10 Things Smart People Do To Mess Up Their Taxes

Back in  2017 we couldn't help but notice that our really smart clients sometimes do things that really mess up their taxes.  In 2022, five years later, things really haven't changed. that much.  So we thought it would be a good thing to publish our list again and help you avoid mistakes with your taxes.

10 Things Smart People Do To Mess Up Their Taxes

Each year after tax season we stop, take a deep breath, and wonder why our very smart clients sometimes do very stupid stuff with their taxes.  Each year we make a list, compiling the knuckle headed stuff that some clients did causing a painful April 15th, with a hope that this list will help you avoid their mistakes. Please note that references to links at our web site 1taxes.com on all found on the resources page.

Making too much money and not paying in their taxes.  We call it putting your big boy pants on. Taxes are a real life part of your families’ budget.  Experts tell us that the combined federal and state tax liabilities are in fact the largest single part of your budget.  Yet some clients seem to be in denial.  In fact some clients have told us that despite their six figure income, they are barely making ends meet, let alone have the money to pay their taxes.  All the deductions and credits in the world still can’t change the fact that paying some taxes are going to be part of your life. The IRS is the worst creditor in the world.  The largest collection agency in the world, the IRS, can make your life miserable.  We live to figure the correct amount of withholding to avoid that very unpleasant scene on April 15th.  Call us we can help.   

A lot of jobs with little or no withholding. Or spouses income pushes clients into a higher tax bracket yet they are not recognizing this fact that by not withholding enough you are not paying the correct tax liability. There is no other way to describe it:  The IRS does a lousy job helping us figure out the correct amount of withholding from our paycheck.  The assumption that the amount of withholding is based upon our dependents has gone the way of the dinosaur.  In fact form W-4 is a fairly complicated calculation requiring you to take in account your marital status, whether you itemize deductions, and whether you have more than one job or if you have two spouses working.   By our calculation the form requires answering 17 questions, and a good number of calculations.  Five in fact.  Two solutions to the problem.  Call us.  Our computer program can make the calculation fairly simply, or check out the link on web site 1taxes.com to the IRS interactive W4 calculator.

Take money out of their IRA or pension plan and don’t have any money withheld for taxes. Still the number one offender and the cause of more heartache is an early distributions from tax sheltered plans. If you have to take money out of your tax sheltered plan don’t forget that there is a 10 percent penalty in addition to Federal tax owed on the distribution if you are under age 59 1/2.  Don’t ever take money out of these plans without having the most Federal tax withheld from the distribution.  Call our office. We can help.

Take money out of their IRA or pension plan or 401 K and not roll it over to another tax deferred plan.  Back on this subject again. Leaving your job usually means cashing in a pension plan or 401 K.  We understand that sometimes the money is needed to pay for day to day bills until you can find a new job.  But if you don’t need the money don’t spend it, roll it over. We can help you if you don’t know what to do.  We can refer you to very competent people that can help with the rollover.  Taking the money if you don’t need it means additional tax liability.

Don’t keep any records. Records are very important in our imaginary tax world, a place nobody really lives in, yet we all step in it come April 15th. Recordkeeping is very important.  Especially for business tax deductions like car expenses. Jotting down on a daily basis in a daily planner, online,  or a pocket calendar is all you need.  Keep a file nearby for tax deductible receipts.  Better yet get a credit card that you use only business tax deductions.  That way you all the receipts organized for you.  Your credit card along with your milage calendar is all you need to make April 15th very less taxing.

Give charitable deductions, especially non cash and don’t make any attempt to value the donation. Each year clients drop off  blank receipts from the charitable organization you donated your items to.  The receipt is incomplete unless you write a  note about the date and time of your deduction and a short list of the description of the deduction in your tax deduction file is all you need.  The million dollar question is how much should I value that deduction I just made.  The internet has made it simpler.  We have linked on our website, 1taxes.com, several websites maintained by various charitable organizations to help you value that deduction.  It is good stuff and helps you increase your refund.  

