How often should you update your business valuation?
Any private company that issues equity-based compensation to U.S. employees (and advisors) would need to comply with Section 409A of the U.S. Internal Revenue Code, which essentially requires, among other things, that stock options and other equity incentives issues are not priced below fair market value when issued.
How often do companies need to update their 409A valuation? A new 409A valuation must be performed whenever there is a material corporate event, including:
- Issuing employee stock options or shares for the first time
- Raising a round of funding
- Turnover of significant employees in leadership positions
- Any significant change to business operations or plans
- Generating first revenue or achieving profit
- A previous 409A valuation is over one year old
Non-compliance with 409A can expose both companies and their U.S. employees (and advisors) to significant tax penalties including a 20 percent federal income tax penalty and varying state tax penalties.
For more information, contact Aspen Valuations Inc, member of Accounting in a Box
Employee Retention Credit (ERC) and What To Consider
Per a recent survey conducted by AICPA, 12% of respondents planned to take advantage of Employee Retention Credit (ERC) while 24% planned to apply for a PPP loan in 2021. Why has ERC become so popular?
There are many rules associated with the ERC. Because of its complexity and broad coverage, we do not cover all aspects of the relevant provisions in this article, but rather highlight some of the core characteristics of the program.
Tax Credit Amount:
Year 2020: Up to $5,000 per employee, per year.
Year 2021: Up to $7,000 per employee, per quarter.
Employee retention credit is refundable. It can also be used to offset future payroll taxes.
Factors to Consider:
The tax credit amount and refundability makes ERC a generous program. However, before applying for the ERC, there are factors that one should take into consideration. Some of these factors are:
– Denial of double benefits.
– Denial of wages paid to related individuals.
– Reduced deduction of wages.
– Potential higher tax bracket due to reduced deduction.
– Five-year statute of limitations (increased from three years)
Generally speaking, the Employee Retention Credit provisions were designed to help employers whose operations were suspended, either partially or fully, by a government order due to COVID-19 OR had a significant decline in gross receipts OR began carrying on business after February 15, 2020.
There are specific criteria that a business needs to meet to be eligible for the ERC.
For more information, contact Dao CPA, PC, member of Accounting in a Box.
**DISCLAIMER The information provided in this article is for informational purposes only. It may be time sensitive and changed after publication. It is indicative only and non-exhaustive. It does not constitute professional advice, nor should it be considered a substitute for advice on your specific situation from your advisors.
How small businesses can benefit from the recent COVID-related Tax Relief Acts
The Consolidated Appropriations Act, 2021 (Act) was signed into law on Sunday December 27, 2020. The American Rescue Plan Act was enacted on March 11, 2021. These two bills contain many changes and updates to the previous relief bill for COVID-19, and it would be impossible to cover all of them in one article. In this post, we aim to highlight a few of the provisions of the bills that would be of interest to small businesses:
1. Expenses paid using forgiven Paycheck Protection Program (PPP) funds are tax deductible. The Act reverses the IRS’s previous guidance and permits taxpayers to deduct the expenses paid with the PPP loan proceeds to the extent they would otherwise qualify as ordinary and necessary business expenses. Special rules apply.
2. The second round of PPP loans is available to not only first-time qualified borrowers but also to borrowers that previously received a PPP loan. Special rules apply.
3. Businesses may be able to claim Employee Retention Credit (ERC) and borrow a PPP loan.
– Prior law: A company was not eligible for the ERC if the company had accepted a PPP loan.
– New law: Now the ERC may be claimed retroactively and prospectively if the company can meet certain requirements.
– Maximum tax credit amount is increased.
– The time period for the ERC tax credit is extended through July 01, 2021.
- The American Rescue Plan Act (ARPA) enacted on March 11, 2021 extends this tax credit through December 31, 2021.
- The ARPA provides the ERC tax credit to businesses that began carrying on any trade or business after February 15, 2020. Special rules apply.
- The statute of limitations for the IRS to audit ERC claims is increased from from three to five years.
4. Economic Injury Disaster Loans (EIDL) Advances do not reduce PPP forgiveness:
– Prior law: Borrowers that received an EIDL Advance (advances between $1,000 and $10,000) had that amount subtracted from their total PPP forgiveness.
– New law: The Act now provides that EIDL Advances will not reduce PPP loan forgiveness. If you received forgiveness already and the amount of your EIDL advance was not forgiven, you can contact your lender to have the advance portion forgiven as well.
