, Stein said.

“For most of our clients, their assets are way more than sufficient to weather the storm and then some,” he said.

In fact, pandemic-induced lockdowns mean that many once-busy rich people find themselves with lots of time to maximize estate plans. Stuck at home, wealthy entrepreneurs finally have a moment to think about the next generation.

 

“It’s a little crazy — I’m busier now than I was before this pandemic,” said Jim Bertles, managing director at Tiedemann Advisors. “It’s because clients and prospective clients reaching out to us have a lot of time on their hands.”

 

 

 

Trump pursues payroll tax cut as GOP, Democrats look elsewhere

By Laura Davison

 

A big cut in the payroll tax is high on President Donald Trump’s wish list for the next coronavirus response bill, but the idea is getting the brushoff from newly cost-conscious Republicans and Democrats who would rather send aid to people who aren’t getting a paycheck.

 

Trump has backed a payroll tax cut since long before the pandemic brought the economy to a halt and threw millions of people out of work. He suggested the idea in August 2019 as a way to boost the economy and tried to include it in the $2.2 trillion stimulus bill passed in late March. Congress instead opted to send $1,200 individual payments to middle- and low-income adults instead.

 

“I like the idea of payroll tax cuts. I’ve liked that from the beginning,” Trump said Tuesday. “A lot of economists would agree with me. A lot of people agree with me.”

 

Wide divisions in early talks on the next aid legislation suggest that any deal may require time and perhaps even more intense negotiations than the first four bills. Those bipartisan bills to boost the economy totaled $2.9 trillion, massively increasing the federal deficit in a time of grave national emergency.

 

Payroll taxes — the 6.2 percent levy on wage income up to $137,700 that finances Social Security — are paid by the vast majority of American workers. Employers pay an additional 6.2% tax for their employees. Gig economy workers, such as drivers for Uber and Lyft and other contractors, are supposed to pay the employee and employer portions of the tax.

 

State, local aid

Not many lawmakers have publicly backed Trump’s proposal for a payroll tax cut. House Democrats seek more money for struggling state and local governments and a second round of direct payments to individuals. A payroll tax cut isn’t on the list because people without jobs wouldn’t benefit.

 

Senate Majority Leader Mitch McConnell says he wants less costly legislation that would encourage companies to reopen by shielding them from lawsuits by employees or patrons who may be exposed to the virus.

 

GOP Senate Finance Chairman Chuck Grassley’s spokesman Michael Zona said it’s too soon to know what any legislation would encompass and that it should address “any ongoing problems in an effective manner.”

 

House Ways and Means Chairman Richard Neal, a Democrat, rejects a payroll tax cut. Instead, he proposes sending another round of direct payments to individuals and expanding a separate tax credit for employers who keep workers on the job, according to spokeswoman Erin Hatch.

 

Garrett Watson, a senior policy analyst at the right-leaning Tax Foundation, said a payroll tax cut is “not well targeted. With unemployment between 10 percent to 20 percent range, those who are unemployed are going to be left out of the relief.”

 

Effect on employment

Economic literature also suggests “there isn’t much effect on employment or stimulative demand,” Watson said. “From an economic growth perspective, a payroll tax cut just doesn’t translate to long-term employment numbers.”

 

Economist and longtime tax-cut proponent Arthur Laffer has been pushing the White House to consider a negative payroll tax, which would effectively provide a subsidy to businesses and their employees for the rest of the year.

 

Congress has already addressed some business concerns about paying their payroll taxes while they’re shut down. The March stimulus bill lets them defer paying the employer-side part of the tab for the rest of this year and repay those levies in 2021 and 2022.

 

Using the payroll tax system to provide further relief to companies does have some appeal in both parties. Senator Josh Hawley, a Missouri Republican, has a plan that would repay 80 percent of some companies’ payroll. Representative Pramila Jayapal, a progressive Democrat from Washington state, has a plan to repay 100 percent of payroll for companies that meet a strict standard of lost revenue. Both plans set limits on replacing wages for high earners.

 

Any of those would come with a large price tag that could total well into the hundreds of billions of dollars depending on how many companies would be eligible for the benefit.

 

‘Welfare payment’

Suspending payroll taxes for three months would cost $300 billion, according to the nonpartisan Committee for a Responsible Federal Budget. A negative payroll tax would cost even more.

 

“A negative tax is effectively another form of welfare payment,” said David McIntosh, president of Club for Growth, which supports lower taxes and reduced government spending. “Let’s remove the cost and let the market work. That will work much better than playing around with the tax code.”

 

McIntosh also said such a move could have big consequences for the Social Security trust fund, a concern shared by more left-leaning economists worried that diverting revenue from it could lead to insolvency problems more quickly than currently predicted. Hawley’s office said his plan would include provisions to replenish the trust fund, as has been done in previous bills.

 

“I’m worried that this is just furthering a longstanding Republican goal: cutting Social Security and privatizing it,” said Dean Baker, a senior economist at the Center for Economic and Policy Research.

 

 

 

 

Figuring out payroll taxes in 2020

By Mark A. Luscombe

 

The favorite tax tool being used by Congress for helping businesses through the coronavirus crisis is the payroll tax, not the income tax. While individuals are receiving advances on their new income tax credit, businesses are receiving advances on a variety of new payroll tax credits.

 

Sorting through that variety and the choices for advances will present a challenge for 2020, but the result will hopefully mean quicker and broader tax relief than an income tax credit might have afforded.

 

Credits for sick, family leave

The Families First Coronavirus Response Act not only mandated that employers with fewer than 500 employees offer paid sick leave and family leave, it provided offsetting refundable payroll tax credits to reimburse employers for the cost. Employers with fewer than 50 employees may be able to request a waiver.

 

The credits apply for payroll for the period from April 1 to Dec. 31, 2020. The self-employed are eligible for the credits. Health insurance costs during the leave period may also be included in calculating the credits.

