Tag Archive for: CARES

EO Accelerator

EO Lunch & Learn: Minimize the Risk of an IRS or California Tax Audit Before Filing Your Tax Return

“The hardest thing in the world to understand is the income tax.” — Albert Einstein

Founder, John Milikowsky presents to the EO Accelerator group on common red flags, tax filing do’s and don’ts and your AB-5 1099 contractor verifications.

“The hardest thing in the world to understand is the income tax.” — Albert Einstein, physicist

John Milikowsky is the Founder and Managing Attorney at Milikowsky Tax Law.

Before founding his practice, John was a small-business owner for 20 years. Having been in the small business owner’s shoes, John is passionate about advocating for business owners and has defended over 300 companies in tax audits and other tax matters before IRS and California tax agencies. John is especially proud of his proposal to IRS, U.S. treasury, and Congressional Sub Committee staff members to abate penalties for taxpayers.

In 2016, John Milikowsky was voted the top three tax attorneys in San Diego by the Union Tribune Reader’s Poll. On his free time, John enjoys spending time with his wife and three kids and engaging in sports including cycling and competitive swimming.

THREE THINGS TO DO Before filing your tax return:

Verify business income: Pull your bank statements & complete a bank deposit analysis to verify income.
Review your general ledger: go through each expense category – verify expenses were properly categorized and personal expenses are not being deducted (i.e. artwork for the office or personal vacation).
Identify complex transactions: review IRS’ website for listed or reportable transactions. You may need to disclose the specific transaction on a separate form.

Who & What is IRS currently focusing on?

High earners, non-filers
Tax shelters

CASE STUDY 1

Family owned operating company opens two new LLCs and establishes a pension in each LLC.
A family business operated a legitimate manufacturing company (an S corp). Their CPA advised them to open a two additional LLCs (a management company and a finance company) to allow the owners to create two pensions where each LLC would receive large payments each year from the main operating company and take a deduction to avoid paying any income tax.

IRS believed this was a tax shelter and opened a 5 year audit. They also assessed approximately $2M in taxes and penalties/interest.
To defend the company and two shareholders, we had to establish two things: 1) the two companies and their respective pensions were not set up purely for tax purposes – in other words, their must be a real “business purpose” to establish two companies and two pensions. 2) The two pensions (in how they were established and funded) were legitimate.

How IRS selects a return for audit

IRS created and uses an algorithm called “Discriminant Function System” (DIF) score that rates the potential for change, based on past IRS experience with similar returns.

The Unreported Income DIF (UIDIF) score rates the return for the potential of unreported income.

OTHER COMMON MISTAKES:

Unreported income (BDA may reveal additional income).
Reporting an amount for “Commissions and Fees” or “Contract Labor” where no 1099s were issued by your company

RED FLAGS that you are under criminal investigation:

You are contacted in person or by phone by an IRS Criminal Investigator (CI).
You received large amounts of cash or wires into your company bank account. Then IRS opens an audit and the auditor is part of the “Abusive Transactions & Technical Issues” group or “Fraud Unit.”
The audit opens an audit and then goes dark or the auditor starts interviewing your neighbors and business associates.
IRS opens an audit that covers 5 years.

California AB-5 Independent Contractor Test:

Borrello 13 factors (CA and many other states)
20 factor test (IRS)
California Law changed in January 1, 2020: AB5 (requires satisfying all 3 elements):
1. Hiring company has no directed control over the worker.
2. Worker performs work outside of the hiring company’s usual course of business (core business function).
3. Worker is engaged in an independent trade/business and actually provides services in that trade/business.

CA Estimates additional taxes from AB5 = $7 BILLION

Before hiring 1099 contractors:

Verify they have a valid trade or business.
We have a product called www.Clear1099.com that produces business reports for companies to verify the elements of a true business and the services offered (essentially elements B and C of the ABC test).

