Many of us have been spending more time than ever at home lately, and with all that at-home time, may have noticed a few shortcomings throughout the entire house. Things that we overlooked before are now glaringly obvious, especially when it comes to functionality. Some households now have two parents working from home, as well as schooling being done remotely. Finding areas to accommodate everyone can be a challenge. To address these concerns, many people are building home offices in their basements, designating specific locations in their living areas or bedrooms, and upgrading lighting, internet services, and more.
The Home Improvement Boom
Adding office space, building a deck, upgrading landscaping and kitchen renovations are all popular projects, and the pandemic has not slowed down the pace of home renovations. According to a recent U.S. Census Bureau report, sales at home and garden centers, hardware stores, and building supply stores have seen a year-over-year increase of 22.6%. Only the category of online sales showed a bigger year-over-year increase. According to Houzz, there was a 58% increase in request for home professionals in June 2020, compared to June 2019.
All of this is not surprising, given that many employers shut down, and non-essential employees were required to work remotely. Working from home has saved many employees on commuting time, and that has opened up a few extra hours for home projects. Plus, our surroundings impact our mental health. The pandemic has invoked increased stress in most individuals, and having a pleasant, functional environment can boost people’s mood. This effect increases when combined with the sense of accomplishment from a project well-done. Even a simple coat of paint and some organization and decluttering can make a huge difference.
Paying for Home Improvements
It may be difficult to find the funds to pay for improvements, especially if you have been out of work due to COVID-19. Some projects, such as painting and adding new cabinet hardware, are inexpensive. Others, obviously, can be quite costly. A popular way to pay for home improvements has always been a home equity loan or home equity line of credit (often referred to as a HELOC). Because interest rates have been low, a cash-out refinance or a HELOC are even more attractive options. While taking on additional debt is always something to be considered carefully, if your projects will increase your home’s value, then it may make sense. Another benefit of a HELOC in these uncertain times is the access to cash it provides, particularly for those who do not have a liquid emergency fund. If you are considering one of these options, do not wait. Some lenders are overwhelmed with applications to process right now, so get the ball rolling as soon as possible.
Tax Implications of Home Improvements
There may be tax implications if you borrow against your home. If you itemize, on your personal income tax return, a portion of the interest and real estate taxes may be limited. Fewer people itemized these last few years because of the $10,000 limit imposed on the deductibility of taxes and the higher standard deduction provided by the Tax Cuts and Jobs Act of 2017.
Under current tax law, home mortgage interest on debt up to $750,000 (or $1 million if the debt originated prior to December 16, 2017) used to purchase or improve your home (that includes your primary residence and a second home) is tax deductible. Home mortgage interest on debt that is not used for home purchase or improvements can no longer be deducted. Therefore, it is important to calculate your deductible vs. non-deductible interest if you itemize and have home mortgage debt that was used for anything other than home purchase or improvement. Keep in mind, these limits are cut in half if you are married filing separately. There are also other restrictions that may apply to your situation.
In addition, major improvements can add to the basis of your home and ultimately reduce the gain on the sale. If you are selling your primary residence, there is a gain exclusion of $250,000 for single and $500,000 for married filing jointly. There are different rules for gain on sale of rentals and vacation homes.
More Information
If you have any questions regarding the above tax issues and limitations, please call us at 401-921-2000, or reach us through email or complete our online contact form.
In the ongoing pandemic, we have seen many businesses at best struggle, and at worst, succumb to unavoidable increased costs of compliance with new mandates. Pairing this with a significant loss of revenue due to restrictions in operations could directly result in a decreased customer base. While many businesses have been seeking aid through the downturn via utilization of the various government provided incentives, those businesses that are considered essential continue to struggle to provide their goods and services to both private owners and government agencies. The construction industry is one such sector deemed essential, and as such, has been faced with the ongoing challenge to adjust to the unintended consequence of employing a workforce that must operate under new mandates.
Contract Prices and the Pandemic
Most construction companies work on fixed price contracts, so the added costs and inefficiencies of adapting and adhering to continuously updated changing recommendations from health, state, and federal government officials are taken directly from corporate profits.
