KROST Quarterly: The Sports & Entertainment Issue - Volume 4, Issue 3

VOLUME 4, ISSUE 3

KROST QUARTERLY M A G A Z I N E

THE SPORTS & ENTERTAINMENT ISSUE PAYROLL PROTECTION PROGRAM – APPLYING FOR FORGIVENESS WEALTH MANGEMENT STRATEGIES FOR ARTISTS & ATHLETES INCREASING TAXES ON HIGH EARNERS: THE PROPOSED AMERICAN FAMILIES PLAN

PROFESSIONAL ATHLETES: STATE ISSUES TAX CHANGES FOR THE ENTERTAINMENT INDUSTRY

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KROSTCPAs.com

CONTENTS

Volume 4, Issue 3 / October 2021 Offices Pasadena (Headquarters) Valencia West LA Woodland Hills Phone: (626) 449-4225

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Payroll Protection Program – Applying for Forgiveness

By Stacey R. Korman, CPA, MST

Fax: (626) 449-4471 Principals Gregory A. Kniss, CPA Managing Principal Lou Guerrero, CPA, MBT Jason C. Melillo, CPA Jean Hagan So Sum Lee, CPA Douglas Venturelli, Esq. Richard Umanoff, CPA, MBA Christopher H. Gaynor, CPA, MS

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Stacey R. Korman, CPA, MST

Wealth Mangement Strategies for Artists & Athletes

By Phil Clark, CPWA®, CFP®

Increasing Taxes on High Earners: The Proposed American Families Plan

By Ronique Davis

Evelyn Fernandez, CPA, MST Production, Copy, and Design Bethany Wolfe, Editor-in-Chief Anna Chen, Editor Mayra Silva, Graphic Designer Diana Vu, Assistant Editor Jackie Do, Assistant Editor Inquiries may be sent to: admin@KROSTCPAs.com Stock Photography Adobe Stock - Used with permission Copyright © 2021 by KROSTCPAs.com All rights reserved. No part of this publication may be reproduced, distributed, or transmitted in any form or by any means, including photocopying, recording, or other electronic or mechanical methods, without the prior written permission of the publisher, except in the case of brief quotations embodied in critical reviews and certain other noncommercial uses permitted by copyright law.

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Professional Athletes: State Issues

By Brad Pauley

Tax Changes for the Entertainment Industry

By Alan Lo, CPA

Securities offered through Avantax Investment ServicesSM, Member FINRA, SIPC. Investment advisory services offered through Avantax Advisory ServicesSM. Placing business through Avantax Insurance AgencySM and Avantax Insurance ServicesSM CA# 0M36260.

THE SPORTS & ENTERTAINMENT ISSUE KROST Quarterly is a digital publication released by KROST CPAs & Consultants headquartered in Pasadena, California. Established in 1939, this full-service Certified Public Accounting and Consulting firm serves clients across a variety of industries. With a focus on recognizing opportunities and creating value, KROST equips clients with tools to make better business and financial decisions for the future.

KROST QUARTERLY VOL. 4 ISSUE 3 - THE SPORTS & ENTERTAINMENT ISSUE

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INTRODUCING KROST’S SPORTS & ENTERTAINMENT TEAM At KROST, we have vast experience in the sports & entertainment industries working with current and former major and minor league players, WGA, DGA, PGA, and SAG members, as well as several Emmy and Academy Award nominees and winners.

Our knowledgeable staff can navigate loan out corporations, Guild, and pension issues. We also have experience handling state withholding and corporate registrations for California corporations doing business in other states. We are well-versed in multi-state/residency issues as well as full-service business and wealth management services.

LEARN MORE 

Our team produces regular KROST Insights posted to our website. This issue will highlight some of the hot topics in the sports & entertainment industry including tax issues for athletes, Payroll Protection

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Program loan, wealth management, and more.

