Category Archives: Accounting

Tax Relief Provided by the CARES Act

The Coronavirus Aid, Relief, and Economic Security Act (CARES Act) signed into law on March 27, 2020, not only provides significant financial relief to individuals and businesses, but it also contains tax law changes to help everyone coping with Coronavirus. Below is a summary of the key provisions impacting individuals and businesses.

Individual Provisions

Waiver of 10% early distribution penalty: The additional 10% tax on early distributions from IRAs and defined contribution plans, such as a 401(k), is waived for distributions made between 1/1/2020 –12/31/2020 by a someone who (or whose family) is infected with or is economically harmed by the Coronavirus.
Waiver of required distribution rules: Required minimum distributions that otherwise would have to be made in 2020 from defined contribution plans, such as 401(k), and IRAs are waived.
Charitable deductions: Individuals will be able to claim a $300 above-the-line deduction for cash contributions made to public charities in 2020. Also, the limitation on charitable deductions based on adjusted gross income doesn’t apply to cash contributions made in 2020.
Break for nonprescription medical products: Beginning in 2020, amounts paid from HSAs and MSAs are to be treated as paid for medical care even if they aren’t paid under a prescription plan. The same applies to reimbursements from Flexible Spending Arrangements and HRAs made in 2020.

Business Provisions

Employee retention credits: Eligible employers can qualify for a refundable credit against their portion of the Social Security payroll tax for up to 50% of certain wages paid to employees during the COVID-19 crisis.
Delay of employer payroll tax payments: Employers can defer payment of the employer portion of Social Security and RRTA taxes and self-employed individuals can defer payment of certain self-employment taxes through the end of 2020.
Advance refund of credits for sick and paid leave: Employers, who paid qualified sick and family leave wages under the Families First Coronavirus Response Act (FFCRA), are eligible for an advance refund of credits against certain payroll taxes paid on those wages.
Changes to net operating loss (NOL) rules: For NOLs arising in tax before 2021, taxpayers can now carryback 100% of NOLs to the prior five tax years. Also, for tax years before 2021, taxpayers can take an NOL deduction equal to 100% of taxable income, rather than the present 80% limit.
Temporary increase in the deductibility of interest expense: Businesses may increase the interest limitation from 30% to 50% of adjusted taxable income (ATI) for 2019 and 2020 and elect to use 2019 ATI in calculating their 2020 limitation. For partnerships, the 30% of ATI limit remains in place for 2019 but is 50% for 2020.
Bonus depreciation now available for interior building improvements: The CARES Act makes a technical correction to the 2017 Tax Law that retroactively treats a wide variety of certain building improvements as eligible for bonus deprecation, allowing for a 100% write-off.

For more information, contact your Bothell Accountant at Padgett Business Services in Bothell, Washington at (425) 408-1695. We handle your bookkeeping, accounting, personal tax preparation & business tax preparation, and payroll needs – so you can focus on what makes you money. Serving Bothell, Lynnwood, Kirkland, Kenmore, Mill Creek and surrounding areas.

Understanding Cash Flow

A healthy cash flow is an essential part of any successful business. Face it – if you fail to have enough cash to pay your suppliers, creditors, or your employees, you’re out of business! No doubt about it, proper understanding and management of your cash flow is a very important step in making your business successful. Despite what some may think, there’s more to it than just a fancy term for the movement of money into, and out of, your business checking account.

Inflows – Inflows are the movement of money into your cash flow. Inflows are most likely from the sale of your goods or services to your customers. If you extend credit to your customers and allow them to charge the sale of the goods or services to their account, then an inflow occurs as you collect on the customers’ accounts.

Outflows – Outflows are the movement of money out of your business. Outflows are generally the result of paying expenses. If your business involves reselling goods, then your largest outflow is most likely to be for the purchase of retail inventory. Purchasing fixed assets, paying back loans, and paying accounts payable are also cash outflows.

Cash flow is typically measured by analyzing the amounts of cash received versus the amount of cash paid out. The report most often used to look at where your cash comes from and find out where it’s going is called the “Statement of Changes in Cash Position (or “Statement of Cash Flows”).

If all is well, you will not be agonizing over the fact that the outflows are larger than the inflows!

For more information, contact your Bothell Accountant at Padgett Business Services in Bothell, Washington at (425) 408-1695. We handle your bookkeeping, accounting, personal tax preparation & business tax preparation, and payroll needs – so you can focus on what makes you money. Serving Bothell, Lynnwood, Kirkland, Kenmore, Mill Creek and surrounding areas.

Importance of Accountable Plans

If you often reimburse employees for job-related expenses they incur, accountable plans can offer a significant measure of safety. Reimbursements under an accountable plan aren’t taxable to the employee and (with the exception of meal and entertainment expenses) are fully deductible by the employer. For the accountable plan to qualify, reimbursements must be for job-related expenses that the employee would reasonably expect to incur, and the employee must provide substantiation and return any excess reimbursements within a reasonable period of time.

Consider this scenario: A courier business employees picks up and delivers packages using their own vehicles. The company’s reimbursements aren’t based on the employees’ actual expenses but instead, their commissions is split between wages and equipment rental (i.e., use of the employees’ vehicles). The employees aren’t required to submit mileage or expense documentation to the employer. The employees’ wages are reported on their W-2s and the expense reimbursements on their 1099-MISCs.