As an industry that thrives on team work, as well as the precision required of people working together in tight spaces, the industry is faced with special challenges in complying with social distancing and health/safety mandates. In time, contract prices will have to be adjusted to compensate for the additional cost of compliance but, by then, the industry may very well see a number of companies succumb to the increased financial burden.
Action for Construction Companies
Construction companies should take various steps and actions to mitigate risk of surrendering to the additional cost of compliance as the coronavirus pandemic continues, and beyond:
- Issue notice of cost and schedule impacts for all projects.
- Document loss/damage due to work slowdowns, shutdowns, weather damage, etc. for insurance purposes, as well as to communicate with owners, general contractors, and subcontractors.
- Update contracts to include pandemic language.
- Establish new cost codes where appropriate to track cost of compliance.
- Evaluate business interruption insurance for applicable coverage, if any.
- Determine exposure to the business in the event any employees fall ill and/or spread the virus at the job site.
- Establish on-site protocols for anyone showing virus symptoms or indicating exposure.
- Address cash flow concerns and take all available measures to align overhead to volume.
- Monitor key metrics and realign acceptable high/low thresholds so you can quickly identify impending issues.
- Revise cash flow projections on existing contracts.
- Utilize change orders on existing and not yet started projects to help cover increased cost of compliance with safety/health ordinances.
- Assess cost of compliance on bid rates and revise as required to cover items such as additional equipment/materials cost due to increased lead times.
- Assess utilization of incentives such as the Families First Coronavirus Response Act (FFCRA) paid sick leave, Paycheck Protection Program (PPP ) loan forgiveness, and any other applicable assistance as they become available.
During these uncertain times, it becomes even more imperative to plan. One certain aspect of that plan should be to reevaluate existing operational protocols to assess the impact of increased cost of compliance with health/safety mandates. By addressing the steps above, construction companies will help to mitigate their risk of surrendering to that unavoidable cost.
More Information
For more information on the above, and its tax implications for you and your business, please reach out via email, give us a call at (401) 921-2000, or fill out our online contact us form.
The COVID-19 pandemic is not yet over, and contractors will continue to feel its impact for subsequent years. As far as accounting and financial statements are concerned, preparations should be made for possible changes, including adjustments to Generally Accepted Accounting Principles (GAAP) requirements and disclosures.
GAAP Changes
Some significant possible changes to GAAP requirements and disclosures affect the following topics:
- Contract modifications
- Debt modifications
- Loan covenants
- Going concern
- Inventory
- Property, Plant, and Equipment (PPE)
- Risks and uncertainties
- Securities
- Subsequent events
These changes will vary from contractor to contractor due to each running their own unique business.
Effects of an Economic Downturn
With the economy slowing and, in some places, shutting down during this pandemic, it is evident it can lead to long term changes to the economy. Contractors need to take into consideration the following possible effects.
Contracts, debt modifications, loan covenants, and going concern are all directly impacted by this. Contractors will have to analyze their current contracts and possibly renegotiate to proceed on. The same goes for amending existing debt agreements regarding liquidity. The impact on going concern evaluations will require the disclosure of the results from COVID-19 and possible reassessments. This would include things such as key financial ratios, financial projections, and their ability to meet debt covenants.
Inventory and PPE are both similarly affected. ASC Topic 330 states when production is lower than typical, it is required to expense, as an alternative to capitalizing, an allocation of fixed overhead costs. Due to the decrease in the workforce, an adjustment to the carrying value of inventory may be necessary and then disclosed. As for PPE, the carrying amount of an asset may no longer be recoverable, which is required to be disclosed as well.
Risk and Uncertainties
After any pandemic, it is expected there could be a significant increase in risks and uncertainties reported on the financial statements. It is required that contractors disclose the impact of COVID-19 and the effect on their current and future operations for their business. Some areas which are expected to be impacted are volume discounts, variable considerations, rebates in revenue contracts, and asset impairment evaluations. Along with risks and uncertainties come securities. It is no secret that COVID-19 had a major impact on the decline of the economy, therefore capital markets were negatively affected. Therefore, it is required for an individual disclosure to be made of equity securities, debt securities, and equity method investments.