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Greg Kniss, CPA Managing Principal

SPORTS & ENTERTAINMENT

Team at KROST Lou Guerrero, CPA, MBT

360° Service Model •

Accounting Services • Accounting and Bookkeeping • Accounts Payable – Bill Pay • Accounts Receivable • Budgeting • Business Management • Personal Accounting Management

•

Tax Services • Audit Support • Loan-Out Corporation • Residency/Multi State • Tax Controversy • Tax Planning and Strategy

•

Wealth Management • Financial Planning • Insurance and Risk Management • Investment Consulting

Principal - Tax

Douglas A. Venturelli, Esq. Principal - Estate Tax & Trust

Stacey R. Korman, CPA, MST Principal - Accounting

Brad Pauley, CPA Director - Tax

Experience You Can Trust Our Sector Expertise •

• • • • • • • • •

Athletes and sports professionals, including minor and major league baseball, basketball, football, and snowboarders Sports entertainment Pre and post production Actors and comedians Radio personalities News and network Models Video bloggers (YouTubers) Producers (television and motion picture) Camera and set lighting

Phil Clark, CPWA®, CFP® Director - KROST Wealth Wealth

Avantax Wealth Management SM is the holding company for the group of companies providing financial services under the Avantax name. Securities offered through Avantax Investment ServicesSM, Member FINRA, SIPC. Investment advisory services offered through Avantax Advisory ServicesSM. Insurance services offered through Avantax Insurance AgencySM. 3200 Olympus Blvd. Suite 100 Dallas, TX 75019.

“The experienced, multi-disciplined teams at KROST can provide tax, accounting, and consulting services for very specific needs relating to sports & entertainment, as well as a holistic approach to tackling multiple challenges as a true partner in the development of your profession.”

KROST QUARTERLY VOL. 4 ISSUE 3 - THE SPORTS & ENTERTAINMENT ISSUE

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Payroll Protection Program – Applying for Forgiveness

By Stacey R. Korman, CPA, MST | Principal - Accounting

As the world is beginning to return to normal, there are now live concerts, productions, and sporting events that are back to full capacity. Although there are new protocols to be followed, everyone is excited to be returning to the new “normal”. Many individuals and businesses applied and received a Payroll Protection Program (“PPP”) loan during 2020, known as PPP 1st draw. The funds have been spent, but how do businesses request forgiveness?

When applying for PPP loan forgiveness, the forgiveness application will be submitted to the lender that loaned the PPP funds. Businesses have 24 weeks to use the money for allowable costs from the time funds are received, which is defined as the covered period. After the end of the covered period, businesses have ten months to apply for forgiveness. Most lenders utilize a portal system to complete the application online and upload any supporting documents.

Over the past year and a half, there have been changes to what is considered an allowable expense and how much needs to be spent on payroll and payroll-related items. The basic rule is at least 60% of the PPP loan proceeds should be used for payroll costs. What is a payroll cost? Payroll includes all forms of cash compensation paid to an employee, including tips, commissions, bonuses, and hazard pay.

Note: Forgivable cash compensation per employee is limited to $100,000 on an annualized basis.

State and local taxes, employer portions of health insurance payments, and employer contributions to retirement plans are also considered part of payroll. Although, there could be limits for owners based on the entity type.

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The remaining 40% of the money can be used for non-payroll permitted costs, which include: •

Rent

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Mortgage interest

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Covered operations expenditures

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Covered property damage costs

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Covered supplier costs

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Covered worker protection expenditures

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Utilities (electric, water, gas, phone, internet, transportation)

Regardless of the loan amount, it is crucial to retain the documentation for six years after the date the loan is forgiven or repaid in full. The Small Business Association (“SBA”) can request to audit the documentation.

The documentation to maintain includes, but is not limited to the following: PAYROLL •

3rd party payroll service providers reports

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Bank statements showing cash compensation paid to employees

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Quarterly Federal and State payroll filings or equivalents

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Insurance invoices

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Retirement plan invoices

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Bank statements and/or copies of canceled checks

NON-PAYROLL PERMITTED COSTS INCLUDED IN FORGIVENESS CALCULATION •

Invoices

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Bank statements and/or copies of canceled checks

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Rental lease verifying the existence of the obligations/services prior to February 15, 2020

The application for forgiveness can be completed once the PPP funds have been utilized. There is no need to wait for the end of the covered period. Even though the forgiveness application can be submitted up until the maturity date of the loan, we recommend submitting the PPP forgiveness application once PPP funds have been utlilized.