 

The paid sick leave credit comes in two forms. If an employee takes emergency paid sick leave due to government quarantine, recommended self-quarantine, or showing symptoms, the tax credit is equal to 100 percent of regular pay up to $511 per day for a maximum of 10 days, or $5,110. If an employee takes emergency sick leave to care for an individual subject to government quarantine or recommended self-quarantine, or to care for a child whose school or place of care is closed due to coronavirus, the tax credit is equal to two-thirds of the employee’s regular pay up to $200 per day for a maximum of 10 days, or $2,000.

 

The paid family leave credit applies if the employee takes emergency or family leave and is unable to work to care for a child whose school or place of care is closed. The tax credit is equal to two-thirds of the employee’s regular pay up to $200 per day for a maximum period of 10 additional weeks, or $10,000. An employer could get a tax credit for both paid sick leave and paid family leave for the same employee.

 

Employee retention credit

The CARES Act creates a 50 percent refundable employee retention credit for quarterly wages paid up to a maximum of $10,000 of wages for the period March 13 to Dec. 31, 2020. It is limited to offsetting the employer’s share of Social Security taxes, not Medicare taxes, and does not include any wages associated with claimed paid sick leave and paid family leave credits. Health insurance costs may be taken into account in determining the wages eligible for the credit.

 

An eligible employer is an employer whose business was fully or partially suspended by a government order or whose quarterly gross receipts were less than 50 percent of the gross receipts for the corresponding quarter in 2019. An employer is no longer eligible in a quarter following a quarter in which the gross receipts are greater than 80 percent of the gross receipts in the corresponding quarter in 2019.

 

Tax-exempt organizations may be eligible employers, but government employers and the self-employed do not qualify for the employee retention credit. Also, any employer who receives a Small Business Administration loan under the Paycheck Protection Program in the CARES Act is not eligible. An eligible employer can elect out of receiving the credit.

 

For employers with greater than 100 employees, qualified wages include wages only of furloughed employees. For employers with 100 or fewer employees, qualified wages include all employees during the period of shutdown or decline in gross receipts. The wages of the employee cannot exceed the wages paid in the prior 30-day period.


Delay of employment taxes

The CARES Act also provides that all employers may defer payment of up to 50 percent of the employer’s portion of Social Security taxes through Dec. 31, 2020. Fifty percent of the deferred taxes must be paid by Dec. 31, 2021, and the balance repaid by Dec. 31, 2022. The deferred payment provision is not available to an employer who had an SBA loan under the PPP forgiven. Under a separate provision of the CARES Act, an exclusion is provided for the amount of the forgiven PPP loan.


Form 7200

New IRS Form 7200 (available only in draft form as of this writing), “Advance Payment of Employer Credits Due to COVID-19,” permits an employer to seek an advance of the refundable leave credits and retention credit to the extent that those credits exceed the required employment tax deposit for the period. An employer may choose to file Form 7200 or not and may file the form as many times as warranted.

 

When the Form 941 is filed at the end of the quarter, it must include a reconciliation of the advances under Form 7200. Self-employed individuals are not eligible for advances of the leave credits.

 

Documentation to support the reconciliation includes the calculation of the leave credits and retention credits, calculation of qualified health plan expenses, documenting employee eligibility for the leave credits, and documenting employer eligibility for the retention credit. The list of documentation requirements highlights the tasks faced by employers in claiming these credits.


Notice 2020-22

IRS Notice 2020-22 provides a waiver of the penalty for failure to pay employment taxes for which there is an offsetting credit available. This applies to both the leave credits and the retention credit. Waiver is not available if the employer obtained advances through Form 7200.


Summary

The credits for paid sick leave and paid family leave only apply to employers with fewer than 500 employees. The employee retention credit applies to all employers, but the calculation is different depending upon whether the employer has more than 100 employees or not. It is possible for an employer to qualify for both credits for different wages paid at different times during the year.

 

Employers also have the choice of not paying the employment taxes otherwise due on a quarterly basis that will ultimately be eligible for the credits on the 2020 tax return or more aggressively seeking an advance of the credits by filing one or more Form 7200s. Additional guidance is expected from the IRS during the course of 2020 on details concerning the credits and Form 7200.

 

 

 

What shape will the recovery be?

US stocks are in a holding pattern but there are 4 potential recovery scenarios.

BY JURRIEN TIMMER

FIDELITY VIEWPOINTS

 

Key takeaways

  • The S&P 500 has gained 27% from the March 23 low—retracing 54% of the decline. After such a rally, some consolidation seems likely.
  • The disconnect between rising stock prices and falling earnings is a sign that the market is pricing in an eventual recovery.
  • Using the discounted cash flow model (DCF), I now think that a more likely path for stocks might be a "swoosh," i.e., a sharp contraction followed by a gradual recovery.
  • This swoosh scenario suggests a fair value of 2,600 for the S&P 500, compared to the current price of 2,825.

 

Since walking back from the abyss in late March, equities have rallied strongly in anticipation of a peaking of the COVID curve and a reopening of the economy.

 

The S&P 500 has gained 27% from the March 23 low and has retraced 54% of the decline. Believe it or not, the S&P 500 is back to its trend line from the 2009 low. It's an impressive feat, considering the economic devastation that the COVID crisis has unleashed.

 

In recent weeks the pace of the rally has slowed, and for the past 2 weeks the market has been treading water. Basically the market has entered a holding pattern in the middle of the range, while it waits for new data.

 

The recent gains have become more narrow and uneven, led by the same familiar secular growers as before. Students of market history typically want to see a broadening of gains to confirm that a new cyclical bull market is underway. Usually the stocks that go down the most (small caps, cyclicals) also recover the most. That is not happening, at least not yet. To the skeptics, this lack of participation is a sign that this is nothing more than a QE-induced bear market rally.