5. Charitable contribution:
– For tax year 2020, taxpayers could take the standard deduction and deduct up to $300 above-the-line for charitable contributions.
– This above-the-line charitable contribution is increased to $600 for those married filing jointly for tax year 2021.
6. 100% tax deduction for business meals provided by a restaurant.
– Prior law: Business meals are only 50% tax deductible.
– New law: Business meals provided by a restaurant are 100% tax deductible for tax years 2021 and 2022.
7. Extended employer tax credits for paid sick leave and expanded family and medical leave voluntarily provided to employees until March 31, 2021.
– Prior law: The Families First Coronavirus Response Act (FFCRA) required certain employers to provide employees with paid sick leave or expanded family and medical leave related to COVID-19, and reimbursed the employers, via refundable tax credits, dollar-for-dollar, for the cost of providing paid sick and family leave wages to the employees. FFCRA was set to expire on December 31, 2020.
-New law: The Act extended employer tax credits for paid sick leave and expanded family and medical leave voluntarily provided to employees until March 31, 2021. However, the Act did not extend employees’ entitlement to FFCRA leave beyond December 31, 2020, meaning employers will no longer be legally required to provide such leave.
- The American Rescue Plan Act (ARPA) enacted on March 11, 2021 extends this tax credit through September 30, 2021.
8. Monthly loan payments on existing and new SBA loans may qualify for payment by the Federal Government (i.e., no payment required by the business) for the first 6-9 months of 2021.
For more information, reach out to one of our members today!
**DISCLAIMER The information provided in this article is for informational purposes only. This list is indicative only and non-exhaustive. It does not constitute professional advice, nor should it be considered a substitute for advice on your specific situation from your advisor.
Are Expenses Paid With PPP Loan Proceeds Tax Deductible?
***Update*** Expenses paid with forgiven Paycheck Protection Program (PPP) loan proceeds are tax deductible per the Consolidated Appropriations Act, 2021 that was signed into law on December 27, 2020 . This Act reverses previous guidance from the Treasury and IRS.
We will post another article to provide more details.
Great news if you borrowed $50,000 or less in PPP Loans!
The federal government announced yesterday major changes to the current PPP loan forgiveness process for those who borrowed $50,000 or less in PPP loans. The borrowers can now use a simpler application, Form 3508S. The changes include:
- The new application doesn’t require borrowers to show how they calculated their loan forgiveness amount.
- It appears not to reduce the forgiveness amount by an Economic Injury Disaster Loan advance (EIDL) received of up to $10,000.
- The total amount eligible for forgiveness is not subject to a reduction if a recipient reduced the salaries or headcount of its employees.
These are not applicable to those who borrowed more than $50,000.
Compiled by Dao CPA PC Staff from SBA publications
Tax credits related to COVID-19 for small businesses
**UPDATE** The Consolidated Appropriations Act, 2021, H.R. 133 was signed into law on December 27th. Among many tax provisions, the bill also extends the refundable payroll tax credits for paid sick and family leave voluntarily provided by employers through the end of March 2021. (It was previously set to end 12/31/2020). However, the Act did not extend employees’ entitlement to FFCRA leave beyond December 31, 2020, meaning employers will no longer be legally required to provide such leave.
The Families First Coronavirus Response Act (FFCRA or Act) requires certain employers to provide employees with paid sick leave or expanded family and medical leave related to COVID-19, and reimburse the employers, via refundable tax credits, dollar-for-dollar, for the cost of providing paid sick and family leave wages to the employees.
There are 3 different types of credit:
- Employee Sick Leave – unable to work (including telework) because of Coronavirus quarantine, self-quarantine or has Coronavirus symptoms and is seeking a medical diagnosis. The credit is at the employee’s regular rate of pay, up to $511 per day and $5,110 in total up to 80 hours. The employer is also eligible for credits for qualified health plan expenses for the employee and the employer’s portion of Medicare tax expenses related to the qualified wages.
- Care Sick Leave – 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. The credit is at 2/3 of the employee’s regular rate of pay, up to $200 per day and $2,000 in total, for up to 80 hours. The employer is also eligible for credits for qualified health plan expenses for the employee and the employer’s portion of Medicare tax related to the qualified wages.
- Expanded Family and Medical Leave – Up to an additional 10 weeks at 2/3 of the employee’s regular pay, up to $200 per day and $10,000 in total where an employee, who has been employed for at least 30 calendar days, is unable to work due to a bona fide need for leave to care for a child whose school or child care provider is closed or unavailable for reasons related to COVID-19.
How will employers receive the credit?