3 things not to do:

Do not convert 1099 contractors mid-year (or mid-quarter) because the same worker will get both a 1099 and W2 for that year.
Do not have 1099 contractors performing the same work as employees.
Do not have 1099 contractors performing “licensed work” without a license i.e. construction.

Tips to respond to an EDD auditor

Review all your 1099s and accounting records (payments to third-parties for services) to confirm whether each individual satisfies AB5 (or Borrello – pre 2020) as an 1099 contractor.

TIPS TO MINIMIZE Taxes:

Analyze whether a C corporation or S corporation is a better structure.
Having an LLC – owners working for the company do not require to be on payroll.
Establish a company retirement plan to defer income.

How to resolve an IRS tax balance

Owing Back Taxes: How to resolve an IRS tax balance:

Does your business owe taxes to IRS – payroll taxes, income taxes?
Did IRS file a federal tax lien against your business that is preventing you from getting a loan?

Founder, John Milikowsky discusses your options:

You may have options to resolve your balance:

1. Payment Plans

IRS generally has 10 years to collect taxes once a return is filed. The time can be extended for numerous reasons such as when you file for bankruptcy or when the IRS is legally prevented from collecting. In cases where a payment plan is an option, it is generally spread out over 72 months unless the IRS has less than 6 years to collect.

2. Offers in Compromise (OIC)

An Offer in Compromise is essentially asking IRS to settle for a lower amount based on financial hardship or based on a legal challenge. For an OIC based on a financial hardship, you will have to provide financial records (bank statements, W2s wage statements, business income tax returns if you own a business as well as proof of your expenses that are being paid such as mortgage statements and utility bills). Then, based on the information given, IRS will determine if you are financially unable to full pay your taxes within the remaining years IRS has to collect from you.

At Milikowsky Tax Law, we are former business owners and key managers and understand where to find crucial information to clearly describe to IRS your financial hardship or circumstances to support your request for a payment plan or OIC. We perform a detailed review of your accounting information and use data analytics to establish financial records that explain why your business may not be able to pay its taxes in full.

We have represented hundreds of businesses in tax law controversies with IRS, EDD and CSLB and have depth of experience and a long history of positive outcomes in working with businesses to resolve tax law issues.

Attorney sharing legal advice

What Tax Credits and Changes Could Affect Your Businesses 2020 Tax Filing?

The U.S government works to pass legislation to help reduce the damage caused by the shut down of our global economy in the face of this novel coronavirus. The CARES Act and the FFRCA are in place to help small businesses like yours to stay afloat during this time. Both of these acts include tax credits and changes to help all small businesses gain more cash flow. The U.S Chamber of Commerce details the nine tax credits and changes you will see in the CARES Act and the FFRCA below:

Coronavirus Small Business Tax Changes: Everything You Need to Know

Coronavirus stimulus bills passed by Congress in 2020 include significant financial benefits to small businesses, including tax credits that offer immediate relief.

In the wake of the coronavirus pandemic, the U.S. government has responded by passing legislation to offer your small businesses financial and tax relief. Both the Coronavirus Aid, Relief, and Economic Security (CARES) Act and the Families First Coronavirus Response Act (FFCRA)specifically include provisions to help businesses with new tax credits and changes.

 

Here are nine tax credits or changes for small businesses that are affected by the COVID-19 crisis, you need to be aware of in 2020.

Employee Retention Tax Credit

One of the most important new tax credits is the Employee Retention Tax Credit (ERTC), which has been designed to encourage businesses to keep on employees. Businesses like yours are eligible for an employee retention tax credit if business operations were fully or partially suspended due to a COVID-19 shut-down order or if gross receipts declined by more than 50% compared to the same quarter in the prior year. 

Eligible businesses can get a refundable 50% tax credit on wages up to $10,000 per employee. The credit can be obtained on wages paid or incurred from March 13, 2020, through December 31, 2020.

