Taxes

Don’t Do This

There is one financial transaction that I strongly discourage clients from doing and here’s why . . .

Do not withdraw from your retirement accounts early! Here are the reasons why I hear most people want to withdraw from their retirement accounts:

  1. Purchase a house
  2. Pay for expenses while unemployed
  3. As a temporary loan, with the intentions of replacing the money
  4. To pay for unforeseen expenses
  5. You need the money for (fill in the blanks)

The main reason to not do this is because it is one of the major reasons for tax problems. Aside from early withdrawal penalties, additional income taxes are accessed  on the balance, withholdings are not usually taken or not enough, and you may end up increasing your income, which sometimes pushes you into an even higher tax bracket. Once you add up all of the penalties and taxes, then the amount withdrawn can disappear by half for some.

What are some other options as you are most likely withdrawing your retirement funds because you desperately need the money and do not have a cash cushion? If you are employed, you may be able to obtain a retirement plan loan from your employer, which is not a taxable event. Alternatively, you might be able to borrow the money from your home’s equity. In some cases, you may be able to delay what you need the money for if not needed for emergency purposes.

Over the long-term, this is why I stress slowly building up a cash emergency fund. Yes, it’s boring and unexciting, but you will be glad you did when the time comes.

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5 Risks to be Aware of that Will Hurt Your Finances

There are ups and downs in life, good times and bad, and everything in between. Unfortunately, some events can hurt your finances in a significant way and may even be beyond your control. What are some of these risks to be aware of and what can you control?

Health Issues

As we become older, there are more chances of having a serious health issue. What is not commonly thought of is that family members, such as spouses, elderly parents, and children can develop health issues, both physical and mental. We have a responsibility to take care of our family, and the time spent will take time away from our job or business, which will eventually lower our earnings. While you cannot control the health of others, you can take charge of your own health and that of your children by living a healthy lifestyle.

Addictions

Do not think that you are immune to addictions. Aside from alcohol, illegal drugs, and gambling addictions, there are other destructive addictions that will ruin your finances such as prescription drugs, video games, and pornography/sex. The statistics on who has these addictions, how they start, age groups, and the impact on your brain are alarming. Be aware of these addictions and do your best to stop them before they start.

Divorce

Aside from paying legal fees, there are statistics that show that divorced women experience a prolonged loss of earnings and lower standard of living after divorce, even though various studies show that approximately 70% of women initiate divorce. Surprisingly, statistics show that a man’s earnings increase significantly after divorce. Focus on a healthy marriage and your finances will be stronger, plus some studies show that divorce does not lead to a better life.

High Income then Low Income

Inconsistent income patterns can hurt your finances in multiple ways. The first is that if your income is very high in one year, then your spending will probably increase, and once your income drops, your spending will probably not drop as quickly, if at all. Second, if you have a very good year in your business and don’t set aside a reserve for taxes, then you won’t have the money to pay your tax bill, especially if your income is lower in the following year. I have seen this situation happen repeatedly.

Expense Creep

Expenses have a way of increasing faster than your income and are hard to lower once they do. A good rule is to increase your savings in the same proportion as your income, and do not incur additional debt. This way, it does not really matter what you spend, and yes, I really did say that, because mathematically it does not matter. It’s putting first things first.

 

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More PPP Updates!

More PPP Updates:

New Forgiveness Application:

A new application to apply for loan forgiveness became available on June 16th. There is also an EZ Loan Forgiveness Application.

Payroll Costs % Decrease

Only 60% of loan proceeds must be used for payroll costs versus 75% with previously issued rules.

Maturity Date

Loans issues prior to June 5th have a maturity of 2 years, and loans issued after June 5th have a maturity of 5 years. I guess it doesn’t pay to be early sometimes!

Payroll Period

For loans received before June 5th, you can calculate eligible payroll costs using a 24 week period or elect an 8 week period. If you received loan proceeds after June 5th then use the 24 week period.

 

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A Few PPP Loan Forgiveness Tactics

You want to make sure that as much of your PPP loan is forgiven as possible. Here are a few ways you may not have thought of:

Non-Payroll Costs:

You can include interest payments on loans, the cost of telephone services, including your cell phone, faxes, VOIP services, and Internet services, fuel for your vehicles, and lease payments for any personal property, such as for vehicles and equipment as long as they were in force before 2/15/2020.