Disclosure
Regarding COVID-19 and subsequent events, contractors must review and disclose the events that occurred because of the pandemic. With the disclosure of a non-recognized subsequent event, the financial impact should be stated as well. Significant disclosures contractors should consider are:
- Government-mandated restrictions
- Staff reductions
- Investment losses
As this pandemic continues, it leaves many contractors wondering what lies ahead. Even though the future is unforeseeable, if contractors act now and take advantage of the resources they are given, they will be prepared. The time to begin planning is now, as it’s important for businesses to know any tax changes and filing requirements. If you have any questions, please reach out via email, give us a call at (401) 921-2000, or fill out our online contact us form.
The Tax Cuts and Jobs Act of 2017 (TCJA) created legislation limiting the deductibility of business interest expense on businesses with average annual gross receipts of $25 million or more (amount is indexed annually for inflation) in the previous three years and businesses considered tax shelters as defined under the Internal Revenue Code. The limitation generally reduces the deductibility of business interest expense to 30% of the taxpayer’s adjusted taxable income. The recent passing of the CARES Act generally increased the deductibility of business interest expenses from 30% to 50% of adjusted taxable income for tax years beginning in 2019 and 2020.
State-By-State Variations
As each state has their own respective tax structure, there are varying degrees of conformity to the federal business interest expense limitations discussed above. Accordingly, businesses may have the added complexity of tracking business interest expense limitations at the state level, which only gets compounded for those businesses operating in multiple jurisdictions. There are currently 35 states that conform to some version of the 163(j) business interest expense limitation, and of these, 22 states conform to the recently increased limitation provided in the CARES Act of 50%, whereas 13 of these states conform to 163(j) as it was originally adopted in the Tax Cuts and Jobs Act of 2017.
More Information
If you are a business who is subject to the limitation on business interest expense, and seek guidance in this area, please reach out via email, give us a call at (401) 921-2000, or fill out our online contact us form.
If you sustain a casualty loss due to a federally declared disaster under Section 165(i), you may elect to deduct a casualty loss in the tax year before the casualty actually occurred. Taxpayers have the option of claiming a deduction for the casualty loss either in the year the loss occurred or the prior year. To claim the deduction in the prior year, an election may be made to accelerate this loss. In 2019, the IRS finalized a proposed regulation it had issued in 2016 that states this election must be made 6 months after the original due date of the current year return. Under the prior rules, the election had to be made by the unextended due date of the current return.
Who Can Benefit?
Any taxpayer that has suffered a disaster-related loss as defined in Sec. 165 (h)(5) can benefit from this election. This is specifically beneficial for taxpayers who have income to take the loss against on prior year returns and are expecting to have a loss in the current year.
Additional Considerations
The election can be revoked for up to 90 days after the due date of the election. This may be a beneficial election particularly during the 2020 tax year where many businesses may be experiencing losses due to the pandemic.
If you have any questions regarding the tax implications of electing to accelerate disaster losses, please reach out via email, give us a call at (401) 921-2000, or fill out our online contact us form.
With nearly 700,000 businesses having applied for the Paycheck Protection Program (PPP), many are unaware that the forgiven portion of the loan for Federal purposes may actually be taxable as gross income in some states.
Will Federally Forgiven PPP Debt be Taxable by States?
The answer to the questions is possibly. Under normal circumstances, cancellation of debt would be includable in your gross income. An example would be if you and your credit card company discussed your balance, and the credit card company forgave a portion of your balance due. The balance of the forgiven portion would then be included as income. Businesses that meet the qualifications for their PPP loans to be fully or partially forgiven at the Federal level will need to determine if the states they have nexus in will follow the Federal guidelines.
Will Expenses Paid with PPP Funds Be Deductible?
