Special tax rules may apply to some children who received investment income in 2020 or expect to receive it in 2021. The rules may affect the amount of tax and how to report the income. Here are five important points to keep in mind if your child has investment income:

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On Wednesday, March 3, 2021, the U.S. Small Business Administration (SBA) issued a revised Paycheck Protection Program (PPP) Interim Final Rule (IFR) on loan amount calculations and eligibility. The 32-page document details new rules which allow self-employed individuals who file Form 1040, Schedule C, Profit or Loss From Business, to elect to calculate the owner compensation share of its payroll costs based on either net profit (as reported on line 31 of Schedule C) or gross income (as reported on line 7 of Schedule C). For a vast majority of self-employed individuals using net profit on their Schedule C, will result in a larger loan amount.

Note that this is not retroactive. The SBA and Treasury have ruled that borrowers whose PPP loans already have been approved cannot increase their loan amount based on the new methodology. If you have yet to be approved for a PPP first- or second-draw loan in the current $284.5 billion phase of the program, you will be eligible to apply using gross profit.

If a Schedule C filer has employees, the owner compensation portion of payroll costs may be calculated based on either net profit or gross income minus expenses reported on lines 14 (employee benefit programs), 19 (pension and profit-sharing plans), and 26 (wages (less employment credits)) of Schedule C.

If approved for a loan as a Schedule C filer, borrowers may use their PPP proceeds to cover the following:

• Owner Compensation (if net profit is used) or Proprietor Expenses (business expenses plus owner compensation if gross income used)
• Employee Payroll Costs
• Mortgage Interest Payments
• Business Rent Payments
• Business Utility Payments (for borrowers entitled to claim a deduction for such expenses on their 2019 or 2020 Schedule C, depending on which one was used to calculate the loan amount)
• Interest Payments on any other debt incurred before Feb. 15, 2020 (these are not eligible for PPP loan forgiveness)
• Covered operations expenditures, as defined in Section 7A(a) of the Small Business Act, to the extent they are deductible on Schedule C
• Covered property damage costs, as defined in Section 7A(a) of the Small Business Act, to the extent they are deductible on Schedule C
• Covered supplier costs, as defined in Section 7A(a) of the Small Business Act, to the extent they are deductible on Schedule C
• Covered worker protection expenditures, as defined in Section 7A(a) of the Small Business Act, to the extent they are deductible on Schedule C

The IFR updated eligibility rules to remove restrictions that have prevented PPP loans from being granted to small business owners with prior nonfraud felony convictions or who are delinquent or in default on federal student loan payments. These changes are reflected on the updated PPP borrower forms for first and second draws.

Schedule C filers that report over $150,000 in gross income to calculate their first-draw PPP loan will not be able to claim the safe harbor provided for borrowers that, together with their affiliates, received PPP loans of less than $2 million. This is to mitigate the risk of fraud. The SBA said it is eliminating the safe harbor for these borrowers because they may be more likely to have other available funds to support their business’s operations than Schedule C filers with lower gross income.

The SBA will additionally review a sample of the population of first draw PPP loans made to Schedule C filers with gross income exceeding the $150,000 threshold. The review will assess whether these borrowers complied with all PPP eligibility criteria, including the good faith loan necessity certification.

The SBA guidance and forms release came a day after the AICPA called on Congress to extend the PPP application period by at least 60 days due to ongoing process delays and the need for time to implement the promised loan calculation guidance. No extension has been provided as of the date of this article.

The SBA also released an updated set of FAQs and six updated or new application forms:

• Updated PPP borrower first-draw (Form 2483) and second-draw (Form 2483-SD) application forms.
• New PPP first-draw (Form 2483-C) and second-draw (Form 2483-SD-C) borrower application forms for Schedule C filers using gross income.
• A revised lender application form for PPP loan guaranty (Form 2484)
• A revised PPP second-draw lender application form (2484-SD)

Wheeler Accountants is here to support businesses and nonprofits navigate the various credits and loans available in the latest round of stimulus to maximize all opportunities in these uncertain times. Please contact your preparer or the PPP team at ppp@wheelercpa.com for assistance with a PPP loan application.

Wheeler has the privilege of serving many excellent local restaurants. We are highlighting them here and invite you to incorporate their offerings into your routine as we all continue to navigate the pandemic. What will it be for you—a slice of pizza? A colorful latte?