 

Technical analysis

The advance off the low has so far followed a corrective-looking a-b-c pattern, and recently the market became technically overbought on a short–term basis. This suggests that some consolidation and retracement is in order. The ability for the market to hold on to its recent gains is an important test. So far, in my view, it is passing the test.

 

If we look at the equal-weighted S&P 500 Index (SPW), the market has rallied the same 27% as the cap-weighted index (SPX), but because it fell further (−39% vs. −35%), it has retraced less of the decline (44% instead of 54%). As a result, the SPW is sitting 23% below the February highs while the SPX is only 16% below. The cap-weighted index (SPX) is organized by company size—bigger companies are a larger proportion of the index. In the equal-weighted index (SPW), the index is divided proportionally among the 500 companies.

 

At the same time, while market breadth (advancers minus decliners as a percentage of issues) has not been robust enough to confirm that we are out of the woods, but it hasn't been terrible either. The percentage of stocks above their 50-day moving average has improved from almost zero in March to +36% last Friday. That's below the +55% at the highs, but that is to be expected given that we have only climbed halfway back from the lows.

 

Likewise, the breadth oscillator (a measure of the momentum of breadth) has improved as well, although it has leveled off in recent days. In both cases, the market's internals are tracking favorably compared to the 1987 and 2008 analogs.

 

Have markets priced in too much of a recovery?

Markets are always discounting the future, and after discounting a depression-scenario a month ago it now seems to be discounting a severe but short-lived recession followed by a recovery. There is little doubt in my mind that the rapid and robust coordinated fiscal/monetary policy response is in large part responsible for this course correction. Don't fight the Fed, as they say, especially when it is coming out with guns blazing.

 

But now the question is whether the markets have priced in too much of a recovery. Until the economy actually reopens we can't really know the answer. Hence the holding pattern. The market is waiting for new information.

Price leads earnings

 

Because price leads earnings, the market picture has become confusing, to say the least. With price up 27% and earnings estimates falling rapidly (down 36% in Q2 and down 19% for 2020), by conventional valuation metrics the market is now more expensive than it was at the pre-COVID peak. The forward price-to-earnings (P/E) ratio (using expected earnings for the next 12 months) is now 19.2x vs. the February peak at 19.1x. Casual observers might understandably conclude that Wall Street is out of touch with Main Street.

 

DCF (Discounted cash flow model)

As investors we have no choice but to come up with some assumptions about what the future might look like, including the entire arc of the recession/recovery cycle. That will give us some clues as to what is priced in and what is not, and from there we can try to infer the market's likely next move.

 

For me, the discounted cash flow model (DCF)* remains a useful tool to help me figure out what is possible and what is priced in. I wrote extensively on this 2 weeks ago, but it's worth an update.

 

Below are 4 different recession/recovery scenarios, from a best-case "sharp-V" to a worst case "L" to 2 different versions of a "Swoosh" in the middle.

4 potential scenarios for the S&P 500

The data in the chart is described in the text.

 

In the chart, payout is the sum of dividends per share and buybacks. Source: Fidelity Investments. As of April 2020.

 

Right tail: Sharp V

Let's start with the tails. For the best case, "V," I am simply using the currently available consensus earnings estimates from Bloomberg. I think this scenario is unattainable, not so much because the near-term estimates are not bearish enough, but because the more distant estimates for 2021 and beyond are calling for a super-charged V-shaped recovery.

 

Those outer-estimates are generally too high anyway, but they seem more so to me this time around. I suspect that this is simply a function of analysts not updating their growth estimates because companies have pulled their forward guidance.

 

Based on the above scenario the DCF model produces an intrinsic value of 3,291, based on an equity risk premium (ERP) of 5.5% and no change in the payout ratio (the amount of earnings returned to shareholders in the form of dividends and buybacks). The February high was 3,394, so this scenario implies that the market will return back to the highs in relatively short order. That is unlikely, in my view.

 

Left tail: L-shaped with reduced payout

A left tail scenario might be an L-shaped cycle composed of a sharp decline with only a modest recovery and a declining payout ratio. Essentially it assumes some permanent impairment to the corporate sector in a way that reduces the amount of capital that can be returned to shareholders in the form of share buybacks. That, or a shift in the balance of power between capital and labor.

 

This scenario produces an intrinsic value of 1,787, which implies a further decline of 37% from current levels. While the issue of share buybacks may well become a major obstacle for the market in the coming years, for now I think the market has been correct in walking away from the abyss. Again, I credit the robust and timely policy response for this.

 

Swoosh

That brings me to some sort of in-between scenario as a more plausible outcome. I have been using a "U" and a "V" recovery as scenarios for this, but a V-shaped path seems too optimistic to me now, given the likelihood that the economy will reopen only gradually and with plenty of bumps along the way. I now think that a more likely path might be a "swoosh," i.e., a sharp fall followed by a gradual recovery.

 

This swoosh scenario has an intrinsic value of 2,593, which is 8% below the current price of 2,825. That suggests very little upside from here, but also not a ton of downside. Assuming we are now in a holding pattern or trading range of say 2,500–2,900, this scenario suggests that we stay in that range until further notice.

 

Slow swoosh

I have added a second, but less robust, swoosh scenario, which we can call a slow swoosh for the lack of a better term. For this scenario, I come up with an intrinsic value of 2,319. That's 18% below the current price. This scenario suggests that the market is too optimistic about the earnings recovery, although even an 18% decline from here would leave the SPX above the March 23 low of 2,192.

 

The table below highlights the fair value for these 4 scenarios.

Valuation scenarios for the COVID crisis and recovery

 

Fair value

 

SPX % change from

 

 

 

Price

P/E

High

Last

Low

Pre-COVID baseline

3,348

21.3

 

 

 

Sharp V

3,291

20.9

−3%

17%

50%

Swoosh: −25% drop, +15% in 2020, +10% in 2021

2,593

16.5

−24%

−8%

18%

Slow swoosh: −30% drop, +10% in 2020, +10% in 2021

2,319

14.8

−32%

−18%

6%

L with reduced buybacks

1,787

11.4

−47%

−37%

−18%

Source: Fidelity Investments. As of April 2020.