Payroll Costs

Payroll costs include wages, but also include group health care benefits, retirement plan contributions, and state and local payroll taxes.

Deadline

The application expires on October 31, 2020. Once the 8 week period is over do not hesitate to work on the application.

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PPP Loan Forgiveness Application

There is a forgiveness application that was made available from the Paycheck Protection Program and here are the highlights and definitions:

Average Full-Time Equivalent “FTE” Calculation:

To calculate FTE, you can use a simplified version to determine this by assigning a 1.0 for employees who work 40 hours or more per week and 0.5 for employees who work fewer hours.

Covered Period for Payroll Costs

The covered period is the eight-week (56 day) covered period of your PPP loan. The first day is the same date that you received the loan proceeds. For example, if loan proceeds were received on Monday, April 20, then the covered period is April 20th thru Sunday, June 14th.

Alternatively, eligible payroll costs can be calculated by using the eight-week (56 day) period that begins on the first day of the first pay period following the PPP loan disbursement date. For example, if you received your loan proceeds on Monday, April 20th and the first day of the first pay period following the PPP loan disbursement is Sunday, April 26th, then the first day is April 26th and the last day is Saturday, June 20th. This represents a 6 day difference from the first example.

Potential Forgiveness Amount

The potential forgiveness amount is the smaller of the PPP loan amount, 75% of your payroll costs, or the modified total calculation (which is the total of payroll costs, business mortgage interest, rent, and utility payments and then factors in wage reductions and FTE reductions).

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PPP Loan Forgiveness

It sounds like it would be straightforward to have your PPP loan forgiven, but that’s like saying the tax code is straightforward. Here are details and confusion on loan forgiveness:

8 Week Period

Qualified expenses have to be paid or incurred during the 8 week period after receiving the loan. Is it incurred or paid? The statute is not clear.

75%/25%

At least 75% of loan proceeds need to be spent on payroll costs. The other 25% can be used for interest costs, rent, and utilities. It looks like rent of vehicles, etc. is considered rent also. What about bonuses, and do they count? Unclear also.

Full-Time Equivalent  (FTE) Calculation

The definition of FTE is not in the statute. It is still not clear if the hours of part-timers should be combined to determined full-time equivalents.

Documentation Needed for Forgiveness

You will need to provide documentation verifying FTE’s, payroll tax filings, financial statements verifying payment of debt obligations, and any other documentation the Administrator determines necessary. What exactly does the last requirement mean? I would think that it means that you better have good bookkeeping.

Are you more confused? I am sure that more guidance will be issued, but hopefully very soon.

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COVID-19 Updates: I Received my PPP Loan, Now What?

If you received your PPP loan, what should you do now?

The main purpose of the PPP loan is to keep your employees on payroll and the proceeds should be used for:

  • Payroll costs, including payment of state and local taxes based upon compensation
  • Group healthcare benefits and retirement
  • Interest on mortgage obligations
  • Rent
  • Utilities (electricity, gas, water, telephone, or internet)

How to obtain forgiveness

  • Your loan forgiveness will be reduced if you decrease your full-time employee headcount during the covered loan period.
  • Your loan forgiveness will also be reduced if you decrease salaries and wages by more than 25% for any employee that made less than $100,000 annualized in 2019.
  • You have until June 30, 2020 to restore your full-time employment and salary levels for any changes made between February 15, 2020 and April 26, 2020.
  • 75% of the proceeds must be used towards payroll costs
  • The period to use the proceeds is the eight week period after receiving the loan

The act excludes from payroll costs the compensation of individual employees that make an annual salary of $100,000. Also, the whole point of this loan is to help pay your employees for two months plus other critical expenses during this time period.

