A new law called the “Paycheck Protection Flexibility Act” or PPPFA, passed June 5, makes major changes regarding how much time business owners have to use the loan and how the loan money can be spent. Many had complained that the PPP was too restrictive considering the varying circumstances of small businesses.

The original PPP (Paycheck Protection Program) loan plan for small business owners required the loans to be used in an eight-week timeframe. The new law extends the period to 24 weeks. Many businesses had asked for the government to lengthen the window, as some owners shut down entirely while others were only partially operating during the pandemic. The new law also gives business owners more time to rehire employees who may have been laid off so that staffing levels meet the requirements for loan forgiveness. Businesses will be able to get loan forgiveness without regard to a reduction in staffing if they are unable to hire former employees, unable to hire similarly qualified employees, or have not yet returned to full business activity because of coronavirus-related guidelines.

The biggest complaint about the PPP loan program was that it required businesses to spend 75% of the loan on payroll in order for the loan to be forgiven. For those businesses shut down due to COVID-19, this meant that businesses were essentially paying their workers to stay home and not work.

The PPPFA reduces the amount of the loan needed to be spent on payroll from 75% to 60% (increasing the amount of funds available for other expenses to 40%).

Business groups had been advocating for 50%-50%, but the new law is still an improvement. But it does not change the list of expenses eligible for forgiveness. It includes rent, mortgage payments, utilities, and interest on loans, but does not include expenses such as inventory, personal protection equipment, remote work, and other needs.

Businesses now have until the end of the year to rehire workers. The first PPP stipulated that workers had to be rehired by June 30, 2020, in order for their salaries to count towards forgiveness. Many businesses were concerned they might not be open, or not at full capacity by this date. It also adds exceptions for a reduced head count. The law says a business can still receive forgiveness on payroll amounts if it:

• Is unable to rehire an individual who was an employee of the eligible recipient on or before February 15, 2020;
• Is able to demonstrate an inability to hire similarly qualified employees on or before December 31, 2020; or
• Is able to demonstrate an inability to return to the same level of business activity as such business was operating at prior to February 15, 2020.

PPPFA extended the repayment term for the loan from two years to five year. The new law also eases repayment terms in the event loans or portions of them are not forgiven.

A business now will have five years at 1% interest to repay any portion of the loan that is not forgivable.
 
 
 

Employer retirement plans

• Employees in 401(k), 403(b), and most 457 plans can defer up to $19,000 of their compensation in 2019 (up from $18,500 in 2018). Those age 50 and older can defer up to an additional $6,000 in 2019 (the same as last year).
• Employees in a SIMPLE retirement plan can defer up to $13,000 in 2019 (up from $12,500 in 2018), and those older than 50 can defer up to an additional $3,000 in 2019 (the same as in 2018).

IRAs

The annual limit on contributions to traditional and Roth IRAs increased to $6,000 in 2019 (up from $5,500 in 2018), and people older than 50 can contribute an additional $1,000. That can be contributed to one or both, but cannot exceed those limits.

For people covered by a workplace retirement plan, the deduction for contributions to a traditional IRA is phased out for the following modified adjusted gross income (AGI) ranges:

Note that the 2019 phaseout range is $193,000 – $203,000 (up from $189,000 – $199,000 in 2018) when the person making the IRA contribution is not covered by a workplace retirement plan but is filing jointly with a spouse who is covered.

Roth IRAs

The threshold ranges of modified AGI phaseout ranges for individuals to make contributions to a Roth IRA are:

Gift taxes

The annual gift tax exclusion for 2019 remains $15,000 per person, the same as in 2018. The amount not subject to gift and estate taxes (the basic exclusion amount) for 2019 rose to $11.4 million, up from $11.18 million in 2018.

Kiddie tax

Under the kiddie tax rules, unearned income above $2,200 in 2019 (up from $2,100 in 2018) is taxed using the trust and estate income tax brackets. The kiddie tax rules apply to: (1) those under age 18, (2) those age 18 whose earned income doesn’t exceed one-half of their support, and (3) those age 19 – 23 who are full-time students and whose earned income doesn’t exceed half of their support.

Standard tax deductions

And finally, new AMT levels:

If you are self-employed, as many of our clients are, you know there are many advantages beyond just being your own boss. There are also unique challenges involved, especially how to handle taxes. Whether you’re running your own business or thinking about starting one, there are specific tax rules and opportunities that apply to you. Here is a look at the good and the bad.

The Self-Employment Tax

For those who work for an employer, payroll taxes to fund Social Security and Medicare are split between you and the employer. For the self-employed, you pay both halves – as employee and as employer. You pay this tax on all net earnings of $400 or more from self-employment.

The self-employment tax rate on net earnings (up to the Social Security threshold of $128,400 in 2018) is 15.3%, with 12.4% going to Social Security and 2.9% allotted to Medicare. Any amount over the threshold is generally subject only to the Medicare payroll tax. However, self-employment and wage income above $200,000 is generally subject to a 0.9% additional Medicare tax. (For married individuals filing jointly, the 0.9% additional tax applies to combined self-employment and wage income over $250,000. For married individuals filing separately, the threshold is $125,000.)

