Our guest, and the author of this article is Jeffrey Skolnick, CPA, M.S. Taxation.
The federal income tax filing date has been pushed back until July 15th. You are not required to file an extension or make any payments. No interest will be charged on payments normally due on April 15th. Some states have also changed the filing date to July 15th, and while we cannot predict the action of each state, most should extend their date as well if they have not done so already.
The stimulus package that was just passed is close to 900 pages long. There are a number of programs in the package aimed at aiding both individual and business taxpayers. There will be additional guidance issued in the coming weeks, with updates published as soon as possible.
Here is what we know so far.
Keeping Americans Paid and Employed Act
Paycheck Protection Program
This may be the best program in the new law for small businesses. Generally, any business that employs less than 500 employees qualifies. This includes self-employed individuals, nonprofit organizations, veterans organizations, and tribal business concerns. The law specifically includes sole proprietors, independent contractors, and eligible self-employed individuals.
The maximum amount of the loan is the lesser of the average total monthly payments by the applicant for payroll costs incurred during the 1 year period before the date on which the loan is made, except that, in the case of an applicant that is seasonal employer, as determined by the Administrator, the average total monthly payments for payroll shall be for the-week period beginning February 15, 2019, or at the election of the eligible recipient, March 1, 2019, and ending June 30, 2019; by 2.5 or $10,000,000.
One of the biggest keys is to determine the definition of payroll costs. These are defined in the law as payments of salary, wage, commission, tip or equivalent, payment for vacation, parental, family, medical, or sick leave, allowance for dismissal or separation, payment for the provisions of group health care benefits, including insurance premiums, retirement benefits, state or local tax assessed on employee compensation, payments to a sole proprietor or independent contractor that is a wage, commission, income, net earnings from self-employment of similar compensation that does not exceed $100,000 in 1 year.
The above definition allows not only wages but also payments to independent contractors and self-employed individuals, health insurance payments, and retirement benefits. There are some things that are not allowed as payroll costs, and they include annual salary of an employee in excess of $100,000, which must be prorated. In other words, if we look at a 4-month window, the prorated amount of a maximum $100,000 salary would be $33,333. Also excluded are federal payroll taxes, withholding, and railroad retirement tax as well as payments to individuals whose principal place of residence is outside the United States.
The loan proceeds are allowed to be used for payroll costs (which we already defined), costs of group health care benefits and insurance premiums, interest on any mortgage obligation, rent, utilities, and interest on any other debt obligations incurred before the covered period. The covered period is February 15, 2020, through June 30, 2020.
Other Loan Provisions
These loans are made without any personal guarantees of shareholders, members, or partners.
- There is no collateral required
- Loans are made without any personal guarantees of shareholders, members, or partners.
- No SBA fees
- No requirement to prove that the small business is unable to obtain credit elsewhere
- Loans are available for up to a 10-year term at 4 percent interest, with six months (and up to one year) deferral of principal and interest payments.
Loans are available for up to a 10-year term at 4 percent interest, with six months (and up to one year) deferral of principal and interest payments.
That the uncertainty of current economic conditions makes the loan request necessary to support the ongoing operations of the eligible recipient.
Acknowledging that funds will be used to retain workers and maintain payroll or make mortgage payments, lease payments, and utility payments.
That the eligible recipient does not have an application pending for a loan under this subsection for the same purpose and duplicative of amounts applied for or received under a covered loan.
During the period beginning on February 15, 2020, and ending on December 31, 2020, that the eligible recipient has not received amounts under this subsection for the same purpose and duplicate of amounts applied for or received under a covered loan.
This is probably the coolest part of the Paycheck Protection Program. The amount of the loan that will be forgiven is the actual amount spent during the 8 week period following the loan origination date for payroll costs (defined above), interest on any covered mortgage obligation, rent and utilities.
The amount of loan forgiven may not exceed the principal borrowed. There are reductions to the forgiveness amount if the average number of full-time employees is lower during the 8 week period following the loan origination date than it is for either the period from February 15, 2019 through June 30, 2019 or January 1, 2020 through February 29, 2020 (borrower may choose which of these two methods they prefer).
A reduction in full-time employees during the period beginning February 15, 2020, and ending on April 26, 2020, will be disregarded, if by June 30, 2020, the borrower has eliminated the reduction in the number of full-time employees.
Borrowers must submit documentation to the lender when seeking forgiveness. The lender has 60 days to issue its decision on forgiveness.
Normally when a taxpayer receives cancellation of a debt, it is considered taxable income; however, these loans are considered an exception and are not taxable income!
Provides small business development centers (SBDCs) and women’s business centers financial assistance in the form of grants for education, training and advising business enterprises on accessing resources and business response to the coronavirus.