Not filing your taxes because you don’t have the money to pay. This is a very fatal mistake.  Always file, even if you do not have the money to pay the taxes you owe. The IRS considers not paying on time and not filing as two separate issues, and a penalty is involved for each.  Those penalties are rather steep  It can be as high as 25% of your unpaid tax liability.  When you file your tax return, you have several options. You can apply for an "offer in compromise," make monthly payments through an IRS installment agreement, or temporarily delay paying. Whichever is best for you, we will help you contact the IRS right away to let them know you cannot pay. You should pay as much as you can when you file because the IRS assesses penalties and interest on the amount not paid.

Ignore those letters from the IRS. Do not ignore mail from the IRS. If you owe taxes, the IRS will collect. Persons who do not communicate with the IRS about inability to pay can expect a "Notice of Federal Tax Lien" to be filed against their property. In lien terms, this is a lien about the size of Alaska. Few carry more weight. The lien attaches all your property, including your house, car and any future property you might obtain. A levy, which is a legal seizure of property to satisfy a tax debt, is another legal means the IRS can use to collect taxes. This means the IRS can seize your car, boat or home and sell it to satisfy your tax debt or it can place a levy on your wages. More good news is that these liens often stay on your records long after the issue has been resolved or until the IRS gets around to removing it. So it's also the gift that keeps on giving!  We have spent significant time and energy in our tax resolution service.  If you are in trouble, it really pays to hire us to help.

Home office expenses are often an overlooked source of valuable business deductions. Many business owners don't claim them because they fear (incorrectly) that home offices are an audit "red flag," or because the recordkeeping is a pain. (Form 8829, which helps calculate the deduction, includes 43 lines and asks you to "see instructions" 17 times.) But now the IRS has released a "safe harbor" method that may make home office deductions more accessible.  It is a simpler per diem rate.  We used it for many taxes we prepared this year.  It works and saves your money.  Do you have a space, not just a room, just a space,  in your home that you use "regularly and exclusively" for business?  But don't specifically deduct it as such?  To see if the new safe harbor makes sense for you, call us.

Big refunds.  Isn’t that the point of filing? Big refunds. In fact some clients rate the expertise of their tax preparer with the size of their refund.  The bigger the refund the better the tax preparer.  Nothing can be farther from the truth.  Refunds are nothing more than interest free loans of your money to the government.  Then you have to go through the expense and the wait of getting your refund when you file your taxes. Extra withholding doesn’t benefit you, only the government. Don’t stand for big refunds.  Stand for bigger paychecks.  Your goal should be break even on April 15th.

Assuming the wrong filing status.  Single taxpayers are probably the most guilty for assuming that they should file as single taxpayers when in fact they qualify for the much-more-favorable head-of-household (HOH) filing status. Say you're single and your non-adult child lives with you and pays for less than half of his or her own support. If you pay more than half the household's costs, you qualify. You may also qualify if you are still married and lived with your child but apart from your spouse for at least the last half of the year. Finally, if you are single and can claim your parent as a dependent, you can probably file as HOH. This is true even if your parent has his or her own place. You are the HOH if you pay more than half the cost of your dependent parent's home.  This year we also had a number of clients for whatever reason, decided to file separately from their spouse.  Married filing separately is the highest tax rate, period.  You lose certain deductions and credits when you file separately.  All too often one spouse will itemize deductions, taking all the mortgage interest and real estate taxes, leaving the other spouse who is forced to itemize with no deductions.  Don’t settle for separate.  File with your spouse.  Or if you are in the middle of a divorce you may in fact qualify for the single filing status, even though you are not officially divorced.  IRS rules concerning whether you are in fact single are quite favorable.  Much more than state law.  Something that you should discuss with us when you file your taxes next year.

Important, no-make-that-very-important changes to the Employee Retention Credit. You, the business owner, probably will no longer be eligible for the credit.

 

On August 4th, the IRS issued guidance on the Employee Retention Credit (ERC) –

 a refundable tax credit that has helped thousands of businesses avoid laying off employees

 since the start of the pandemic. Unfortunately, the recent IRS guidance makes it so 

that wages to business owners or their spouses only qualify for the ERC if the 

business owner doesn’t have any living siblings, parents, or children.

I highly disagree with the IRS guidance.  And apparently so does Congress. 

Michigan Congressman Jack Bergman wrote to IRS Commissioner Charles P Rettig:

“I write to express my concerns with the recent IRS Guidance on the Employee Retention Credit under Section 3134 of the Code and on Miscellaneous Issues Related to the Employee Retention Credit (Notice 2021-49). Specifically, I object to language that prevents wages paid to a majority owner 

of a corporation from qualifying under the Employee Retention Credit (ERC) solely if the owner 

has a direct family member.