 

There are so many variables

All of these scenarios are assuming an equity risk premium (ERP) of 5.5%, which is a stable and conservative assumption in my view. (Equity risk premium is the additional return above a "risk-free" rate investors expect for putting their money into a riskier asset class.) Based on various approaches and time frames, the realized ERP (as opposed to the implied ERP, which tends to bounce around a lot) is between 4% and 6%. As the chart shows below, the ERP that we use to discount earnings makes a huge difference in determining the present value of future cash flows. So getting this part right is crucial.

 

DCF scenarios

Discounted cash flow model methodology

The data in the chart is described in the text.

Monthly data. Source Bloomberg, FMRCo. As of April 2020.

 

The other critical variables are the risk-free rate (i.e., the 10-year Treasury yield), and of course the payout ratio (the amount of earnings returned to shareholders). That last number is currently 89% and has been in roughly that zone since the buyback era began in the mid-2000s. But it hasn't always been this high. During the 1970s the payout ratio was only around 50%. Getting that one right will be very important.

 

As you can see, the DCF involves a number of variables, from the earnings track to the risk premium to the risk-free rate to the payout. It's like solving a 3-dimensional puzzle in real time. That's difficult enough in a normal market, let alone at a time like this.

 

 

 

10,000 recalled IRS employees need to bring their own masks

By Daniel Hood

 

The Internal Revenue Service is recalling approximately 10,000 employees to handle "mission-critical" work on-site at agency offices on Monday — and it's requiring them to bring their own protective masks.

 

According to an internal IRS email released by Democratic lawmakers on the House Ways & Means Committee over the weekend, agency employees who are coming in to answer phones, open mail, and handle other tasks will need to bring their own masks, even if they're homemade.

 

"Although the IRS is seeking to procure personal protective equipment (PPE) such as masks and gloves, each IRS facility may not be able to initially procure the PPE for all employees immediately," the email, from IRS human capital officer Robin Bailey and deputy human capital officer Kevin McIver, reads.

 

"Employees are therefore required to bring personal face coverings for their nose and mouth area when they come to work," the email continues. "As stated in the CDC recommendations, these face coverings can be fashioned from common household materials, such as clean t-shirts or bandanas. Materials used to create the covering must be conducive to a professional work environment and not contain any images or text that may be deemed inappropriate or offensive to others."

 

After the release of the email, the service clarified that it expected to be able to provide PPE for most employees this week — and that it would initially be seeking volunteers with incentive pay. A statement from the National Treasury Employees Union noted that if enough employees do not respond, the service will begin requiring employees to return to work at physical IRS offices.

 

 

 

Working from home? Beware of the Doom Loop

By Kyle Walters

 

In his bestseller "Good to Great," author Jim Collins describes something called the “Flywheel Effect.” No matter how dramatic the end result, good-to-great transformations never happen in one fell swoop. In building a great company or firm, Collins argues there is no single defining action, no grand program, no one killer innovation, no solitary lucky break, no miracle moment. Instead, it’s a process that’s like relentlessly pushing a giant, heavy flywheel, turn upon turn, building momentum until a point of breakthrough, and beyond.

 

How does the flywheel apply to CPA success? It’s a series of actions we take, no matter how small these actions are, that all feed the direction we’re going. (For more on this topic, see my article, "The ant on the elephant.")

 

At times like these, it’s important to make sure your Positive Flywheel doesn’t deteriorate into a negative Doom Loop — a downward spiral of negative behavior that, if you’re not careful, will turn into long-term negative habits.

 

We’ve already been in this stay-at-home quasi-quarantine period for at least a month. It’s likely to continue for at least another month depending on where you live. Right now, we’re in the danger zone of having some of these pandemic-era habits becoming permanent. Those daytime snack runs to the fridge are dangerous. Starting happy hour in the mid-afternoon or catching up on a few episodes of Netflix during 9 to 5 can be tough addictions to break.

 

Eat to feel better

Nutrition is a big deal right now. Many people don’t have a gym to turn to, and access to their refrigerators is way too easy. So many people can’t figure out why they don’t feel right. You’re not able to do the things you normally do. How can you create an environment where you’re able to simulate as much of your normal A-game life as possible?

 

Focus time

When you’re working from home, I know it’s tough to tell yourself: “I need to work for six hours straight.” That can be daunting. But there are several easy-to-implement time management techniques that can be helpful. One I like is the 25/5 Pomodoro Technique. With this approach, you commit to deep focus for 25 minutes and then follow that focus time with a strict five-minute break. Then you do another 25 minutes of deep focus, followed by five-minute break, etc.

 

I know you may have young kids, teenagers or elderly relatives at home. They don’t care what your work-versus-break interval is. Trust me, I know. I have two very active young daughters at home. But this current situation is not the Zombie Apocalypse. It’s just a few months of self-imposed working from home. It’s not that bad, is it? The reason it feels bad is because you’re not free to live your normal life. You can’t easily see friends or go to restaurants or the gym or the movies or a ball game — the pleasant diversions you’re accustomed to when not working.

 

Again, just keep your eyes and ears open for hints of the negative Doom Loop creeping into your life. You want to keep that Positive Flywheel spinning.

 

Here’s a good rule of thumb. If there’s any behavior you would never be caught dead doing in the office, don’t do it at home!

 

As Jocko Willink wrote in his bestseller, "Extreme Ownership: How U.S. Seals Lead and Win," the key to being tougher is just being tougher. C’mon guys. We’re not starving or out on the battlefield under enemy fire. We have our families around us. We have power and water. We have internet service. We should be able to handle a few months of working from home. It’s going to be fine. Again, just make sure that none of your habits during this temporary break in our work routine turn into self-destructive lifelong habits. After 60 days, they’ll get harder and harder to break.

