Tax Credits for Self-Employed Individuals

The FFCRA provides for sick leave and family leave refundable credits against the self-employment tax. The sick leave credit provision for self-employed individuals allows an income tax credit for a qualified sick leave equivalent amount. The qualified sick leave equivalent amount equals the number of days (up to 10) that the self-employed individual can’t perform services and would have been entitled to receive paid sick leave under the EPSLA if he were an employee, multiplied by the lesser of two amounts, based on the circumstance of the leave. The credit is limited to the lesser of 100% of average daily self-employment income, or $511 per day if the self-employed individual is (1) subject to a federal, state, or local quarantine or isolation order related to COVID-19; (2) advised by a health care provider to self-quarantine due to coronavirus concerns; or (3) experiencing coronavirus symptoms and seeking a medical diagnosis. The credit is limited to the lesser of 67% of average daily self-employment income, or $200 per day for a self-employed individual who is caring for another individual described in item 1 or 2, caring for a son or daughter whose school or place of care is closed or child care provider is unavailable, or because the self-employed individual is experiencing a “substantially similar condition” specified by the government. The family leave credit provision for self-employed individuals allows an income tax credit for a qualified family leave equivalent amount. The qualified family leave equivalent amount equals the number of days (up to 50) that the self-employed individual can’t perform services and would have been entitled to receive paid leave under the EFMLEA if he were an employee, multiplied by the lesser of 67% of average daily self-employment income, or $200. The credits for self-employed individuals apply only to days occurring during the period beginning on April 1, 2020.

Employee Retention Credit

A refundable payroll tax credit is available for 50% of wages paid by eligible employers to certain employees during the COVID-19 crisis. The credit is available to (1) employers, including nonprofits, whose operations were fully or partially suspended due to a COVID-19-related shut-down order and (2) employers whose gross receipts declined by more than 50% when compared to the same quarter in the prior year. The credit is based on qualified wages paid to employees. For employers with an average number of full-time employees during 2019 greater than 100, qualified wages are wages paid to employees when they are not providing services due to the COVID-19-related circumstances described earlier. For eligible employers with an average number of full-time employees during 2019 of 100 or less, all employee wages qualify for the credit, whether the employer is open for business or subject to a shut-down order. However, wages do not include those taken into account for purposes of the (1) payroll credits for required paid sick leave or required paid family leave under the FFCRA or (2) employer credit for paid family and medical leave (IRC Sec. 45S). In addition, no credit is available with respect to an employee for any period for which the employer is allowed a work opportunity credit under IRC Sec. 51 with respect to that employee. The credit applies to the first $10,000 of compensation, including health benefits, paid to an eligible employee after March 12, 2020 and before January 1, 2021. The Secretary of the Treasury is granted authority to advance payments to eligible employers and to waive applicable penalties for employers that do not deposit applicable payroll taxes in anticipation of receiving the credit. The credit is not available to employers receiving Small Business Interruption Loans (CARES Act Sec. 2301).

Student Loan Payments By Employers

This new provision enables employers to provide a student loan repayment benefit to employees on a tax-free basis. An employer may contribute up to $5,250 annually toward an employee’s student loans, and the payment will be excluded from the employee’s income. The $5,250 cap applies to both the new student loan repayment benefit as well as other educational assistance (such as tuition, fees, and books) provided by the employer under current law. (such as under IRC Sec. 127.) The provision applies to any student loan payments made by an employer on behalf of an employee, whether paid to a lender or to the employee, after the CARES Act’s March 27, 2020 enactment date and before January 1, 2021. To prevent a double benefit, student loan repayments for which the exclusion is allowable cannot be deducted under IRC Sec. 221 (the limited deduction provision for student loan interest)

Retirement Plan Distributions – A Change in the Rules

If your retirement plan rules allow, the CARES Act waives the 10% early withdrawal penalty for distributions up to $100,000 from IRAs and defined contribution qualified retirement plans [such as 401(k) plans] made for coronavirus-related purposes on or after January 1, 2020 and before December 31, 2020. Income attributable to these distributions will be subject to tax over three years, and the taxpayer may recontribute the funds to an eligible retirement plan within three years after receipt without regard to that year’s cap on contributions. Additionally, defined contribution plans are permitted to allow plan loans up to $100,000, and repayment of existing plan loans is extended for employees who are affected by the coronavirus. A coronavirus-related distribution is any distribution made to an individual (1) who is diagnosed with COVID-19; (2) whose spouse or dependent is diagnosed with COVID-19; or (3) who experiences adverse financial consequences as a result of being quarantined, furloughed, laid off, having work hours reduced, being unable to work due to lack of child care due to COVID-19, closing or reducing hours of a business owned or operated by the individual due to COVID-19, or other factors as determined by the IRS.