Slice Project Pizza

300 Main Street, Watsonville, CA, 95076

Monterey Bay Caterers

152 West Lake Avenue, Watsonville, CA 95076

Tacos Moreno

1601 41st Ave Suite W in Capitola

Betty Burgers

Locations in Santa Cruz and Aptos

Oak and Rye

303 N. Santa Cruz Avenue, Los Gatos, CA, 95030

Steamers

31 University Ave, Los Gatos, CA 95030

Halal Guys

Locations in San Jose, Santa Clara, and Sunnyvale

The Halal Guys’ journey began in 1990 with three Egyptian founders. They first started a hot dog cart in New York City, then pivoted to selling halal food to Muslim taxi drivers who at the time had few outlets for authentic halal food in the five boroughs.

Voyager Coffee

Locations in San Jose and Santa Clara

If you need an inspiring cup of coffee, try Voyager! This coffee spot was born out of a desire to usher in a new paradigm within specialty coffee.

It’s 2021, and Wheeler is starting the year off strong with multiple employee Promotions! After the challenges faced in 2020, we want to honor these individuals for their growth and contribution to our incredible team.

Join us in CONGRATULATING:

        Dylan Ward – Promotion to Tax Manager

        Evan Benevento – Promotion to Tax Manager

        Anh Diep – Promotion to Senior Accountant

        Jenna Schuman – Promotion to Administrative Supervisor

Thank you all for your dedication to excellence and service!

by Matt Wheeler, CPA

It is clear to many that COVID-19 has caused us to redefine where and how we work. While many of the trends toward remote work were in place prior to this year, the pandemic has massively accelerated them. There have been many positives as workers and employers everywhere see benefits in decreased commute times, increased flexibility, reduced costs, and so on. On the other hand, new problems await the unwary.

SOUTH DAKOTA V. WAYFAIR, INC.

The state tax landscape has always been confusing and convoluted. Over the years, states have naturally become more aggressive in expanding their tax base and adapting to changes in how goods and serviced are produced, delivered, and consumed. But in 2018, the Supreme Court decided South Dakota v. Wayfair, Inc., ushering in a new era of state tax changes impacting businesses in all 50 states. The Wayfair case substantially broadened the reach of states and now necessitates that companies analyze and determine whether they have nexus—a connection or link to—any given state and whether this connection is sufficient to cause the company to be liable for sales, use, payroll, income, or franchise taxes in that state or locality.

DEFINING NEXUS

For years, Public Law 86-272 was the gold standard for state tax nexus and exposure. Companies were generally not subject to taxation by a given state unless there was substantial, often physical, nexus to a state via a business establishment or employees. As the nature of how goods and services are delivered has changed over the years, and with the meteoric rise in internet-based sales and transactions, many states have now adopted economic nexus thresholds based on the Wayfair case. These states now assert that a business’ nexus or connection to that state is based on the level of economic activity, via sales of tangible property or provision of services, in that state. Physical presence is no longer required.

COVID ERA COMPLICATIONS

These trends have existed since 2018, but COVID has now ushered in new wrinkles and accelerated many of these changes. Employees have dispersed across the nation and an employer that was formerly limited to a single office in a single state may now have employees scattered across two, three, four, or more different states. This diaspora of employees has significant state tax consequences, not only to the employees themselves, but also the business. Payroll tax, benefits, sales and use taxes, and income and franchise taxes may all be impacted by these moves. Owners of pass-through entities may find themselves now being forced to file and pay tax in multiple jurisdictions. Businesses may be required to register to do business in various states, and failure to do so may result in contractual and legal problems when they discover their “right” to do business has been revoked for failure to properly register and file the various annual returns and reports required. Additionally, companies may find themselves in the unenviable position of owing sales or use taxes on sales made to customers where no sales or use tax was originally collected as is required, affecting profit margins substantially.

DUE DILIGENCE

As with any business problem, the first step is to gather facts and assess the potential extent of exposure. This is even more important for business owners who intend to exit or sell their business in the next several years. Buyers in M&A transactions are increasingly requesting warranties and representations surrounding state tax compliance efforts, and this can become a significant part of the due diligence process in a transaction. Given the impact COVID-19 has had on the national and state economies, we expect states to continue aggressively targeting any potential revenue shortfalls to help repair massive budget deficits and expanding their tax base through policies such as taxation of services.

STRATEGY MATTERS

Despite these trends, all is not lost. Many states offer voluntary disclosure programs giving businesses a chance to “come clean” with limited lookback periods and substantially reduced, or eliminated, interest and penalty regimes. Developing a proper strategy on how to tackle these issues, including determining priority and timing, are essential to minimizing overall exposure and reducing the cost of compliance.

