On August 8, 2020, President Trump issued an executive order and three memoranda providing or extending COVID-19 relief to individuals and organizations.
The executive order directs various Cabinet and executive agency heads to find means of limiting evictions and foreclosures. The three memoranda provide for the deferral of:
Collection of payroll taxes
Supplemental unemployment payments
An extension of student loan payment deferments
Reduction of interest rates for student loans
At this time, many questions exist surrounding these directives, and additional guidance is needed before implementation.
Payroll Tax Deferral
The payroll tax memorandum directs the Secretary of the Treasury to defer withholding, deposit, and payment of the employee portion of social security tax on wages or compensation paid from September 1 through December 31, 2020. The deferral includes only the 6.2 percent social security portion of taxes under the Federal Insurance Contribution Act for employees with bi-weekly pre-tax income less than about $4,000.
Amounts deferred will be without penalties, interest, increased amounts, or additions to tax. The payroll tax memorandum directs the Secretary of the Treasury to issue guidance to implement the memo and find ways to eliminate the deferred tax.
Note: The payroll tax memorandum provides only for the deferral of the employee portion of the social security tax. If the Secretary of Treasury does not eliminate the deferred tax, an affected employee will be required to pay any remaining deferred tax. Until further guidance is issued, it is uncertain how an employee will pay the deferred tax following the end of the deferral period.
The memorandum raises several questions for employers, including:
Is it voluntary?
How do you determine which employees are eligible?
When will the tax be due?
How do you collect the deferred tax from employees?
When will the tax be due in the future?
Will the software providers be ready?
When will additional guidance be available?
We expect the Department of Treasury and IRS to issue additional guidance soon. We recommend employers continue to withhold and remit the employee portion of social security tax as usual.
Unemployment Insurance Benefits/Disaster Relief
In March, the CARES Act created the Federal Pandemic Unemployment Compensation Program, which provided an additional $600 per week to individuals collecting regular unemployment compensation benefits. This benefit expired on July 31, 2020.
The disaster relief memorandum directs the Federal Emergency Management Agency to provide benefits from the Department of Homeland Security’s Disaster Relief Fund. It advises states to use their Coronavirus Relief Fund allocation to provide financial relief to unemployed Americans affected by COVID-19, principally through an up to $400 per week supplemental unemployment compensation benefit. Seventy-five percent of the cost of the benefit shall come from those federal funds. State governments will be responsible for the remaining 25 percent, subject to an agreement between the federal government and the state concerning the program and funding.
The disaster relief memorandum makes two significant changes in eligibility compared to the $600 supplemental benefit under the CARES Act.
It limits eligibility to individuals who receive at least $100 per week in unemployment compensation assistance.
It requires the individual to certify that their lost wages are attributable to disruptions caused by COVID-19.
Student Loan Payment Relief
The student loan memorandum advises the Secretary of Education to continue student loan payment relief during the COVID-19 pandemic for specific federal student loans held by the Department of Education. It also directs the Secretary of Education to continue the temporary waiver of all interest on student loans until December 31, 2020. This memorandum further provides that student loan borrowers may continue to make payments if they wish to do so.
The housing executive order directs Cabinet members to consider steps to take action necessary to minimize residential evictions and foreclosures during the ongoing COVID-19 national emergency. The order advises cabinet secretaries to consider how to halt evictions and foreclosures temporarily and look at ways to provide temporary financial assistance to renters and homeowners struggling to make monthly payments, including providing Federal funds to landlords.
Based on the need for significant additional guidance at this time, we cannot recommend implementing the payroll tax deferral. We are monitoring developments closely. As more guidance is provided, Smith Schafer will keep you informed.
Choosing the right entity structure for your transportation business
One of the most important decisions you make for your
transportation business is determining the legal entity structure because it
directly impacts taxes and other liabilities. Choosing the right type of entity
structure for your transportation business can be a complicated process. There
are numerous factors going into making this decision.
It is critical to understand the business structure options
available to you, the tax implications of each option and when each is most
appropriate for your business. We provided a summary of the most common
business structures a transportation business and the tax advantages and
disadvantages of each.
This is one of the most common types of business entity
structures. It is also the easiest to form and maintain, and offers complete
managerial control to the owner. However, the owner is also personally liable
for all financial obligations of the business.
Income and expenses
are included on the 1040 so there is no separate form to file.
Business losses may
offset other income earned on the 1040.
You pay both the employee and employer portions of employment taxes on your self-employed income. This is typically 15.3%.
It is unincorporated, which means there is no legal separation between you and your business. Since you are personally responsible for your business’ liabilities, your personal assets may be at risk.
