How Has COVID 19 Altered Your Retirement Plan?

How Has COVID 19 Altered Your Retirement Plan?

Qualified retirement plans are a key component of financial security for owners and their employees. The SECURE Act in December 2019 and the CARES Act in March 2020 made significant changes in various rules related to retirement plans. Incentives for small businesses to adopt plans have increased and special rules related to COVID-19 have been put in place to enable employees to tap their accounts now. But taking advantage of favorable law changes requires owners to take action. 

COVID-19 Actions for Existing Retirement Plans

Your company’s 401(k) or other retirement plan can be a source of financial help to employees that may be struggling as a result of the pandemic. The plan isn’t required but can permit qualified individuals to take COVID-1 distributions up to $100,000 (with special tax treatment for participants who take them) and loans up to $100,000 (with special rules for the suspension of loan repayments) from March 27, 2020, through December 31, 2020.

Follow the rules. The plan isn’t required to offer these COVID-19 incentives, but if it does, be sure to comply with tax rules. COVID-19 distributions means they are restricted to an individual, spouse, or dependent who is diagnosed with the disease, experiences adverse financial consequences as a result of the pandemic, or meets other specified conditions (defined by the IRS). Some things to consider:

  • Understand the scope of the rules. For example, those who take distributions can repay them within 3 years. The plan administrator can accept the recontributions during this period only if the recontributions are eligible for direct rollover treatment (they were initially made as COVID-19 distributions as certified by the participant, which is explained later),
  • Follow special reporting rules for Form 1099-R. Reporting is required even if funds recontributed. Instructions to this form explain new reporting requirements (instructions for the 2020 form are not yet available).
  • Develop reasonable procedures for identifying when distributions are treated as coronavirus-related distributions. The plan administrator can rely on an individual’s certification that he or she meets the tests described earlier (there’s a sample acceptable certification form here).
  • Follow certain basic rules. For example, when making a distribution from a pension plan, spousal consent is still required).
  • Don’t withhold 20% on the distribution. That’s what the IRS says.

Make plan amendments. If the plan offers COVID-19-related distributions and loans, the plan must be amended to reflect this. The deadline for amendments is the last day of the first plan year beginning on or after January 1, 2022, so there’s plenty of time to act.

Mid-year Plan Changes

Typically, employers commit to their contributions to 401(k) plans at the start of the year. This can influence employees’ decisions on their salary reduction contributions. If the business is experiencing financial difficulties and can’t continue to make promised contributions for employees in 2020, the employer is allowed to make mid-year changes under certain circumstances. Under a safe harbor, certain notice to employees must be given to employees.

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No Plan Yet? Consider One

If your business doesn’t have a qualified retirement plan, consider adding one. It is an important employee benefit for attracting and retaining valuable employees. And there are helpful tax breaks for employers and employees. For example, employers can deduct contributions to the plan, while employees who make salary reduction contributions are not currently taxed on the compensation used for this purpose. And employees may be eligible for a tax credit for their contributions.

Which plan to choose? There are many different types of options. Some are funded entirely by employers, some by employees (with optional employer contributions), and some with employee contributions along with certain employer-matching contributions. The plan you choose depends on many factors, including the size of your staff and what your company can afford. Find a comparison of retirement plan options in IRS Publication 3998.

Tax breaks for initiating plans. If you are a small business (defined as one with 100 or fewer employees who received at least $5,000 in compensation from you in the preceding year), you may qualify for one or both of the following tax credits as an offset to administrative costs.

  • Startup plan. The tax credit for starting a plan that covers at least one participant who isn’t an owner or owner’s spouse is the greater of (1) $500 or (2) the lesser of (a) $250 for each employee eligible to participant who isn’t highly compensated or (b) $5,000. The credit can be claimed for up to 3 years. This credit replaces a much smaller credit that applied to a plan adopted before 2020. The credit can only be claimed if you didn’t have a plan for employees in the 3 years before the first year of the plan for which you’re claiming the credit.
  • Automatic enrollment plan. If you start a plan that automatically enrolls eligible employees (who can still decide to opt out or reduce their contributions) or you convert an existing plan to automatic enrollment, you can take a tax credit of up to $500 per year for up to 3 years. This credit can be claimed in addition to the startup credit. It’s new starting in 2020.

Final Thought

When it comes to retirement plans, the opportunities are great, but the pitfalls are numerous and can easily lead to penalties and other problems. Because the subject of qualified retirement plans is highly complicated, be sure to discuss your situation with your CPA or a benefits advisor.


