New Bills in Congress

Business owners and individuals alike will be impacted by new bills introduced in Congress this week. We anticipate some big changes to PPP loans, possibly including a 2nd round for qualifying businesses and changes to loan amounts for some farmers. The bills currently include a new stimulus payment and changes to unemployment, as well as new/changed business tax credits. LWH will keep you up to date as the bills make their way through Congress.

Donating a Used Car to Charity

One of the negative aspects of buying a new car is the annoyance involved with getting rid of your old car. Many individuals find the trade-in allowance offered by dealers (if any) to be well below the car's true value. But the alternative of selling the car on your own involves the expense of advertising as well as the commitment of time needed to meet with potential buyers, accompany them on test drives, negotiate a fair price, etc.

For these reasons, some taxpayers consider a different option for their old cars: donating them to charity. An increasing number of charities have turned to car-donation programs. You may have seen ads from some of these organization in your local newspaper urging individuals to donate their old cars. The donation approach saves you the trouble of trying to sell the car. Many charities offer the added convenience of picking up the car at your home.

In taking this approach, however, bear in mind that the amount of the deduction you will be allowed to claim is subject to special limitations. In many cases, the deduction you can claim is less than your view of the car's value. If you compare the tax savings from a donation with a dealer's trade-in offer, the offer may not seem as small.

For cars worth over $500, the deduction will be the lesser of the vehicle's fair market value or the amount for which the charity actually sells the car, if it sells the car without materially improving it. This limit applies to any motor vehicle designed for road use, including vans and trucks, as well as to boats and airplanes.

Since most charities do sell the cars they receive, it's likely that your donation will be limited to the actual sale price. Furthermore, these sales are often at auction or in bulk and typically result in sales below "Blue Book" value. Also, you won't know the amount of your deduction until the charity has sold the car and reported the sale proceeds to you (see below).

Only if the charity uses the car in its operations or materially improves the car before selling it will your deduction be based on the car's fair market value at the time of the donation. In that case, fair market value is usually set according to the "Blue Book" listings for used cars published by the National Automobile Dealers Association. The IRS will accept the value in the "Blue Book" or another established used car pricing guide if the guide lists a sales price for a car that is the same make, model, and year, sold in the same area, and in the same condition, as the car you donated. In some cases, this value will exceed the amount you could actually get on a sale.

However, if the car is in poor condition, because it needs substantial repairs or is unsafe to drive, and the pricing guide only lists prices for cars in average or better condition, the guide won't set the car's value. Instead, you must establish the car's true market value by any reasonable method. Many used car guides show how to adjust value for items such as accessories or mileage.

In any case, you must itemize your deductions to get the tax benefit; you can't take a deduction for a car donation if you take the standard deduction.

Make sure the charity qualifies and is legitimate. You won't be entitled to a charitable deduction unless you donate your car to an eligible charitable organization. In some cases, the transaction is more complex because private fund-raisers may be operating car donation programs on behalf of charities. This is legitimate as long as the private company is acting as the agent for a qualified charity. We can help if you have any doubts about the qualification of any donee you are considering.

Proving your right to the deduction. If you donate your used car to charity, make sure you take the steps needed to substantiate your tax deduction.

If the charity sells the car, you will need a written acknowledgement from the charity containing your name and tax ID number, the vehicle ID number, a certification that it was sold at arm's length to an unrelated party, the gross proceeds of sale, and statement that the deduction cannot exceed the proceeds. The charity should provide you with this acknowledgement within 30 days of the sale.

If, instead, the charity will use (or materially improve) the car, the acknowledgement needs to certify the intended use (or improvement) and the intended duration of the use, along with a statement that the car will not be sold before completion of the use or improvement. In this case, the acknowledgement should be provided within 30 days of the donation.

Please contact us with any questions on how donating a car could benefit your 2020 taxes.

Paycheck Protection Program Flexibility Act of 2020

Additional changes to PPP loans were passed by the Senate last night and are expected to be signed by the President.  The following changes will apply to all PPP loans (with one optional exception discussed later).

·         The loan covered period was extended from 8 weeks to 24 weeks.

·         The minimum loan percentage that must be used toward payroll costs decreased from 75% to 60%; the remaining 40% can be spent on allowable non-payroll costs.  (Note: as currently written, at least 60% of the total loan must be spent on payroll for any money to be forgiven.  There may be a future technical correction coming related to this.)

·         The safe harbor period for reinstating levels of employment has been extended from June 30, 2020 to December 31, 2020.

·         There are new exceptions for restoring the number of full-time equivalent employees.  There is no longer a reduction if either of the following can be documented:

o   You are unable to rehire the individuals who were employees on February 15, 2020 and cannot hire a similarly qualified employee(s) by December 31, 2020.

o   You are unable to return to the same level of business activity as of February 15, 2020 due to specific factors related to COVID-19, as outlined in the Act.

There is also an optional exception written into the Act that allows anyone who already had a PPP loan before this Act was effective to use the 8 week period instead of extending the period to 24 weeks.

Please contact us with questions you have.  We are happy to discuss how these changes will specifically impact your PPP loan and can help you determine if applying for a PPP loan is beneficial to your business situation.  June 30, 2020 is the cut off for applying for a PPP loan.

Reasonable Compensation

As the owner of an incorporated business, you are probably aware that there's a tax advantage to taking money out of the corporation as compensation (salary and bonus) rather than as dividends. The reason is simple: a corporation can deduct the compensation that it pays, but not its dividend payments. Thus, if funds are withdrawn as dividends, they're taxed twice, once to the corporation and once to the recipient. Money paid out as compensation is taxed only once, to the employee who receives it.

However, there's a limit on how much money you can take out of the corporation in this way. The law says that compensation can be deducted only to the extent that it's reasonable. Any unreasonable portion is nondeductible and, if paid to a shareholder, may be taxed as if it were a dividend. As a practical matter, IRS rarely raises the issue of unreasonable compensation unless the payments are made to someone "related" to the corporation, such as a shareholder or a member of a shareholder's family.

How much compensation is "reasonable"? There's no simple formula. The IRS tries to determine the amount that similar companies would pay for comparable services under like circumstances. Factors that are taken into account include:

•       the employee's duties;

•       the amount of time required to perform those duties;

•       the employee's ability and accomplishments;

•       the complexities of the business;

•       the gross and net income of the business;

•       the employee's compensation history; and

•       the corporation's salary policy for all its employees.

There are a number of concrete steps you can take to make it more likely that the compensation you earn will be considered "reasonable," and therefore deductible by your corporation. For example, you can:

•       Use the minutes of the corporation's board of directors to contemporaneously document the reasons for the amount of compensation paid. For example, if compensation is being increased in the current year to make up for earlier years in which it was too low, be sure that the minutes reflect this. (Ideally, the minutes for the earlier years should reflect that the compensation paid in those years was at a reduced rate.)

•       Avoid paying compensation in direct proportion to the stock owned by the corporation's shareholders. This looks too much like a disguised dividend and will probably be treated as such by the IRS.

•       Keep compensation in line with what similar businesses are paying their executives (and keep whatever evidence you can get of what others are paying - such as salary offers to your executives from comparable companies - to support what you pay if you're later questioned).

•       If the business is profitable, be sure to pay at least some dividends. This avoids giving the impression that the corporation is trying to pay out all of its profits as compensation.

As in most tax situations, planning ahead avoids problems later. Contact us if you would like to discuss this or any other aspect of your current or deferred compensation strategies.