 

Right now, your clients need you more than they ever have. It’s still busy season, even though it’s been extended. Again, it’s work from home, with emphasis on the word “work.”

 

I get it. I know you’re not going to be on your A game when working from home. Just be very careful. Habits and your brain are incredibly difficult to pull back. Not to scare you even further, but think about the very real possibility that we’ll be getting back to normal in early summer, just when kids are out of school and people start thinking about vacations and travel plans.

 

Every morning when you wake up, ask yourself, “What do I absolutely have to get done today?”Write that down before your day gets started. It’s not just a to-do list. Put those must-dos in your calendar and commit specifically to the time of day when you’re going to get those things done.

 

At times like these, you have to hold yourself accountable because you’re not in a normal workplace environment that’s going to hold you accountable.

 

Eventually this crazy time in our nation’s history will pass. It will be OK. You just don’t want to find yourself and your team members miles behind the competition when this pandemic passes, with lots of bad habits in tow. Make sure everyone is staying on track. And whatever you do when you get discouraged, don’t let the Doom Loop creep into your life. Keep that Positive Flywheel moving.

 

 

 

Coronavirus payments hit glitches

 

Errors are turning up in the Internal Revenue Service’s $1,200 payments to households this week, with some people receiving too little, a handful getting more than expected and some seeing their payment go into an unrecognizable bank account.

 

Many of the millions of people expecting the payments are struggling with an IRS “Get My Payment” webpage intended to give the status of their funds. Several users said on Twitter that their payment information is unavailable, even though they should qualify for the money. Some said the IRS deposited the money into a bank account that isn’t theirs.

 

Duncan Daniels, 36, of Milwaukee said in an interview that the IRS website shows his correct Citibank account number and that the money was deposited there on April 15. But the money hasn’t appeared in his account and there isn’t a pending transaction. When he called Citibank, employees said they didn’t see any trace of the funds, Daniels said.

 

The Treasury Department said it is aware of the issues and working to address them. The department has rushed to process 80 million payments in three weeks -- about half of the 150 million to 170 million direct deposits and checks being sent to Americans as part of the $2.2 trillion coronavirus package passed in late March.

 

The IRS has directed users of its webpage to keep trying daily to learn the status of the payment. But the solution is less clear for those who say their funds went into a bank account they don’t recognize.

 

“The IRS deserves high grades for pulling this off at this stage,” said Mark Everson, a former IRS commissioner. “But now they have to be extremely careful to make sure security protocols are correct.”

 

Wrong account

It’s not clear how widespread the glitches are or whether the cause lies with problems at the IRS or with the end users or their banks. And the situation isn’t new -- the IRS has an online form for taxpayers whose annual refunds have been sent to the wrong account.

 

Still, taxpayers are going to get anxious if they don’t see their payments, which puts them more at risk of falling victim to scammers, said Everson, now a vice chairman of tax advisory firm AlliantGroup LP.

 

The IRS says that if a payment goes to a closed account, the bank will reject the deposit and the IRS will send the person a check in the mail. The IRS says it will start mailing payments on April 20 and can process about 5 million checks a week.

 

People whose payment went astray will be notified where it was sent and given instructions for reporting problems in receiving the money. But those notices won’t arrive until about two weeks after the payment was scheduled to appear.

 

Tax preparers' fault?

Taxpayers who previously got advance tax refunds from a tax preparer, such as Intuit Inc.’s TurboTax, Jackson Hewitt or H&R Block Inc., could also face delays. The bank account on file may be reported as closed because it’s a temporary account associated with the tax preparer or lender, National Taxpayer Advocate Erin Collins said in a blog post.

 

Those taxpayers will get their checks sent to a personal account, if possible, or will get a check in the mail. That could also explain some of the unrecognizable account numbers some taxpayers are seeing.

 

Some of the millions who have received payments are seeing less than anticipated after the bank garnished some or all of the payment. The law bars the government from garnishing payments if individuals owe back taxes, but it didn’t say whether banks could seize payments to cover other debts their customer owes.

 

Five banking groups said in a letter to Congress that absent a law change or guidance from Treasury, they are required to enforce court-ordered garnishment to pay creditors.

 

Some banks say they won’t seize assets for late fees or below-zero account balances. USAA said in a statement Thursday that it will pause collecting against negative account balances after it had initially garnished some stimulus payments from their account holders. Wells Fargo & Co., JPMorgan Chase & Co. and Citigroup Inc. said they’re working to ensure that checking-account customers with negative balances still get their full stimulus payments.

 

Higher state levies

People in Alabama, Iowa, Louisiana, Missouri, Montana, and Oregon could face a state tax bill next year on some of their stimulus payment, because of laws that increase state tax liability as federal tax bills are decreased. If people end up being eligible for a bigger payment than the IRS initially sent, because of a change in family size or job change, the state could tax that portion, said Jared Walczak, director of state tax policy at the Tax Foundation.

 

Additionally, others including international students and relatives of people who died are getting payments they didn’t expect. The IRS is relying on tax return data as old as 2018 in some cases.

 

The IRS hasn’t specifically said whether the funds will need to be repaid in either instance, but generally the agency has said payments sent in error won’t need to be returned to the IRS.

 

Still, public policy experts are worried that bureaucracy, a lack of awareness and lack of access to technology will prevent many people from getting their payments.

 

The IRS has said recipients of Social Security and Supplemental Security Income won’t have to do anything to receive their funds. But if they have dependent children, they must submit information to the agency to get the $500 per child they are owed. Additionally, some people receiving veterans benefits will need to submit their information to the IRS.