Section IV, Subsection D of Notice 2021-49 addresses whether wages paid to an employee who is a majority owner of a corporation, or to their spouse, may be treated as qualifying wages under the ERC. As written, this guidance excludes wages to majority owners or spouses only if “the majority owner has a brother or sister (whether by whole or half-blood), ancestor, or lineal descendant.” As a result, the only business owners that can take advantage of this credit are those who are orphaned and have no children or siblings. Meanwhile, those with families are cut off from this support, despite having 

an equal or greater need for financial relief through the ERC.

The distinction made in your guidance is entirely illogical, goes against the intent of Congress, and arbitrarily punishes Americans with families. I, therefore, request further explanation as to the statutory rationale for this decision and urge you to take action as needed to correct this absurd bureaucratic move.” 

The tax practitioner community is recommending that we hold off doing anything for 

past 941 filings.  

 

We were operating under the law.  

 

And the probability of this decision being reversed is highly likely. 

 

We have three years to amend any returns.  

However, looking forward, we will no longer be calculating the ERC for any wages paid to the 

majority owner, or family members.

Please feel free to call us with questions.

Tax Partners 2021 Tax Guide is now available.

It's here. Tax Partners 2021 Tax Guide is hot off the presses. 

 

Our fees. We have not increased them from last year.

What we can do to recover lost stimulus payments. It's a little complicated.

A discussion of last minute changes in the tax laws. And there are many.

How to use our new client file transfer portal. Send your information to us without visiting our office. 

List of items needed to prepare your taxes.  Did you know that you can now deduct charitable contributions whether or not you itemize deductions. 

Please click on this link to read Tax Partners 2021 Tax Guide.

Last minute tax savings tips for small business owners. Our December 2020 Client Newsletter

On January 1, 2021 the minimum wage in Illinois will increase to $11.00 an hour for employees and $6.00 an hour for tipped employees.

We will see what the effects of the increased minimum wage has with the now shaky Illinois economy.

The experts say that an increased minimum wage will reduce employment in the long run, and less employment opportunities for low-skilled workers.

How are you going to handle your increased labor costs? I don’t see any other option but to consider yet again a price increase and considering limiting your employees hours.

Don’t forget we will be calling you asking about your health insurance premiums this month.

We know your thoughts are on the holiday and not tax savings ... but taking actions in the next few weeks specifically designed to reduce your 2020 tax liability will prove to be rewarding when you file your taxes next year.

Earlier this month I attended two days of virtual tax school. Taught by a former IRS agent, Chris Bird, Chris teaches from a much different approach than the virtual IRS Nationwide Tax Forum I attended for four weeks this summer. Chris looks at everything from the practitioner perspective, not from a we make the rules perspective. Specifically how we can help you save taxes.

However, a reality check is in order. There really isn’t anything new in our imaginary tax world this year, with the exception of Covid-19 relief legislation. New rules apply to foreclosures, and repossessions, cancellation-of debt income, and 2020 relief loans and grants such as the PPP loan you may have gotten earlier this year. By the way PPP loan forgiveness is not taxable income to you. I can assure you that the Covid-19 is an extraordinary taxpayer friendly legislation and hopefully produces even bigger refunds for 2021.
 

With just 31 days left in the year, now is the time to focus on some last minute tips to help you have a happier April 15th. Tis the season for tax planning and more importantly tax savings.

Whether you are filing your tax return as a partnership, corporation, or a sole proprietor, there are certain things you should be doing right now to save taxes. We hate April 15th surprises just as much as you do. Please understand that the things you do right now can make all the differences come next April.

But first a quiz. What deduction is absolutely free? Is only available if you are a small business owner or own rental property. And likely won’t survive a change in administrations. If you answered QBI, you would be correct. The Qualified Business Income (QBI) deduction is something that we have never seen in more than 40 years of tax practice. It has an extraordinary effect on your tax liability.

Why? Because the QBI deduction reduces the net income of your small business by 20 percent. That means you will pay taxes on 80 percent of business’ net income this year. The IRS has introduced a new form 8995. It is attached to your personal tax return, calculating how we made the QBI deduction.