WE CAN HELP

Other than highly localized businesses, most businesses will encounter these issues at some point in their life cycle, or currently have unknown exposure because of the remote workforce issues discussed above. Our firm can assist you in analyzing and quantifying your state tax exposure, preparing and entering into voluntary disclosure agreements with states to get back into compliance, and developing a game plan for staying compliant moving forward. If you are interested in learning more about how your business may be impacted by these changes, or would like to learn more about some of the specific issues discussed in this article, you may reach us by using the contact form on our website or following us on social media.

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Matt Wheeler, CPA is the Managing Partner of Wheeler Accountants LLP, a full service accounting firm located in the heart of Silicon Valley. Matt works primarily with individuals on comprehensive tax strategies, specializing in equity compensation, serial entrepreneurs, venture capitalists and ultra high net worth individuals. He is also the co-host of the Avocado Toast Podcast – a Podcast targeting HENRYs (high earner not right yet) and millennials helping them make smart financial decisions.

www.wheelercpa.com

While there have always been payment options available from the IRS to help taxpayers struggling to pay tax debts, the new IRS Taxpayer Relief Initiative was put into place to expand these options and offer relief during the pandemic. These revised COVID-related collection procedures will help taxpayers, especially those who have a record of filing their returns and paying their taxes on time.

These types of relief are not automatic. Taxpayers need to request payment relief by contacting the number on their balance due notice or responding in writing.

Highlights of the Taxpayer Relief Initiative

• Taxpayers who qualify for a short-term payment plan may now have up to 180 days to resolve their tax liabilities instead of 120 days.
• The IRS is offering flexibility for some taxpayers who are temporarily unable to meet the payment terms of an accepted Offer in Compromise.
• The IRS will automatically add certain new tax balances to existing Installment Agreements for individual and business taxpayers who have gone out of business.
• Certain qualified individual taxpayers who owe less than $250,000 may set up Installment Agreements without providing a financial statement if their monthly payment proposal is sufficient.
• Some individual taxpayers who only owe for the 2019 tax year and owe less than $250,000 may qualify to set up an Installment Agreement without a notice of federal tax lien filed by the IRS.
• Qualified taxpayers with existing Direct Debit Installment Agreements may be able to use the Online Payment Agreement system to propose lower monthly payment amounts and change their payment due dates.

If you owe taxes to the IRS, don’t hesitate to contact the office about your options. Help is just a phone call away.

San Jose: (408) 252-1800

Watsonville: (831) 726-8500

As always, taxpayers should be aware of several key items involving credits, deductions, and refunds when filing their tax returns. Let’s take a look:

1. Recovery Rebate Credit/Economic Impact Payment. In January, the Treasury Department and the IRS began sending the second round of Economic Impact Payments (EIP2) to millions of Americans as part of the implementation of the Coronavirus Response and Relief Supplemental Appropriations Act. As with the first round of Economic Impact Payments (EIP1), taxpayers don’t need to take any action to receive these payments.

Taxpayers who didn’t receive an advance payment should review the eligibility criteria when they file their 2020 taxes because many people, including recent college graduates, may be eligible for a credit.

Taxpayers who received an Economic Impact Payment should have received Notice 1444, Your Economic Impact Payment, and should keep it with their 2020 tax records.

Individuals who received the full amount for both Economic Impact Payments do not need to complete information about the Recovery Rebate Credit on their 2020 Form 1040 or 1040-SR because they’ve already received the full amount of the Recovery Rebate Credit as advance payments.

Eligible individuals who did not receive an Economic Impact Payment – either the first or the second payment – can claim a Recovery Rebate Credit when filing their 2020 Form 1040 or 1040-SR this year. They may be eligible to claim the Recovery Rebate Credit on their tax year 2020 federal income tax return if:

• they didn’t receive an Economic Impact Payment, or
• their Economic Impact Payment was less than the full amount of the Economic Impact Payment for which they were eligible.

2. Option to Use Prior Year Income Amounts. Also new this year is the option to use prior year income amounts (2019) when computing the Earned Income Tax Credit and the Additional Child Tax Credit.

3. Interest on Refunds is Taxable. Taxpayers who received a federal tax refund in 2020 may have been paid interest. Refund interest payments are taxable and must be reported on federal income tax returns. In January 2021, the IRS will send Form 1099-INT, Interest Income to anyone who received interest totaling $10 or more.

4. Charitable Deductions. In 2020, taxpayers who don’t itemize deductions may take a charitable deduction of up to $300 for cash contributions made in 2020 to qualifying organizations. Please note that this amount applies whether filing individual or joint returns. In 2021, this amount increases to $600 for joint filers ($300 for single filers).