A corporation receives a certificate of incorporation and is
considered legally separate from owners. It is the most complex and expensive
entity to create and maintain, but it offers the most protection of all
Owners avoid any personal liability and personal assets are not at risk.
Currently, corporations have a flat tax rate of 21%. This tax is paid at the corporate level, with no corporate tax paid by owners.
Any earnings distributed to shareholders are taxed at individual tax rates on the shareholder’s individual tax return. This leads to double taxation of the same earnings – once at the corporate level and again at the individual level.
One way to avoid the double taxation of a corporation is to
elect to be taxed as an S Corporation. An
S Corporation has several appealing tax benefits and provides business owners
with the liability protection of a corporation.
Income and losses are passed through to shareholders and included on their individual tax returns. There is no tax paid at the corporate level.
An S Corporation may be eligible for a qualified business income deduction of up to 20% of qualified business income.
Since income is taxed at the individual level, the tax rate may be higher than the flat corporate tax rate of 21%.
S Corporation shareholders must be paid reasonable wages, which generally means wages are comparable to what would be paid to someone else to do the same job. This results in additional taxable income to the individual, plus an additional expense in the form of wages and payroll taxes for the corporation.
An LLC is a popular entity structure for small to medium-sized transportation
businesses. It is a form of a partnership allowing owners to limit personal
liabilities. LLCs were created to provide business owners with the liability
protection that corporations benefit from, without the burden of double
Income and losses are passed through to the partners and included on their individual tax returns. There is no tax paid at the entity level.
An LLC may be eligible for a qualified business income deduction of up to 20% of qualified business income.
You pay BOTH the
employee and employer portions of employment taxes on your self-employed
income. This is typically 15.3%.
several factors you should consider when selecting an entity structure for your
transportation business – liability, tax implications, cost of formation and
ongoing administration, flexibility and control. With the recent Tax Reform, taxation has been brought to the
forefront in making and rethinking this decision for transportation business
are planning to start a new transportation business, you will need to decide
what type of entity structure you want. As discussed, there are several
advantages and disadvantages to each entity so it is important you do your
research and contact a professional with experience. If you are an established
transportation business, the Smith Schafer team can analyze your situation,
advise you on the advantages and disadvantages of each option and provide a
Partner with an experienced team of cpas to help you create
saving opportunities both now and in the future. Contact us today to schedule a
consultation about your transportation business.
As a business owner, you
have a lot of responsibilities – budgeting, marketing, selling, and countless
other tasks. It is easy to put your own financial plans on the back burner for
the sake of growing the business. But it is important for you to have a
personal financial plan and to ensure it takes into account the unique
considerations and opportunities of owning a business. Below are seven basic
tips to start creating your personal financial plan:
1. Save for your own retirement.
The right retirement plan
allows you to maximize your retirement savings, while also benefiting your
transportation company and employees.
Example: You could implement a safe harbor 401(k) plan for your transportation company. This type of plan requires the company to contribute to employees’ savings accounts. These contributions by the company are completely tax deductible. In addition, a safe harbor 401(k) plan automatically passes annual compliance testing, which will allow you as an owner to maximize your contributions to the plan.
A retirement plan only helps
your retirement savings IF you choose to contribute to it. We recommend you
maximize your contributions, or at least contribute enough to maximize your
company’s matching funds. If you have a 401(k) plan, you can contribute up to
$19,000 to it in 2019 (plus another $6,000 if you are over 50).
2. Create key estate planning documents.
The first step to estate
planning is to start with the documents:
Ensure these documents
address what happens to your transportation business in the case of your death
or disability. Well-executed estate planning documents ensure someone you trust
inherits the business or manages business transactions on your behalf.
3. Purchase life and disability insurance.
As a business owner, you
should have life and disability insurance policies naming the business as a
beneficiary. This will guarantee an income stream to help keep the business
operating in your absence.
4. Have a buy-sell agreement.
If your transportation business
has multiple owners, you should have a buy-sell agreement in place. Buy-sell
agreements specify who can buy an owner’s shares of the business, under what conditions,
and at what price. Having this agreement in place now may reduce conflict and
potential costs when a business owner exits the business.
5. Create a succession plan.
After completing basic estate planning documents, we recommend creating a succession plan. This lays out, in detail, how the business will prepare for a transition in ownership. If your succession plan includes transferring the business to a family member or key employee, it could be beneficial to start that transfer now.
In 2019, you are allowed to gift up to $15,000 to an individual without incurring a gift tax liability. If you and your spouse own the business, each of you can gift $15,000. Likewise, if you are transferring the business to an individual and his or her spouse, you can gift each of them $15,000. Transferring your transportation business this way allows you to transfer a significant portion of your business without any gift or estate tax liabilities.
