September 2020 - Ullrich Delevati

September 10, 2020

Employees – who work for tips. If you received $20 or more in tips during August, report them to your employer. You can use Form 4070.

September 15, 2020

Individuals – Make a payment of your 2020 estimated tax if you are not paying your income tax for the year through withholding (or will not pay in enough tax that way). Use Form 1040-ES. This is the third installment date for estimated tax in 2020.

Employers – Nonpayroll withholding. If the monthly deposit rule applies, deposit the tax for payments in August.

Employers – Social Security, Medicare, and withheld income tax. If the monthly deposit rule applies, deposit the tax for payments in August.

S Corporations – File a 2019 calendar year income tax return (Form 1120S) and pay any tax due. This due date applies only if you timely requested an automatic 6-month extension. Provide each shareholder with a copy of Schedule K-1 (Form 1120S) or a substitute Schedule K-1.

Partnerships – File a 2019 calendar year return (Form 1065). This due date applies only if you were given an additional 6-month extension. Provide each partner with a copy of Schedule K1 (Form 1065) or a substitute Schedule K1.

Corporations – Deposit the third installment of estimated income tax for 2020. A worksheet, Form 1120-W, is available to help you make an estimate of your tax for the year.

Does your business receive large amounts of cash or cash equivalents? You may be required to submit forms to the IRS to report these transactions.

Filing requirements

Each person engaged in a trade or business who, in the course of operating, receives more than $10,000 in cash in one transaction, or in two or more related transactions, must file Form 8300. Any transactions conducted in a 24-hour period are considered related transactions. Transactions are also considered related even if they occur over a period of more than 24 hours if the recipient knows, or has reason to know, that each transaction is one of a series of connected transactions.

To complete a Form 8300, you will need personal information about the person making the cash payment, including a Social Security or taxpayer identification number.

You should keep a copy of each Form 8300 for five years from the date you file it, according to the IRS.

Reasons for the reporting

Although many cash transactions are legitimate, the IRS explains that “information reported on (Form 8300) can help stop those who evade taxes, profit from the drug trade, engage in terrorist financing and conduct other criminal activities. The government can often trace money from these illegal activities through the payments reported on Form 8300 and other cash reporting forms.”

What’s considered “cash”

For Form 8300 reporting, cash includes U.S. currency and coins, as well as foreign money. It also includes cash equivalents such as cashier’s checks (sometimes called bank checks), bank drafts, traveler’s checks and money orders.

Money orders and cashier’s checks under $10,000, when used in combination with other forms of cash for a single transaction that exceeds $10,000, are defined as cash for Form 8300 reporting purposes.

Note: Under a separate reporting requirement, banks and other financial institutions report cash purchases of cashier’s checks, treasurer’s checks and/or bank checks, bank drafts, traveler’s checks and money orders with a face value of more than $10,000 by filing currency transaction reports.

E-filing and batch filing

Businesses required to file reports of large cash transactions on Form 8300 should know that in addition to filing on paper, e-filing is an option. The form is due 15 days after a transaction and there’s no charge for the e-file option. Businesses that file electronically get an automatic acknowledgment of receipt when they file.

The IRS also reminds businesses that they can “batch file” their reports, which is especially helpful to those required to file many forms.

Setting up an account

To file Form 8300 electronically, a business must set up an account with FinCEN’s BSA E-Filing System. For more information, interested businesses can also call the BSA E-Filing Help Desk at 866-346-9478 (Monday through Friday from 8 am to 6 pm EST) or email them at BSAEFilingHelp@fincen.gov. Contact us with any questions or for assistance.

If you’re a partner in a business, you may have come across a situation that gave you pause. In a given year, you may be taxed on more partnership income than was distributed to you from the partnership in which you’re a partner.

Why is this? The answer lies in the way partnerships and partners are taxed. Unlike regular corporations, partnerships aren’t subject to income tax. Instead, each partner is taxed on the partnership’s earnings — whether or not they’re distributed. Similarly, if a partnership has a loss, the loss is passed through to the partners. (However, various rules may prevent a partner from currently using his share of a partnership’s loss to offset other income.)

Separate entity

While a partnership isn’t subject to income tax, it’s treated as a separate entity for purposes of determining its income, gains, losses, deductions and credits. This makes it possible to pass through to partners their share of these items.

A partnership must file an information return, which is IRS Form 1065. On Schedule K of Form 1065, the partnership separately identifies income, deductions, credits and other items. This is so that each partner can properly treat items that are subject to limits or other rules that could affect their correct treatment at the partner’s level. Examples of such items include capital gains and losses, interest expense on investment debts and charitable contributions. Each partner gets a Schedule K-1 showing his or her share of partnership items.