5. Virtual Currency. If in 2020, you engaged in a transaction involving virtual currency, you will need to answer the question on page 1 of Form 1040 or 1040-SR. In 2019, this question was on Schedule 1.

6. Form 1099-NEC. Individuals may receive Form 1099-NEC, Nonemployee Compensation, rather than Form 1099-MISC, Miscellaneous Income, if they performed certain services for and received payments from a business in 2020.

Don’t hesitate to contact the office with any questions or concerns about these and other tax changes related to the pandemic.

San Jose: (408) 252-1800

Watsonville: (831) 726-8500

Are you wondering if there’s a hard and fast rule about what income is taxable and what income is not taxable? The quick answer is that all income is taxable unless the law specifically excludes it. But as you might have guessed, there’s more to it than that.

Taxable income includes any money you receive, such as wages, tips, and unemployment compensation. It can also include noncash income from property or services. For example, both parties in a barter exchange must include the fair market value of goods or services received as income on their tax return.

Nontaxable Income

Here are some types of income that are usually not taxable:

• Gifts and inheritances
• Child support payments
• Welfare benefits
• Damage awards for physical injury or sickness
• Cash rebates from a dealer or manufacturer for an item you buy
• Reimbursements for qualified adoption expenses

In addition, some types of income are not taxable except under certain conditions, including:

• Life insurance proceeds paid to you are usually not taxable. But if you redeem a life insurance policy for cash, any amount that is more than the cost of the policy is taxable.
• Income from a qualified scholarship is normally not taxable; that is, amounts you use for certain costs, such as tuition and required books, are not taxable. However, amounts used for room and board are taxable.
• If you received a state or local income tax refund, the amount might be taxable. You should have received a 2020 Form 1099-G from the agency that made the payment to you. If you didn’t get it by mail, the agency might have provided the form electronically. Contact them to find out how to get the form. Be sure to report any taxable refund you received even if you did not receive Form 1099-G.

Important Reminders about Tip Income

If you get tips from customers, that income is subject to taxes. Here’s what you should keep in mind:

1. Tips are taxable. You must pay federal income tax on any tips you receive. The value of noncash tips, such as tickets, passes or other items of value are also subject to income tax.

2. Include all tips on your income tax return. You must include the total of all tips you received during the year on your income tax return, such as tips received directly from customers, tips added to credit cards, and your share of tips received under a tip-splitting agreement with other employees.

3. Report tips to your employer. If you receive $20 or more in tips in any one month from any one job, you must report your tips for that month to your employer. The report should only include cash, check, debit, and credit card tips you receive. Your employer is required to withhold federal income, Social Security, and Medicare taxes on the reported tips. Do not report the value of any noncash tips to your employer.

4. Keep a daily log of tips. Use the Employee’s Daily Record of Tips and Report to Employer (IRS Publication 1244) to record your tips.

Bartering Income is Taxable

Bartering is the trading of one product or service for another. Small businesses sometimes barter to get products or services they need. For example, a plumber might trade plumbing work with a dentist for dental services. Typically, there is no exchange of cash.

If you barter, the value of products or services from bartering is taxable income. Here are four facts about bartering that you should be aware of:

1. Barter exchanges. A barter exchange is an organized marketplace where members barter products or services. Some exchanges operate out of an office and others over the Internet. All barter exchanges are required to issue Form 1099-B, Proceeds from Broker and Barter Exchange Transactions. The exchange must give a copy of the form to members who barter and file a copy with the IRS.

2. Bartering income. Barter and trade dollars are the same as real dollars for tax purposes and must be reported on a tax return. Both parties must report as income the fair market value of the product or service they get.

3. Tax implications. Bartering is taxable in the year it occurs. The tax rules may vary based on the type of bartering that takes place. Barterers may owe income taxes, self-employment taxes, employment taxes, or excise taxes on their bartering income.

4. Reporting rules. How you report bartering on a tax return varies. If you are in a trade or business, you normally report it on Form 1040, Schedule C, Profit or Loss from Business.

If you have any questions about taxable and nontaxable income, don’t hesitate to contact the office today.

San Jose: (408) 252-1800

Watsonville: (831) 726-8500

Everyone wants to save money on their taxes, and older Americans are no exception. If you’re age 50 or older, here are five tax tips that could help you do just that.

1. Standard Deduction for Seniors. If you and/or your spouse are 65 years old or older and do not itemize your deductions, you can take advantage of a higher standard deduction amount. There is an additional increase in the standard deduction if either you or your spouse is blind.

