Taxes | Dunham Tax Professionals

PPP Qualified Expenses

by Michelle Roberts | Feb 19, 2021 | PPP, Taxes

PPP loans can only be used for certain expenses. If you use your loan for anything other than these expenses, you will not qualify for full loan forgiveness. So how exactly can you use your funds? What are the PPP spending requirements?

PPP eligible expenses include:

Payroll Costs including
- Salaries, Wages, Tips & Commissions: Capped at $100,000/annually per employee
- State & Local Taxes on Compensation
- Employee Benefits: Includes costs associated with retirement plans, group health insurance, separation or dismissal, vacation time, sick and medical leave, and parental and family leave

If you’re a sole proprietor or independent contractor, self-employment wages, salaries, and commissions not exceeding $100,000 annually qualify as payroll costs.

Note: These costs will need to be proven by submitting payroll documentation. For small businesses, acceptable documentation includes: Tax Forms: Form 941 quarterly tax filings and Form 944 annual tax filings; Payroll Registers, which ideally should be from the last 12 months, and Business Bank Statements: Should be from the last 12 months

If you’re an independent contractor or sole proprietor, documentation proving payroll costs include: Tax Forms: 1040 Schedule C and 1099s; Income and expense reports

Other documentation may be acceptable — ask your chosen lender for additional details about how they’re handling PPP allowable expenses

Mortgage Interest: PPP loan can be used to pay mortgage interest. Mortgage interest obligations must have been incurred before February 15, 2020, to be a qualified expense.

Make sure to have documentation showing the mortgage interest that was paid. Acceptable documentation includes receipts, bank statements, account statements, and canceled checks.

Rent: If you rent your commercial space, you can use a portion of your funds to cover rent over the next two months. To be considered a qualified expense, a lease agreement for the property must have been in effect before February 15, 2020.

Again, you need to keep all documentation proving your funds were spent toward this qualified expense. So, don’t forget to hang onto your account statements, receipts, bank statements, and canceled checks.

Utilities: A portion of your loan can be to cover your utilities – which the SBA defines utilities as electricity, gas, water, transportation, telephone or internet access, for which service began before February 15, 2020.

You’ll want to have documentation proving that these utilities were paid by keeping account statements, bank statements, canceled checks, and receipts.

One last thing to note is that you must use at least 60% of your loan to cover payroll costs to be forgiven. The remaining 40% can be used to pay mortgage interest, utilities, and rent.

The new round of PPP loans expands the list of qualified expenditures on which you can use the 40% of your loan that isn’t dedicated to payroll. These qualified expansions include:

Software: Since the onset of the pandemic and its mandated shutdowns, more and more of us are working from home – and many businesses that have had to start taking and processing orders online that had previously been done in person. This paradigm shift has several associated costs such as cameras, software and the like.
Property Damage: Yes, that’s right, property damage – stemming from periods of civil unrest – can be a portion of your expenditures. These of course, need to be proven and accounted for.
Necessary Supplier Costs: this is another major addendum from Round One payments to the current Round Two: the new relief recognizes the importance of restocking critical supplies to keep your business running. Keep records of these expenditures – although your business should already be doing so.
COVID-related Protective Measures: If your business is fortunate enough to have stayed open during these times, e.g., grocery stores, food service, gas stations or civil services, it has likely had to implement some changes to stay compliant with mask orders and social distancing guidelines; these may also include putting up shield guards and plexiglass barriers – and now they are included in potential PPP forgiveness.

Dunham Tax Professionals continues to stress the importance and value of consulting a professional for expert guidance and additional information. Please feel free to contact us to make an appointment. We’re here to help.

Schedule an Appointment

Best Practices for Maximizing Deductions and PPP

by Michelle Roberts | Feb 17, 2021 | Taxes

The question of whether Payroll Protection Program – PPP – expenses would be tax deductible was a big part of the confusion for the first round of funding under the CARES Act, and as we know by now, the IRS issued guidance in 2020 asserting that no tax deduction would be allowed for expenses paid for with forgiven PPP loans. And this was an attempt to eliminate the double benefit that taxpayers would receive if they were able to take a tax deduction for expenses paid for by the government.
However, with round two, the new guidance is that expenses paid for with PPP funds are deductible

This additional funding generally intended to cover payroll and other costs incurred by small businesses that are still struggling as a result of the pandemic. The new law allows hard-hit businesses to obtain a second PPP loan provided their first PPP loan has or will be used up by the time

Businesses with 300 or fewer employees per location can apply for a first- or second- time PPP loan under the second draw – which was reduced from 500 employees under the CARES Act. And also, there are more stringent requirements in place: borrowers must demonstrate proof of a decline in gross receipts before the new loan is disbursed. Generally speaking, the new law requires businesses to demonstrate a 25% loss in gross receipts for any quarter of 2020 when compared to the same quarter in 2019. Special rules apply to businesses that were not yet in operation in the corresponding 2019 quarter.