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Changes to Donation to Charity You Need to Know

Changes to Donation to Charity You Need to Know

The Coronavirus Pandemic brought out the best in many small business owners despite their own financial difficulties. Many have given generously to help others in their communities and beyond. You have supported concerns with cash and other types of donations. <! – ->

Are charitable donations tax-deductible?

The tax law rewards the above donations with depreciation. And the CARES law improves the deduction options.

Donating money

If you or your company have given money to charitable organizations, you may be able to make higher deductions due to changes in tax law. Donations need not be limited to support from COVID-19. All donations of money to tax-exempt organizations (except certain private foundations and donor-advised funds) in 2020 qualify for the new tax relief.

  • For donations from C-companies . Charitable donations for cash donations in 2020 are limited to 25% of taxable income (compared to the usual 10% of taxable income).
  • For other donors . Contributions from sole proprietorships, partnerships, limited liability companies and suburban companies are not claimed by the companies. They go to owners who claim them for their personal returns. Donations of money can be deducted from people who provide their personal deductions, rather than claiming the standard deduction of up to 100% of adjusted gross income in 2020 (from the usual 60% of adjusted gross income). Typically, those who don't provide information can't deduct anything, but for 2020, those who claim the standard deduction can write off up to $ 300 in charitable donations in a 2020 income tax return. This dollar limit applies to each "control unit", so the same amount applies regardless of whether you are single or married and submit together.

Donations of food inventory

<! – -> Companies that have given away food from their inventory can make higher deductions for 2020 thanks to changes in the law. These tax breaks apply as long as the food is "apparently healthy food", which means that it meets state standards for quality and labeling.

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The increased deduction depends on your entity type:

  • For C companies. The deduction is typically the lower of (1) base plus half the market value that exceeds the base, or (2) double base. For 2020, the deduction is subject to 25% of taxable income (the same limit applies to cash donations).
  • For other entities. Donations of food inventories by sole proprietors, partnerships, limited liability companies, and suburban companies are typically limited to 15% of the net income from these through transactions. For 2020 this limit will be raised to 25%.

What has not changed

While some things have changed when it comes to deducting charitable donations, some things remain the same.

  • The tax treatment of donations from stocks other than food remains unchanged. Generally, the deduction is limited to the lower cost or fair market value of the items. These items will be removed from the opening inventory. For C companies, there is an increased deduction for donations to organizations that care for the sick, the elderly or infants.
  • You cannot withdraw donations directly from anyone, no matter how needy they are. Only donations to organizations approved by the IRS can be deducted. Browse the list of such organizations from the IRS .
  • Contributions that exceed the applicable limits (e.g. donations from C companies that account for more than 25% of taxable income) can be carried out for up to five years.
  • It is still important to obtain the necessary evidence. Without them, legitimate donations are not deductible. For donations over $ 250, the required justification means a written confirmation from the charity. Different rules of justification apply to other types of donations. For more information on the reasons, see IRS Publication 526 .

Final Thought

Amid the COVID 19 crisis, many fake charities have emerged to steal money and the personal identity of generous people. Of course, continue to be as generous as your heart and wallet allow, but beware of the party you give

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Corporate Structure Tax Comparison – Where Can You Save Money?

Corporate Structure Tax Comparison – Where Can You Save Money?

Companies of all sizes and industries were literally put under pressure in 2020. Nobody could have predicted the consequences of the corona virus for entrepreneurs from independent contractors to C companies and everyone in between. <! – ->

However, it is positive that the tax period has been postponed to July 15, 2020.

Company structure tax comparison for 2020

That said, there is still time to learn about tax issues based on your business unit and to take advantage of some tax savings regardless of your legal structure.

Sole proprietorship <! – ->

In a sole proprietorship there is no legal separation between the business owner and the company. Property and liabilities are held on behalf of the owner. Usually the owner is an individual, but it can also be a married couple. Company taxes are submitted as personal income using Schedule C (company profit or loss) filed with IRS Form 1040.

Although it is the simplest and cheapest type of business that needs to be founded and maintained, there is a disadvantage that the owner is personally legally and financially liable for the company. For example, if the company is affected by a lawsuit or the company is unable to pay its debts, the personal assets of the owner (bank accounts, apartment, car, pension, etc.) are at risk.

In most countries, starting a sole proprietorship can be as easy as submitting a fictional name, also known as a DBA (Doing Business As). But even that may not be necessary if the owner uses his first and last name in the company name. Depending on the type and location of the company, licenses or permits may be required. Otherwise, the formalities for start and ongoing compliance are minimal.

A sole proprietorship is usually sufficient for: <! – ->

  • Domestic companies
  • A business with only one owner
  • Companies without employees
  • A company that offers products and services with minimal legal risks.