In the normal course of business, ordinary and necessary expenses are deductible. However, if you received a loan to pay your expenses, and then the debt was forgiven and not taxed, did you pay those expenses? The IRS believes that expenses paid with forgiven funds should not be deductible from a company’s gross income. The exclusion of forgiven expenses in calculating taxable income will increase the company’s tax liability and the amount due to the IRS. Ruling for this topic is not final, although some states have issued guidance.
Disagreement Among States
Each state has the power to regulate the laws within their respective state borders. There are twenty-one rolling conformity states, which means they conform with the Internal Revenue Code (IRC) whenever there are changes. Nineteen states are static conformity. This means their tax laws are based on the IRC as of a specific date. As new federal tax laws are enacted, their legislative body must vote to either adopt any federal changes or change their state’s IRC conformity date. These static conformity states may operate under the pre-TCJA code (Tax Cuts & Jobs Act) due to their outdated conformity of the IRC. The other states either do not have an income tax or have selective conformity between individual and corporate taxation. Significant tax issues may arise for businesses that operate or have nexus in multiple state jurisdictions.
If you have any questions regarding federal PPP loan forgiveness and how it could affect your business, please reach out to us via email, give us a call at (401) 921-2000, or fill out our online contact us form. For further information regarding COVID-19 assistance programs, please visit our COVID-19 Resources page.
As every student with loans probably knows, the Coronavirus Aid, Relief, and Economic Security (CARES) Act that President Trump signed into law on March 27, 2020, provides some assistance for borrowers of federal student loans (private loans may or may not have special treatment depending on the lender). The Act suspends all payments from March 13, 2020 through September 30, 2020. During this period, interest will not accrue and collections and garnishments will not be pursued. Additionally, the missed months of payments will still count toward the 120 payments required for those borrowers working toward public service loan forgiveness. This is great news for about 9 million student loan borrowers.
On August 9, 2020, the President signed an Executive Order to extend student loan relief through the end of the year. More specific information on the changes, if any, will be forthcoming.
But what happens when 2021 rolls around, especially if you’re out of work due to the widespread impact of the coronavirus, lack of work or any other circumstances? There are still options to continue deferring or reducing the payments on your student loans. Ideally, the time to look into these options is now, and not when the relief has expired.
Student Loan Options
For reducing or deferring your student loan payments, here are a few options:
- Refinance at a lower interest rate.
- Consolidate several loans into one loan with a fixed interest rate that is based on the average interest rate of all loans being consolidated.
- Sign up for income-driven repayment.
- Apply for loan forgiveness programs; there are several, including ones available to teachers, nurses, military personnel, and those in public service. You may also qualify for income-driven repayment forgiveness, which allows you to base your payments on your monthly income. After 20 or 25 years (the plans have different time frames), your balance may be forgiven.
If you’re interested in learning more about these options, an excellent resource is the Federal Student Aid website, studentaid.gov. You will also be able to find updates on new legislation related to student loans due to COVID-19, as the administrators update the website frequently.
Finances During COVID-19
We would be remiss if we didn’t also touch upon what to do with the funds you would have used for student loan debt had there been no forbearance. Assuming you have income, whether from working or unemployment, and you have cash remaining after covering your necessities (housing, utilities, food, etc.), here are some financial tips we would recommend:
- Establish, or add to, your emergency fund. As the pandemic has so clearly illustrated, bad things can happen. Aim for at least three months of living expenses; six to twelve months (or even more) is ideal.
- Once you are comfortable with the level of your emergency funds, concentrate on paying down debt, beginning with the highest interest rate balances.
- Add to retirement savings.
- After you’ve taken these steps, you can look at other goals, such as a home improvement or vacation fund, or saving for your children’s education.
No one expected a global pandemic this year and all that has followed, but if it has shown that we need to be ready for the unexpected. We can take the lessons learned from this pandemic to prepare for the next bump in the road.
If you have any questions regarding federal student loans and the relief provided by the CARES Act, please reach out via email, give us a call at (401) 921-2000, or fill out our online contact us form. For further information regarding COVID-19 assistance programs, please visit our COVID-19 Resources page.