In order to claim the ERTC, eligible employers will report total qualified wages and related health insurance costs on their quarterly tax returns (via Form 941) beginning in the second quarter of 2020. The ERTC credits can be taken against the employer’s share of Social Security tax but the excess is refundable. To speed things up, employers may choose to hold on to employment taxes that would have otherwise been deposited.

Tax credit for sick and family leave

The FFCRA made big changes to sick and family leave for small businesses that have less than 500 employees. Those businesses will be required to provide paid sick leave and paid family leave to employees for specific reasons related to the Coronavirus. To reimburse employers for those expenses, the CARES Act provides a refundable tax credit equal to 100% of the amount paid out for paid sick leave and paid family leave. 

 

This tax credit is paid every quarter. However, to help small businesses with cash flow, Treasury has said that businesses can hold onto the employer portion of payroll taxes that they would normally deposit and use that to pay for leave. At the end of the quarter, if the Treasury owes an employer additional reimbursements it will be paid at that time. An employer will not be penalized for failure to deposit payroll taxes if that was done in anticipation of a tax credit. 

Delayed payroll tax payments

Businesses and self-employed individuals can also delay payroll tax payments due to the CARES Act. These payments, which are Social Security tax and deposits owed for 2020, can instead be deferred and paid over the next two years. Fifty percent must be paid by the end of 2021 and 50% must be paid by the end of 2022. (Important note: The ability to defer these taxes generally does not apply to a business that receives a Paycheck Protection Program (PPP) loan. However, businesses can participate in the new PPP and also take advantage of new provisions allowing them to defer payroll taxes, under certain conditions. The IRS has provided that businesses can take advantage of both programs up until the point at which they have any loans forgiven – then the deferral ends.)

Charitable gift deduction expansion

The CARES Act has expanded deductible charitable cash gifts by corporations. Before the Act, charitable contributions made by a corporation could not exceed 10% of taxable income, but this has now been increased to 25%. This change is not automatic and must be elected.

Net operating loss changes

Businesses that have net operating losses (NOLs) have some limitations relaxed because of the CARES Act. If your business had an NOL in the tax years 2018, 2019, or 2020, 100% of that NOL can be now be carried back up to five years. NOLs from 2018, 2019, and 2020 may be carried forward up to 20 years, but will be subject to the 80% limitation. This may improve cash flow and liquidity for some businesses, including pass-through businesses and sole proprietors.

“Businesses that were due to receive AMT credits at the end of 2021 can instead claim a refund now, in order to improve cash flow.”

Business loss deduction changes

The cap on the deduction for business losses on individual returns was halted in the CARES Act. Under the 2017 tax reform law, business losses that exceeded a $500,000 threshold for couples and $250,000 for individuals were nondeductible, with any excess carried forward. The CARES Act suspends this loss limitation rule for 2018 through 2020, so business owners who had losses limited in 2018 and 2019 could file amended returns to receive refunds.

Corporate AMT credits

The corporate alternative minimum tax (AMT) was repealed in the 2017 tax reform law, but corporate AMT credits were made available as refundable credits over several years, ending in 2021.

Businesses that were due to receive AMT credits at the end of 2021 can instead claim a refund now, in order to improve cash flow.

Interest deductibility changes

Businesses are able to increase their business interest expense deductions on their tax returns because of the CARES Act. For 2019 and 2020, the amount of interest expense that businesses are allowed to deduct on their tax returns is increased to 50% from 30% of adjusted taxable income.

Facility improvement write-off

Through a provision in the CARES Act, businesses and commercial property owners can immediately start to write off costs associated with improving the interior of a non-residential building. This basically expands the tax deduction for many property improvements to 100% of the cost, with the deduction applicable right away, which can provide more liquidity to businesses. This change was issued to fix some language of the 2017 tax reform law and the change is effective for 2018 to present, so businesses might think about amending older tax returns if they made facility improvements in 2018 or 2019.

