Accounting & Tax

Article Dean Dorton

The Health Resources and Services Administration (HRSA) announced two important updates last week related to Provider Relief Funds (PRF) and Reporting Requirements:

  • $8.5 billion for providers that serve rural patients under the Medicare, Medicaid or Children’s Health Insurance Program (CHIP), and
  • $17 billion “for a broad range of providers who can document revenue loss and expenses associated with the pandemic.”
  • Implemented in order to help providers comply with PRF reporting requirements
  • Although HHS will not initiate collection activities or enforcement actions during the grace period, providers will still be out of compliance if reporting is not submitted by September 30, 2021
If you have questions about these two updates, please reach out to us for more information.

Questions? Contact Us!

Article Dean Dorton

The Kentucky Department of Revenue (DOR) is now accepting applications from eligible farmers for new agriculture exemption numbers. All eligible farmers accustomed to buying certain items exempt from sales tax must have an agriculture exemption number on January 1, 2022 to continue making exempt purchases.

An eligible farmer is a person who:

  • Regularly engages in the occupation of tilling and cultivating the soil for the production of crops as a business
  • Regularly engages in the occupation of raising and feeding livestock of a kind the products of which ordinarily constitute food for human consumption
  • Raising and feeding poultry
  • Producing milk for sale
  • Regularly engages in raising ratite birds, llamas, alpacas, buffalos, cervids, or aquatic organisms as an agricultural pursuit.

The sales and use tax exemptions for certain agriculture items have not changed. An example of an exemption is feed and feed additives for livestock or poultry, provided the products of such livestock or poultry ordinarily constitute food for human consumption.

Also exempt are feed and feed additives when used in connection with:

  • An agricultural pursuit involving ratite birds and eggs
  • Llamas and alpacas that are used either as beasts of burden or in an agricultural pursuit
  • The pursuit of cervid farming
  • Buffalo that are used either as beasts of burden or in an agricultural pursuit
  • An aquacultural pursuit involving aquatic organisms.

Similarly, exempt is water sold to a person regularly engaged in the business of farming and used either:

  • In the production of crops
  • In the production of milk for sale
  • In the raising and feeding of livestock or poultry (the products of which ordinarily constitute food for human consumption), or ratites, llamas, alpacas, buffalo or aquatic organisms.

The General Assembly enacted the requirement for an agriculture exemption number in 2020.

“Our Department of Revenue staff have worked closely with both the farming and retail communities in the development of a simple process to qualify for the exemption number,” said Tom Miller, Department of Revenue Commissioner. “This application process and issuance of an agriculture exemption number will improve overall compliance with state tax codes while minimizing claims by parties ineligible for the exemptions. An upcoming release of a new searchable database will also make this process transparent and convenient for both the sellers and the buyers.”

The Application for the Agriculture Exemption Number, Form 51A800, should be submitted by email to DOR.Webresponsesalestax@ky.gov or mailed to:

DOR’s Division of Sales and Use Tax
Station 66, P.O. Box 181,
Frankfort, KY 40602-0181

In addition, DOR advises applicants to supply IRS Schedule F, Profit or Loss from Farming, if possible, to expedite the application process.

The deadline to apply for the new agriculture exemption number for current farmers is January 1, 2022. The agriculture exemption number is valid for three years from the date of issuance.

Erica Horn, CPA, JD | Tax Associate Director
ehorn@deandorton.com
859.425.3674

Article Dean Dorton

Repayment of Paycheck Protection Program (PPP) loans will begin this month for early 2020 borrowers that have not yet applied for forgiveness. By submitting a forgiveness application, required principal and interest payments are forestalled until the Small Business Administration (SBA) decides on forgiveness of the loan. If you have not applied, you are not alone as approximately 71% of total PPP loan borrowers have yet to apply for forgiveness.

The earliest PPP loans were issued on April 3, 2020. If a borrower received its PPP loan funds on that date and chose the twenty-four-week covered period, the borrower’s first payment on the loan is due on or about July 17, 2021. A borrower must apply for forgiveness within ten months of the end of its covered period to avoid having to make principal and interest payments on the loan. In addition, if the SBA determines that the loan is not eligible for forgiveness (in whole or in part), the PPP loan is no longer deferred and the borrower must begin paying principal and interest. If this occurs, the lender must notify the borrower of the date the first payment is due.

However, not all is lost if a borrower cannot submit its forgiveness application before the due date of the first payment. While that payment still must be made, once the forgiveness application is submitted and ruled upon, the SBA will direct the lender to repay payments made by the borrower if the amount of the payments is part of the loan forgiveness.

