EIDL Loan – Is there Personal Liability?
With respect to EIDL loans, there is no loan forgiveness option, even in the event of a corporate dissolution. In short, if you stop paying on your EIDL loan, you will be considered delinquent and/or in default. In essence, with delinquency, the SBA will contact you and push for payment within 30 days. After this 30-day period, you will be in default. The consequences of default are:
Any collateral (property) pledged for the loan is at risk.
Any parties who guaranteed the loan can be sued for the balance due (more about this below).
The SBA will send you a demand letter.
Your business credit report (and possibly personal report) will show the default.
The IRS can levy tax refunds.
The loan default will be reported to the IRS and you may have to recognize income equal to the amount which is in default at some point in the future.
In the event of a loan amount which was not more than $200K, there was technically no personal guarantee with the loan document. However, there is still significant uncertainty as to what the consequences will be (i.e., for the business and its owner). The SBA has indicated that they are going to aggressively go after those in default. When a loan is over $25K but under $200K, there will be a blanket lien placed. The SBA would have made a UCC-1 filing on assets of the business. That means any assets of the business such as inventory, furniture, fixtures, computers, receivables, etc. can and probably will be seized. The SBA hasn’t definitively stated that they will report this on your credit report, but they probably will. The SBA has also ruled out any offers in compromise. The reason that significant uncertainty still exists is due to the wording of the EIDL loan agreement, which states:
“By signing or otherwise authenticating below, each individual and each organization becomes jointly and severally obligated as a Borrower under this agreement.”
With respect to this, the terms are very clear… This is a personal guarantee. A “Guarantor” means each person or entity that signs a guarantee of payment for the note. Granted, the CARES Act waived the personal guarantee for loans under $200K with the following language:
“With respect to a loan made under section 7(b)(2) of the Small Business Act (15 U.S.C. 636(b)(2)) in response to Covid-19, which stated that during the covered period, the Administrator shall waive..
“(1) any rules related to the personal guarantee on advances and loans of not more than $200,000 during the covered period for all applicants; …”
Notwithstanding this, the waiver of personal guarantee for loans below $200,000 should have been reflected in the contract. This was not specifically clear in the document. There should have been a clause which specifically stated that because the loan is below $200,000, this does not include a personal guarantee. The government may not enforce it, but the way in which it’s written, they probably could. Of course, a logical position would be that the person designated to sign on behalf of the business signed the documents only as Owner/Officer of the company, not Individually, and obviously there must be someone to sign on behalf of the entity. For all loans above $200K, there is a separate Guarantee document prepared where the principal of the organization signed in their Individual Capacity and there was an additional Guarantee Paragraph in the Loan Authorization Agreement. Those were not present in the loans below $200K.
While the EIDL Loan Agreement does not state that no individuals are personally liable on the loan, The Loan Authorization and Agreement specifically stated that each individual or entity acknowledges and accepts personal obligation and full liability under the Note as borrower. Again, the last two words of the sentence are important, as it is only The Borrower (company) on loans under $200K that is liable under the loan and agreeing to the terms in the Agreement. The Security Agreement only grants a security interest in the property owned by Borrower (Company), and the UCC financing statement to be filed is only supposed to identify the Company as debtor, with no reference to the signing officer. So, again, it’s a little bit unclear. They are not supposed to enforce this against owners in their capacity as an individual, but they probably could based on the way in which the Loan Agreement was worded. In short, you are taking your chances if you stop paying, and you could conceivably be held personally liable. The government really dropped the ball with this, which is probably not entirely surprising.
Please contact Dr. Shawn M. Folberg, CPA, if you have any questions or would like further clarification or information specific to your individual situation.
S-Corporation Basis Reductions
Losses and deductions from an S-corporation are typically allocated proportionate to stock ownership (percentage of shares owned). Losses and deductions are realized by shareholders in the year incurred to the extent that the shareholder has sufficient basis in his/her stock and loans to the corporation. Losses in excess of basis are carried over to subsequent years. Notwithstanding this, there is a specific ordering requirement under the law when it comes to taking deductions, losses, and distributions. Further, nondeductible expenses do not carry over from year to year; they reduce shareholder basis to zero (but not below zero), with the remainder forfeited, unless an election is made under Regs. §1.1367-1(g). The effect of this election is to take nondeductible expenses before other items of deduction and losses. Without such election, ordering is as follows:
Any increase in basis attributable to income items, as well as the excess of non– oil and gas depletion deductions over the basis of the property subject to depletion.
Any decrease in basis attributable to S-corporation distributions that are not taxable to the shareholder under the distribution rules of §1368.
Separately stated items of loss and deduction that flow through to and are deductible by the shareholder.
Any decrease in basis attributable to non-separately stated loss or deduction that are taken into account by the shareholder.