Company income is subject to self-employment tax. Entrepreneurs of individual companies were therefore entitled to funding through the CARES law from both the Paycheck Protection Program (PPP) and the Economic Injury Disaster Loan (EIDL) and EIDL Advance. According to the PPP and EIDL advance rules, the business owner would not have to repay or repay the PPP as long as 75 percent of the proceeds are used to replace income and the other 25 percent are used to qualify business expenses. However, since the PPP application required 2.5 months' worth of income documentation, some independent contractors may not have enough expenditure to be considered forgivable. This means that the remaining amount must be repaid at a fixed interest rate of 1.00%. The balance of the PPP loan is due in two years and payments are deferred by six months. The good news is that business loan interest is deductible as long as the money is used for business purposes.

Although the self-employed are normally not entitled to unemployment benefits, they are entitled to the special program Pandemic Unemployment Assistance (PUA) under the CARES Act if they are qualified. How much PUA pays varies by state, as does regular state unemployment insurance (UI) programs, which are funded by the federal government. Taxes on PUA payments can be withheld on request. (S Corps and LLCs are also entitled to PUA benefits.)

<! – -> Another option for taxpayers who claim loss of business on their individual income: due to the coronavirus crisis previous restrictions on individual business loss deductions ($ 500,000 for couples and $ 250,000 for other applicants were suspended for the period 2018-2020.


In its simplest form, the partnership structure reflects an individual company. It is used when there is more than one owner of the company. In a partnership, the owners share the legal, financial and management responsibilities for the company. In fact, one partner's actions could make another partner's personal assets liable.

Partners should have a detailed partnership agreement with their lawyer to determine the division of property and duties. As with a sole proprietorship, there is no separation between the company and its owners. Trade tax obligations are transferred to the individual owners.

There are other types of partnerships, including:

  • Limited Partnerships : A partnership in which some or all of the partners have limited partnerships.
  • Professional partnerships : The unit consists of two or more professionals such as accountants, doctors or lawyers who provide the public with professional services.
  • Limited partnerships : A partnership with a general partner (runs the business and is personally liable for the debts and obligations of the business) and a limited partner (limited partnership and does not participate in the management).

A partnership is usually sufficient for:

  • Business partners who do not intend to reinvest money in the business
  • Company with several owners without employees
  • Multi-owner company that offers minimal legal risk products and services

Unless there is a special agreement between the partners, the IRS considers all partners to be the same when assessing tax obligations. You are taxed equally in a partnership, regardless of whether you are a partner who contributed financial assets or nothing.

C Corporations

In contrast to sole proprietorships and partnerships, a C Corp. a legal entity separate from its owners – all actions of the company belong only to the company. Owners are employees, and therefore C Corp offers its owners (shareholders) a significant degree of personal liability protection. The ability to sell shares in the company provides the ability to raise capital to fund initiatives and drive growth. The status as a C corporation often makes a company more attractive to external investors.

A company must submit its own income tax return (IRS Form 1120) and can deduct business expenses, which reduces its tax liability when it generates revenue. Dividends paid to shareholders are deemed to be income for shareholders and must be claimed on their shareholders' individual tax forms. The term "double taxation" is often used to describe how a company's earnings are taxed, and then profits that are distributed as dividends (which are not deductible as expenses for the company) are taxed to shareholders.

Establishing a company involves submitting statutes to the state and involves higher start-up costs and higher administrative complexity than running a company as a sole proprietorship, partnership or LLC. A company must have statutes and a board of directors, hold regular meetings, and comply with other regulations to maintain its status.

The advantages of a C Corp are:

  • The company is a separate legal identity.
  • There is limited liability for the owners
  • Business is ongoing
  • There are no restrictions on who can hold shares
  • Easily transferable shares
  • to prefer venture capitalists and other investors
  • Possibility to offer stock options

The Law on Tax Reductions and Employment from 2017 reduced the corporate tax rate from 35 percent to a flat rate of 21 percent. However, the law also removed deductions for maintenance costs and transportation services for workers, such as local passports, commuter vehicles, and parking permits.

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The CARES 2020 law introduced some tax benefits that C Corp owners can take advantage of, including:

NOL (Net Operating Loss) transfers . The CARES Act temporarily lifted the NOL exclusion that was removed under the 2017 Tax Cut and Employment Act. The net operating losses that occurred in 2018, 2019 and 2020 can now be traced back up to five years. In addition, the taxable income limit of 80 percent for the use of NOL for the years 2018 to 2020 has been lifted.

Extended interest deduction . The 2017 tax cuts and jobs law limited the deduction that companies could claim for interest on corporate debt to 30 percent of adjusted taxable income (ATI). The CARES law limits net interest depreciation to 50 percent for 2019 and 2020.