It does require some work. Specifically looking at how to maximize this free deduction, and calculate the lowest tax liability, while preserving current and future tax deductions. Is it better to make an IRA deduction, or expense the purchase of new equipment? Does the QBI deduction outweigh the benefits of let’s say a SEP contribution? These decisions can only be made when we prepare your tax return. It is that complicated calculation. But it is a really good thing. Trust me.

Version 37 of the same story.

Sally Smith, was a smart businessperson, she knew the basics of year-end tax planning.

1. Postpone income to next year.

2. Pay as many expenses as possible this year.

3. Keep inventory level low.

4. If you are going to make a capital investment, do so before the end of the year.

5. Double check for missing deductions.

6. Invest in an IRA or a similar type account.

Sally owns a retail store and faced the year end with her eyes wide open. Sally knew that a few strategies would pay big dividends on April 15th. Here is what she did to reduce her tax liability:

Since Sally was operating her business on a cash basis and relied upon cash sales through her cash register, she did not have the opportunity to postpone much income. She followed a policy based on our firm’s standard practice for clients for many years, to close her books on December 28th, which gave her an opportunity to defer three days of sales to next year.

Sally then reviewed her bills. She started to write out checks for her expenses. She wrote checks for all expenses due, even if some expenses were due in January. She dated her checks for December 28, 2020 to be sure that the expenses were recorded for this year on December's bookkeeping. Her checks written totaled to almost $10,000. Her one simple strategy, accelerating expenses meant that Sally saved over $4,000 in income tax this year.

Since you pay taxes on your inventory at the end of the year, Sally knew that reducing her inventory to the lowest amount possible was important for her. First, she decided to review her inventory to see if she had things that have been gathering dust. She found items that in fact had been sitting around for more than three years. She decided to mark those items down and immediately started an inventory reduction sale for those items. She knew that the value of her inventory was based upon her costs of the items, not the selling price. She also knew that items that were partially used, or supplies not for resale, did not count as part of her inventory.

Sally had been debating whether to purchase a new computer for her business. The local computer store was offering a "six-months same as cash" financing offer for the purchase of new computers. Sally decided to purchase the computer now, electing to take advantage of the special financing offer. She knew that she could deduct the full purchase price of the computer on her tax return, even though she did not pay for it right away. When you purchase something using a credit card or borrow the money, as Sally did, you get to deduct the amount when you purchase the item. The $3,000 computer saved Sally $1,200 in income tax.

As part of her year-end review Sally took a minute to see if perhaps she has recorded all her business expenses as part of her monthly record keeping. She knew that the credit card that she had been using exclusively for business had some interest payments that were not included.

She made a note to record her year-end statement from her credit card company to make sure that it was included as interest paid on her year-end documents to her accountant. In addition, she decided to review her automobile mileage and other receipts for expenses that she might not have had for her business and had a chance to record in her monthly record keeping.

Surprisingly, Sally read a previous newsletter and decided to take her business accounting online. She took our advice and subscribed to Wave app accounting. She took advantage of downloading her bank account and discovered how easy it was to enter her data. She really liked it and is recommending it to other small business owners she knows.

Sally also knew that she had time to make her annual IRA contribution until April 15 of next year. She decided not to make it till next April. She also made a note to talk to us about Roth IRA accounts and analyze the different options available to her. One of her options was a self-employed Pension Plan commonly called a SEP. IRA's. SEP. IRA's do not have to be opened or funded until the due date of your return. That means that Sally doesn't have to open or make a contribution to a SEP IRA for the 2020 tax year until April 15, 2021. She can also contribute a larger amount to her SEP IRA than she could to her regular IRA. However, she was reluctant to open one because she also knew that she would have to contribute an amount to her full time employees.

She made a note to ask her tax guy what that contribution would be and what her resultant tax savings would equal. She also thought her accountant might have ideas on how to "cushion" the employee's contribution issue.Sally knew that her year end review of her tax situation saved her almost $7,000 this year.

She made a note to review her year end information before we prepared her tax return in 2021.

SAVE TAXES...REMEMBER BEFORE JANUARY 1, 2021


Postpone income to next year.



Pay as many expenses as possible this year, even if you do not send the checks off till January, be sure to write the checks for the expenses.