Any decrease in basis attributable to nondeductible, noncapital expenses and the oil and gas depletion deduction to the extent the depletion deduction does not exceed the proportionate share of the adjusted basis.
With a proper election under Regs. §1.1367-1(g), ordering is as follows:
Any increase in basis attributable to income items and the excess of non– oil and gas depletion deductions over the basis of the property subject to depletion.
Any decrease in basis attributable to S-corporation distributions that are not taxable to the shareholder under the distribution rules of §1368.
Any decrease in basis attributable to nondeductible, noncapital expenses and the oil and gas depletion deduction to the extent the depletion deduction does not exceed the proportionate share of the adjusted basis (excess nondeductible expenses are carried forward)
Any decrease in basis attributable to separately stated and non-separately stated items of loss or deduction that are taken into account by the shareholder.
Schedule an appointment to talk with Dr. Shawn Folberg, CPA as soon as possible to discuss the benefits to each option. Stay up to date with these and other important elections which may affect your business!
Inherited IRAs
On December 20, 2019, the SECURE act - Setting Every Community Up for Retirement Enhancement – was signed into law. Essentially, the intent of the legislation was to encourage families to save for retirement. However, it also includes several unfavorable provisions intended as budget offsets – i.e., to offset the loss in tax revenue which is expected to result from what is termed the 10-Year Rule.
The 10-Year Rule - Elimination of the Stretch IRA for Non-Spouse Beneficiaries:
The SECURE Act eliminates the stretch for most non-spouse beneficiaries and replaces it with the 10-Year Rule. With the 10-Year Rule, the inherited IRA must be completely withdrawn by the end of the 10th year following the year of inheritance. It is important to keep in mind that the Stretch IRA was essentially a strategy which enabled IRA beneficiaries to keep their inherited account intact throughout their entire lifetime. Beneficiaries could maximize tax-deferred growth and reduce the tax impact of IRA withdrawals by spreading those withdrawals and the resulting taxable income over their lifetime. It is important to note, that under the new law and the relevant 10-year period, there is no required minimum distribution, year-to-year. That is, the beneficiary can withdraw the IRA evenly throughout the 10-year period or wait until the 10th and final year to withdraw the entire amount. The only requirement is that the entire balance is withdrawn by the end of the 10th year following the death of the original account holder.
Exceptions to the 10-Year Rule:
The 10 Year Rule does not apply to IRAs inherited during 2019 or prior. Others who are not subject to the new 10-Year Rule include beneficiaries who are:
• Spouses
• Disabled
• Chronically ill
• Not more than 10 years younger than the original account owner
Those who are exempted (above) are eligible to stretch their inherited IRA in the same manner as they would have been able to do prior to the SECURE Act. Further, certain minor children who are beneficiaries will be allowed to take age-based required minimum distributions until they reach age 18, upon which time they too are then subject to the 10-Year Rule.
Implications of the 10-Year Rule:
The elimination of the Stretch IRA for many beneficiaries significantly increases the possibility that IRA withdrawals will be subject to higher marginal tax rates. Since the new rules require an inherited IRA to be liquidated over a shorter period of time, there is a greater likelihood the beneficiary will end up in a higher marginal
income tax bracket. This also reduces the likelihood of a beneficiary being able to defer part or all their inherited IRA distributions into their own retirement years – those years which are likely to be in a lower tax bracket.
Planning Strategies:
The flexibility for withdrawal within the 10-Year Period will provide some tax planning opportunities. For example, a beneficiary who knows they are likely to be in a lower tax bracket soon may elect to defer withdrawals until that time, provided it is within the ten-year period. Even more powerful may be the use of a partial Roth conversion, a strategy that must be employed while the original account holder is still living. A note of caution: This strategy needs to be implemented in conjunction with careful planning and guidance from your CPA, as it has implications for both Social Security taxation and Medicare premiums.
If you have any questions, please feel free to schedule a consultation. Dr. Shawn Folberg, CPA is your foremost expert on tax and accounting matters.
Estate and Gift Tax
Estate and gift tax planning is critical to ensure a person’s property passes according to his/her wishes and in a manner which is consistent with his/her financial goals. Also important is to incur the minimum possible outlay of taxes. Dr. Folberg’s experience as both a management and tax advisor, coupled with his expertise in gift and estate taxation, enables him to provide advanced estate planning services to his clients.
Some facts to consider:
There is a combined lifetime estate and gift tax exclusion. Gifts above the annual exclusion amount of $15,000 go towards the lifetime combined gift and estate tax exclusion amount. While the federal lifetime amount is $11.4 million (double if you're married filing joint - $22.8 million), which is quite a lot of money, for estates that exceed this, the tax rate is a whopping 40%. Just to put things in perspective, this is in addition to all the other taxes we pay, including income tax, property tax, sales tax, gasoline tax, etc.