Employers can be immediately reimbursed for the credit by reducing their required deposits of payroll taxes. 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.
Compiled by Dao CPA PC Staff from IRS and DOL publications
Why high-net-worth families may benefit from Covid-19?
This year, COVID-19 has caused tremendous disruptions to our lives and businesses. Companies have to pivot their operations and put more efforts in planning, not only for short-term but also long-term perspectives. Family businesses start to think hard about their intended transition from the founder generation to their children.
At Aspen Valuations, during the last few months, we have seen a significant increase in business valuation demand for the purposes of succession and tax planning. We have also seen a drop in value for many businesses. Depending on the specific sectors, some companies suffer significant operating losses in the recent months, resulting in a material drop in their current value. During this time, many family businesses execute an estate freeze. In general terms, an estate freeze is used to transfer the control of a privately-owned business between generations. If your business value is greatly reduced, this will allow the locking in of the low value today, resulting in lower capital gain taxes on death. This will also be a good planning opportunity for business owners that plan to retire outside of Canada.
A combination of a lower business value and unprecedentedly low prescribed interest rates set by governments (i.e. IRS or CRA) creates an opportunity to gift or sell shares to family members. For example, in Canada, an inactive family member would need to acquire a minimum of 10% of voting shares in a company in order to receive dividends from the company as income splitting without being taxed under the Tax On Split Income (TOSI) rules.
In addition, if a U.S. corporation or subsidiary is involved, gifting now when business value is low can help business owners take advantage of the federal exemption from estate and gift tax which is currently capped at $11.58 million for individuals under the Tax Cuts and Jobs Act in 2017. This exemption cap is set to be reverted back to $5 million by December 31, 2025 or could be sooner depending on the coming administration.
By Aspen Valuations, Published July 06, 2020. Click here to book a consultation.
PPP Flexibility Act
The much anticipated bill, Paycheck Protection Program Flexibility Act of 2020 was signed into law on Friday, June 5th, 2020. The new law provides for greatly expanded flexibility for PPP debt forgiveness by 1) extending the period during which eligible costs will be forgiven, 2) relaxing restrictions with respect to non-payroll costs, 3) extending the deadline to rehire employees, 4) increasing the loan repayment period for any residual loan value that is not forgiven, 5) enhancing payroll tax deferral options, and 6) providing additional benefits as well.
The changes include:
* 24 weeks to use the funds, up from eight weeks
* 60% of funds must be used for payroll to have the loan forgiven completely, down from 75%.
* Dec. 31 deadline to rehire workers and use funds to qualify for loan forgiveness, extended from June 30.
* Five years to repay, up from two years.
For more information, please contact Robert Johnson.
Click here to see the full bill.
Status of Your Stimulus Payment
Millions of Americans have already received their stimulus payments authorized by the Coronavirus Aid, Relief, and Economic Security Act (CARES Act). The IRS continues to calculate and automatically send the payments to most eligible individuals, however some may have to provide additional information to the IRS to get their payments.
You may be eligible to receive a stimulus payment if you:
– Are a U.S. citizen, permanent resident or qualifying resident alien;
– Cannot be claimed as a dependent on someone else’s return;
– Have a Social Security number (SSN) that is valid for employment (valid SSN); and
– Have adjusted gross income below an amount based on your filing status and the number of your qualifying children.
Exception: If either spouse is a member of the U.S. Armed Forces at any time during the taxable year, then only one spouse needs to have a valid SSN.
Should you amend your 2018’s tax return?
The Coronavirus Aid, Relief, and Economic Security (CARES) Act was signed into law on March 27, 2020 as part of a $2.2 trillion aid package.
Some parts of the bill do not require you to take any action such as the ‘stimulus check’ for eligible individuals ($2,400 for joint filers, $500 per qualifying child). However, there are several provisions that apply retroactively, that would require actions such as amending previous tax returns, which could result in significant tax refunds for some taxpayers.
Here are two of the retroactively applicable provisions under the CARES Act that we want to bring to your attention:
- The bill temporarily repeals the 80% income limitation for net operating loss deductions for years beginning before 2021. For losses arising in 2018, 2019, and 2020, a five-year carryback is allowed.
- The bill also makes technical corrections regarding qualified improvement property (QIP) applying retroactively to 2018. QIP is now eligible for 100% bonus depreciation. If your business incurred costs on improving a business property and did not deduct all of the costs in 2018, consult with your tax advisor about this provision. Click here to see the full bill.
For more information, please contact Dao CPA, P.C.