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COVID-19 Tax and Financial Updates 04-17-2020

Tax Updates

  • Some taxpayers have started to receive their Economic Impact Payments
  • The CARES Act also provided retroactive tax law changes, such as allowing improvements to nonresidential buildings to be eligible for bonus depreciation (the ability to be expensed 100% in one year), while reducing the number of years of depreciation from 39 to 15 years
  • Business losses from 2018, 2019, and 2020 are eligible to be carried back up to five years and losses carried to 2019 and 2020 can now offset 100% of taxable income versus 80% previously

Paycheck Protection Program Info

  • The PPP loans have reached their maximum in less than two weeks, and now we have to wait to see if there will be an increase to the limitation.
  • So far, not one client has informed me that they received funds from the PPP

Adapting to the Situation

  • We hear stories from our clients and others who are making changes to their businesses to help adapt and survive through this financially. Some changes include:
    • Virtually serving clients and customers, when possible
    • Creating new services that are in demand now
    • Selling products online versus traditional retail
  • It also appears that there is a renewed sense of putting things in perspective, focusing on what is important, not living just to work, and a general sense of community. I like those changes.

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COVID-19 Tax and Financial Updates 04-10-2020

Here are the latest updates and some reminders:

Tax Updates

  • Tax deadlines: both New Jersey and New York have finally extended the tax deadline from April 15th to July 15th.
  • If you have an existing installment agreement with the IRS, payments due between April 1 and July 15, 2020 are suspended.
  • CARES Act economic impact payments: payments will begin this month and you do not have to take any action if you filed a return for 2018 or 2019.

Paycheck Protection Program Info

  • Sole proprietors, independent contractors, and self-employed persons can start applying for this loan starting today
  • The banks are completely overwhelmed with loan applications and some have temporarily stopped taking new applications, especially if your business does not have an existing relationship with the bank
  • The information required consists mainly of prior year’s payroll filings, loan applications, etc.
  • The program will be available until June 30, 2020
  • We are not sure how long it will take to receive funding, but if you have received funding, then please let us know

Existing SBA Loans

  • The SBA will automatically pay the principal, interest, and fees of current 7(a), 504, and microloans for a period of six months.
  • The SBA will also automatically pay the principal, interest, and fees of new 7(a), 504, and microloans issued prior to September 27, 2020.

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COVID-19 Tax and Financial Updates 04-03-2020

Here are the latest updates and some may have already changed after this was written:

Tax Updates

  • Tax deadlines: both New Jersey and New York have finally extended the tax deadline from April 15th to July 15th.
  • CARES Act economic impact payments: payments will begin in the next three weeks and will be distributed automatically. Who is eligible?
    • Tax filers with adjusted gross income up to $75,000 for individuals and up to $150,000 for married couples filing joint returns will receive the full payment. For filers with income above those amounts, the payment amount is reduced by $5 for each $100 above the $75,000/$150,000 thresholds. Single filers with income exceeding $99,000 and $198,000 for joint filers with no children are not eligible. Social Security recipients and railroad retirees who are otherwise not required to file a tax return are also eligible and will not be required to file a return.
    • Eligible taxpayers who filed tax returns for either 2019 or 2018 will automatically receive an economic impact payment of up to $1,200 for individuals or $2,400 for married couples and up to $500 for each qualifying child.

Paycheck Protection Program for Small Businesses

Here is a summary of the program and you can start applying for this as of today, April 3rd. You can apply through any existing SBA 7(a) lender or through any federally insured depository institution, federally insured credit union, and Farm Credit System institution that is participating. Remember, guidance is changing on an almost daily basis so this information can change and probably already has.

  • Overview: This program, also known as PPP provides funds to pay for payroll costs, interest on mortgages, rent, and utilities. The amount of the loan is generally calculated by multiplying 2.5 by your average monthly payroll costs.
  • Eligibility: Small businesses with 500 or fewer employees—including nonprofits, veterans organizations, tribal concerns, self-employed individuals, sole proprietorships, and independent contractors – are eligible. Businesses with more than 500 employees are eligible in certain industries
  • Forgiveness: Loan funds may be fully forgiven if used to pay for payroll costs, interest on mortgages, rent, and utilities within 8 weeks beginning on the date of the loan. 75% of the funds must be used for payroll to be forgiven.
  • Headcount: You must maintain or quickly rehire your employees and also maintain salary levels. Forgiveness will be reduced if headcount declines or if salaries and wages decrease.
  • Maturity: The loan has a maturity of 2 years and an interest rate of 1%.
  • The loan does not have a personal guarantee.
  • An application form is attached to see more details of what is required.

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