There are three forgiveness applications: Form 3508S, Form 3508EZ, and Form 3508. Form 3508S is for loans of $150,000 or less. Form 3508EZ is for loans of more than $150,000 where the borrower (1) did not reduce the number of employees, or the average paid hours of employees between January 1, 2020 and the end of the covered period and did not reduce the annual salary or hourly wages of any employee (whose annualized salary was $100,000 or less) by more than 25% during the covered period, compared to the most recent full quarter preceding the covered period; or (2) was unable to operate during the covered period at the same level of business activity as before February 15, 2020 due to compliance with government health and safety requirements or guidance issued during specified timeframes. Borrowers unable to use either Form 3508S or Form 3508EZ must use the “long-form” Form 3508.

The Employee Retention Credit (ERC) and Shuttered Venue Operator Grants (SVOG)

Business owners should evaluate whether their business qualifies for the potentially lucrative employee retention credit (ERC). The ERC is a refundable payroll tax credit for eligible employers, calculated as a percentage of qualified wages paid to employees between March 13, 2020 and December 31, 2021. To be eligible, a business must meet one of two criteria during a calendar quarter:

  1. The operation of the business is fully or partially suspended due to orders from an appropriate governmental authority limiting commerce, travel, or group meetings because of COVID-19; or
  2. The employer experiences a significant decline in gross receipts.

To learn more about the ERC, click the button below to access A Guide to the Employee Retention Credit.

A Guide to the Employee Retention Credit

Former President Trump signed the Consolidated Appropriations Act (Act) in late December 2020. The Act authorized over $16 billion for Shuttered Venue Operator Grants (SVOG). SVOG funds are available to eligible entities including promoters and operators of live venues, talent representatives, museums, zoos, aquariums and motion picture theaters. The SVOG must be used for specified expenses, such as payroll costs, rent, utilities, personal protective equipment, insurance payments, and scheduled debt payments. As of June 28, 2021, it appears that approximately $4 billion in funds remained available. You can read more about SVOG here. Also, the SBA has issued detailed guidance on the program.

covid19solutions@deandorton.com

Article Dean Dorton

By Matt Smith, CPA | msmith@deandorton.com and Elizabeth Leatherman, J.D., CPA | eleatherman@deandorton.com

Qualified Charitable Distributions

You can make a qualified charitable distribution (QCD) by directly transferring funds from your IRA custodian to a qualified charity. QCDs can be counted toward satisfying required minimum distributions (RMDs) for taxpayers over age 70 1/2.

A taxable IRA distribution increases the recipient’s adjusted gross income (AGI), which may increase income taxes and Medicare premiums. In the case of a QCD, the distribution is not included in AGI, and no charitable gift deduction is allowed. In many cases, the substantial increase in the standard deduction levels in recent years has resulted in limited or no tax benefits from charitable contributions. Consequently, QCDs have become more useful as a tax savings tool.

Consider the following two examples in which a QCD is preferable to receiving an RMD and donating a like amount to charity.

Example 1

Facts Tax results Primary reasons for the tax savings from the QCD
  1. Single person, age 73
  2. RMD of $14,000
  3. Social security benefits of $30,000
  4. Other ordinary income of $30,000
  5. Charitable contributions of $14,000 and minimal other itemized deductions
  1. Federal and Kentucky income tax without QCD – $8,579
  2. Federal and Kentucky income tax with $14,000 QCD – $4,710
  3. Tax savings from QCD – $3,869 (45%)
  1. Minimal benefit from the charitable contribution deduction if no QCD
  2. More social security would have been taxable due to the increased AGI if no QCD

Example 2

Facts Tax results Primary reasons for the tax savings from the QCD
  1. Married couple filing jointly, each age 75
  2. RMD of $80,000
  3. Social security benefits of $50,000
  4. Capital gains and qualifying dividends of $100,000
  5. Other ordinary income of $150,000
  6. State and local tax deductions of $10,000
  7. Charitable contributions of $80,000
  1. Federal and Kentucky income tax without QCD – $62,478
  2. Federal and Kentucky income tax with $14,000 QCD – $55,710
  3. Tax savings from QCD – $7,361 (12%)
  1. Reduced benefit from the charitable contribution deduction if no QCD
  2. More investment income subject to the 3.8% net investment income tax due to the increased AGI if no QCD

In limited situations, using a QCD may cost additional taxes. Consider the following example:

Example 3

Facts Tax results Primary reasons for the tax increase if a QCD is made
  1. Married couple filing jointly, each age 75
  2. Kentucky tax-free bond interest of $35,000
  3. Capital gains and qualified dividends of $25,000
  4. Wife receives a 401(k) plan distribution of $100,000
  5. Husband has a $50,000 RMD from his IRA
  6. Itemized deductions, other than charitable contributions, of $18,000 of home mortgage interest and $10,000 of state and local taxes
  7. Charitable contributions of $50,000
  1. Federal and Kentucky income tax without QCD – $32,667
  2. Federal and Kentucky income tax with QCD – $33,805
  3. Tax cost from QCD – $1,138 (3%)
  1. Kentucky provides an exclusion from AGI of up to $31,110 of retirement plan income. Had the QCD not been made, the couple would have had a $50,000 charitable contribution deduction and would have been taxed by Kentucky on only $18,890 ($50,000 less $31,110) of the RMD

Note that our examples may suggest that all of an IRA owner’s RMD may need to be distributed to charity to take advantage of the potential benefits of qualified charitable distributions. That is not a requirement. An IRA owner may distribute only a portion of the RMD to charity as a QCD, taking the balance as a taxable distribution.

Several requirements must be followed to properly make a QCD. Please consult your tax advisor to help you determine if this could be a good tax planning tool in your situation.

This article was originally published in News & Views (Dean Dorton’s quarterly newsletter).

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Article Dean Dorton

By: Elizabeth Woodward, CPA/CFF, CFE | ewoodward@deandorton.com and Joe Daugherty, CPA | jdaugherty@deandorton.com 

As cryptocurrency seems to be gaining in popularity, there are a couple of issues we believe investors should know about before getting involved with one or more of the proliferating number of cryptocurrencies, such as Bitcoin, Ethereum, and Litecoin. If you aren’t already educated about cryptocurrencies, a good starting place may be the Federal Trade Commission’s website, https://www.consumer.ftc.gov/articles/what-know-about-cryptocurrency-and-scams.

This article is by no means a complete discussion of the things people who are involved with cryptocurrency should know. It is intended to touch upon only a couple of relevant considerations.

One Risk of Cryptocurrency

Earlier this year, Elizabeth Woodward received a phone call from a colleague with what she first thought was a simple forensic accounting matter. Elizabeth’s colleague’s family member had died unexpectedly and there was some evidence that the deceased family member had invested in a cryptocurrency. But, no “private key” (cryptocurrency password) had been found to access the account. Without the private key, the estate’s executor wondered who he could contact to get the private key to know the value of the account and to make appropriate disposition of it to the estate’s beneficiaries.

After making some inquiries and doing a little research, Elizabeth’s answer to the executor’s question was “no one.” Cryptocurrency cannot be claimed without the private key. Maybe the cryptocurrency industry will develop a system to help with his kind of problem in the future. One risk of cryptocurrency is that a fraudulent person reaches out to a family member inquiring about cryptocurrency assets, promising to help – for a fee – and then fails to deliver. Cryptocurrencies are not backed by any government, so purchases, sales, exchanges, and other transactions involving cryptocurrencies are private transactions. It is important to consider both the risk of fraudulent people offering help with finding cryptocurrency and the risk of what happens to cryptocurrency when a family member with cryptocurrency assets dies.

Tax Basics of Cryptocurrency

The fundamental tax issue regarding cryptocurrencies is whether they should be viewed as cash or other property. The Internal Revenue Code does not address this issue, but in 2014 the IRS issued its position that cryptocurrencies are non-cash property for tax purposes. The implications of this are very significant. If someone, say, buys $25,000 worth of Bitcoins, it is viewed the same as buying $25,000 worth of Apple shares. Thus, when those Bitcoins are sold, the seller normally will recognize a capital gain or loss, which may be short- or long-term, depending on the familiar holding period rules. But, what if those Bitcoins instead are used to purchase something else, perhaps another cryptocurrency or other property? That transaction also would be a recognition transaction for tax purposes, with the gain or loss being measured by the value of the Bitcoins used, expressed in U. S. Dollars, at the time they are used in relation to their value, again expressed in U.S Dollars, when the Bitcoins were acquired.

For someone who is very active in buying or selling cryptocurrencies and in receiving or using them for property or services, accounting for these transactions can be very challenging.

We anticipate that the IRS will be enhancing third-party reporting rules and increasing its scrutiny of cryptocurrency transactions to reduce noncompliance with its rules.