 

The “biggest concern” is that people who don’t normally communicate with the IRS will need to take extra steps to get full payments, said Thomas Giordano, who heads the Social Security disability practice at law firm Pond Lehocky & Stern. He said that’s particularly hard because public libraries and other places that offer access to computers are closed.

 

“You’re talking about the most underprivileged portion of our populace,” he said.

 

 

 

IRS hits the brakes on collections in response to the coronavirus

By Roger Russell

 

As part of government attempts to alleviate economic pressures due to the coronavirus, the IRS has begun to pause collection activities for many taxpayers.

 

In a memorandum to collection executives from Frederick Schindler, director, Headquarters Collection, in the Small Business/Self-Employed Division, collection executives were told: “We are implementing a temporary deviation that provides guidance as to the collection activities that should be suspended as well as others that will continue to take place during the suspension period [March 30, 2020, through July 15, 2020].”

 

“To provide relief to taxpayers, employees were advised to suspend most collection activities unless:

  • There is a risk of permanent loss to the government due to the expiration of a statute or other exigent circumstance; or,
  • The taxpayer has agreed to an action.”

 

Taxpayers on installment agreements may suspend making any payments normally due between April 1 and July 15, 2020, according to E. Martin Davidoff and Robbin Caruso, partners at Top 100 Firm Prager Metis and partner-in-charge and co-managing partner of the National Tax Controversy Practice, respectively.

 

“This may be three or four payments depending upon when your payment would normally be due,” said Davidoff. “Although the IRS will allow such suspension without terminating the agreement, interest will continue to accrue at a rate of 5 percent per year. And, in many cases, an additional charge for late payment of 0.25 to 0.5 percent per month will also be added to the balance.”

 

For clients in a direct debit installment agreement, Davidoff and Caruso recommend that they contact their bank and ask them to stop the direct debits payments. “Some banks may take this information over the phone, while others will require written instructions,” advised Caruso. “Since some banks may require at least two weeks' notice, this should be done as soon as possible.”

 

Once DDIA payments have been stopped, there are several possibilities after July 15, 2020. Davidoff and Caruso explained a number of options.

 

If a taxpayer’s financial situation has changed permanently, it may take a bit of renegotiating the installment agreement. If the taxpayer has recovered fully, or merely wishes to begin the payments again, one option is to simply ask the bank to resume the direct debit. This may not be an option at all banks. Other options are to make post-July 15 payments via Direct Pay on the IRS website, through the Electronic Federal Tax Payment System.

 

For those who have been targets of IRS collection but are not yet in an installment agreement, the IRS is suspending garnishment, seizures of property, civil suit proceedings and lien filings through July 15, 2020. Davidoff notes that this is a good opportunity to assemble documentation and prepare a financial disclosure package to secure a collection alternative (installment agreement, offer in compromise, or currently not collectible status).

 

“Revenue officers in the field will be able to establish new installment agreements for those who wish to enter into such agreements,” Davidoff added.

 

Not necessarily a permanent situation

“Practitioners and taxpayers should not be lulled into complacency,” cautioned Daniel Gibson, a tax partner at Top 100 Firm EisnerAmper. “Once this suspension period ends, the IRS could very well start to file liens and levies with a vengeance. Therefore, practitioners and taxpayers should take advantage of this breathing space to prepare collection forms and organize supporting documentation in order to be ready when the suspension period ends.”

 

“Although revenue officers will continue to the extent they can operate remotely, no enforcement action will occur except for exigent circumstances,” he said.

 

“Officers must make taxpayer contacts with caution and extreme sensitivity to the taxpayer’s personal circumstances,” Gibson said. “Stress and fatigue are factors requiring consideration, even in instances where taxpayers have not experienced any personal illness or monetary loss from the pandemic. In most cases, revenue officers may request that taxpayers provide documentation, but will not warn taxpayers of enforcement action, except in exigent circumstances.”

 

“The memo notes that, while SB/SE cannot anticipate and provide guidelines for every possible situation, it remains vitally important for all front-line SB/SE employees to be sensitive to the individual circumstances of taxpayers and provide them with appropriate relief,” Gibson said.

 

 

 

Organizations lose 5 percent of revenue to fraud every year

By Michael Cohn

 

Organizations lose 5 percent of their revenue to fraud each year, according to a new report from the Association of Certified Fraud Examiners.

 

The percentage has remained relatively constant over the years, according to the ACFE’s 2020 Report to the Nations. The biannual report analyzes 2,504 cases of real fraud from 125 countries that totaled over $3.6 billion in losses. The typical case of fraud costs $8,300 per month, and the median duration of each fraud case was 14 months.

 

The median loss per case was $125,000 total, but the overall average loss per case was $1.509 million. The use of anti-fraud controls — including hotlines, anti-fraud policies and training — have increased significantly over the past decade (up to a 13 percent increase for each control).

 

Forty-three percent of the schemes have been detected by tips, and half of those tips came from employees. There has been a steady decline in organizations pressing criminal charges for fraud, but there has been an increase in them opting for civil litigation against fraudsters.

 

There are three main categories of occupational fraud, according to the report. Asset misappropriation, which involves an employee stealing or misusing the employing organization’s resources, happens in the vast majority (86 percent) of cases, but these schemes also tend to cause the lowest median loss, at $100,000 per case. On the other hand, financial statement fraud schemes, in which the fraudster intentionally causes a material misstatement or omission in the organization’s financial statements, are the least common (10 percent of schemes) but account for the costliest category of occupational fraud. The third category, corruption — which includes bribery, conflicts of interest and extortion — falls in the middle in terms of both frequency and financial damage. Corruption schemes happen in 43 percent of cases and lead to a median loss of $200,000.

 

“One of the other areas that the ACFE highlights as well as the revenue falsification and revenue recognition is misappropriation of assets,” said Brian Fox, president and founder of Confirmation, a maker of audit confirmation technology. “Misappropriation of assets can be things like inventory, but primarily cash. People aren’t going to steal a John Deere tractor, but they will steal lots of cash.”