One last thing

Most of the changes above will apply in some way to small- and medium-sized businesses, but there are other small provisions related to things such as alcohol and aviation excise taxes. Be sure to talk with your tax adviser or financial planner about how coronavirus legislation will impact your bottom line this year and beyond.

attorney and client

Coronavirus has caused companies of all sizes to take a hit. To help your businesses that need extra funds, the federal government came out with a few funding options. The Main Street Loan Program was intended to serve larger businesses like the SBA PPP served smaller businesses. But, as of Monday, June 8, 2020, the Federal Reserve Board expanded the program to give both small and medium-sized businesses the ability to receive funding. TGG, a San Diego-based outsourced accounting firm, explains the newly released details regarding the Main Street Loan Program:

On Monday, June 8, 2020, the Federal Reserve Board decided to expand the Main Street Loan Program to give small and medium-sized businesses the ability to receive support. The Main Street Lending Program should be open soon for lender registration.

Some of the recent changes include:

  • The minimum loan amount has been reduced to $250K.
    • Making the EBITDA minimum $62,500 with no debt.
  • Increased the maximum loan size
  • They have extended the loan term from 4 years to 5 years.
  • The principal payment has been delayed to 2 years, with the repayment schedule being as follows for all loan types:
    • Y1: 0% Y2: 0% Y3: 15% Y4: 15% Y5:70%
  • They have raised the FEDs participation to 95% for all loans.

Jerome H Powell, the Federal Reserve Chair, explained this decision by saying “supporting small and mid-sized businesses so they are ready to reopen and rehire workers will help foster a broad-based economic recovery.” This infers, these businesses are essential to the economy and employment in the United States.

When a lender registers for the MSLP, they are encouraged to start making loans immediately. This program is intended to purchase 95% of eligible loans, if documentation is complete and the transactions are consistent with the Main Streets facility’s requirements. Therefore, Loans originated under the previous terms will be accepted if they are funded before June 10, 2020.

There are a few loan options available within the Main Street Lending Program. These options include:

  • New Loans: 
    • These loans have a 5-year term
    • With a $250,000 minimum loan amount
    • With a maximum loan size of $35M, or an amount added to outstanding or undrawn available debt does not exceed 4.0x the adjusted EBITDA.
    • Hold a risk retention of 5%
    • Have a principal deferred for 2 years with years 3-5- 15%, 15%, 70%
    • Interest payments deferred for one year
    • A LIBOR rate of +3%
  • Priority Loans:
    • These loans have a 5-year term
    • With  $250,000 minimum loan amount
    • Consist of maximum loan size of $50M, or an amount added to outstanding or undrawn available debt does not exceed 6.0x the adjusted EBITDA.
    • Hold risk retention of 5%
    • Principal deferred for 2 years with years 3-5- 15%, 15%, 70%
    • Interest payments deferred for one year
    • Have a LIBOR rate of +3%
  • Expanded Loans:
    • These loans have a 5-year term
    • With a $10M minimum loan amount
    • With a maximum loan size of $300M, or an amount added to outstanding or undrawn available debt does not exceed 6.0x the adjusted EBITDA.
    • Have a risk retention of 5%
    • Principal deferred for 2 years with years 3-5- 15%, 15%, 70%
    • Interest payments deferred for one year
    • Have LIBOR rate of +3%

See the FED press release here:

https://www.federalreserve.gov/newsevents/pressreleases/monetary20200608a.htm

Term Sheet: Main Street New Loan Facility

Term Sheet: Main Street Priority Loan Facility

Term Sheet: Main Street Expanded Loan Facility

W-2

Organization is Key: Were Your Finances in Line Before You Applied for Your SBA PPP Loan?

The SBA relaxes the loan forgiveness criteria in mid June allowing you 24 weeks to use SBA funds and to allocate 60% of funds to payroll. This is replacing the previous amount equal to 75%. Furthermore, now is the best time to ask if your finances were in line prior to applying for the SBA PPP loan. 