Final Thoughts Regarding Today’s State of Cryptocurrency

Whether someone views cryptocurrency as an investment or as pure speculation, or with characteristics of each, we believe those who get involved with cryptocurrency first should become educated about its fundamentals, risks, and tax treatment.

This article was originally published in News & Views (Dean Dorton’s quarterly newsletter).

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Article Dean Dorton

By: Erica Horn, CPA, JD | ehorn@deandorton.com and Maddie Schueler, JD, LLM | mschueler@deandorton.com

State governments provide services largely by using taxes paid by their residents and others doing business in the state. It is no secret that Kentucky has borders with seven states: Indiana, Illinois, Missouri, Ohio, Tennessee, Virginia, and West Virginia. The borders with Indiana and Tennessee have the greatest impact on the state’s tax policy, but Ohio and West Virginia also play a role. Therefore, it is interesting to compare Kentucky’s sources of state tax receipts to those of Indiana, Tennessee, Ohio, and West Virginia.1 Here is what we found.

Except Kentucky, the states rely most heavily on sales and use taxes, followed by individual income taxes. For example, because Tennessee has no individual income tax, 64.0% of its state tax receipts are from sales and use taxes. By contrast, only 32.2% of Kentucky’s total receipts are from sales and use taxes, while 37.7% are from individual income taxes. Here is a comparison of the percentage of gross receipts by state for sales and use and individual income taxes.

https://deandorton.com/wp-content/uploads/2021/06/Reliance-on-Individual-Income-and-Sales-and-Use-Taxes-600×305.png

The role of taxes on business, whether based on income, gross receipts, or another measure, is less than 7.5% in all states except for Tennessee.[2] Business taxes comprise 19.7% of Tennessee’s total tax receipts. By comparison, the business tax receipt percentages for the other states are Kentucky— 5.1%, Indiana— 4.4%, Ohio— 7.4%, and West Virginia— 5.6%.

Transportation taxes, such as motor and special fuels, motor vehicle licensing fees, and similar charges make up at least 9.0% of total state tax receipts. West Virginia leads the way with transportation taxes equal to 16.5% of its total gross receipts. By contrast, Ohio’s and Indiana’s are 9.1% and 9.4%, while Tennessee’s and Kentucky’s are 10.3% and 11.6%.

Tobacco and alcohol taxes are less than 5% of total state tax receipts in each state. The highest percentages are in West Virginia and Kentucky, which come in at 4.8% and 4.2%. The other three states range between 2.7% and 3.4%.

Three additional observations relate to property, natural resources, and gaming taxes. First, the only state with state property tax receipts over 1.0% is Kentucky, where state property taxes were 5.1% of total state tax receipts. Second, West Virginia’s gross receipts from taxes on natural resources were 5.2% of its total, while Kentucky’s was 0.7%. Finally, Indiana had the greatest percent of gross receipts from gaming, with a total of 2.5%.

https://deandorton.com/wp-content/uploads/2021/06/Tax-Type-as-a-Percent-of-Total-State-Tax-Receipts.png

On a final note, here is a look at the raw dollars by tax type and a breakdown of the total state tax receipts on a per capita basis.3

Tax Type KY IN TN OH WV
Individual Income $4,765,235,522 $5,271,814,147 $57,641,855 $10,349,317,882 $1,386,571,000
Sales and Use $4,070,905,629 $8,234,288,437 $9,656,615,553 $11,018,498,537 $1,947,946,000
Business $639,305,779 $756,865,803 $2,978,925,918 $2,106,257,278 $290,031,000
Tobacco and Alcohol $536,316,748 $462,143,513 $452,301,117 $970,428,864 $246,501,000
Transportation $1,460,330,063 $1,610,918,000 $1,559,612,993 $2,587,643,289 $852,000,000
Other $1,168,354,882 $719,224,900 $393,900,663 $1,319,692,416 $439,480,000
Total Tax Receipts $12,640,448623 $17,055,254,800 $15,098,998,099 $28,351,838,266 $5,162,529,000
Population 4,505,800 6,785,500 6,910,840 11,799,400 1,793,700
Per capita $2,805 $2,513 $2,185 $2,403 $2,878

1 Our comparisons were made using data from the budget offices and departments of revenue of the states for their fiscal years ended June 30, 2020. We excluded local tax receipts and non-tax sources of revenue, such as state lotteries.

2 Note that most closely-held businesses operate in pass-through entities; in these cases, individual owners normally are taxed on business profits, and those taxes are included in individual income taxes paid.

3 Data source: Census Apportionment Results

This article was originally published in News & Views (Dean Dorton’s quarterly newsletter).

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