Basis and distribution rules ensure that partners aren’t taxed twice. A partner’s initial basis in his partnership interest (the determination of which varies depending on how the interest was acquired) is increased by his share of partnership taxable income. When that income is paid out to partners in cash, they aren’t taxed on the cash if they have sufficient basis. Instead, partners just reduce their basis by the amount of the distribution. If a cash distribution exceeds a partner’s basis, then the excess is taxed to the partner as a gain, which often is a capital gain.

Here’s an example

Two individuals each contribute $10,000 to form a partnership. The partnership has $80,000 of taxable income in the first year, during which it makes no cash distributions to the two partners. Each of them reports $40,000 of taxable income from the partnership as shown on their K-1s. Each has a starting basis of $10,000, which is increased by $40,000 to $50,000. In the second year, the partnership breaks even (has zero taxable income) and distributes $40,000 to each of the two partners. The cash distributed to them is received tax-free. Each of them, however, must reduce the basis in his partnership interest from $50,000 to $10,000.

Other rules and limitations

The example and details above are an overview and, therefore, don’t cover all the rules. For example, many other events require basis adjustments and there are a host of special rules covering noncash distributions, distributions of securities, liquidating distributions and other matters.

We are pleased to announce exciting changes to our firm’s Partnership. As our founder, Marcus Ullrich, passes the torch of full-time Managing Partner role to Partner, Anthony Delevati, two senior staff members, Lisa Martinez Dunham and Vivian Plank, will join as Partners. Marcus Ullrich will continue to serve his present clients as an active Partner, and Jim Engstrom will remain as a Principal for the West Sacramento Office.

This expansion of our Partnership strengthens our ability to provide you and our growing client base with the exemplary service and uncompromising quality we’re known for. We are well-poised for the future, and we look forward to growing more with our community.

If your business was fortunate enough to get a Paycheck Protection Program (PPP) loan taken out in connection with the COVID-19 crisis, you should be aware of the potential tax implications.

PPP basics

The Coronavirus Aid, Relief and Economic Security (CARES) Act, which was enacted on March 27, 2020, is designed to provide financial assistance to Americans suffering during the COVID-19 pandemic. The CARES Act authorized up to $349 billion in forgivable loans to small businesses for job retention and certain other expenses through the PPP. In April, Congress authorized additional PPP funding and it’s possible more relief could be part of another stimulus law.

The PPP allows qualifying small businesses and other organizations to receive loans with an interest rate of 1%. PPP loan proceeds must be used by the business on certain eligible expenses. The PPP allows the interest and principal on the PPP loan to be entirely forgiven if the business spends the loan proceeds on these expense items within a designated period of time and uses a certain percentage of the PPP loan proceeds on payroll expenses.

An eligible recipient may have a PPP loan forgiven in an amount equal to the sum of the following costs incurred and payments made during the covered period:

Payroll costs;
Interest (not principal) payments on covered mortgage obligations (for mortgages in place before February 15, 2020);
Payments for covered rent obligations (for leases that began before February 15, 2020); and
Certain utility payments.

An eligible recipient seeking forgiveness of indebtedness on a covered loan must verify that the amount for which forgiveness is requested was used to retain employees, make interest payments on a covered mortgage, make payments on a covered lease or make eligible utility payments.

Cancellation of debt income

In general, the reduction or cancellation of non-PPP indebtedness results in cancellation of debt (COD) income to the debtor, which may affect a debtor’s tax bill. However, the forgiveness of PPP debt is excluded from gross income. Your tax attributes (net operating losses, credits, capital and passive activity loss carryovers, and basis) wouldn’t generally be reduced on account of this exclusion.

Expenses paid with loan proceeds

The IRS has stated that expenses paid with proceeds of PPP loans can’t be deducted, because the loans are forgiven without you having taxable COD income. Therefore, the proceeds are, in effect, tax-exempt income. Expenses allocable to tax-exempt income are nondeductible, because deducting the expenses would result in a double tax benefit.

However, the IRS’s position on this issue has been criticized and some members of Congress have argued that the denial of the deduction for these expenses is inconsistent with legislative intent. Congress may pass new legislation directing IRS to allow deductions for expenses paid with PPP loan proceeds.

PPP Audits

Be aware that leaders at the U.S. Treasury and the Small Business Administration recently announced that recipients of Paycheck Protection Program (PPP) loans of $2 million or more should expect an audit if they apply for loan forgiveness. This safe harbor will protect smaller borrowers from PPP audits based on good faith certifications. However, government leaders have stated that there may be audits of smaller PPP loans if they see possible misuse of funds.

Tax Deadlines: September 2020

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