Year-End Planning: Qualified Disaster Relief Under Section 139

By George Batas

As such an unprecedented year draws to a close, employers and employees alike may be interested to know that Section 139 of the Internal Revenue Code allows an employer to make qualified disaster relief payments to an individual on a tax-free basis. The employer would get a deduction for the payments and the individual would receive the money tax-free.

To qualify under Section 139, a two-prong test must be met. First, a “qualified” disaster must have occurred. Based on the Emergency Declaration, the pandemic has met this test. The second test is that payments must be considered “qualified” disaster relief payments. Qualified disaster relief payments are meant to include any amount to reimburse or pay reasonable and necessary personal, family, living, or funeral expenses because of a qualified disaster. Some expenses that could fall into this category include costs associated with establishing a home office, medical expenses related to COVID-19 and not covered by insurance, dependent care expenses incurred due to closure of existing care providers, costs associated with alternative forms of commuting due to mass transit being unavailable or unsafe, and costs to purchase PPE . The payments from Section 139 are not allowed to be a replacement of wages to an employee.

Although there is no specific requirement for employers to adopt a written plan or policy to make qualified disaster payments, it is recommended that the employer put together a plan that would communicate who is eligible for the payments, what expenses would be covered, whether the employee must provide receipts or other proof of payments, and how and when the payments are to be made. The IRS has specifically stated employees are not required to account for actual expenses to qualify for the Section 139 exclusion as long as the amount of payments can be “reasonably expected to be commensurate with the expenses incurred.” It is highly recommended that the employer have signed statements from employees affirming that their claims arise from an area covered by the disaster declaration, that they have incurred qualified expenses, and that their expenses will not be covered through an insurance policy.

If you have questions regarding Section 139 qualification, please contact us.

 

IRS Will Expand Identity Protection PIN Opt-in Program in 2021

The IRS announced this week that starting in January 2021, the Identity Protection (IP) PIN opt-in program will be expanded to all taxpayers who can properly verify their identities. The IP PIN is a six-digit number assigned to eligible taxpayers to help prevent the misuse of their Social Security number on fraudulent federal income tax returns. An IP PIN helps the IRS verify a taxpayer’s identity and accept their electronic or paper tax return.

The fastest way to get an IP PIN is through the IRS’s “Get An IP PIN” tool. Expected to be available in mid-January, the tool uses Secure Access authentication, which verifies a person’s identity through several different methods. Once received, an IP PIN is valid for one year; taxpayers must obtain a newly generated IP PIN each January. The IRS plans to offer an opt-out feature to the IP PIN program in 2022 if taxpayers find it is not right for them.

More information is available here.

Paycheck Protection Program (“PPP”) – Update November 2, 2020

By Alan R. Sasserath, CPA, MS

Several months have passed since a constant stream of critical PPP updates dominated our days. However, we are writing now because last week the Small Business Administration (“SBA”) released a notice that it will seek to obtain certain information from PPP loan borrowers whose PPP loan exceeds $2 million.

The SBA will seek to obtain such information via two new forms:

  1. Form 3509 – Loan Necessity Questionnaire (For-Profit Borrowers)
  2. Form 3510 – Loan Necessity Questionnaire (Non-Profit Borrowers)

Proposed versions of the forms are attached, and the public has until November 25, 2020 to submit comments regarding the content of such forms before they are finalized.

This request relates to the certification made by every company that applied to the PPP that stated, “Current economic uncertainty makes this loan request necessary to support the ongoing operations of the Applicant” (the “Certification”).  This Certification has been the topic of many discussions.

Forms 3509 and 3510 also appear to be in response to the SBA’s PPP Loan FAQ #31 and FAQ #46.  These questions relate to the Certification and whether businesses owned by large companies have adequate sources of liquidity to support the business’s ongoing operations.

How will these forms affect other borrowers – those with PPP Loans of less than $2 million?  Pursuant to FAQ #46, “Any borrower that, together with its affiliates, received PPP loans with an original principal amount of less than $2 million will be deemed to have made the required certification concerning the necessity of the loan request in good faith.”  Based on this, it appears that the forms may act as a helpful guide to such borrowers that may have questions regarding loan necessity, but (we hope) nothing more.

The forms include questions related to what the SBA refers to as a Business Activity Assessment and a Liquidity Assessment (“Assessments”).  Attached are copies of the FAQs referred to above.

One of the key points that we saw regarding such Assessments is that the Certification was required to be made at the time of the application and not at any point after that date.  The Assessments ask questions relating to financial activity occurring up through the end of the loan forgiveness covered period (the 24-week period after the date of the loan).

Based on the instructions, the completion of either form is required by every borrower that, together with its affiliates, received PPP loans with an original principal amount of $2 million or greater.  The completed form is due to the lender servicing the PPP loan within ten business days of receipt from the lender.