Required Minimum Distributions are not required in 2020

If you don’t want to take a Required Minimum Distribution from your IRA/401K/403B in 2020, then you don’t have to. Nothing special to do – just don’t take the money out of your retirement plan.
You still should consider making Qualified Charitable Distributions from your retirement plan (giving money directly from the retirement plan to charity) since this is one of the only ways to take money out of these plans tax-free.
Since you are not required to take RMDs, you will have a lower overall income and might be in the lowest tax bracket of the remainder of your life and might want to consider rolling money from your retirement plan to a Roth IRA this year (voluntarily paying tax on the retirement distribution in a low-tax year to avoid ever having to pay tax on the money or the earnings again). Ask us if you are a good candidate for this.

Little-known employee gifting rules

• Because of the COVID-19 Federally Declared Disaster, employers may gift amounts to their employees and not withhold payroll taxes AND still deduct the gifts – this can only be done during Federally Declared Disasters. Thus, beginning immediately, employers may provide tax-free payments to employees — while still claiming a full deduction for the payments (and not report gifted amounts on the employee’s W-2s). Some care should be taken with this (there is very little guidance on how this works in reality):

• Enacted in 2002 (as a result of the 9/11 events), but unused until now, a reasonable interpretation of the statutory text, reveals that, at a minimum, the following payments from employer to employee should be treated as deductible to the employer and tax-free to the employee, provided the expenses relate to the COVID-19 pandemic:

o Medical expenses of the employee that are not compensated for by insurance (for example, the employees deductible and out-of-pocket expenses);

o The cost of over-the-counter medications and hand sanitizer;

o Funeral costs of an employee or a member of an employee’s family;

o The costs associated with enabling an employee to work from home throughout the pandemic, including the cost of a computer, cell phone, printer, supplies, and even increased utility costs of the employee.

o The cost of an employee’s child care or tutoring for family members that are not permitted to attend school throughout the pandemic;

Paying Investment Expenses in your Taxable Brokerage Accounts?

Assume you have a brokerage account that is not a Roth, IRA, or 401K that charges investment-management fees. Those fees can no longer be deducted on your individual tax return (this was a 2018 law change). Instead of paying investment-management fees from your taxable brokerage account, direct your advisor to withdrawal the investment management fees from your IRA or 401K account. This will reduce the amount in those accounts which will someday be taxed, thus providing a back-door method to deduct those fees.

Do your Employee’s Spend Money to Perform Their Job?

Most employees incur expenses to do their jobs. The employee might drive for their job or use their cell phone or home internet or maintain a home office. If you don’t reimburse your employee’s expenses, then the employee has no way to deduct those un-reimbursed expenses on their individual tax returns (those deductions go wasted). Instead, consider reducing your employee’s wage and replacing that reduction with a reimbursement. Example: If your employee earns $50,000 and incurs $5,000 of un-reimbursed expenses (driving, cell phone, internet, supplies, home office), then you pay FICA tax on $50,000 and your employee pays tax on $50,000 and can’t deduct their $5,000 of expenses. If you instead pay that employee $45,000 as a wage and $5,000 of reimbursement, then the employee is still making $50,000, but you pay FICA tax on $45,000 (save $383) and the employee pays tax on $45,000 instead of $50,000 (saving the employee around $1,200 of tax/year).

For Those over 70 ½ who Donate to Charity

If you are over age 70 ½, then you are forced to withdrawal money from your IRA each year and include that amount in your taxable income. Most retirees don’t itemize since their itemized deductions (state and local taxes, mortgage interest, and donations) don’t exceed the $27,000 standard deduction – thus their donations don’t save them any tax. The solution: If you donate to charity directly from your IRA, then you don’t have to include that donated amount as income on your tax return…so in a round-about way, you get to deduct that donation (i.e., your taxable income doesn’t include the amount you donated to charity directly from your IRA).

Need a Large Business Deduction This Year?

If you arrive at the end of the year and need a business or rental deduction to make sure that you don’t creep into the next tax bracket, then consider pre-paying 2020 expenses in 2019. You can pre-pay up to 1 year’s worth of 2020 expenses in 2019 and take a deduction for that pre-payment in 2019. You can pre-pay 12 months of phone bills, utilities, rent, supplies, insurance, etc. Remember, you get a deduction for what you charge on your credit card in 2019 on your 2019 return even if you don’t pay off the credit card until a future year.

Want Triple Tax Savings?

Health Savings Accounts (HSAs) are, in our opinion, the best tax-savings vehicle in existence. 1. You can deduct the amount you contribute (up to a maximum deduction of $9,000/year). 2. The money in the HSA grows tax-free. 3. In addition, you don’t have to pay tax when withdrawing the money from the HSA. There is no other tax-savings vehicle that provides all 3 of these benefits. Traditional IRAs and Traditional 401Ks only allow a deduction of contributions but not the other 2 benefits. Roth IRAs and Roth 401Ks only allow tax free earnings and tax-free withdrawals, but not deductible contributions. If you qualify, be sure to contribute the maximum each year to your HSA.