6. Discuss your plans.
Once you have an estate or succession plan in place, make sure you discuss them with all parties affected. These may be hard conversations, but they are imperative to ensure everyone knows what is at stake. This can help avoid conflict and disappointment later.
7. Review and update your plans regularly.
Finally, you should review
your plans regularly and update them as necessary. You may have a new family
member or a key employee leave your organization. These things can drastically
change your retirement, estate or succession plans. In addition, tax laws are constantly changing, so something
that is tax advantageous in one year may not be in a different year. It is
important your plan is always up-to-date to reflect your wishes.
Your future can be more
secure with the help of a Smith Schafer advisor. We can help you determine the
appropriate immediate and long-term retirement and estate planning strategies.
The sooner you start planning, the better. We can help with:
you are age 70 ½ or older, IRS rules require you to take a required minimum
distribution each year from your tax-deferred retirement accounts. This
additional taxable income may push you into a higher tax bracket and reduce
your eligibility for certain tax credits and deductions. To eliminate or reduce
the impact of required minimum distribution income, you may want to consider
making a qualified charitable distribution.
A qualified charitable
distribution is a
direct transfer of funds from your IRA to a qualified charity. Amounts
distributed as a qualified charitable distribution may be counted toward
satisfying your required minimum distribution for the year and be excluded from
your taxable income.
An eligible qualified charitable distribution must meet the following conditions:
at least 70 ½
funds must come out of your IRA by your required minimum distribution deadline
– typically December 31
must be transferred directly from your IRA to one or more qualified charities
charitable distributions are limited to the amount that would otherwise be
taxed as ordinary income
maximum annual distribution amount qualifying a qualified charitable
distribution is $100,000. However, if you are a joint tax filer, both you and
your spouse may make a $100,000 qualified charitable distribution from your own
are allowed to make a qualified charitable distribution in excess of your required
minimum distribution amount, up to $100,000. However, any amount donated above
your required minimum distribution does not count toward satisfying a future
year’s required minimum distribution. If your qualified charitable distribution
does not fulfill your required minimum distribution for the year, you will need
to withdraw additional funds to satisfy your required minimum distribution.
Example: You take a required minimum
distribution in February, and then in November decide you want to do a qualified
charitable distribution. You cannot retroactively deem the February
distribution to be a qualified charitable distribution. You may still make the qualified
charitable distribution and exclude this distribution from taxable income, but
you will still need to include the February distribution as income.
you take a regular withdrawal from an IRA and use it to make a charitable contribution,
you still need to include this required minimum distribution in your taxable
income. In order to meet the requirements of a qualified charitable
distribution, it must be made directly to the charitable organization. A
distribution in the form of a check must be made payable to the organization.
Qualified Charitable Distributions & Charities
purposes of making a qualified charitable distribution, a eligible charity is
any 501(c)(3) organization. This DOES NOT include private foundations or
donor-advised funds. You are not allowed to receive any benefit in return for
your qualified charitable distribution.
Example: If your donation covers tickets to a
gala, your gift would not qualify as a qualified charitable distribution.
charitable organization must cash your check before year-end for the qualified
charitable distribution to satisfy your required minimum distribution. If you
are planning to use a qualified charitable distribution as part of your
year-end giving strategy, ensure you allow plenty of time for the charity to
cash the check. Make certain you receive acknowledgement of the donation
because you will need this to claim a deduction for a regular charitable
firms process each qualified charitable distributions differently. Contact your
broker to learn exactly how to make a qualified charitable distribution from
your account. The default option on many IRA distributions is to have tax
withheld since most distributions are considered taxable income. If you are
making a qualified charitable distribution, confirm with your broker you are
not automatically having tax withheld, because the distribution is not taxable.
Create a strategy. Gain value beyond the next tax return.
Do you understand the impact of the new accounting standard on your business? Revenue recognition has been around since 2010, when the first draft of the new standard was released. Three exposure drafts and numerous accounting standards later, it will be required to recognize income under the five-step approach.
We hosted a free breakfast seminar event at the Golden Valley Country Club on July 30 and attendees learned…
1. GAINED A BETTER UNDERSTANDING.
The new revenue accounting standards requires a consistent, single model for recognizing revenue and disclosure requirements on financial statements. This new standard was effective January 1, 2019 for all industries.
2. HOW TO PLAN FOR CHANGES.
In 2020, nearly all leases will need to be disclosed on the balance sheet. This may have a major affect on business banking relationships and access to new capital.
3. RECEIVED GUIDANCE ON THE IMPACTS.
At this educational seminar, we provided attendees with awareness and advice on these key issues and how they may impact business decisions.