Keep inventory at a low level.

If you are going to make a capital investment, do so before the end of the year.

Double check for missing deductions.

Invest in an IRA or similar type account.

Here is our list of last minute individual tax strategies for 2020:


1. Increase your contributions to your 401(k) or IRA retirement investment plans. A retirement plan is an easy deduction. If your employer is not participating in your retirement plan, you should consider an IRA or participate in the self funded 401(k) if at all possible. Also, while some employers require a wait time or require employees to wait until open enrollment to start up payroll deductions, some companies will let you start at the end of the year or even on the next paycheck. It’s worth looking into, since the money contributed to a retirement account is typically not subjected to income taxes.


2. Charitable giving. Not only are donations good for your taxes, they're good for society as a whole. While there may be no large tax benefit for some donations, please consider the social benefits to making donations to charitable organizations.


Even older computers and cell phones can be useful for training or other charitable causes -- it doesn't have to be an iPad. You're entitled to fair market value for clothes and furniture, among other things, so take time right after Christmas to clean your closets and head to your favorite charity.


The little things add up too, and you can write off out-of-pocket costs incurred while doing good works. For example, ingredients for casseroles you prepare for a nonprofit organization’s soup kitchen and stamps you buy for your school’s fundraising mailing count as a charitable contribution. You can also deduct any out-of-pocket travel expenses for charitable causes, which includes everything from mileage for travel, taxis or parking expenses.


3. Choose stock donations over cash. If you're thinking about making a large cash donation, you might want to think about using stock in a company that has done well. Make a donation of those shares; if you sell the shares to make a large donation you have to pay taxes on the profit. However, if you donate the shares then you receive a tax deduction for the fair market value of the stock.


4. Paying next semester’s college costs early and counting the costs toward the American Opportunity tax credit. Simple and easy. Works best for freshmen who started college in the fall of 2019.


5. Sell losing investments. Capital losses are first used to offset capital gains, and then up to $3,000 of the net loss can be deducted against income, such as your salary. Any excess loss is carried forward to future years.


8. See if you can deduct any medical costs. You have to itemize to qualify for this deduction and expenses have to be more than 7.5% of your adjusted gross income, but if you have a lot of doctors' visits and medical procedures, it may be worth checking out. Will you need surgery in the near future? If so, try to get it in before the end of the year.


I hope this helps your planning!

Six things shut downed Illinois restaurants should be doing now.

 

Back in August 2020 I wrote in our monthly client newsletter “I have been doing a lot of thinking about this whole Covid 19 thing. If you are still in business congratulations.  If you are a still open restaurant business owner, you are an extraordinary business person. 

Yelp is reporting that at least 4,400 Chicago businesses have closed permanently.  As we enter the fourth month of this thing (I really don’t know how to define it) I have nothing but respect and admiration for you, my valued client. ‘

So here we go again.  Another shutdown aimed at the hospitality industry. Another challenge, with virtually no financial aid available. I have been thinking again.  What advice can we give you?  What are the things you should be doing right now?

Remember if it is going to be it is up to me.  You must be your own advocate. The survival of your business depends solely on the actions you take now. Pick up the phone and call your local mayor, county board member, state legislator, state senator, governor (no comment), congressman, and senator.  Tell these elected officials how the current shutdown is affecting both your business and employees lives.  Ask for their assistance.                                                                        

Apply for unemployment benefits.  By now you know the drill.  If you have an account you will have to apply online.  Remember you must have paid yourself a salary to receive benefits.  And yes IDES is still a mess. We continue to offer limited assistance for clients.  Please call with any questions. 

Update your must needed web site, google my business, yahoo and yelp review sites.  Here are the links:

https://smallbusiness.yahoo.com/local 

Get your free personalized report to see how your business appears online. More importantly Yahoo complies a Covid 19 Small Business Resource Listing that is the most comprehensive I have found on the web. This up to date list of the most useful COVID-19 resources from government, non-profit and private companies is updated daily to support small businesses during this time of crisis.

https://smallbusiness.yahoo.com/advisor/resource-center/covid-19-small-business-resource-center/                                                    

And finally:

https://www.google.com/intl/en_us/business/

https://www.yelp.com/   

All of the above web sites are free

Start an eat local campaign. Prominently display outside of your restaurant a banner telling your customers you are still open and asking for their support.  Carryout here and keep local jobs. Here is a link to https://www.bannersonthecheap.com

Call you suppliers and landlords again.  Be upfront about the situation and your intentions on paying past due bills. Do not hesitate to call your vendors.  They want to hear from you. 