As your business prepares to apply for forgiveness, your loans should be throughly looked over. Prior to applying for the SBA loan, ask yourself, how organized were your business finances? This can make a huge difference when your audits occur. If your finances were not in order before applying and accepting the SBA PPP loan then get them in order. Disorganization or even misreporting finances can lead your business to potential risks when audits begin again on July 15th. You should consider these questions before beginning to prepare for audit:

Did you under-report Wages?

When thinking about your SBA PPP application, did you under-report wages that could allow for more loan to be granted? Banks will ask you to return the total initial loan amount and reapply for the loan with revised reporting.  If there are still funds available to return, consider the possibility that you may not get the revised loan. The funds may be depleted before your second application is approved. Furthermore, they may simply be approved for the same amount as your original approval – wasting your time, resources and energy.  

Did you submit false information to a government agency?

If, on review of your SBA PPP loan application, you believe that you misreported anything in your application, contact our team at Milikowsky Tax Law.  We can review your tax returns from previous years and your current financials to determine how far off your initial statements are and remedy any potential audit exposure you may have. 

By doing a full risk assessment and deep dive into your financials, you can mitigate risk for fines and penalties as well as criminal exposure you may have by misreporting your financials to a government agency. Contact us today to see how we can help your business limit your risk in regard to potential audits!

Cash transactions

Small businesses continue to struggle to acquire SBA PPP funds, as a few larger companies refuse to return the funds they have received. Though these larger publicly traded companies could face severe consequences, the threat is not causing any movement towards these companies returning their funds. While the Trump Administration and Treasury Secretary, Steven Mnuchin, are working to encourage larger companies to return the funds, there is some concern that it will not be enough to motivate these larger businesses…

BY  

A new analysis shows that the overwhelming majority of publicly listed companies that received coronavirus stimulus loans from the federal government, which were intended for struggling small businesses, do not plan on returning the funds.

The study was conducted by Reuters, which analyzed data from the market research firm FactSquared. The news organization found that as of May 22, only 68 out of 424 public companies had returned the funds, with those declining to do so and claiming that they need the funds to maintain operations.

Companies who took the loans despite having enough resources to get through the financial crisis, were required to return the money by May 18 without facing any penalties. But the Reuters analysis found that at least 76 companies who did not return the loans had “enough cash and cash equivalents to cover operating costs until at least June.”

Reports began circulating in April that many large companies had received millions in loans through the program, despite the intent being to prop up struggling small businesses. President Donald Trump and Treasury Secretary Steven Mnuchin have both been critical of large companies taking advantage of the program and urged them to return the funds.

But the Trump administration has faced significant criticism for not doing enough to ensure the loans are directed to businesses that need the funds the most. Legal experts have also said it is unlikely that companies that exploited the program could face serious repercussions.

“I don’t see anybody being convicted for this, honestly,” Scott Pearson, a partner at Manatt, Phelps & Phillips told CNBC. “What will scare people away is the threat of being accused. The suggestion there is criminal liability for a company that has a good argument that they were eligible for these loans based on the structure of the CARES Act is ludicrous.”

Some Democratic lawmakers have urged greater oversight of the funds approved by Congress. Some large companies that received millions in assistance–including Ruth’s Chris Steak House, Shake Shack, and the Fiesta Restaurant Group–have returned the funds.

“Unfortunately, we know that unscrupulous business owners have been applying for and taking funds that others have a much more urgent need for,” Representative Katie Porter of California said in an opinion article published by NBC News on May 12.

“As a result, our smallest, most vulnerable businesses are losing out and at risk of disappearing,” the congresswoman warned.

Milikowsky Tax Law

In April 2020, the Paycheck Protection Program (PPP) was announced as part of the Coronavirus Aid, Relief, and Economic Security (CARES) Act. The PPP granted loans to businesses across the country to support more than 51 million jobs and over 80 percent of all small business employees. 