CONTACT STACEY 

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Wealth Mangement Strategies for Artists & Athletes Guest Contributor: Phil Clark, CPWA®, CFP®, CLU® Director - Wealth Management, KROST Wealth

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or those in the Entertainment and Sports fields, signing that first contract is a huge milestone. You have already worked with your tax advisor in setting up the appropriate business structure and addressed your retirement opportunities.

The next step for most is curating a team of experts to guide this newly established career to new heights. A crucial member of this support group is the wealth manager. As wealth increases, strategy and planning become vital to reaching shortterm and long-term goals.

Consider the following strategies when building out a wealth plan with an advisor that knows the business:

1 CHOOSE INVESTMENTS WISELY A financial advisor can help determine the type of investments to pursue—finding the balance between conservative versus aggressive portfolios. It can be easy to leave financial planning to the experts, and certainly, with the right advisor, a safe thing to do. However, we advise our clients to maintain interest in some aspects of their wealth management portfolio. To do this, we suggest choosing a portion of investments that spark interest or passion. For example, finding companies with a mission that inspires. Maintaining this connection to assets is crucial and leads to a better understanding of wealth planning in general and is a great skill to sharpen as wealth grows. As the wise Nobel Prize winner for Economics, Harry Markowitz, once stated, “Diversification is the only free lunch in investing.” His work on the Modern Portfolio Theory (MPT) introduced in 1952 still applies today. The theory states that by diversifying, investors can benefit from reduced risk without diminishing their returns.

This strategy is simple: diversification is key to long-term investment success.

Securities offered through Avantax Investment ServicesSM, Member FINRA, SIPC. Investment advisory services offered through Avantax Advisory ServicesSM. Placing business through Avantax Insurance AgencySM and Avantax Insurance ServicesSM CA# 0M36260.

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2 LIMIT TAXES OWED ON INVESTMENTS With higher income and asset sizes, taxes matter more. Investments can either be tax-efficient or taxinefficient. It is vital to know the difference. A certified financial planner can identify these strategies and set up a plan that works based on an individual’s unique circumstances. Ultimately, the best investments offer exponential growth with a low tax liability.

3 CHARITABLE GIVING If you have a charitable giving strategy, consider cash flow fluctuations and plan your contributions within your financial plan. There are charitable vehicles available that can serve you short- and longterm charitable goals.

4 STAYING LIQUID Liquidity affords strategy, options, and flexibility for sports pros and entertainers. For example, while buying real estate can be a wise financial decision, it is vital to know how much to buy and what is too much. An experienced financial advisor can help determine the right balance. The same applies to other major purchases, as it all impacts the bottom line.

Understanding these key strategies can help shape a curated wealth management plan customized to unique needs and desires. In addition, tax-efficient financial planning can ensure cash flow is consistent and available to support an artist's or athlete’s journey throughout a career. We advise all KROST Wealth clients to get involved in planning for the future, as this connection and education lead to a better plan and strategy overall. Questions about wealth management? We’re here to help.  Diversification does not assure or guarantee better performance/profit and cannot eliminate the risk of investment losses in declining markets. Avantax affiliated Financial Professionals may only conduct business with residents of the states for which they are properly registered.

CONTACT PHIL 

Securities offered through Avantax Investment ServicesSM, Member FINRA, SIPC. Investment advisory services offered through Avantax Advisory ServicesSM. Placing business through Avantax Insurance AgencySM and Avantax Insurance ServicesSM CA# 0M36260.

KROST QUARTERLY VOL. 4 ISSUE 3 - THE SPORTS & ENTERTAINMENT ISSUE

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INCREASING TAXES ON HIGH EARNERS: THE PROPOSED AMERICAN FAMILIES PLAN

By Ronique Davis, CPA | Senior - Tax

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resident Joe Biden introduced the American Families Plan in April 2021, with an aim to expand opportunities by making education more affordable, providing economic security for families, expanding tax credits to benefit workers and families, and more. As part of the plan, earners of over $400,000 can expect an increase in taxes from 37% to 39.6%. This increase would roll back tax cuts that were established as part of the Tax Cuts and Jobs Act (TCJA) in 2017. Experts debate whether the increase would positively impact the economy or not.

