What qualifies as a “coronavirus-related distribution” from a retirement plan?

As you may have heard, the Coronavirus Aid, Relief and Economic Security
(CARES) Act allows “qualified” people to take certain “coronavirus-related
distributions” from their retirement plans without paying tax.

So how do you qualify? In other words, what’s a
coronavirus-related distribution?

Early distribution basics

In general, if you withdraw money from an IRA or eligible
retirement plan before you reach age 59½, you must pay a 10% early withdrawal
tax. This is in addition to any tax you may owe on the income from the
withdrawal. There are several exceptions to the general rule. For example, you
don’t owe the additional 10% tax if you become totally and permanently disabled
or if you use the money to pay qualified higher education costs or medical

New exception

Under the CARES Act, you can take up to $100,000 in
coronavirus-related distributions made from an eligible retirement plan between
January 1 and December 30, 2020. These coronavirus-related distributions aren’t
subject to the 10% additional tax that otherwise generally applies to
distributions made before you reach age 59½.

What’s more, a coronavirus-related distribution can be included
in income in installments over a three-year period, and you have three years to
repay it to an IRA or plan. If you recontribute the distribution back into your
IRA or plan within three years of the withdrawal date, you can treat the
withdrawal and later recontribution as a totally tax-free rollover.

In new guidance (Notice 2020-50) the IRS explains who qualifies
to take a coronavirus-related distribution. A qualified individual is someone

  • Is diagnosed (or whose spouse or dependent is
    diagnosed) with COVID-19 after taking a test approved by the Centers for
    Disease Control and Prevention (including a test authorized under the
    Federal Food, Drug, and Cosmetic Act); or
  • Experiences adverse financial consequences as a result
    of certain events. To qualify under this test, the individual (or his or
    her spouse or member of his or her household sharing his or her principal
    residence) must:

    • Be quarantined, be furloughed or laid off, or have
      work hours reduced due to COVID-19;
    • Be unable to work due to a lack of childcare because
      of COVID-19;
    • Experience a business that he or she owns or operates
      due to COVID-19 close or have reduced hours;
    • Have pay or self-employment income reduced because of
      COVID-19; or
    • Have a job offer rescinded or start date for a job
      delayed due to COVID-19.

Favorable rules

As you can see, the rules allow many people — but not everyone —
to take retirement plan distributions under the new exception. If you decide to
take advantage of it, be sure to keep good records to show that you qualify. Be
careful: You’ll be taxed on the coronavirus-related distribution amount that
you don’t recontribute within the three-year window. But you won’t have to
worry about owing the 10% early withdrawal penalty if you’re under 59½. Other
rules and restrictions apply. Contact us if you have questions or need

© 2020

Launching a business? How to treat start-up expenses on your tax return

While the COVID-19 crisis has devastated many existing
businesses, the pandemic has also created opportunities for entrepreneurs to
launch new businesses. For example, some businesses are being launched online
to provide products and services to people staying at home.

Entrepreneurs often don’t know that many expenses incurred by
start-ups can’t be currently deducted. You should be aware that the way you
handle some of your initial expenses can make a large difference in your tax

How expenses must be handled

If you’re starting or planning a new enterprise, keep these key
points in mind:

  • Start-up costs include those incurred or paid while
    creating an active trade or business — or investigating the creation or
    acquisition of one.
  • Under the Internal Revenue Code, taxpayers can elect to
    deduct up to $5,000 of business start-up and $5,000 of organizational
    costs in the year the business begins. As you know, $5,000 doesn’t get you
    very far today! And the $5,000 deduction is reduced dollar-for-dollar by
    the amount by which your total start-up or organizational costs exceed
    $50,000. Any remaining costs must be amortized over 180 months on a
    straight-line basis.
  • No deductions or amortization deductions are allowed
    until the year when “active conduct” of your new business begins.
    Generally, that means the year when the business has all the pieces in
    place to begin earning revenue. To determine if a taxpayer meets this
    test, the IRS and courts generally ask questions such as: Did the taxpayer
    undertake the activity intending to earn a profit? Was the taxpayer
    regularly and actively involved? Did the activity actually begin?

Expenses that qualify

In general, start-up expenses include all amounts you spend to:

  • Investigate the creation or acquisition of a business,
  • Create a business, or
  • Engage in a for-profit activity in anticipation of that
    activity becoming an active business.

To be eligible for the election, an expense also must be one
that would be deductible if it were incurred after a business began. One
example is money you spend analyzing potential markets for a new product or

To qualify as an “organization expense,” the expenditure must be
related to creating a corporation or partnership. Some examples of organization
expenses are legal and accounting fees for services related to organizing a new
business and filing fees paid to the state of incorporation.

Thinking ahead 

If you have start-up expenses that you’d like to deduct this
year, you need to decide whether to take the elections described above.
Recordkeeping is critical. Contact us about your start-up plans. We can help
with the tax and other aspects of your new business.