Minority Business Development Agency
The Minority Business Development Agency of the Department of Commerce will provide financial assistance in the form of grants to minority business centers and minority chambers to provide education, training, and advising to minority business enterprises on accessing resources and business response to the coronavirus.
Emergency Economic Injury Disaster Loans (EIDLs)
The definition of businesses that are eligible for EIDLs is the same as entities eligible for the Paycheck Protection Program. Borrowers request up to a $10,000 emergency advance, which is paid within 3 days after the application is submitted. These funds can be used for paid sick leave for employees unable to work due to the direct effect of the coronavirus, payroll costs during business disruptions or substantial slowdowns, increased material costs incurred because materials are unavailable from the applicant’s original source due to interrupted supply chains, rent or mortgage payments and repaying obligations that can’t be met due to revenue losses.
Applicants are not required to repay any amounts advanced under this provision, even if they are subsequently denied a loan.
Resources and services in languages other than English
Resources and services will be made available to small business concerns in the 10 most commonly spoken languages, other than English, in the United States, which shall include Mandarin, Cantonese, Japanese and Korean.
Subsidy for certain loan payments
The SBA will pay all principal, interest, and fees on all existing SBA loan products, with the exception for the Paycheck Protection Program, for six months as relief to small businesses negatively affected by the coronavirus pandemic. Loans that are already on deferment will receive six months of payment by the SBA, beginning with the first payment after the deferral period. Loans made in the first six months after enactment will also receive a full six months of loan payments by the SBA.
Provides increased relief to debtors under bankruptcy chapters 7, 11 and 13. The law allows for plan modifications to debtors that have experienced coronavirus related hardships.
Unemployment Insurance Provisions
Pandemic Unemployment Assistance
The Pandemic Unemployment Assistance program extends benefits to self-employed individuals, which would include independent contractors and sole proprietors who would not normally qualify for unemployment benefits. These individuals would have to self-certify that they were otherwise able to work but are unable to due to the coronavirus pandemic. It does not include those with the ability to work remotely with pay or individuals receiving sick leave or other paid leave benefits. These individuals would be covered for any weeks; they are unable to work because of the Pandemic between January 27, 2020, and December 31, 2020, limited to a total of 39 weeks. The weekly benefit amount is the weekly benefit amount authorized under the unemployment law of the state where the covered individual was employed plus $600. The additional $600 is for a period of up to four months.
Emergency increase in unemployment compensation benefits
This provision provides those individuals receiving unemployment benefits an additional $600 per week for a period up to four months.
The additional $600 per week compensation is not taken into account when determining income for purposes of Medicaid and Children’s Health Insurance Program (CHIP) benefits.
An additional 13 weeks of unemployment compensation is available through December 31, 2020 to qualified individuals. Qualified individuals are individuals who have exhausted all rights to regular compensation under the applicable state law or under federal law with respect to a benefit year; have no rights to regular compensation with respect to a week under such law or any other state unemployment compensation law or to compensation under any other federal law; are not receiving compensation with respect to such week under the unemployment compensation law of Canada; and are able to work, available to work, and actively seeking work.
The weekly benefit amount is the weekly benefit amount authorized under the unemployment law of the state, where the covered individual was employed plus $600. The additional $600 is for a period of up to four months.
Most people have heard by now of the $1,200 recovery rebates for individuals. These are considered refundable credits against a taxpayer’s 2020 income tax. These payments are limited by the Adjusted Gross Income (AGI) of the taxpayer. For single individuals with AGI under $75,000, they will receive the full $1,200. For single taxpayers with AGI greater than $75,000, the $1,200 amount is phased out by 5% of the amount AGI exceeds $75,0000 with the amount being reduced to $0 for taxpayers with AGI exceeding $99,000. For individuals filing as Head of Household, the $1,200 amount begins its phase out at $112,500 and is reduced to $0 for taxpayers with AGI greater than $136,500. Married taxpayers filing jointly are allowed a $2,400 rebate, which begins to phase out at $150,000 of AGI and is completely eliminated for taxpayers with AGI exceeding $198,000. There is also an additional $500 per child for qualifying dependent children under age 17. The government will issue checks based on your most recently filed income tax return. If you have filed 2019, they will use 2019; if you have not yet filed they will use your 2018 return.