Regardless, many sports and entertainment professionals are likely to be affected by this proposed tax reform.

The American Families Plan Fact Sheet on the White House website states that the administration intends to “reform tax code so that the wealthy have to play by the same rules as everyone else. It will ensure that high-income Americans pay the tax they owe under the law—ending the unfair system of enforcement that collects almost all taxes due on wages, while regularly collecting a smaller share of business and capital income.”

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"According to the President’s plan, the proposed tax reforms could raise $1.5 trillion across the next decade."

CAPITAL GAINS RATES INCREASE In addition, this $1.8 trillion plan will also increase rates on both long-term and short-term capital gains for the top 3%.

Currently, long-term capital gains are taxed at 20%, while short-term gains are taxed as ordinary income for single filers making at least $445,851 and married filers making over $501,601. Households making over $1 million a year will be subject to the same income tax rate of 39.6% on their capital gains or investment returns. However, President Biden’s proposal would exempt one-time gains, such as the sale of family real estate, and profits from home sales would be largely excluded under specific guidance.

While tax law changes can significantly impact sports and entertainment professionals, proper tax planning can be a valuable tool to offset any impact on finances. KROST’s team of tax experts, along with a dedicated financial advisor, can help with this planning.

Contact us today for assistance.  More information on the White House American Families Plan: whitehouse.gov/american-families-plan/

CONTACT US

KROST QUARTERLY VOL. 4 ISSUE 3 - THE SPORTS & ENTERTAINMENT ISSUE

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PROFESSIONAL ATHLETES: STATE ISSUES

By Brad Pauley, CPA | Director - Tax

STATES TARGETING PROFESSIONAL ATHLETES According to an article on CNBC1, states are aggressively pursuing professional athletes in an attempt to make up for lost revenue. State auditors who aim for professional athletes can drive revenue for their state by focusing on athletes with the richest contracts. In 2020, with reduced schedules and games in fewer states, the ratio of duty days in any given state versus the total number of duty days in a season was larger. This means that if a state can establish even one extra duty day in their state, they will generate a lot more revenue.

Teams are generally careful to keep track of duty days in each state. However, sometimes, they do not issue W-2s to athletes from every state they play in. An example is New York. That’s why it’s imperative for CPAs that have athlete clients with large contracts to review the athlete’s schedule and determine if the team missed issuing any W-2s, especially to high tax states. If no W-2 was issued for a particular state, all of those wages were apportioned to the athlete’s home state. Apportioning it to the new state will not cause those wages to be double taxed as they will receive a credit on their home state’s return for taxes paid to other states.

"It’s imperative for CPAs that have athlete clients with large contracts to review the athlete’s schedule and determine if the s team missed issuing any W-2s, especially to high tax states."

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Another reason to keep track of an athlete’s whereabouts is when they are on the injured reserved list and not traveling with the team. They could be in a low or no-tax state doing their rehabilitation work, and often, teams do not account for that and continue to apportion their wages as if they were still with the team. This comes even more into play if the athlete lives in a no-tax state and is either at home rehabbing or in another no-tax state.

Another issue for states, due to the pandemic, is athletes who work with coaches and or training staff remotely. If the athlete is in one state but is working with coaches in another state, which state gets to claim that duty day? “New York state, which levies a top marginal tax rate of 8.82% on income over $1,077,551, treats them as New York duty days regardless of where the athlete is physically,” said Timothy Noonan, a lawyer with Hodgson Russ, focused on athlete tax issues. Other states have also piggybacked on New York, which could ultimately lead to double taxation. Unfortunately, there is not a lot that can be done if states are able to monitor and keep track of things like this.

ESTABLISHING RESIDENCY It is very tempting for an athlete to establish residency in a no-tax state, especially if their team is in one of those states.