Since the Forms are not yet finalized, we believe that those with PPP loans of $2 million or more should at a minimum start formulating how they would respond to such a request.  For all recipients of PPP loans, we suggest that you document why you believe that you were able to make the Certification if ever asked for such information.

As always, we are available to help. Please contact us at 631-368-3110.

PPP Loan Forgiveness Update

By George Batas

It is difficult to believe that seven months have passed since the Paycheck Protection Program (PPP) started dominating the national business conversation. Yesterday, the U.S. Small Business Administration released a simpler loan forgiveness application for PPP loans of $50,000 or less.

The new application is intended to help streamline the PPP forgiveness process for those smaller loans.

The SBA began approving PPP forgiveness applications last week. View the links below and contact your S&Z professional for guidance on your forgiveness application.

Download the new loan forgiveness application

Download the instructions for completing the loan forgiveness application

Download the Interim Final Rule on the forgiveness process for loans of $50,000 or less

Tax Implications of Employees Traveling Between the United States and Canada

By Alan R. Sasserath, CPA, MS; Michael D. O’Brien, EA; and Richard Weber; CA

March 2012 Vol. 3 No. 3 The Tax Stringer – The global economy has produced a growing need for individuals flexible enough to work outside of their home countries, especially among companies with operations in both Canada and the United States. Proper tax planning is essential in minimizing the potential tax liability that can be associated with a work-related transfer between these two countries.
Several important tax policies exist for U.S. resident employees of U.S. corporations and for Canadian resident employees of Canadian corporations who render employment services in the other country. In both the United States and Canada, penalties that might be significant in amount may be imposed on employer corporations and their employees for failure to comply with the tax requirements of each country.
The two scenarios below can act as a general guide to help CPAs prepare for work relocation, although professional advice should be sought for real-life client situations. For simplicity, the two scenarios assume that the country of residence of the individual’s employer corporation is the same as the individual’s home country. These scenarios do not cover state, provincial or Social Security taxes. U.S. Residents Travelling to Canada to Perform Employment Duties Canadian (Host Country) Tax Implications
Liability of Employee to Tax in Canada. Nonresidents of Canada who earn income from employment rendered in Canada are typically subject to taxes on that income according to the domestic tax laws of Canada. But the Canada/U.S Tax Treaty (“the Treaty”) provides the following two helpful and distinct exemptions from such liability for Canadian tax:

  • First, employment income earned by a U.S. resident that is attributable to employment carried out in Canada will generally be exempt from tax in Canada if such remuneration for the calendar year is not more than $10,000 (measured in the currency of the host country – in this case, Canada).
  • A second exemption from Canadian tax may also be available if the individual is not physically present in Canada for more than 183 days in any 12-month period beginning or ending in the fiscal year in question and if the remuneration is not paid by or on behalf of a person who is a resident of Canada or borne by a “permanent establishment” in Canada. In the latter exemption, “borne by” means allowable as a deduction in computing taxable income.

For example, assume that an individual is a resident of the United States and is employed by a U.S. company. Assume also that the individual performs employment duties in Canada (for less than 183 days) at a Canadian branch office of the US. company. The Canadian source employment income earned by the individual for the calendar year exceeds $10,000 (Canadian). The amount of the individual’s Canadian source employment income is charged by the head office of the U.S. company to its Canadian branch office, which deducts the charge in computing its income for Canadian tax purposes. In this case, the individual would be subject to tax in Canada on the Canadian source employment income because the Canadian employment income is borne by the permanent establishment in Canada.

Tax Return Filing Requirement. Canada’s domestic tax laws contain an exemption from the requirement for individuals to file a Canadian tax return where “no tax is payable … for the year.” The Canada Revenue Agency (CRA) restricts the requirement to file a tax return to situations where an individual has to pay tax for the year or if the CRA requests the individual to file a tax return (for example, if a T4 slip has been filed by the employer). Also, an individual may want to file a tax return voluntarily to facilitate the claim for a refund due, such as for Canadian taxes withheld at source related to Canadian source employment income that is not subject to tax in Canada due to the Treaty.

U.S. (Home Country) Tax Implications

Employees working in Canada may be on a short-term (fewer than 12 months) or a long-term (more than 12 months) work assignment or may even be commuters who travel back and forth on a regular basis. U.S. citizens and residents remain taxable on their worldwide income and so all income earned will continue to be reported on the U.S. individual income tax return.

Short-term assignees may deduct away-from-home living expenses to the extent that they maintain their tax home in the United States and satisfy certain additional requirements. Long-term assignees will seek to meet the criteria enabling them to qualify for the foreign earned income and housing exclusions as applicable.