© 2020

Some people are required to return Economic Impact Payments that were sent erroneously

The IRS and the U.S. Treasury had disbursed 160.4 million
Economic Impact Payments (EIPs) as of May 31, 2020, according to a new report.
These are the payments being sent to eligible individuals in response to the
economic threats caused by COVID-19. The U.S. Government Accountability Office
(GAO) reports that $269.3 billion of EIPs have already been sent through a
combination of electronic transfers to bank accounts, paper checks and prepaid
debit cards.

Eligible individuals receive $1,200 or $2,400 for a married
couple filing a joint return. Individuals may also receive up to an additional
$500 for each qualifying child. Those with adjusted gross income over a
threshold receive a reduced amount.

Deceased individuals

However, the IRS says some payments were sent erroneously and
should be returned. For example, the tax agency says an EIP made to someone who
died before receipt of the payment should be returned. Instructions for
returning the payment can be found here: https://bit.ly/31ioZ8W

The entire EIP should be returned unless it was made to joint
filers and one spouse hadn’t died before receipt. In that case, you only need
to return the EIP portion made to the decedent. This amount is $1,200 unless
your adjusted gross income exceeded $150,000. If you cannot deposit the payment
because it was issued to both spouses and one spouse is deceased, return the
check as described in the link above. Once the IRS receives and processes your
returned payment, an EIP will be reissued.

The GAO report states that almost 1.1 million payments totaling
nearly $1.4 billion had been sent to deceased individuals, as of April 30,
2020. However, these figures don’t “reflect returned checks or rejected direct
deposits, the amount of which IRS and the Treasury are still determining.”

In addition, the IRS states that EIPs sent to incarcerated
individuals should be returned.

Payments that don’t have to be returned

The IRS notes on its website that some people receiving an
erroneous payment don’t have to return it. For example, if a child’s parents
who aren’t married to each other both get an additional $500 for the same qualifying
child, one of them isn’t required to pay it back.

But each parent should keep Notice 1444, which the IRS will mail
to them within 15 days after the EIP is made, with their 2020 tax records.

Some individuals still waiting

Be aware that the government is still sending out EIPs. If you
believe you’re eligible for one but haven’t received it, you will be able to
claim your payment when you file your 2020 tax return.

If you need the payment sooner, you can call the IRS EIP line at
800-919-9835 but the Treasury Department notes that “call volumes are high, so
call times may be longer than anticipated.”

© 2020

Assessing productivity as you cope with the pandemic

The COVID-19 crisis is affecting not only the way many
businesses operate, but also how they assess productivity. How can you tell
whether you’re getting enough done when so much has changed? There’s no easy,
one-size-fits-all answer, but business owners should ask the question so you
can adjust expectations and objectives accordingly.

Impact of remote work

Heading into the crisis, concerns about productivity were
certainly on the minds of many in leadership positions. In March, research firm
Gartner conducted a snap poll that found 76% of HR leaders reported their
organizations’ managers were concerned about “productivity or engagement of
their teams when remote.”

Many of these fears may well have been alleviated after a month
or two. News provider USA Today collaborated with researchers YouGov and social
media platform LinkedIn to conduct a poll in April that found 54% of
respondents (professionals ages 18-74) said that working remotely has
positively affected their productivity. They cited factors such as time saved
by not having to commute and fewer distractions from co-workers.

The bottom line is that allowing — or, in recent months,
requiring — employees to work remotely shouldn’t drastically alter your
expectations of their productivity. Every employee must continue to fulfill his
or her job duties and meet annual performance management objectives (as perhaps
adjusted in light of the pandemic and altered economy).

However, it’s unrealistic to expect anyone to accomplish
markedly more just because he or she is no longer subject to a long commute and
regular office hours. In fact, when assessing productivity, business owners
should bear in mind the dual challenge of work-life balance while working
remotely (childcare obligations, etc.) and the mental health component of
living through a pandemic.

Solid metrics

If remote work isn’t a major concern for your company — either
because your employees were already doing it, adapted to it readily or simply
cannot work from home — there remain some tried-and-true ways to evaluate
productivity. Metrics can be useful.

For example, one broad measurement of productivity is revenue
per employee. To calculate it, you’ll need to check your financial statements
to see how much revenue your business brought in during a defined period. Then,
you divide that dollar figure by your total number of employees. The idea is
that every worker should generally bring in enough revenue to rationalize his
or her paycheck.

It’s not a “be all, end all” metric by any means, but revenue
per employee can help accurately shape your understanding of productivity and
cash flow. And, as mentioned, you’ll need to think about how this year’s
economic conditions have altered your productivity needs and what employees can
reasonably accomplish.

Careful calibration

When the subject of productivity arises, many business owners’
instinctive answer is “more, more, more!” Carefully calibrating your
expectations and goals, however, can lead to more sustainable results. We can
help you choose and calculate the right metrics and set realistic productivity

© 2020

Steer clear of the Trust Fund Recovery Penalty

If you own or manage a business with employees, you may be at
risk for a severe tax penalty. It’s called the “Trust Fund Recovery Penalty”
because it applies to the Social Security and income taxes required to be
withheld by a business from its employees’ wages.