2. Credit for the Elderly or Disabled. If you and/or your spouse are either 65 years or older–or under age 65 years old and are permanently and totally disabled–you may be able to take the Credit for Elderly or Disabled. If you are under age 65, you must have your physician complete a statement certifying that you had a permanent and total disability on the date you retired. You must also have taxable disability income that meets certain requirements. The Credit is based on your age, filing status, and income.

You may only take the credit if you meet the following:

In 2020, your adjusted gross income (AGI) on Form 1040 (or Form 1040-SR) line 11 must be less than $17,500 ($20,000 if married filing jointly and only one spouse qualifies), $25,000 (married filing jointly and both qualify), or $12,500 (married filing separately and lived apart from your spouse for the entire year).

and

The nontaxable part of your Social Security or other nontaxable pensions, annuities, or disability income is less than $5,000 (single, head of household, or qualifying widow/er with dependent child); $5,000 (married filing jointly and only one spouse qualifies); $7,500 (married filing jointly and both qualify); or $3,750 (married filing separately and lived apart from your spouse the entire year).

3. Retirement Account Limits Increase. Once you reach age 50, you are eligible to contribute (and defer paying tax on) up to $26,000 in 2020 (and in 2021). The amount includes the additional $6,500 “catch up” contribution (2020 and 2021) for employees aged 50 and over who participate in 401(k), 403(b), most 457 plans, and the federal government’s Thrift Savings Plan.

4. Early Withdrawal Penalty Eliminated. If you withdraw money from an IRA account before age 59 1/2, you generally must pay a 10 percent penalty (there are exceptions – call for details); however, once you reach age 59 1/2, there is no longer a penalty for early withdrawal. Furthermore, if you leave or are terminated from your job at age 55 or older (age 50 for public safety employees), you may withdraw money from a 401(k) without penalty. You will, however, still have to pay tax on the additional income.

5. Higher Income Tax Filing Threshold. Taxpayers who are 65 and older are allowed an income of $1,650 more ($2,600 married filing jointly) in 2020 before they need to file an income tax return. In other words, older taxpayers age 65 and older with income of $14,050 ($27,400 married filing jointly)in 2020 or less may not need to file a tax return.

Don’t hesitate to call if you have any questions about these and other tax deductions and credits available for older Americans.

San Jose: (408) 252-1800

Watsonville: (831) 726-8500



Whether you are starting a new job or reassessing your financial situation, a new year often means a fresh start. Why not get the new tax year off to a good start as well?

One way people can do this is by checking their federal income tax withholding using the Tax Withholding Estimator on IRS.gov. This online tool is useful because it helps employees avoid having too much or too little tax withheld from their wages. It also helps self-employed people make accurate estimated tax payments. Having too little withheld can result in an unexpected tax bill or even a penalty at tax time, while having too much withheld results in less money in your pocket.

Taxpayers can use the results from the Tax Withholding Estimator to determine if they should:

• Complete a new Form W-4, Employee’s Withholding Allowance Certificate and submit it to their employer.
• Complete a new Form W-4P, Withholding Certificate for Pension or Annuity Payments and submit it to their payer.
• Make an additional or estimated tax payment to the IRS.

The Tax Withholding Estimator asks taxpayers to estimate:

• Their 2021 income.
• The number of children to be claimed for the child tax credit and earned income tax credit.
• Other items that will affect their 2021 taxes.

The Tax Withholding Estimator does not ask for personally identifiable information, such as a name, Social Security number, address, and bank account numbers. Also, the IRS doesn’t save or record the information entered in the Estimator.

Before using the Estimator, taxpayers should gather their 2019 tax return, most recent pay stubs, and any income documents. These documents will help taxpayers estimate 2021 income and answer other questions asked during the process.

Most income is taxable, including unemployment compensation, refund interest, and income from the gig economy and virtual currencies. Therefore, taxpayers should also gather any documents from these types of earnings, such as W-2s, Forms 1099 from banks and other payers, and Form 1099-NEC. Forms 1095-A, Health Insurance Marketplace Statement may also be useful for those claiming the premium tax credit.

As a reminder, the Tax Withholding Estimator results will only be as accurate as the information entered by the taxpayer. People with more complex tax situations, including taxpayers who owe alternative minimum tax or certain other taxes, and people with long-term capital gains or qualified dividends, should consult a qualified tax professional.

San Jose: (408) 252-1800

Watsonville: (831) 726-8500