Do you, as an employer, have parking available at your office or place of work? If the answer is yes, there are some things you will need to consider. The Tax Cuts and Jobs Act (TCJA) generally disallows the employer deduction for expenses regarding the cost of qualified transportation fringes for employees. When TCJA was first enacted, there was not much guidance in this section, that is until Notice 2018-99 was issued.
Notice 2018-99
This notice provided the guidance people had been asking for for over a year. All in all, parking that is taxable to the employee of the business can be deducted by the employer, only if it is on an after-tax basis. Different factors come into play whether an employer pays a third party for parking, or if the employer owns/leases their own parking facility. The notice guides the employer in determining what is and is not deductible through both instances.
Third-Party Parking
For employers who pay a third party, the deduction to be taken is fairly simple. Everything is disallowed except for the amount paid in excess of the monthly limitation. A reminder that any parking expense paid for employees in excess of the IRS prescribed monthly qualified parking exclusion can be included in the employee’s W2 income, and therefore would be deductible by the employer as part of the parking expense.
Owned or Leased Parking
As for those employers who own or lease their parking lot, the following is a brief explanation of how the calculation for disallowed expenses would work. This is a four-step calculation where the cost would include maintenance, repairs, snow removal, landscaping, insurance, taxes, security, and parking attendants. The notice specifically states that depreciation and expenses paid for items not located in or on the parking facility, for example lighting, are not included in the cost. Once that cost is figured, one can begin the process of calculating.
Step one of this equation would be to figure out the “reserved employee spots”. All of the costs in relation to their spots will not be deductible. These spots include any areas with specified signage or other ways to designate spots to anyone but the general public. Businesses were granted until March 31, 2019 to remove any signage to eliminate or decrease the amount of reserved parking spots within their lots. The employer should then allocate the percentage of total cost to these spots and deduct them 100% from the allowable expense.
The next step in the process is to determine the principal use of the remaining spots. These are spots not set aside specifically for employees. If 50% or more of the remaining spots are or can be used by the general public, then all of those spots are entirely deductible, and your calculation is complete. There is a guideline on what constitutes these spots as “provided to the general public,” which also needs to be taken into consideration within this calculation.
If the second step above is not the end of the road, then you must next calculate the reserved non-employee parking spots. These spots could be reserved for visitors, partners or 2-percent shareholders and are fully deductible. Again, this step requires you to calculate the percentage of spots reserved for non-employees and then you may deduct that amount in full.
Finally, step four is to determine the remaining allocation of the expenses. This is the part where anything that may not fall specifically into the above three steps would sit. The employer would then need to reasonably determine the use of these spots on a normal business day. This could be based on actual or estimated figures.
More Information
It should be noted that final guidance has not been provided for this issue. The IRS states that these guidelines are to be used in the determination of deductible qualified transportation fringes until the publication of proposed and final regulations. As you can see, the calculation for this deduction is in no way simply done. If you feel this change in law could pertain to you, or have any questions, please reach out via email, give us a call at (401) 921-2000, or fill out our online contact us form.
A “Just In Case” For Those Struggling Financially Due to COVID-19
It would be difficult to find a business or individual in the world that hasn’t been impacted by COVID-19 in some way. Millions of people are either unemployed, struggling to keep their businesses open, or are just trying to maintain the minimum cash flow necessary to provide the essentials needed to live. While unemployment assistance is available and stimulus payments continue to go out, much of the assistance has been slow, or has yet to arrive. Many people are exhausting their savings, if they haven’t already, and are looking for any possible way to survive financially. The Coronavirus Aid, Relief, and Economic Security (CARES) Act was signed into law on March 27, 2020. It included qualified retirement plan distribution relief that may be an option to help you get through this global pandemic.
Background
Prior to COVID-19, the IRS did allow taxpayers to take retirement distributions early, however doing so would result in a 10% additional tax if you were under age 59 1/2. Considering the economic hardship that most Americans are currently facing, the IRS has provided some much-needed relief to individuals that are adversely affected by this pandemic.