And finally consider a Business Interruption Grant. You must have been in business prior to the original March 2020 Covid shutdown.  You will need bank statements from July and August of 2019 and July and August of 2020.  You will need a copy of your business tax return.  These items along with a copy of the owner’s drivers license and a signed W 9 and we can make an application for your business.  Please note that if you did receive other Cares Act funding such as a PPP loan or an Economic Injury Disaster loan or grant, your application will be considered after others who have not received any assistance to date.

The first person you should call is your tax guy!  No other person on your team has the experience, resources and contacts with other small business owners, such as yourself, to help you find the answer to that most perplexing, impossible to solve problem.

No matter the problem, we continue to offer you unlimited free telephone assistance, no matter what your client service level is, 52 weeks a year.  No calling customer service call centers.  No extra charge meters. No need to worry.  A trained experienced professional is ready, willing, and able to offer assistance and answer your questions. We demonstrate and deliver value to our clients every day.

Governor Pritzker’s “Masks on. Masks off” recent executive order for restaurant customers really doesn’t cut the science mustard.

 

According to Capitol News Business Journal, effective Wednesday, Aug. 26, 2020, all bar and restaurant patrons will be required to wear face coverings when interacting with wait staff or other employees. Masks will also be required when food or beverages are being brought to the patron’s table, when placing orders and when picking up carry-out orders. “Illinois has had a mask mandate since May 1 this year, and in most establishments people are adhering to it,” Pritzker said during a COVID-19 briefing in Joliet. “But it’s important that we treat hospitality employees just as you would in any retail store or establishment. This new requirement asks a little bit more of our residents dining out in order to protect their health and safety and that of our front-line hospitality workers.”


But I got to thinking, you have to take your mask off to eat and drink. But what if the server asks, as servers do frequently, how is it tasting? Do I stop eating my meal, and put on my mask before washing my hands? Or if the bus person stops by my table and asks if he/she can clear my dishes. Do I stop everything, and put on my mask before washing my hands? And when should I put on my mask? What if the server stays six feet away? What if the server sneaks up on me? What if the owner wants to stop by our table and thank us for coming in? What “front line hospitality workers are included in the executive order? Where do I store my mask between courses or should I replace my used mask with a new one every time an employee stops by my table? What other States are making customers take their masks on and off so many times when they are dining at a restaurant?


All these interactions can, by my count, amount to at least eight times (ordering the food, having the food served in courses, cleaning the table, having the check placed on the table, paying the check, signing the credit card receipt) I have to take my mask off and then put it back on during an average dinner at my local restaurant.


All this mask on and mask offs can’t be good. Right? So I did a little research.


Let’s consult first the WHO (which has had its ups and down lately) guidance about Masks:

“Today, World Health Organization (WHO) officials reminded the public that masks still must be worn correctly, cared for and kept clean to ensure that they are effective. "People can infect themselves if they use contaminated hands to adjust a mask or repeatedly take it on or off," explained the Director-General Dr Tedros Adhanom Ghebreyesus.”

"I cannot say this clearly enough," said the Director-General. "Masks alone will not protect you from COVID-19." Source WHO June 5, 2020 briefing.

But wait there's more. Let’s see what other experts say about repeatedly taking a mask on and off.

"Once you wear a mask once, it's contaminated by whatever. If you take the mask off and sit it on another surface, that surface is now contaminated," says Geoffrey Mount Varner, MD, MPH, FACEP, a Maryland-based emergency medicine physician.

"It's best to use one-use masks and once they are taken off, dispose of them," says Mount Varner. "If you use a cloth or hand-made mask, it needs to be washed and sanitized between wears."

"If you contaminate your mask even from the outside, you can get easily infected," says physician Dimitar Marinov, MD, Ph.D.

"Taking off your face mask and then reapplying it with contaminated hands can move the bacteria or virus directly into the breathable area," says Jared Heathman, MD, a Texas-based psychiatrist.

“Make sure your hands are clean before adjusting the mask. It's best to avoid touching your face in general.”