Because the taxes are considered property of the government, the
employer holds them in “trust” on the government’s behalf until they’re paid
over. The penalty is also sometimes called the “100% penalty” because the
person liable and responsible for the taxes will be penalized 100% of the taxes
due. Accordingly, the amounts IRS seeks when the penalty is applied are usually
substantial, and IRS is very aggressive in enforcing the penalty.

Far-reaching penalty

The Trust Fund Recovery Penalty is among the more dangerous tax
penalties because it applies to a broad range of actions and to a wide range of
people involved in a business.

Here are some answers to questions about the penalty so you can
safely stay clear of it.

Which actions are penalized? The Trust
Fund Recovery Penalty applies to any willful failure to collect, or truthfully
account for, and pay over Social Security and income taxes required to be
withheld from employees’ wages.

Who is at risk? The
penalty can be imposed on anyone “responsible” for collection and payment of
the tax. This has been broadly defined to include a corporation’s officers,
directors and shareholders under a duty to collect and pay the tax as well as a
partnership’s partners, or any employee of the business with such a duty. Even
voluntary board members of tax-exempt organizations, who are generally excepted
from responsibility, can be subject to this penalty under certain
circumstances. In addition, in some cases, responsibility has been extended to
family members close to the business, and to attorneys and accountants.

IRS says responsibility is a matter of status, duty and
authority. Anyone with the power to see that the taxes are (or aren’t) paid may
be responsible. There’s often more than one responsible person in a business,
but each is at risk for the entire penalty. Although a taxpayer held liable can
sue other responsible people for contribution, this is an action he or she must
take entirely on his or her own after he or she pays the penalty. It isn’t part
of the IRS collection process.

Here’s how broadly the net can be cast: You may not be directly
involved with the payroll tax withholding process in your business. But if you
learn of a failure to pay over withheld taxes and have the power to pay them
but instead make payments to creditors and others, you become a responsible

What’s considered “willful?” For
actions to be willful, they don’t have to include an overt intent to evade
taxes. Simply bending to business pressures and paying bills or obtaining supplies
instead of paying over withheld taxes that are due the government is willful
behavior. And just because you delegate responsibilities to someone else
doesn’t necessarily mean you’re off the hook. Your failure to take care of the
job yourself can be treated as the willful element.

Avoiding the penalty

You should never allow any failure to withhold and any
“borrowing” from withheld amounts — regardless of the circumstances. All funds
withheld must also be paid over to the government. Contact us for information
about the penalty and making tax payments.

© 2020

After you file your tax return: 3 issues to consider

The tax filing deadline for 2019 tax returns has been extended
until July 15 this year, due to the COVID-19 pandemic. After your 2019 tax
return has been successfully filed with the IRS, there may still be some issues
to bear in mind. Here are three considerations.

1. Some tax records can now be thrown away

You should keep tax records related to your return for as long
as the IRS can audit your return or assess additional taxes. In general, the
statute of limitations is three years after you file your return. So you can
generally get rid of most records related to tax returns for 2016 and earlier
years. (If you filed an extension for your 2016 return, hold on to your records
until at least three years from when you filed the extended return.)

However, the statute of limitations extends to six years for
taxpayers who understate their gross income by more than 25%.

You’ll need to hang on to certain tax-related records longer.
For example, keep the actual tax returns indefinitely, so you can prove to the
IRS that you filed a legitimate return. (There’s no statute of limitations for
an audit if you didn’t file a return or you filed a fraudulent one.)

When it comes to retirement accounts, keep records associated
with them until you’ve depleted the account and reported the last withdrawal on
your tax return, plus three (or six) years. And retain records related to real
estate or investments for as long as you own the asset, plus at least three
years after you sell it and report the sale on your tax return. (You can keep
these records for six years if you want to be extra safe.)

2. You can check up on your refund

The IRS has an online tool that can tell you the status of your
refund. Go to irs.gov and click on “Get Your Refund Status” to find out about
yours. You’ll need your Social Security number, filing status and the exact
refund amount.

3. You can file an amended return if you
forgot to report something

In general, you can file an amended tax return and claim a
refund within three years after the date you filed your original return or
within two years of the date you paid the tax, whichever is later. So for a
2019 tax return that you file on July 15, 2020, you can generally file an
amended return until July 15, 2023.

However, there are a few opportunities when you have longer to
file an amended return. For example, the statute of limitations for bad debts
is longer than the usual three-year time limit for most items on your tax
return. In general, you can amend your tax return to claim a bad debt for seven
years from the due date of the tax return for the year that the debt became

We can help

Contact us if you have questions about tax record retention,
your refund or filing an amended return. We’re not just available at tax filing
time — we’re here all year!

© 2020