A U.S. person could qualify for up to $92,900 of foreign earned income exclusion in 2011 ($95,100 in 2012), in addition to claiming specified housing exclusions that vary by location. To qualify for these exclusions, taxpayers must satisfy one of two tests: they must maintain taxed homes outside the United States for a period that includes a complete U.S. tax year or they must maintain a taxed home outside the United States and be present outside the country for at least 330 days in any 365-day period. If they can satisfy one of these tests, the U.S. employee can reduce U.S. tax withheld in anticipation of claiming these exclusions on the U.S. tax return when filed.

Employees will also wish to ensure that they can utilize the maximum amount of foreign tax credit available on their U.S. tax return for Canadian taxes paid or accrued. To this end, income taxed by both the United States and Canada should ultimately be taxed only once-at the higher prevailing tax rate. Where the U.S. employer is obliged to withhold Canadian taxes on wages paid for work performed in Canada, the corresponding U.S. tax withholding can be suspended to avoid an undue withholding burden on the employee.

U.S. employees living and working in Canada for extended periods may face additional U.S. information reporting requirements in relation to interests that they acquire in foreign corporations, foreign trusts or foreign bank accounts.

Canadian Residents Travelling to the United States to Perform Employment Duties

U.S. (Host Country) Tax Implications

Liability of Employee to Tax in the United States. A foreign national working in the United States is likely to be engaged in a U.S. trade or business and therefore subject to U.S. tax at normal graduated tax rates unless such person qualifies as exempt under the Treaty.

Broadly speaking, Article XV of the Treaty permits taxation only in the country of residence for services rendered in the other country when-

  • remuneration does not exceed $10,000 (in the currency of the other country) or
  • the recipient is present in the other country for less than 183 days and the remuneration is not borne by an employer with a presence in the other country.

Tax Return Filing Requirement. The first consideration for any Canadian employee on U.S. work assignment is often whether the amount of time spent by that employee in the United States will give rise to a U.S. tax filing requirement and what (if any) provisions of Treaty will prevaiL As mentioned above, for those individuals on short­term business trips, spending less than 183 days per year in the United States or earning less than $10,000 per year from U.S. sources, the Treaty may permit taxation only in Canada. A treaty-based nonresident tax return will confirm this position.

Individuals will normally become U S. residents for tax purposes if they obtain permanent residence status (green card holder) or if they meet the substantial presence test, which is met in any year that an individual spends at least 31 days in the United States during the current year and 183 days in the United States when counting all of the current-year U.S. days, one-third of the prior-year U.S. days and one-sixth of the U.S. days in the second prior year. A foreign national may end up filing Form 1040, Form 1040NR, or a combination of both-known as a dual-status tax return-all depending on the actual residency start date, as well as on any elections that might be entered into for the year of arrival.

Canadian nationals working in the United States who become U.S. residents are subject to additional U.S. information reporting requirements in relation to interests they may have in foreign corporations, foreign trusts, and foreign bank accounts (including registered retirement savings plan accounts).

Canadian (Home Country) Tax Implications

Foreign Tax Credit Related to U.S. Taxes Incurred. In order to avoid what would otherwise constitute double taxation, Canada permits a foreign tax credit in respect of U.S. source employment income earned by a Canadian resident that is first subject to taxation in the United States. To ensure that no undue hardship would arise, an application to the CRA may be made by the individual to request a reduction in the amount of Canadian tax withheld at source that relates to U.S. source employment income that is subject to U.S. tax withholding.


Alan R. Sasserath, CPA, MS, started his career in the audit department
of Emst & Young before working in the tax departments of two large
regional firms. In 1996, he began his own practice and then joined with
Gregory Zoraian in 1997 to form Sasserath & Zoraian LLP. Mr. Sasserath
has more than 20 years of public accounting firm experience, with a
broad background in accounting, tax, audit, and financial planning. His
technical experience includes working with high-net-worth individuals and closely-held businesses. His industry experience includes technology
companies, real estate management companies, construction, and printing, as well as numerous service industries. He can be contacted at alan@sz-cpas.com or by phone at 631-368-3110.

Michael D. O’Brien, EA, is a tax principal at Sasserath & Zoraian, LLP
with over 20 years of experience in public accounting, most of it gained at PricewaterhouseCoopers and BOO in New York and, prior to that, at
KPMG in London. Mr. O’Brien has a wide range of private client, business
and international experience, specializing in cross-border tax situations
giving rise to offshore structure planning, as well as expatriate and
nonresident alien tax matters. He also engages in tax planning and
compliance for U.S. beneficiaries of foreign trusts, in addition to advising foreign athletes and entertainers. He can be reached at michael@sz-cpas.com or by phone at 631-368-3110.

Richard Weber, CA, is a tax principal at Fuller Landau, and he has
specialized in tax since 1996. Mr. Weber specializes in numerous areas
of corporate and personal tax, including corporate reorganizations, estate
planning, complex tax research, and cross-border tax planning. He works
with clients that operate in many industries and is knowledgeable about
U.S. companies expanding their businesses into Canada. He can be
contacted at rweber@fullerlandau.com or by phone at 416-645-6522.