Charitable Donation . C Corps may deduct a charity donation, but only up to 10 percent of its taxable annual income. According to the CARES law, the C Corps can temporarily use up to 25 percent for cash donations in 2020. In addition, donations for food stocks were increased from 15 percent to 25 percent.

S Corporation

S Corp is a subtype of the corporate structure. It enables a C-company to choose taxation as a partnership, with all business income being taxed at the owner (shareholder) level at the tax rate for natural persons. This avoids the double taxation that companies normally face. A possible tax advantage for owners is that instead of the entire business income, only the salaries of the owners are collected. Profits granted to shareholders as distributions are not.

Some other advantages of a C Corp, such as personal liability protection, are retained. On the other hand, for an S Corp. a number of restrictions on ownership of shares. For example, it can only issue one share class, it can only have up to 100 shareholders, and it cannot have shareholders who are non-residents.

Today, the IRS allows several types of companies to be taxed as S Corp. For example, an LLC, just like a company, could be taxed as an S Corp if it applied for the election of S Corp the required time period.

S Corp is preferable if:

  • C Corp shareholders or LLC members want to minimize their tax burden for the self-employed
  • The company wants to avoid double taxation of dividend income.
  • A company need not issue more than one share class or have more than 100 shareholders.

Again, the main advantage of S Corp's election status is that only the income paid on the payroll is subject to the self-employment tax. Profits paid as distributions / dividends are not subject to social security and Medicare tax.

Limited Liability Company (LLC)

The LLC structure combines the advantages of a company with those of a partnership or a sole proprietorship. It can be a single member LLC or a multiple member LLC. An LLC is considered a separate entity from its members, so it offers some liability protection to its owners. In general, LLC members' personal assets are not at risk if the company is sued or unable to pay its debts.

In an LLC, members can choose how their business divides the company's profits and losses among its owners. This enables members to consider not only the money invested, but also the time and effort involved in distributing profits. The LLC is a pass-through unit, like a sole proprietorship and a partnership, in which all income flows to the members and is shown in their personal tax returns. However, the LLC can also choose to be taxed as a C Corp or S Corp.

The LLC structure also offers management flexibility. It can be managed by members, with the owners performing the day-to-day administration. Or an LLC can refer to a person (or people) as a manager, which is referred to as an LLC managed by managers. Most states view an LLC as "member-managed" by default, unless the founding documents state that it is an LLC managed by managers. Learn more about the options of Member-Managed LLC and Manager-Managed LLC.

The LLC structure is preferable if:

  • Entrepreneurs want limited personal liability, but not a company's compliance formalities.
  • Entrepreneurs want flexibility who owns and manages their company.
  • The company does not plan to apply for venture capital and equity.

LLC business profits that are passed on to individual members are subject to Social Security and Medicare tax. This can lead to an unfavorable financial situation for LLC owners as they have to pay self-employment taxes on their distribution share of the LLC's profit even if they invest that money back in the business rather than distributing these profits.

CARES Act Tax Changes for Employers

Deferral of income tax . Companies with employees are entitled to late wage tax payments according to the CARES law. This means that the company can postpone the company's share in social security tax on workers' wages from March 27 to December 31, 2020. As an employer, you must pay half of the deferred amount by December 31, 2021 and December 31, 2021, the other half by December 31, 2022. Self-employed workers can also defer half of the self-employment tax they owe. However, employers who have received a PPP loan cannot postpone the deposit and payment of the employer's contribution to the social security tax once the company has been informed that the PPP loan has been granted.

tax credit for employee retention . If a company had to completely or partially shut down operations in a quarter of 2020 due to the pandemic, the company is entitled to the tax credit for employee retention . The company is also eligible if the gross income has decreased significantly. Again, a company cannot claim the employee retention tax credit if the company has received PPP funding. The credit corresponds to 50 percent of employee wages from March 12, 2020 and before January 1, 2021, but the self-employed are not entitled to this tax credit. According to the IRS, authorized employers can then use the funds to pay wages to receive the employee retention loan. A company can either use the money saved for wages or request an advance on the loan from the IRS for the amount of the loan that is not funded through access to federal labor tax deposits by submitting Form 7200, Prepaid by employer credit based on COVID-19 .

Families First Coronavirus Relief Act (FFCRA) . With effect from April 2, 2020 to December 31, 2020, FFCRA will expand FMLA services and offer companies reimbursement of paid sick leave due to the coronavirus. Employers must pay paid sick leave if:

  • The employee has to quarantine or isolate himself due to the corona virus.
  • An employee has coronavirus symptoms and is waiting for a diagnosis.
  • The employee is a caregiver for a person (does not have to be a family member) who has to be quarantined or isolated himself.
  • An employee looks after his child because his school or childcare is closed.
  • Employers then receive a refundable tax credit equal to 100 percent of the family vacation wages paid . The FFCRA also applies to the self-employed.