Relief Breakdown
As part of the CARES Act, the 10% early withdrawal penalty is being waived. This applies to coronavirus-related retirement distributions up to an aggregate total of $100,000 from all eligible plans and IRAs to a “qualified individual”. This waiver will apply to all retirement distributions that qualify under the CARES Act between January 1, 2020 and December 31, 2020, even if you are under 59 ½. This waiver applies to eligible retirement plans such as:
- Traditional individual retirement accounts (IRAs)
- 401(k) plans
- Profit-sharing plans
- Stock bonus plans
- Qualified 403(a) annuity plans
- 403(a) annuity contracts
- Custodial accounts
- Governmental section 457 deferred compensation plans
In addition to the 10% waiver, taxpayers can pay the tax associated with the distribution over a three-year period beginning with tax year 2020. Depending on the plan, taxpayers may also recontribute the funds they withdrew in one or more payments over a three-year period.
Eligibility
To be considered a “qualified individual” for this relief, you must have experienced at least one of the following;
- Either you, your spouse, or one of your dependents was diagnosed with COVID-19
- You have experienced financial hardship because you have been quarantined, furloughed, laid off, or had hours reduced due to the pandemic
- You are unable to work due to child care responsibilities
- You own or operate a business and had to close or reduce hours due to the pandemic
- You have experienced an adverse financial consequence due to other factors as provided in guidance issued by the IRS
Withdrawing funds from a qualified retirement plan early should never be a first choice, but under certain circumstances it may be necessary. It’s nice to have the option available without having to take the 10% early withdrawal penalty, while also having the option to pay income taxes on the distribution over a three-year period.
Further Information
If you have any questions regarding the qualified retirement plan distribution relief available though the CARES Act, please reach out via email, give us a call at (401) 921-2000, or fill out our online contact us form. For further information regarding COVID-19 assistance programs, please visit our COVID-19 Resources page.
Do you have a number of real estate properties that are creating losses that you would like to deduct against your other income for tax purposes? Under the passive activity loss (PAL) rules, this would normally be impossible. In general, passive losses cannot be deducted against nonpassive income (such as salary, interest, dividends, or income from a business you materially participate in).
There is an exception where a taxpayer can deduct up to $25,000 of losses from real estate activities against nonpassive income from an activity that the taxpayer actively participates in. This exception begins to phase out if the taxpayer’s adjusted gross income exceeds $100,000. However, if you materially participate in rental real estate activities, you may qualify to be classified as a “real estate professional”. One of the advantages of being classified as a real estate professional is that losses from real estate activities can be used to offset other ordinary income such as wages, interest, or other nonpassive income.
Under IRC Sec. 469(c)(7)(B), an individual is eligible to be classified as a real estate professional if:
- The taxpayer materially participates, and more than half of their personal service time performed is attributable to real property trades or business, and
- The taxpayer spends greater than 750 service hours during the tax year materially participating in real property trades or business. Only time actually spent on performance or services qualifies towards the 750 hours. Being on-call or willing to work will not count towards the 750 hours, but travel time between rentals properties will.
IRC Sec 469(c)(7)(C) broadly defines real property trades or businesses as real property development, redevelopment, construction, reconstruction, acquisition, conversion, rental, operation, management, leasing, or brokerage.
In order to be eligible for this classification, an individual or closely held C Corporation must materially participate in the rental real estate activity. The taxpayer would need to meet one of seven tests in order to be considered materially participating in an activity. If the taxpayer is a limited partner in a Limited Partnership, they only need to meet one of three tests in order to qualify. There is also an election the taxpayer can make to aggregate their rental activities when determining material participation.
The tests for determining whether you qualify as a real estate professional are applied annually. That means some years you may qualify as a real estate professional, but not in other years. The losses from your rental real estate activity are not automatically treated as passive if you qualify as a real estate professional. If you materially participate in the rental real estate activity, any losses would be treated as nonpassive and, as a result, be able to offset other nonpassive income.
For additional information on qualifying as a real estate professional, click here.
If you want to know whether or not you qualify, or would like more information, please reach out via email, give us a call at (401) 921-2000, or fill out our online contact us form.