"A mask should be changed or disinfected as often as every 2 hours, otherwise viral particles can accumulate on it and you are more likely to breathe them in," says Marinov. Source MSN lifestyle April 2, 2020.

And finally on April 7, 2020, Forbes Magazine wrote. What’s the most important thing to do when wearing masks?

“There are actually three things. First, wash or sanitize your hands, clean your face with a warm damp face cloth, and allow your face to dry before applying your mask. Second, avoid touching your face. Third, always wash or sanitize your hands before and after applying and removing your mask.”

Sound to me Governor Pritzker, your mandate is impossible to follow at the average restaurant, by the average diner, no matter how well intended, and really doesn’t protect the user or the front line server. Unless you plan on washing your hands before each server encounter. Or of course replacing your mask after each encounter. Sometimes things look better on paper than they do in practice.

Paycheck Protection Act looks like the way to keep your business afloat.

The Paycheck Protection Act the cornerstone of the CARE act is finally online.  I strongly encourage your to take advantage of it. 

Below is a discussion from the Intuit folks about the Paycheck Protection Act that they provided me to forward to you.

One word of caution, some of the links in the article are not working.  Here is the primary link to the U S Department of Treasury web site dealing with the Assistance for Small Business resource page.

This link should have everything you need to start the process.

The Paycheck Protection Program (PPP) is a cornerstone of the $2 trillion Corona virus Aid, Relief, and Economic Security (CARES) Act. The program provides $349 billion in Small Business Administration (SBA) loans for small businesses with 500 or fewer employees. The goal of this loan program is to encourage businesses to keep workers employed during the corona virus pandemic.

Typically, SBA loans are for businesses that cannot find credit through other lenders, but the CARES Act waives that requirement. And while SBA loans require borrowers to post collateral and sign a personal guarantee that they’ll repay the loan, PPP loans require neither. Instead, the federal government is providing loan guarantees to lenders.

All businesses—including nonprofits, veterans’ organizations, Tribal business concerns, sole proprietorships, self-employed individuals, and independent contractors—with 500 or fewer employees can apply. Businesses in certain industries with more than 500 employees that meet applicable SBA employee-based size standards can also apply.

Determining Paycheck Protection Program loan eligibility

Lenders must determine if a business was operating as of February 14, 2020, and if it was paying employees on that date. Proof of your payroll costs is the biggest factor in determining the size of your loan. “Employees” includes full- and part-time workers. Independent contractors paid through 1099s are also included in the payroll calculation. Criteria for loan eligibility include:

• The business has 500 or fewer employees.
• The owner certifies that the uncertainty of economic conditions makes the loan necessary to continue operations during the pandemic.
• The loan proceeds must be used to fund payroll, rent or mortgage payments, interest on debt, and utility payments.

How much can an eligible small business borrow?

Eligible small businesses can borrow up to $10 million. The maximum loan amount is based on the business’s average total monthly payroll costs for the prior 12 months, multiplied by 2.5.

Loans will cover annual payroll, up to $100,000 per worker, but cannot exceed $10 million. If your business has operated for less than a year, your loan will be based on employee payroll between January and February 2020. The SBA is paying origination fees to lenders, so borrowers don’t receive additional fees.

What are the taxes and loan terms?

After eight weeks, borrowers must submit to lenders detailed reports on how they used funds. But to streamline the process and keep small businesses running, all PPP loans have identical terms:

• Interest rates of 0.5%
• Maturity of two years
• First payment deferred for six months after approval
• 100% guarantee by the SBA
• No collateral or personal guarantees from borrowers
• No borrower or lender fees payable to the SBA

What can I pay for using Paycheck Protection Program funds?

Since the program is designed to help businesses keep employees on the payroll, the primary use of Paycheck Protection Program funds should be used to cover payroll-related expenses. Eligible expenses include:

• Salaries
• Wages
• Commissions
• Expenses
• Vacation, sick, parental/family/medical pay
• Retirement contributions
• Group health coverage premiums
• State and local taxes

Federal taxes are not included, nor are payroll costs for employees making over $100,000 a year. However, the program covers the first $100,000.