While the average loan size was $100,000, some businesses received up to $10 million. Since its initial announcement, however, the U.S. Small Business Administration (SBA) has begun performing audits on the loans they granted following the discovery that many loans were granted under false pretenses.

Let’s review what this means for businesses that took an SBA PPP loan.

What Criminal Exposure Could You Be Subject to Because of your SBA PPP Loan?

Mnuchin, the Treasury Secretary announced that all SBA PPP loans of $2 million are guaranteed to be audited. However, smaller loans may be audited as well. This announcement resulted in business owners being concerned about potential criminal exposure

What Will SBA Look For in The SBA PPP Loan Audits?

SBA Will Verify That The Business Needed the Loan

During an audit, SBA is looking for signs that you took funds when your businesses did not really need them. These audits are an effort to make sure only those who needed assistance received it.

SBA Will Verify That The Business Used the Funds Correctly

PPP loans are forgivable loans that could be used for:

  • Payroll costs
  • Rent
  • Mortgage interest
  • Utilities

SBA Will Look at Payroll

SBA will evaluate payroll reports in a PPP loan audit. Business owners can use these payroll reports to prove that their business spent at least 60% of the loan proceeds toward payroll costs. 

There are a few exceptions to the requirement that 60% of the loan must go to payroll, including:

  • Employees did not return despite receiving a good faith offer to return to their jobs with the same wages and hours
  • Business operations were unable to be restored to the pre-pandemic levels as a result of restrictions on operations
  • The business was unable to find qualified employees

SBA May Review Other Records

During an audit, SBA may also ask business owners to provide proof of how they used for other expenses outside of payroll. Owners should be prepared to provide such information. 

Additionally, owners can assume any information discussed in the PPP loan or forgiveness application may be evaluated in an audit.

How to Avoid Criminal Charges as a Small Business Owner 

Business owners can avoid criminal charges during an SBA loan audit by following these protocols:

  • Make sure all certifications you submitted for the loan are accurate
  • Hold onto appropriate documentation to support loan application certifications
  • Be cognizant of any statements by company representatives to ensure consistency with claims to the government 
  • Stay compliant with any follow-on requirements for retaining the loan, obtaining loan forgiveness, or submitting subsequent certifications
  • Keep internal compliance mechanisms functioning appropriately
  • Take note–whistleblowers often report fraud internally before going to the government.

What Are the Potential Criminal Charges?

If business owners do not take the above points seriously then once audits do come around, they may be on the hook for loan fraud, bank fraud, and criminal tax exposure. 

Loan Fraud

According to a report from the federal Pandemic Response Accountability Committee (PRAC), “flaws in the structure, administration, and terms of the PPP created many fraud risks… Many companies may have fraudulently taken advantage of the program’s quick rollout at the height of the COVID-19 crisis.”

Bank Fraud

Individuals may face the risk of being prosecuted for bank fraud under 18 U.S.C. § 1344. This federal statute makes it a criminal offense to defraud a financial institution in order to “to obtain any of the moneys, funds, credits, assets, securities, or other property owned by, or under the custody or control of, a financial institution” through false or fraudulent pretenses, representations, or promises.”

Criminal Tax Exposure

Individuals and companies accused of PPP loan fraud will likely face allegations of tax evasion. For example, this can include:

  • Unlawfully claiming deductions for payroll expenses covered with PPP loan funds
  • Evading income tax by not reporting income resulting from business activity supported by PPP loans

No company will be treated differently based on size or ownership. Be prepared to support your SBA PPP loan eligibility. Also, ensure that you are following all the regulations to prevent potential serious charges. These regulations have shifted significantly since the start of the SBA PPP program. 

The Bottom Line

If you keep organized records of how you used the SBA PPP, and are able to prove your eligibility there is no need to be concerned. 

However, if you did not take these precautions, you may want to enlist the help of an expert tax attorney to analyze your risk.

Need Assistance Analyzing Your Potential Risk?

Reach out to Milikowsky Tax Law. We are experts in criminal tax defense and government audits, and we want to help you keep your business safe.