In this situation, since actual expenses aren’t reported to the employer, the reimbursements aren’t part of an accountable plan. As a result, the “reimbursement” must be included on the employees’ Forms W-2 and subject to employment taxes.

While this scenario involves a delivery service, the rules apply to all businesses. Although some exceptions exist, it’s best to either include the full amount in wages or require employees to submit detailed expense reports for reimbursement under an accountable plan.

For more information, contact your Bothell Accountant at Padgett Business Services in Bothell, Washington at (425) 408-1695. We handle your bookkeeping, accounting, personal and business taxes, and payroll needs – so you can focus on what makes you money. Serving Bothell, Lynnwood, Kirkland, Kenmore, Mill Creek and surrounding areas.

Do you have a Capitalization Policy?

In an attempt to alleviate past confusion, the IRS issued new regulations clarifying which costs are classified as repairs and maintenance and deductible in the current year. This is versus those fixed asset expenditures that have to be capitalized and depreciated over a number of years.

General Rule: Taxpayer must capitalize and depreciate all costs that facilitate the acquisition or production of property. Improvements to property that better a unit of property, restore it, or adopt it to a new and different use must also be capitalized.

The regulations provide circumstances for when certain items can be expensed, rather than capitalized.

  1. De Minimis Safe Harbor: Supplies and Materials that are $200 or less per item, per invoice OR have a useful life of 12 months or less can be expensed in the current year.
  2. Routine Maintenance Safe Harbor: Repairs and maintenance that keep business property in ordinarily efficient operating condition, such as inspection, cleaning, testing, and replacement of worn or damaged part can be expensed.
  3. Per Building Safe Harbor for Small Businesses: Taxpayers with average annual gross receipts of $10 million or less in the three preceding tax years can deduct improvements made to a building with an unadjusted basis of $1 million or less. The deduction is limited to $10,000 or 2% of the building’s unadjusted basis. This election is made annually on a timely filed return and is on a building-by-building basis.

Exceptions to the General Rule:

  1. A Capitalization Policy establishes the threshold (minimum cost) for capitalization and depreciation of fixed assets. Taxpayers that have a written policy for accounting procedures in place by the beginning of the tax year can deduct up to $500 per item, per invoice (instead of $200). The $500 de minimis safe harbor election can be made by attaching a statement to a timely filed federal income tax return. This election is not considered a Change in Accounting Method and therefore Form 3115, Application for Change in Accounting Method, is not required. For businesses that had a written Capitalization Policy in place at 1/1/2014, the $500 threshold can be applied on the 2014 Federal return. For businesses that did NOT have a policy in place can still make the election for 2015 by establishing accounting procedures for the 2015 tax year before January 1st.
  2. The IRS has hinted at flexibility in the dollar ceilings where the taxpayer has the burden of showing that such treatment clearly reflects income. If you think your business model can support a higher de minimis threshold, consider filing Form 3115, Application for Change in Accounting Method, with the tax return for the year the change is to be effective.

These regulations are lengthy and complex, so contact your local Padgett office for assistance, as these new provisions will affect every business, even yours!

For more information, contact Padgett Business Services in Bothell, Washington at (425) 408-1695. We handle your bookkeeping, accounting, tax (personal & business) and payroll needs – so you can focus on what makes you money. Serving Bothell, Lynnwood, Kenmore, Mill Creek and surrounding areas.

The Gift of Inventory – Maximize Your Tax Deduction

Donating excess or obsolete inventory can help small businesses avoid hefty storage fees and make room in their warehouse for the products which do sell. Small business owners could also receive a valuable tax deduction if the donation meets certain requirements.

  • What can be donated? Obsolete inventory exists when the items are no longer in season/style, have expired, or are outdated for the purposes of your business. To qualify for a tax deduction, it must still retain some value and must be able to be used by the charitable organization. A computer is an example for which you can receive a tax deduction. However, the donation of a typewriter to a charitable organization will unlikely qualify for the tax deduction.
  • How much can you donate? The IRS encourages businesses to donate excess inventory to charity in quantities that can be used in the charitable organization’s normal course of business and help them to meet the stated mission of their organization. For example, a manufacturing business can’t receive a deduction for donating 200 widgets to the Salvation Army since they provide no benefit to the charity. However, a clothing store donating 200 coats to Salvation Army would receive a charitable deduction. What if there were 1,000 coats? To receive a deduction for all 1,000 coats, the Salvation Army would have to be able to sell these in the normal course of business, otherwise a deduction would be allowed for only a reasonable number of donated coats.
  • Who can you donate to? Only charitable organizations that are listed as 501(c)(3) organizations will qualify for the tax deduction. Schools, hospitals and churches are some examples of these types of organizations. If you’re in doubt, you can ask the charity about its status.
  • How much can you deduct? The amount you can deduct is the smaller of its fair market value on the day you contributed it or its basis. The basis of contributed inventory is any cost incurred for the inventory. You must remove the amount of your charitable contribution deduction from your opening inventory, as it is not part of the cost of goods sold. If the cost of donated inventory is not included in your opening inventory, the inventory’s basis is zero and you cannot claim a charitable contribution deduction.

If your small business has excess inventory, contact your local Padgett office to see how you may benefit from making a donation.

For more information, contact Padgett Business Services in Bothell, Washington at (425) 408-1695. We handle your bookkeeping, accounting, tax (personal & business) and payroll needs – so you can focus on what makes you money. Serving Bothell, Lynnwood, Kenmore, Mill Creek and surrounding areas.