 

In one-third of the cases in the ACFE study, the fraudster committed more than one of the three main categories of occupational fraud, with 26 percent of fraudsters undertaking both asset misappropriation and corruption schemes, while 3 percent misappropriated assets and committed financial statement fraud, 1 percent engaged in both corruption and financial statement fraud, and 5 percent participated in all three categories of occupational fraud.
 

 

 

10 good habits for working from home

By Bill Hagaman

 

I hope as you read this, you and your loved ones are safe and healthy. As many of us enter another week of working from home, cabin fever is likely setting in, if it hasn’t already. You may find yourself struggling to keep spirits and energy up while in quarantine. Lack of sunlight, fresh air and social interaction impact our psyche. For those of us not previously acclimated to working in the same space we live, discovering how to divide and use our space to the best of our ability is vital to both our productivity and mental health.

 

In my recent weekly managing partner message to Withum, I shared a list of 10 tips I am personally practicing to keep myself motivated and energized. I’d like to share it with you with the hopes it may help.

 

1. Consistency

Create a routine and stick to it, particularly during the workweek. You want to be able to differentiate a Wednesday from a Saturday.

 

2. Keep up appearances

Get dressed every day. Get out of those pajama bottoms and throw on some jeans and perhaps a pullover from your firm.

 

3. Small steps

Make your bed. Starting your day with even this one small accomplishment is proven to set the tone for a productive day.

 

4. Keep others informed

Communicate your workload and availability with partners, managers and schedulers. Your proactive outreach is appreciated.

 

5. Seek help fast

If you are stuck on a problem, speak immediately to another engagement team member to get it resolved quickly. Don’t let it languish.

 

6. Stay in touch

Be sure to connect daily with another team member, preferably through Microsoft Teams or Zoom, with the camera on to maximize social interaction. We all need it.

 

7. Be early

When attending scheduled virtual meetings, “arrive” three to five minutes early. (Let’s face it, there’s no traffic to deal with or meeting rooms to get to.)

 

8. Overcommunicate

We don’t see each other around the office, so let others know what you are doing to stay busy, so there is no misinterpretation that you might not be doing anything (see No. 4).

 

9. Break it up

Be sure to take a break at some point during the workday. Have lunch with your family or friends. If the weather permits, go out and take a walk or bike ride (while practicing social distancing, of course). Spring is not canceled! Taking a little breather is a great way to re-energize and finish the day strong.

 

10. Attitude matters

Finally, and most importantly, stay positive and optimistic. This too shall pass. Utilizing these tips will put you in a position to make the most out of your time working while social distancing. No two home offices are alike, so find what works for you to create your own quarantine normalcy. Trial and error is key, so remember to practice patience.


I wish you and everyone in your firms the best of health and peace of mind as we get through this unprecedented time together.

 

 

 

SBA disaster loan assistance application: An update

By Melissa Diaz

 

If you are a small business owner in the U.S., it is probably a safe bet that you and/or your customers have been impacted in some way by the COVID-19 pandemic. High Rock Accounting is no different and applied for an SBA Economic Injury Disaster Loan (EIDL) at the first opportunity available as a result (see our article detailing this process here) . Unfortunately, those of us that were early movers now have to re-apply using the new, “streamlined” EIDL application platform provided by the SBA.

 

As of this morning, High Rock re-applied for the SBA EIDL. The process took substantially less time to complete due to two factors: 1. The website moved at a normal browsing speed, and 2. The information required to submit an application was noticeably reduced. With regard to the latter, this time all we had to provide was:

 

1. Eligibility verification based on a multiple-choice question from the SBA.

  • Our reason was that we are a business with not more than 500 employees (all available answers are all pre-populated).

 

2. Basic business information, including:

  • Business name, EIN, organization type
  • Gross revenues and cost of goods sold for the 12 months prior to Jan. 31, 2020.
  • Business address, nature of activities and established date of the business

 

3. Basic business owner information, including:

  • Name, phone number and title
  • Ownership percentage, Social Security number, birth date and address.

 

4. Additional information, including:

  • Whether the business is applying for the $10,000 grant advance
  • Banking information where the grant advance is to be sent.

 

As of yet, we are still in a waiting game to get a response from the SBA on our application. We’ve received acknowledgement via the website that our application was submitted, along with an assigned application number. We have not yet received an email acknowledgement or any communication as to how long the review process will take or how much will be awarded (if anything). For now, we are crossing our fingers that the SBA is able to support small businesses like ours effectively during this difficult time.

 

 

 

Small construction cos. top list of virus relief loan approvals

 

Construction firms have had a larger share of loans approved than other industries so far under a government program meant to help small businesses survive the coronavirus outbreak, and the average loan amount for all applications has been about $239,000, a new report shows.

 

The U.S. Small Business Administration on Tuesday released the most comprehensive report to date of the $349 billion Paycheck Protection Program, a cornerstone of the federal government’s $2.2 trillion response to pandemic. It details more than 1 million applications totaling $247.5 billion approved as of Monday.

 

As of late afternoon Tuesday, almost 1.2 million applications, totaling more than $268 billion, had been approved since the program launched April 3, according to the SBA’s latest totals. Funds for the program could be exhausted by Thursday, a top White House adviser said, but negotiations in Congress to replenish it remain stalled.

 

There’s no comprehensive accounting of how much money lenders have disbursed to small businesses so far. JPMorgan & Chase & Co. has funded $9.3 billion to firms and has more than 300,000 businesses in the application process representing $37 billion in loans, chief financial officer Jennifer Piepszak said Tuesday.

 

Construction companies received approval for 114,838 loans totaling about $34 billion through Monday, the SBA report shows. Professional, scientific and technical service companies were approved for 126,372 loans worth $30.3 billion, while holding companies had 2,278 loans approved totaling $888 million. Manufacturing firms had applications totaling $30.3 billion, and health care and social assistance firms $27.9 billion.