Keep in mind that each state sets a much lower threshold for estate tax (it's state by state). While Florida does not have an estate tax, our friends up north may have cause for concern. For example, Oregon has a mere $1 million exclusion; Washington is $2.19 million; Minnesota is $2.4 million (and so on). Again, this is a separate tax that must be paid, and the bar is much lower meaning that you will likely owe state taxes even if you don't owe federal Estate Tax.
When it comes to gifting money, people often do not realize that the person giving the gift pays the tax (not the person receiving the gift). If you gift over $15,000 in any given year, it is important to file a return so that you to stay within IRS and State guidelines, while reducing the chances of an audit and establishing the statute of limitations. This is especially critical if you gift real or personal property. Substantiation is key.
Our estate planning services include:
• Minimizing estate, trust, and capital gains taxes
• Reviewing all estate-related documents (wills, trusts, etc.) for tax and financial implications
• Estate and gift tax compliance services, including preparation of Form 706, Form 709, Form 1041.
You can count on Dr. Folberg to educate you and help you to make the most well-informed decisions concerning the future of your estate and business.
Cost Segregation: Finding Hidden Tax Saving Opportunities
Naturally, you want to negotiate the best deal possible when you purchase a new business, take on a remodeling or expansion project, or evaluate a new construction or development plan. Yet, are you aware that you likely have thousands of dollars of tax-saving opportunities buried in your construction and purchase costs? Through a Cost Segregation Analysis, Dr. Folberg can assist you in recognizing opportunities which you may have never thought to consider.
It is well known that tax laws generally allow depreciation of certain types of property at an accelerated rate compared with that which is allowed for buildings. By utilizing this shorter depreciation period, current depreciation deductions are maximized, thereby lowering your current tax liability and increasing your tax savings. A Cost Segregation Study is designed to find expenses in your project which may be characterized as personal property or improvements, rather than as building costs. Some examples of such costs which may be targeted include furnishings, flooring and wall coverings, certain equipment, and landscaping.
Dr. Folberg has a thorough process for breaking down your construction, renovation, or acquisition costs and allocating them to specific categories, enabling you maximize tax savings, improve your cash flow, and increase your return on investment.
You owe it to yourself to find out more through a free consultation with Dr. Folberg. Whether you’re in the process of acquiring a business, constructing or renovating a building, or planning a construction or development project, time is money, so don’t delay. It is beneficial to be proactive, and you will want to contact us today to find the tax-saving opportunities hidden in your project.
Tax Cuts and Jobs Act of 2017: Excess Trade or Business Losses
You will certainly want to stay in close contact with Tampa Bay’s Premier CPA, Dr. Shawn M. Folberg, for future updates on many of the new provisions in the tax law. Several aspects of the law are presently in need of clarification, and Dr. Folberg is your #1 source for up-to-date information. One such provision, which may affect you or someone you know, involves the deductibility of net business losses.
One of the seemingly minor provisions that may have gone unnoticed in the recent Tax Cuts and Jobs Act of 2017 is the new limitation on excess trade or business losses imposed on individual taxpayers. Although this impacts those taxpayers who would not consider their business to be a tax shelter, this new limitation has been labeled an anti-tax-shelter measure. This new limitation adds yet another restriction on top of the other limitations which continue to remain in effect, including basis limitations, at-risk limitations, and passive activity loss limitations. Please contact Dr. Folberg if you need further clarification on these existing provisions, which are outside the scope of this blog post. In short, this new provision is intended to restrict the ability of taxpayers (other than C Corporations) to use trade or business losses to offset other sources of income.
Effectively, the new law limits a taxpayer’s deductible net business losses to a threshold amount for the tax year incurred. Under the new Internal Revenue Code Section 461(I), any amount greater than this threshold is an “excess business loss.” More closely defined, such loss is calculated by taking the excess of the aggregate trade or business deductions (expenses) over the taxpayer’s aggregate trade or business income or gain plus a threshold amount. For 2018, the threshold amount was $250,000 for individual taxpayers and $500,000 for those who were married filing joint (to be indexed for inflation).
One open question concerning this new provision of the tax law is whether wages as an employee will be considered “trade or business” income for purposes of calculating aggregate business income or loss. We are still waiting for guidance from the IRS on this important issue, and it remains to be seen when or whether we may receive additional guidance on the matter. Presently, there appears to be two logical possibilities, as seen by Dr. Folberg, as to the likely outcome:
1) Only wages from the trades or businesses that generate losses will be counted, or
2) All wages will be considered trade or business income for purposes of the §461(l) limitation.
Stay tuned, and feel free to contact our office if you have any questions. We love hearing from our clients!