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All registration deadlines for 2020 are not the same

All registration deadlines for 2020 are not the same

April 15 was formerly a tax day. Due to COVID-19 the IRS changed a number of filing deadlines so that most filing and payment deadlines for taxes will typically fall from April 1, 2020 to July 14, 2020 until extended to July 15, 2020. Some new amendments to the federal law also affect some due dates. But not all federal tax deadlines have changed. And not all countries have followed suit, which has created a very confusing situation. <! – ->

Deadlines for filing taxes until 2020

Here's what you need to know about tax periods … federal, state, and local periods.

Federal income tax return

The due date for filing federal tax returns for 2019 and paying the tax amount due this year for individuals and businesses in calendar year C is July 15, 2020. If more time is required to file a tax return, there is one automatic renewal available for asking. Individuals submit Form 4868 and companies use Form 7004 to receive an extension of registration until October 15, 2020. However, there is no time left to pay the balance for the 2019 return. July 15 is the last payment deadline. From that day on, interest and penalties will apply. The IRS offers a variety of options for those who cannot pay all or part of their tax bill until July 15th.

State income tax return

<! – -> All states and municipalities with income taxes have also granted extension exemptions, but this was not uniform. The vast majority have provided federal term extensions, but some have shorter or longer extensions. For example, the Idaho period was only extended until June 15, 2020, while the Iowa period was extended until July 31, 2020. The AICPA contains a list of the extension dates at the state level. Be sure to monitor these deadlines. Additional extensions may be provided for you.

Estimated taxes

In general, the first two installments of the federal government's estimated taxes for 2020 would have been due on April 15 and June 15. Both payments are now due by July 15, 2020. However, due to a change in the law, the self-employed can choose to defer payment of the so-called employer's share of the social security taxes that are part of the self-employment tax (the self-employment tax is part of the estimated taxes). Self-employed persons who use this deferral option and reduce their estimated taxes accordingly for 2020 will then pay 50% of the deferred amount by December 31, 2021 and the other 50% by December 31, 2022.

Note: If you have previously scheduled tax payments for April 15 and June 15 through you can change your payment date . If you've never used this free electronic payment method but want to, remember that registration can take up to 5 business days. So don't delay your online application.

At the state level, different extensions apply to estimated taxes. For example, Iowa did not extend the 2020 deadline for paying estimated taxes, even though a penalty was granted until late July. New Jersey extended the first rate of estimated tax for 2020 (due April 15) to July 15; No extension was planned for the second installment due on June 15th. But California and Massachusetts, like the federal government, extended both the first and second installments until July 15. The District of Columbia did not provide an extension for estimated taxes.

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Employment increases

Employers are required to file labor taxes according to their current schedule (which depends on the amount of their payroll) and to submit certain employer declarations. The deadline for filing labor taxes has not changed. The due dates for the quarterly employer declarations (Form 941) have not changed. <! – ->

These forms can be used to apply for reimbursement of certain labor taxes when employers are required to provide paid sick leave and paid family vacation, or when applying for the employee retention loan. Here you will find instructions for the paid vacation programs and the employee loyalty loan of the IRS. In addition, the IRS is exempt from the penalty for not paying labor taxes for employers who are eligible for these reimbursable credits, but only in the amount of those credits.

Employers may also be required to withhold state income taxes and to deposit them in good time. And employers have to pay state unemployment taxes. Again, the rules for these actions may or may not have changed in your state.

Deadlines for other tax measures

<! – -> In addition to income and employment taxes, the deadline for certain other tax measures has been extended:

  • If a tax refund is due to you from 2016, the IRS has extended this deadline for filing a refund claim to July 15, 2020. If you owe a state income tax refund from 2016, check if you have a similar extension. Your time to file a refund for state and / or local income taxes may have expired on April 15.
  • If you have sold real estate at a profit and would like to defer the tax by investing the proceeds in a qualified opportunity fund and the 180-day investment period has decreased between April 1, 2020 and July 14, 2020, the deadline is for the completion of the investment July 15, 2020.

Conclusion on the registration deadlines for 2020

You can monitor federal tax deadlines through the corona virus tax relief for businesses and IRS tax-exempt companies . Check your state's deadlines through your Department of Revenue, Finance, or Tax. You can find the contact information for your country here . And work with your CPA or other tax advisor to set the applicable deadlines for your tax measures now.


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