 

Loan applications from Texas, California, Florida, Illinois and New York accounted for nearly a third of the total amount, according to the report.

 

Tuesday’s report shows that 70 percent of the loans approved were for $150,000 or less, but they accounted for just 15 percent of the $247.5 billion in total approved lending. Almost 40 percent of that total went to loans between $1 million and $5 million, and about 10 percent to businesses that borrowed more than $5 million.

 

The program offers loans of as much as $10 million. They are forgivable if proceeds are used to keep workers on the payroll and cover rent and other approved expenses for about two months, a short-term stopgap designed to help businesses get by until the economy reopens.

 

 

 

IRS not processing paper tax returns due to coronavirus

By Michael Cohn

 

The Internal Revenue Service has stopped processing paper tax returns, with much of its staff now working remotely because of the novel coronavirus pandemic, and is encouraging taxpayers to file their taxes electronically during the three-month extension period for this year’s tax season.

 

The IRS said Friday that to protect the public and its own employees, and in compliance with orders of local health authorities across the U.S., some IRS services such as live assistance on telephones, processing paper tax returns and responding to correspondence are extremely limited or suspended until further notice. All of the IRS’s in-person Taxpayer Assistance Centers are temporarily closed along with many volunteer tax preparation sites until further notice. However, that won’t affect the IRS's ability to deliver “economic impact payments,” the stimulus payments of at least $1,200 that it began directly depositing Saturday in some taxpayers’ bank accounts.

 

While the tax-filing deadline has been extended from tomorrow’s original due date until July 15, the IRS noted that it’s continuing to process electronic tax returns, issue direct deposit refunds, and accept electronic payments. As of April 3, the IRS has received more than 97.4 million tax returns and issued over $213 billion in tax refunds.

 

However, paper tax returns are a problem this tax season with most of the IRS staff out of the office. The IRS wants all taxpayers to file electronically through their tax preparer, tax software provider or IRS Free File if possible. This year, more than 90 percent of taxpayers have filed electronically.

 

The IRS said it’s not currently able to process individual paper tax returns. “If you already have filed via paper but it has not yet been processed, do not file a second tax return or write to the IRS to inquire about the status of your return or your economic impact payment,” said the IRS. “Paper returns will be processed once processing centers are able to reopen.”

 

Similarly, the IRS's National Distribution Center is closed until further notice. The IRS said it’s unable to take any orders for forms or publications to be mailed during this time. Most forms and publications can be downloaded electronically at IRS.gov/forms.

 

 

 

Avalara debuts free sales tax risk assessment tool for e-commerce cos.

By Ranica Arrowsmith

 

Tax automation software provider Avalara has released its Sales Tax Risk Assessment tool to help e-commerce companies accurately assess whether they have achieved economic nexus in any given U.S. state. The self-serve tool was in development before the novel coronavirus pandemic, but COVID-19 has provoked a major uptick in e-commerce business, which makes the tool very relevant now.

 

According to "Internet Retailer," stay-at-home orders across the U.S. are partly responsible for a 52 percent uptick in online orders from web-only retailers year over year during the weeks of March 22 and April 4.

 

The Sales Tax Risk Assessment tool is interactive, and allows users to either answer three questions, or upload up to one year’s worth of financial transactions. The tool then displays a map of the United States that shows the states in which the company has achieved economic nexus — either by number of transactions or value of sales — and which states they should monitor because they are getting close to it. This information is then put into a PDF report that businesses can share with relevant parties.

 

Avalara then provides access to free expert advice to discuss the report.

 

In addition to the increased online sales driven by the pandemic, businesses, primarily online sellers, are facing added sales tax complexity. The Supreme Court's South Dakota v. Wayfair Inc. ruling in June 2018 said that states could now collect sales tax from remote sellers. To date, 44 states and the District of Columbia have adopted sales tax laws requiring businesses to use where their customers are located as part of determining compliance requirements. This ruling has also driven up the business of tax automation providers like Avalara.

 

Beginning in 2017, states began enforcing marketplace facilitator laws to begin collecting sales tax on third-party online marketplace sales. States can now collect sales tax attributable to third-party sales from marketplaces, rather than the individual sellers. However, in many cases, the revenue generated from marketplace sales also contributes to a remote seller crossing economic nexus thresholds. Forty-one states and the District of Columbia have adopted sales tax laws requiring the marketplace facilitator to collect and remit sales tax on behalf of marketplace sellers. The first step for merchants to stay tax-compliant is to determine where they have economic nexus established by a certain level of economic activity in a given period, which can include analyzing sales revenue, transaction volume, or a combination of both.


“When the Wayfair decision came down, we saw businesses saying they need to be compliant in so many different places they weren’t before,” said Liz Armbruester, senior vice president global compliance at Avalaraa. “It takes a while for businesses to get that information into the system and then take action. Then that taking action piece is whole separate activity. The 'long tail' of Wayfair means an additional compliance burden in calculating and remitting tax, and then that second step of actually being compliant. We believe that this activity around being compliant will continue to extend over a long period, because businesses who are operating in a physical state are probably going to have to look at different viable options.”

 

“Tax rates and rules vary widely from state to state and are continuously changing, making it extremely difficult for a business to understand and keep up with where they owe sales tax,” said Paul Sanford, vice president, product management at Avalara, in a statement. “The Sales Tax Risk Assessment provides an easy first step for businesses looking to get a handle on their sales tax obligations by providing them with sales tax information necessary to make more informed, proactive decisions about their business.”

 

For additional information and to sign up for the Sales Tax Risk Assessment tool, click here.

 

 

Disclaimer: This article is for general information purposes only, and is not intended to provide professional tax, legal, or financial advice. To determine how this or other information in this newsletter might apply to your specific situation, contact us for more details and counsel.

 

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