This can save an athlete with a large contract millions of dollars since half of all games a team plays are at home. In addition, a team that is located in a no-tax state may also play some of their away games in other no-tax states. An example is the Tampa Bay Rays. They will most likely also play teams like the Florida Marlins, Texas Rangers, Houston Astros, and Seattle Mariners, which leads to even more of their contract being exempt from state tax.

However, it is imperative that the athlete actually moves to that state and proves they are a resident. To prove residency, athletes can rent or buy a home or condo, get a driver's license in the new state, register a car, open a bank account, register to vote, etc. In addition, if the athlete keeps their home in the higher tax state or spends any time there, they should purchase a tracking app just in case a residency audit ever surfaces.

There are many issues that can surface with athletes playing, training, or rehabbing in various states. Working with a CPA that is knowledgeable in these areas can mitigate problems that may arise and ultimately save the athlete money.  1

cnbc.com/2021/01/11/state-tax-departments-set-their-sights-on-pro-athletes-earnings-.html

CONTACT BRAD 

KROST QUARTERLY VOL. 4 ISSUE 3 - THE SPORTS & ENTERTAINMENT ISSUE

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TAX CHANGES FOR THE

By Alan Lo, CPA | Senior - Tax

IMMEDIATE EXPENSING OF QUALIFIED PRODUCTION COSTS

T

he Internal Revenue Code (IRC) Section 181, which allows immediate expensing of qualified production costs associated with a Television Series, Films, and Live Theatricals, is now extended through 2025. The extender allows taxpayers to deduct up to $15 million ($20 million in certain qualified low-income/distressed areas) of qualified production costs as they are incurred. In order to qualify for the immediate expensing, IRC Section 181(d) requires at least 75% of the production compensation costs are incurred within the United States.

Rather than deducting the expenses after the release date through amortization, Section 181 is an alternative tool for production companies to minimize the timing difference between production costs and the revenue it generates. On the other hand, the opportunity to use Section 181 can dramatically change the outlook of an investor's risk assessment on a film project. The money invested and spent is expensed as incurred and will create a loss that can be passed-through to the investor. This could be a considerable tax benefit in the same year as the production.

Before deciding how to utilize a Section 181 deduction, producers should also examine their state’s laws. Many states, including Georgia, recognize Section 181 on the state return, while California does not.

Before determining whether or not to make the Section 181 election, a thorough analysis should be performed based on the company’s short-term and long-term financial position, current tax situation for both Federal and States, and perhaps most importantly, the ability to attract investors.1 100% DEDUCTION OF BUSINESS MEALS As businesses within the field of restaurant and hospitality have suffered mightily during the Coronavirus pandemic, the Consolidated Appropriations Act creates a meaningful tax incentive to spend more on business-related food and beverage expenses.

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ENTERTAINMENT INDUSTRY

Under the new law for tax year 2021 and 2022, business meals provided by restaurants are 100% tax-deductible under the following conditions: •

The expenses are not lavish or extravagant under the circumstances,

•

The taxpayer is present at the furnishing of the food and/or beverages, and

•

The food and/or beverages are provided to the taxpayer or a business prospect (customer, client, supplier, professional advisor, employee, etc.)

A special note worth pointing out is that while entertainment is 100% nondeductible, food and beverages provided during the entertainment activity are deductible when purchased separately from the entertainment or separately stated on the bill.2 TAXABILITY OF PAYCHECK PROTECTION PROGRAM (PPP) LOANS The Paycheck Protection Program (PPP) Loan was created under the CARES Act to provide relief for business owners during the pandemic. The loan is forgivable and tax-free if the funds were spent for qualified use such as rent, utilities, payroll expenses, etc.

Are expenses paid also tax-deductible if they were paid with the PPP Loan? The IRS initially argued that a tax-free treatment on forgiven loans and tax deduction paid from the forgiven loans is essentially “double-dipping,” and thus ruled that the expenses paid with PPP loans were not tax-deductible. However, the ruling was subsequently overturned under The Consolidated Appropriations Act, and the IRS conformed with the act by issuing Revenue Ruling 2021-2.