Self-employed people can file Form 1040 Schedule C, as either a sole proprietor, independent contractor, or statutory employee. The net income listed on Schedule C is considered “self-employment income” and must be included on Schedule SE, which is filed with your Form 1040. Schedule SE is used both to calculate self-employment tax and to report the amount of tax owed. You are allowed to deduct one-half of the self-employment tax paid (but not any portion of the Medicare surtax) when you compute the self-employment tax on Schedule SE.

Estimated Tax Payments

The self-employed need to make quarterly estimated tax payments (with IRS Form 1040-ES) to cover federal tax liability. You may have to make state estimated tax payments as well. Estimated tax payments are generally due each year on the 15th of April, June, September, and January. If you fail to make estimated tax payments on time, you may be subject to penalties, interest, and a large tax bill at the end of the tax year. So it’s important to stay on top of the quarterly payments.

Retirement Plans

If you are self-employed, you don’t have the option to contribute to an employer’s 401k or 457b plan to save for retirement. But you have other — sometimes much better — options. These plans also provide numerous tax benefits. A number of retirement plans are ideal for self-employed individuals:

• SEP IRA plan
• SIMPLE IRA plan
• Individual or Solo 401(k) plan

The type of retirement plan depends on your specific business cash flow and your circumstances and goals. In addition, if you have employees, your retirement benefits and maximums will hinge on their status.

Business Tax Deductions

With your own business, you can deduct some of the costs of starting that business, as well as all the current operating costs of running it. To be deductible, business expenses must be both ordinary (common and accepted in your field of business) and necessary (appropriate and helpful for your business).

Since business deductions will lower your taxable income, you should take advantage of all deductions that apply to you. You may be able to deduct a variety of business expenses, such as start-up costs, home office expenses, phone, and office equipment.

Healthcare Expenses and HSAs

If you qualify, you can benefit from the self-employed health insurance deduction, which enables you to deduct up to 100% of the cost of health insurance that you provide for yourself, your spouse, your dependents, and employees. In addition, if you are enrolled in a high-deductible health plan, you may be able to establish and contribute to a health savings account (HSA), which is a tax-advantaged account into which you can set aside funds to pay qualified medical expenses.

HSAs are the only savings vehicle that offers a triple play: tax deferral on contribution, tax-free growth, and tax-free withdrawals for qualifying healthcare payments. So don’t overlook these accounts if you have a high-deductible healthcare plan. But don’t go for the HSA if a high-deductible plan is not for you and your health.  (Depending on your state, HSA contributions may or may not be subject to state taxes.)
 

Retirement plans for the self-employed

If you are self-employed, you don’t have access to an employer’s 401k plan, but there are other avenues to save money for retirement. These contributions are deductible to your business and grow tax-deferred.

Several retirement plans can be used by the self-employed:

• SEP IRA plan
• SIMPLE IRA plan
• SIMPLE 401(k) plan
• “Solo” 401(k) plan

The type of retirement plan you choose depends on your business, income flows, and specific circumstances. Talk to us so we can consider the complexities and make sure you have the right plan, as there are pros and cons to each type.

Business deductions

When you have your own business, you can deduct all your current operating costs of running that business. To be deductible, expenses must be both “ordinary” (common and accepted in your field of business) and “necessary” (appropriate and helpful for your business). Keep your receipts.

Because business deductions will lower your taxable income, you should take advantage of any and all deductions! If in doubt, ask us. You can deduct a variety of business expenses, including start-up costs, home office expenses, marketing and advertising, and computer and office equipment.

Healthcare expenses

If you qualify, you may be able to benefit from the self-employed health insurance deduction, which allows you to deduct up to 100% of the cost of health insurance that you provide for yourself, your spouse, and your dependents.

In addition, if you are enrolled in a high-deductible health plan, you could establish and contribute to a health savings account (HSA), which is a highly tax-advantaged account that you can use to set aside funds to pay qualified medical expenses, either this year or many years in the future.

Contributions made to an HSA account are generally tax deductible, they grow tax-free, and can be taken out without tax when used for the qualified medical expenses. Depending on your state, HSA contributions may not be subject to state taxes.

Estimated tax payments

The self-employed must make quarterly estimated tax payments (with IRS Form 1040) to cover federal tax liability. You may have to make estimated tax payments to your state as well. Estimated tax payments are generally due each year on the 15th of April, June, September, and January. Watch out – if you don’t make estimated tax payments on time, the IRS may charge penalties and interest, which can add up to a large tax bill at the end of the tax year.

When you work for an employer, payroll taxes for Social Security and Medicare are split between you and the employer. For the self-employed, you pay the total of both halves – as both employee and employer. But then you get to deduct half the costs, for the “employer” half.

The self-employment tax rate on net earnings (up to $127,200 in 2017) is 15.3%, with 12.4% going to Social Security and 2.9% allotted to Medicare. Any amount over the earnings threshold is generally subject only to the Medicare payroll tax. However, for self-employment and wage income above $200k you pay an additional 0.9% additional Medicare tax. (For married filing jointly, the 0.9% additional tax applies to combined self-employment and wage income over $250,000.)

If you file Form 1040 Schedule C, as a sole proprietor, independent contractor, or statutory employee, the net income listed on your Schedule C is self-employment income and must be included on Schedule SE, which is filed with your Form 1040. Schedule SE is used both to calculate self-employment tax and to report the amount of tax owed.