There are also a number of changes implemented between CARES and the new PPP. Under the CARES Act, forgivable costs were limited to payroll costs, rent, covered mortgage interest and utilities. The new law expands this list to include:

Covered operations expenditures, including payments for business software or cloud computing services necessary to keep business operations running, e.g., HR, accounting, payables, inventory and other similar functions
Covered property damage costs attributable to looting and vandalism during public disturbances that occurred during 2020
Covered supplier costs, including perishable inventory
Covered worker protection expenditures necessary to adapt a business so it complies with mandated COVID-19 sanitation, safety or social distancing standards. In a restaurant setting, this could include funds spent on the installation of drive-through windows, physical barriers such as sneeze guards and reconfiguration of dining rooms to comply with social distancing requirements.

It’s important to note that similarly to the rules applicable to the original PPP loans, borrowers can obtain full forgiveness if they spend at least 60% of the loan proceeds on payroll costs.

As always, we here at Dunham Tax Professionals want to stress the importance of consulting with a professional to determine all eligibility and action plans. Give us a call and schedule an appointment today. Remember, PPP applications must be submitted no later than March 31, 2021. We’re available and here to help.

Schedule an Appointment

Payroll Protection Program: What Happens in the Long Run?

by Michelle Roberts | Feb 16, 2021 | PPP, Taxes

So, you’ve submitted your SBA Paycheck Protection Program – PPP – application and you might have even received your loan proceeds, but that does not mean there is nothing left to be done: It is critical for you to closely manage and account for your PPP loan proceeds, not just for cash flow purposes but for accounting purposes in order to apply for your PPP loan forgiveness. The amount of documentation you will ultimately need for the forgiveness component of this loan will be substantial, so get your process in place now to shorten the turnaround of this.

For accounting purposes, it may be a good practice to set up this separate bank account and a PPP note payable in your general ledger: The idea here is to record the proceeds deposited into the bank account with an offset to PPP note payable.

Keep in mind that this is a 2-year loan and it will be considered both a short-term and a long-term debt. As such, once you receive your loan amortization schedule, you should consider breaking out the amounts due between current and long term in your financial statements.

Remember to document the date of receipt on the PPP funds. This is important because this is your start of the eight-week period. Any eligible expenses paid within the eight-week period will factor into the forgiveness calculation.

Pay for all eligible expenses out of this bank account. For any items paid, keep support for these disbursements. You will need the support for the forgiveness submittal.

Payroll costs
Business Rent or Mortgages
Utilities owed for the business – E Electricity, gas, water, transportation, telephone, or internet access.
Interest Payments

It is noteworthy that your non-payroll items (rent, utilities, and interest) can be no more than 25% of the total forgivable portion of your loan. Be sure to track your eligible expenses as you could be in for a surprise if you use your PPP loan proceeds primarily for non-payroll items.

If you opt to not open a separate bank account for their PPP money, that is fine, but the same processes of documentation are recommended and isolating ultimate loan funds will be a bit more complicated.

Lastly, consider how to account for the forgiveness of this PPP loan on your books. For tax purposes, loan forgiveness is not taxable. For book purposes, loan forgiveness will ultimately be income (either through a reduction in operating expenses or more likely being recorded as other income). Keep in mind that loan forgiveness like this will most likely be considered an extraordinary item in your profit and loss for the year and will influence employee compensation that is driven by net income. Each company will need to evaluate the impact of loan forgiveness on a case-by-case basis.

As always, Dunham Tax Professionals wants to point out that our blogs serve to give you an idea of some of the basics, and that if you have more in-depth questions or concerns, it’s always best to consult with a professional. Give us a call and or set up an appointment today. We’re here to help.

Schedule an Appointment

IRS begins processing tax returns…

by Michelle Roberts | Jan 18, 2021 | Taxes

The Internal Revenue Service announced that the nation’s tax season will start on Friday, February 12, 2021, when the tax agency will begin accepting and processing 2020 tax year returns.

The February 12 start date for individual tax return filers allows the IRS time to do additional programming and testing of IRS systems following the December 27 tax law changes that provided a second round of Economic Impact Payments and other benefits.

Start your tax preparation onboarding process with Dunham Tax Professionals LLC here.

4 Critical Tax Considerations for the Year End

by Michelle Roberts | Oct 29, 2020 | Taxes

Each year, small business owners overpay their taxes because they miss out on certain deductions and tax planning strategies that can reduce their taxable income. Often, it’s because they just don’t understand the tax saving strategies available to them. But you don’t need to make tax planning your full-time job to save money at tax time. As we’re very near the end of October, this is a critical time to perhaps consider a number of strategies to potentially maximize your tax savings as a business owner.

Plan – Paying taxes is arguably one of the least enticing aspects of small business ownership. For that reason, some small business owners put it off. They skip making their required quarterly estimated payments, figuring they’ll catch up at tax time – but that can be a costly mistake. Federal tax code requires that taxes be paid on income as it is earned. For the individual as an employee, these taxes are withheld. As a small business owner, you need to make estimated quarterly payments. If you don’t make estimated payments or pay too little throughout the year, the IRS will charge penalties and interest.