For California, under Assembly Bill 80 (AB80), there is a small catch to qualify for the double-dipping treatment under Federal law. In order to qualify for the tax deductions, a business must demonstrate at least a 25% reduction in quarterly gross revenue in 2020 compared to 2019, and the taxpayer cannot be a publicly-traded company.3 Internal Revenue Code Section 181 Consolidated Appropriations Act 2021 / Internal Revenue Code Section 274 3 Coronavirus Aid, Relief and Economic Security Act 2020, Consolidated Appropriations Act 2021, Internal Revenue Ruling 2021-2, and California Assembly Bill 80 1 2

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FEDERAL EMPLOYEE RETENTION TAX CREDITS (ERTC) The Federal Employee Retention Tax Credit (ERTC) originated as part of the CARES Act to encourage businesses to continue paying employees by providing a credit to the eligible employer for wages paid to eligible employees. Under the American Rescue Plan Act, the ERTC was extended through the end of 2021, and the recipients of PPP loans are now eligible to qualify retroactively for the credit in 2020 and 2021.

"Under the American Rescue Plan Act, the ERTC was extended through the end of 2021 and the recipients of PPP loans are now eligible to qualify retroactively for the credit in 2020 and 2021."

For tax year 2020, there is a maximum credit of $5,000 per eligible employee. The 2020 credit is computed at a rate of 50% qualified wages paid, up to $10,000 per eligible employee for the year. For eligible employers with less than 100 average full-time employees in 2019, the credit is available for all employees receiving wages in 2020.

For tax year 2021, there is a maximum credit of $7,000 per eligible employee per quarter. The 2021 ERTC is computed at a rate of 70% of qualified wages paid, up to $10,000 per eligible employee per quarter. For eligible employers with less than 500 average fill-time employees in 2019, the credit is available for all employees receiving wages in 2021.4 DEFERRAL OF FEDERAL PAYROLL TAXES Under Section 2302 of the CARES Act, employers can defer the deposit due date of their share of social security taxes from the 2nd quarter to the 4th quarter of the 2020 payroll filing. The deferral only applies to the employer’s share of social security taxes and does not apply to employer Medicare taxes nor tax withholdings from employees. Instead of the weekly/quarterly required deposit due date, the deferral allows employers to deposit 50% of their share of social security taxes by 12/31/2021 and the remaining 50% by 12/31/2022. On the other hand, self-employed individuals are also eligible for the same treatment to defer 50% of their social security tax (employer’s share) imposed on their net earnings from self-employment.

A special note in relation to PPP: employers with PPP loans were initially ineligible to defer any payroll taxes on the amount due after receiving their PPP loan forgiveness. However, the Paycheck Protection Program Flexibility Act subsequently eliminated this restriction, and therefore, employers with PPP loans can now make payroll tax deferrals even after their PPP loan forgiveness.5 In summary, numerous significant tax changes could help businesses survive the pandemic and nevertheless opportunities to succeed down the road if they are carefully addressed. If you have any questions or need assistance, please contact KROST.  Coronavirus Aid, Relief and Economic Security Act 2020 and American Rescue Plan Act 2021 Coronavirus Aid, Relief and Economic Security Act 2020 / Paycheck Protection Program Flexibility Act 2020

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Stacey R. Korman, CPA, MST, Brad Pauley, CPA, and Douglas A. Venturelli, Esq. lead the Sports & Entertainment Industry group at KROST

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For over 80 years, KROST has assisted businesses and individuals to reach their financial goals through their in-depth knowledge of Tax, Accounting, Client Accounting Services (CAS), Assurance and Advisory, M&A, KROST Business Intelligence (KBI), and Wealth Management Services. KROST also provides specialty tax services such as Cost Segregation Studies, R&D Tax Credits, Employee Retention Tax Credit (ERTC), Transfer Pricing, Green Building Tax Incentives, Repair vs. Capitalization, Fixed Asset, IC-DISC, and more.

Pasadena • Woodland Hills Valencia • West Los Angeles Phone: (626) 449-4225 Fax: (626) 449-4471 KROSTCPAs.com