Was your SBA PPP loan forgiveness denied?

Find out what to do next in our full guide, here.

SBA loan audit

The potential penalties that arise when borrowers apply for the SBA PPP loan has business owners questioning whether or not they should keep their loan funds. Borrowers must consider their individual circumstances to make this decision, but there can be adverse consequences if you do not utilize the loan funds properly. 

With the looming potential of IRS audits coming in the next few months, many business owners are concerned that IRS might open a criminal tax investigation on them. There are a few things IRS looks for when looking to prove criminal intent. Here are a few signs that may trigger IRS to believe you have acted criminally:

The federal False Claims Act states that those who “knowingly (i) presents… a false or fraudulent claim for payment or approval [or]…(ii) makes, uses… a false record or statement material to a false or fraudulent claim” will be penalized. When auditing, IRS typically follows these guidelines to decide whether or not you acted with criminal intent. So, even if you might have “mistakenly” understated $10k, to get those SBA PPP loans, you should consult your CPA or tax attorney to review your tax documents and loan applications. This will help you identify whether you could be at risk for investigation or worse…charged for tax evasion. 

If this scenario sounds familiar, reach out to one of our tax attorneys at Milikowsky Tax Law. You will get expert advice and help from our team.  We specialize in Criminal Tax Defense and Government Audits.

Tax fraud

The SBA PPP loan is to help support small businesses that would otherwise disappeared due to COVID-19. Now that these funds have been widely disbursed, the federal government is stepping it. They are taking action to check on the recipients. Furthermore, their actual need and whether or not their applications submitted to the SBA match their actual numbers. The big question lingering over business owners now is, how can you reduce potential fraud in an audit?

Let the audits begin. 

If you have concern about your audit risk, here are a few points to consider as you decide whether or not you need to seek guidance from a tax attorney. 

Step 1

First and foremost, consider the information you submit to receive the SBA PPP loan. Is it correct? Or shall we say, was it 100% accurate? Could you attest to every number you put down in your application? If you can, you’re off to a great start! If you “estimated” some of your numbers and they’re a little too generous, you may be facing some more serious consequences. Potentially even criminal liability for your company. While the process of auditing companies may take a few months, when you do get an audit, you may be facing charges that lead to jail time. 

Step 2

The government will be looking especially close at payroll numbers; inflation of payroll numbers or deflation of employee headcount. You must verify you did not adjust your business logistics in regard to employees and payments in your loan application. Knowing these loans came to small business owners very quickly and it was on a first come first serve basis, we understand you may have had to act quickly. Therefore, you may have made decisions with intent simply to qualify for the loan. With that being said, businesses who come forward and rectify numbers before an audit have more options than those who wait to be flagged. 

Step 3

Finally, as forgiveness applications are being submitted, be sure to note how you are using the SBA PPP funds. Use the funds exactly as they intend. These guidelines are up to date as of June 25th, 2020: 

“The loan will be fully forgiven if the funds are used for payroll costs, interest on mortgages, rent, and utilities (due to likely high subscription, at least 60% of the forgiven amount must have been used for payroll). Loan payments will also be deferred for six months. No collateral or personal guarantees are required. Neither the government nor lenders will charge small businesses any fees.”

Loans issued prior to June 5 have a maturity of 2 years. Loans issued after June 5 have a maturity of 5 years. All loans have an interest rate of 1%.“

Do not use these funds for any other uses or the loan will not be forgiven. Be sure to save your receipts and keep your loan funds separate, so you know exactly where the money from your loan is going.

If you are unsure if you comply with these regulations, or if you need assistance determining your fraud risk, please reach out to our team at Milikowsky Tax Law. We will help you evaluate your financial situation to ensure your safety and reduce your potential of fraud discovery in an audit. We are experts in government audits and criminal tax defense, and in these unprecedented times, we are here to support you. 