Consider a Change in Tax Status – As a small business owner, you have several options when it comes to structuring your business. You can operate as a sole proprietor, partnership, LLC, S corporation or C corporation. Each business structure has different pros and cons and changes the way that your business is taxed. If you outgrow one type of business structure, you can usually change it to one that’s a better fit. For example, LLCs can elect to have their business treated like a S corporation. As always, it is important to note that a tax professional – such as Dunham Tax Professionals – will be able to properly advise and generate a cost benefit analysis to see if a change is appropriate for your business needs.

Income: Defer or Accelerate? – Many small businesses use the cash method of accounting on their books and tax return. Under the cash method, a company recognizes income when it’s received and expenses when they are paid. If you expect to be in a lower tax bracket next year, you might want to defer income to next year, when you’ll pay taxes at a lower rate. On the other hand, it may be appropriate to accelerate income, such as potentially lucrative contracts on the horizon are likely to really increase your business income, as well as changing your tax bracket. You may elect to collect those monies, report that and pay on that rate currently.

Expenses: Accelerate or Wait? – If you’re in a higher tax bracket now but expect to be in a lower tax bracket next year. If you were planning on purchasing office supplies and equipment next year, you might want to accelerate those deductions, and take them this year to reduce your taxable income for the current year. Conversely, if you expect to be in a higher tax bracket next year, you might put off paying some bills and purchasing equipment and supplies until the next year, when you’ll need all of the tax deductions you can get.

Schedule an Appointment

Tax Planning, Tax Avoidance and Tax Evasion: It Pays to Know the Difference

by Michelle Roberts | Oct 27, 2020 | Tax Planning, Taxes

In the past couple of weeks and considering the president’s actions – or inactions as the case may be – in regard to his taxes, may still be leaving some individuals and business-owners alike, confused about the legality of things. Or especially if it would be considered tax evasion.

There are some key features and distinctions that are important to note, here.

Tax planning is the process of elaborating the company’s financial related matters to maximize the tax benefits under eligible provisions of the tax framework. The planning assists taxpayers to lessen their tax liability through a variety of means, namely deductions, credits, rebates and exemptions provided under the corresponding tax laws.

A key feature of tax planning is its relation to the future. An efficient tax planner of the company with a good tax planning in hand may facilitate the tax minimization in either short term or long term. To bring the best possible outcome for the tax perspective, effective tax planning should bring below some essential elements into consideration:

Choice of business entity
Timing of Income
Business Size
Planning for Expenditures and Purchases
The Residency Status of the Business Owner and Where the Business Operates
Capital Structure of the Business

Tax avoidance is where some individuals and business owners may have some issues or feel especially concerned. As legal citizens and permanent residents of the United States, it is a duty and requirement to pay taxes, but naturally taxpayers want to save as much as – legally – possible. Tax avoidance may seem dubious or questionable, but it is all still part of effective tax planning.

Tax avoidance is the act of minimizing tax liability within the limits of the law or without breaking the law. In other words, taxpayers can use legitimate methods to reduce the amount of tax payable in association with their financial activities. Such methods to allow taxpayers to avoid paying tax to the government may include the followings:

Using tax deductions for decreasing business expenses and business tax bill
Delaying the payment of tax until a later date with an appropriate tax deferral plan
Taking advantage of tax credits for legal purposes like business purchases, benefiting the company’s employees for sick leave and family leave.
Sheltering revenue from tax liability through the establishment of employee retirement plans.

The key takeaway here is that what makes these things – tax planning as well as tax avoidance – legal is always going to be to ask yourself the purpose doing it, which should always be to maximize your savings in an efficient way, and not merely to try and “get over” on the government. Some taxpayers may consider loopholes a convenient form of getting away with something that everyone does, but, here, it becomes important to consider the nature and timing of everything as well: If you – or preferably a tax professional search for and apply tax loopholes that are legal, and do so before the tax liability becomes due – and you can prove everything as legitimate, you’ll most likely be audit-proof.
Anything else is tax evasion.

Tax evasion is any illegal method or unlawful attempt to reduce tax liability of taxpayers. It is highly attached to techniques or illicit practices which results in showing fewer profits to minimize the individual or company’s tax burden.

Examples of tax evasion usually include the following:

Making false statements and information
Inflating deductions without legal proof
Hiding related documents to prove the earned business profits like records of transactions or report of cash income
Concealing or transferring assets illegally
Magnifying tax credit
Claiming excessive expenditure

Tax evasion is a form of tax fraud which indicates illegitimate and deliberate actions for not paying taxes. Since employing such unfair means is fraudulent, any taxpayers regardless of individual or business committing tax evasion behaviors would be subject to statutory punishment such as a heavy fine or imprisonment.

Contact Dunham Tax Professionals if you have any questions about this or any other tax concerns.

Schedule an Appointment