Paycheck Protection Program funds may also be applied to administrative costs like:

• Utilities (electricity, gas, water)
• Communication (phone or internet access)
• Insurance premiums or other healthcare costs
• Rent, provided borrowers signed their lease before February 15, 2020

If small business owners use the PPP funds to cover qualified expenses over eight weeks, they may be eligible for loan forgiveness.

How is a Paycheck Protection Program loan forgiven?

Loans may qualify for forgiveness under some circumstances:

• The loan is only used to cover qualified expenses.
• You pay 100% of payroll dollars to employees during the eight weeks after the loan is approved.

The amount of the loan eligible for forgiveness will be reduced if:

• You reduce the number of full-time workers you employ over eight weeks.
• You reduce payroll costs by 25% or more.

Forgiveness is determined by the banks that grant the loans. Banks will have 60 days to approve or deny a business’s loan forgiveness request.

Normally, when a bank approves loan forgiveness, the borrower is taxed on the dollar amount of the loan, as if the loan was business income. The CARES Act does not tax the borrower when the loan is forgiven.

What if the loan is not forgiven?

If a portion of the loan is not forgiven because at least 75% of the loan did not cover payroll costs, the remaining loan must have a maturity date of 10 years or fewer. And the interest rate will be no more than 4%. There will be no penalty for loan prepayment, and the federal government will continue to guarantee the loan.

Does the Paycheck Protection Program cover sole proprietors and independent contractors?

Yes! Sole proprietors and independent contractors meet the definition of a small business under SBA size standards. Professionals in this category must also document their income and expenses.

You can document your income using bank statements and 1099s received from clients. Contractors may not receive 1099s for smaller payments. Expenses can be supported using bank statements and credit card documentation. Much of this information should be filed with your 2019 tax return.

How to apply for the Paycheck Protection Program

On April 3, 2020, small businesses and sole proprietorships can apply for these loans. On April 10, 2020, independent contractors and self-employed individuals can apply.

Complete the SBA’s Paycheck Protection Program sample application, and submit the document to any existing SBA-approved lender. Federally insured depository institutions, federally insured credit unions, and Farm Credit System institutions may also be participating as SBA lenders. Check with your bank to find out if they’re participating in the program.

When you apply for the loan, your lender will consider both your personal credit score and your FICO score. The SBA uses the FICO business score for all business loans. Both credit scores evaluate your use of credit and if you make debt payments on time. To maintain a good business score, you must pay vendors and suppliers on time.

You will need to have the following documentation to apply:

• Articles of incorporation for each borrowing entity
• By-laws or operating agreement for each borrowing entity
• Copies of each owner’s driver’s license
• Payroll expense verification
• Certification that all employees live in the United States
• A detailed list of employees who do not live in the U.S., with corresponding salaries
• A trailing 12-month profit and loss statement
• Proof of expenses like rent or mortgage payments, interest payments on debts, and utility payments.

Potential borrowers must also provide payroll details to the lender to obtain loan approval. You’ll also need to provide payroll data during the eight weeks after the loan is finalized. If you use accounting software or a payroll processor, the payroll data will be easy to access. Otherwise, you’ll need to provide documentation for:

• Gross pay. This includes gross wages as well as paid time off, vacation pay, and family medical leave pay for the last 12 months.
• Tax withholdings. This includes the last 12 months of federal, state, and local income taxes withheld.
• 2019 FUTA taxes. This includes IRS forms 940 and 941 for federal unemployment taxes.
• 1099s. This includes 2019 payments to independent contractors.
• Health insurance premiums. This includes company-paid premiums for group health insurance for the last 12 months.
• Retirement plan funding. This includes business contributions to employee retirement plans over the last 12 months.

Your business will still have to withhold federal and state income taxes, Medicare, and Social Security. Check with a CPA to determine the dates to file payroll tax reports and submit withheld payments.

Where to go from here

Contact your bank and find out if they’re participating in the SBA lending program. If they don’t, ask for a referral for another institution. Then gather your records, complete the application, and submit the data to an SBA lender as soon as possible. A CARES Act loan can serve as a lifeline for your business. Explain the application process to your workforce, so they understand the direction you’re headed. Finally, give yourself some credit for taking action.

One additional note, we are reading that some banks may not be set up yet to start the loan application process.  Chase is not up yet, but Bank of America is for example.  Anything put together in a week in government inefficiency world has got to have a few bumps in the road.