Taxes

Heads up — while you are now allowed to take up to $100,000 out of your IRA and pay it back within three years with no tax hit, doing so may have some hidden consequences that you likely have overlooked initially.

The Internal Revenue Code calls these tax-favored withdrawals “coronavirus-related distributions,” which will be referred to as “CVDs.” It’s important to note that while not all IRA owners will be eligible for the CVD privilege, many probably will and you could be among them.

If you qualify for this CVD privilege, you will be allowed to take one or more CVDs in 2020 up to a combined limit of $100,000. You can then re-contribute (repay) any CVD amount to an IRA that has been set up in your name within the three-year window. You will be expected to treat each CVD and the related contribution as a federal-income-tax-free IRA rollover transaction.

There are no restrictions on how you can use CVD funds. If you’re cash-strapped, you can use the money to pay bills and recontribute later (within the three-year window) when your financial situation improves. You can even help out your adult kids now and recontribute later, making CVDs an extremely useful cash-flow management tool in these troubled times.

Don’t get too excited — there are some interim tax consequences if you decide to take advantage of this opportunity.

While you can re-contribute a CVD within the three-year window and pay the typical federal-income-tax-free IRA rollover transaction, there are some interim federal tax consequences to take care of before you arrive at that favorable tax-free outcome.

Unfortunately, the interim tax consequences can diminish the cash-flow advantage of the CVD deal and require filing amended returns to gain federal-income-tax-free treatment. The interim tax consequences were recently clarified when the Congressional Joint Committee on Taxation (JCT) released its explanation of the tax provisions in the CARES Act. 

How the interim tax consequences work

If you take several CVDs (up to the $100,000 combined limit), the interim tax consequences apply separately to each CVD. But let’s keep things as simple as possible to make the following examples easier to understand.

Example 1: You recontribute early

If you have the necessary cash, you can recontribute the CVD amount in the next two years. For instance, if you re-contribute the entire $100,000 in 2022, there won’t be any interim tax hit for that year. File amended returns for 2020 and 2021 to get back the interim tax hits for those years. Once again, the CVD is federal-income-tax-free at the end of the day, but it is not free of caveats. 

Example 2: You recontribute in 2023

Let’s assume you are eligible for the CVD privilege and make the decisions to take $100,000 CVD from your traditional IRA sometime this year. The $100,000 would be fully taxable under the regular federal income tax rules for traditional IRA withdrawals. (If you’ve made nondeductible traditional IRA contributions over the years, the withdrawal would not be 100% taxable, but we’re keeping things simple here.)

The JCT report explains that the usual way to line up federal-income-tax-free treatment for your CVD involves spreading the $100,000 of taxable income that you would report under the regular tax rules equally over 2020, 2021, and 2022. So, you would report $33,333.33 on your 2020 Form 1040. The same goes for 2021 and 2022.

After re-contributing the entire $100,000 sometime in 2023, before the three-year window closes, you would file amended returns for 2020, 2021, and 2022 and get back the interim federal income tax hits for those years. At the end of the day, the CVD is federal-income-tax-free, as advertised, but the road to get there is long and bumpy.

Example 3: You report all CVD income on your 2020 return

You also have the option of reporting the entire $100,000 of CVD income on your 2020 Form 1040. If you re-contribute the $100,000 within the three-year window, you file an amended return for 2020 to get back the interim tax hit. You generally must file an amended 2020 return within three years from the date you filed your original 2020 Form 1040.

No matter what path you take, your results will likely vary from the examples above.

To put it simply, the interim tax consequences of taking this cash out of your IRA under the CARES act will have at least a few inconvenient consequences. Beyond that, some consequences may be unfavorable enough to skip the process altogether. If you are trying to decide whether or not to take advantage of the CVD opportunity, consider contacting an associate at Milikowsky Tax Law for assistance. 

As you can see, the interim tax consequences are at least inconvenient. And they can be downright unfavorable — because they can reduce the cash-flow management advantage of the CVD deal.