View the original publication on The Tax Stringer here.

Confronting the Brutal Facts

“You must never confuse faith that you will prevail in the end – which you can never afford to lose – with discipline to confront the most brutal facts of your current reality, whatever they might be.” – Admiral Jim Stockdale

Admiral Stockdale was the highest-ranking U.S. military officer in the “Hanoi Hilton” prisoner-of-war (“POW”) camp during the height of the Vietnam War, imprisoned there from 1965 to 1973. If you haven’t read Good to Great by Jim Collins, it’s worth the investment of your time. This quote was taken out of Chapter 4 where Collins talks about “The Stockdale Paradox.” Stockdale also says, “I never doubted not only that I would get out, but also that I would prevail in the end and turn the experience into the defining event of my life, which, in retrospect, I would not trade.”

 

Fortunately, what we are going through now is nothing like being in a POW camp; however, it is the worst economic climate that many of us have ever known. Couple that with the uncertainty surrounding us, the fact that many things that were familiar are now new (if I hear one more person say “new normal” I’m going to puke) and it all adds up to a very frustrating, stressful, and frightening time. The Stockdale Paradox holds true for us in business, as discussed in Good to Great, as it did for Admiral Stockdale’s time in Vietnam.

 

The reality is that we don’t know when we will be past this and therefore we need to focus and make our decisions based on our current brutal facts. We can’t look past the pandemic nor can we afford to make decisions based on what we hope will happen in the next month or two or three. This is not easy, but if we can do this, we and our teams will get through this and be stronger in the end.

 

One of the brutal facts many of us are facing is PPP money running out (if it hasn’t already) and ensuring that we get full loan forgiveness. Over the last two weeks, there has been additional information released regarding PPP loan forgiveness that is discussed below. Our updated workbook is also linked below.

 

If loans are on your radar – or even if they aren’t but should be (think “brutal fact”) – you should consider the interest-free loan relating to payroll tax deferral, the Economic Injury Disaster Loan (“EIDL”), and the Main Street Lending Program. We will briefly discuss the payroll tax deferral loan and EIDL below. The Main Street Lending Program is beyond the scope of this writing; however, we are happy to discuss this, so feel free to reach out to us for guidance.

 

With regard to the PPP loan, the recent guidance issued included:

 

1) An updated PPP loan forgiveness application indicating the following:
  • The 24-week covered period as opposed to the original 8-week covered period;
  • The maximum forgivable cash compensation per employee of $46,154 over the 24-week covered period;
  • Owner Compensation, including compensation of S corporation and C corporation owners, is limited to the lesser of 2.5 months of 2019 compensation up to a maximum of $20,833; and
  • There is no “cliff effect” for not spending at least 60% of PPP loan proceeds on payroll.

 

2) In addition to the updated PPP loan forgiveness application, an additional EZ PPP loan forgiveness application was also released if you meet one of the three following requirements:
  • The borrower is a self-employed individual, independent contractor or sole proprietor with no employees;
  • The borrower did not reduce the number of employees or the average paid hours of employees between January 1, 2020 and the end of the Covered Period (exceptions apply); or
  • The borrower was unable to operate between February 15, 2020, and the end of the Covered Period at the same level of business activity as before February 15, 2020 due to compliance with requirements established or guidance issued between March 1, 2020 and December 31, 2020, related to maintenance of standards of sanitation, social distancing or any other work or customer safety requirement related to COVID-19.

 

3) Other PPP items to consider:
  • Currently, forgivable expenses are NOT deductible for income tax purposes;
  • With regard to applying for forgiveness, for those companies that require financial statements, keep in mind that you will most likely need the bank’s forgiveness determination to issue such financial statements; and
  • Please note that if you qualify for the EZ application referred to above, there is no need to complete the workbook linked below in its entirety. Please see the updated instructions.

 

With regard to the payroll tax deferral, EVERY BUSINESS that carries debt and has payroll should consider taking advantage of this opportunity. This option became more attractive with the Paycheck Protection Flexibility Act of 2020. Employers are permitted to defer the employer share of Social Security taxes for the period March 27, 2020 (practically July 1, 2020) – December 31, 2020. Since the second quarter ends today, June 30, 2020, you should notify your payroll company of the desire to take advantage of this IMMEDIATELY. The payroll taxes deferred are due 50% each on December 31, 2021 and 2022 without interest. Click here for the link to the IRS FAQs regarding this program.
With regard to the EIDL, the program was recently reopened. We are suggesting businesses that carry debt to apply for this loan as the terms can be up to $150,000 to be repaid at an interest rate of 3.75% over 30 years.

 

Thank you for your time and please let us know if we can assist in any way.

 

– Alan R. Sasserath, CPA, MS

Download the workbook here.