Early withdrawal penalties
Under normal circumstances, unless a taxpayer meets one of the exceptions. If an individual withdraws money from a retirement plan before reaching age 59 ½, not only is that withdrawal subject to income tax, but it is also assessed a 10% penalty for early withdrawal. The 10% penalty will not apply to coronavirus-related distributions. Coronavirus-related distributions are defined as distributions made from an eligible retirement plan during 2020 to an individual that is diagnosed with COVID-19, whose spouse or dependent is diagnosed with the virus or who has experienced adverse financial consequences as a result of being quarantined, being furloughed or laid off or having work hours reduced due to such virus or disease, being unable to work due to lack of child care due to such virus or disease, closing or reducing hours of a business owned or operated by the individual due to such virus or disease, or other factors as determined by the Secretary of the Treasury. This exception applies to distributions of up to $100,000. Keep in mind these distributions will still be subject to income tax.
Distributions discussed in the previous paragraph that are subject to income tax will be spread over a 3 year period unless the taxpayer elects not to spread the income. Individuals are also allowed to repay the withdrawn amounts any time over a 3-year period beginning on the day after a distribution was taken. If withdrawn amounts are repaid, the transaction will be treated as a rollover (normal rule of having to repay within 60 days in order to qualify as a rollover is waived).
Loans from Qualified Plans
If you are an owner of a qualified retirement plan (not an IRA), typically, you are allowed to borrow up to $50,000 which must be repaid within 5 years unless the proceeds are used to purchase a principal residence. The new law allows loans of up to $100,000 if they are taken within the 180 days, beginning on the date of the enactment of the law (March 27, 2020). Additionally, if a loan from a retirement plan had a due date falling between March 27, 2020, and December 31, 2020, it will be delayed 1 year.
Required Minimum Distributions (RMDs)
Recent legislation passed raised the age at which RMDs were required to begin. The age was moved from 70 ½ to 72. The new law waives all required minimum distributions for 2020 without regard to whether the taxpayer has been impacted by the coronavirus.
Qualified Charitable Contributions
In 2020, taxpayers will be allowed an “above the line” deduction for charitable deductions of up to $300. Typically taxpayers only receive credit for charitable contributions if they itemize their income tax deductions. This rule allows all taxpayers to deduct up to $300, whether they itemize or not.
Contributions which are usually limited to 50% of AGI can be unlimited in 2020 for individual taxpayers. Corporations are normally limited to 10-percent-of -net income will be allowed to deductions up to 25% of net income in 2020.
Employer payments of student loans
Employers are permitted to pay up to $5,250 of student principal and interest loan payments, whether paid to the employee or to a lender on any qualified education loan incurred by the employee for the employee (i.e., it cannot be for the employee’s child). This provision is for payments made during 2020 only.
Employee Retention Credit for Employers Subject to Closure due to Coronavirus
Eligible employers are allowed a 50 percent refundable credit of qualified wages (including health benefits) paid between March 13, 2020, and December 31, 2020. There is a maximum of $10,000 per employee per quarter. Eligible employers are defined as employers carrying on a trade or business during 2020 and whose business is fully or partially suspended during a calendar quarter due to a shutdown order or whose gross receipts are less than 50 percent of gross receipts for the same calendar quarter in the prior year.
Qualified wages for eligible employers with greater than 100 full-time employees are wages paid to employees not providing services when the business is fully or partially suspended during a calendar quarter due to a shutdown order or whose gross receipts are less than 50 percent of gross receipts for the same calendar quarter in the prior year. There is a limitation on these employees based on the amount such employees would have been paid for working an equivalent duration during the 30 days immediately preceding the coronavirus crisis.
Qualified wages for eligible employers with no more than 100 full-time employees are all wages paid whether or not the employer is open for business or subject to a shutdown order.
This credit is not available for those employers receiving a covered loan under the Paycheck Protection Program covered above.
Delay of Payment of Employer Payroll Taxes
Employers (including those paying self-employment taxes) are permitted to delay the payment of their 6.2% portion of social security or self-employment taxes incurred between March 27, 2020, and December 31, 2020. 50% of this deferred amount is due by December 31, 2021, and the remainder by December 31, 2022.
This provision is not applicable to any taxpayer that has had Loan Forgiveness detailed above.
Modifications for Net Operating Losses (NOLs)
Net operating losses incurred in 2018, 2019, and 2020 can offset 100% of taxable income (the Tax Cuts and Jobs Act had previously limited NOLs to 80% of taxable income). In addition, these losses can be carried back 5 years. Previously these losses were only allowed to be carried forward. Carrying these losses back and amending prior returns may provide refunds to taxpayers. Although carrybacks may go as far back as 2013, filings are considered timely if filed within 120 days after the enactment of this law.
Modification of Limitation on Losses for Taxpayers Other Than Corporations
There was a provision in the law which limited the loss allowed from trades or businesses of a taxpayer for losses incurred after 2017. The 2019 amounts were scheduled to be $255,000 ($510,000 for married couples filing jointly). The limitation under this new Act is eliminated for years 2018 through 2020.
Business Interest Expense Limitation Modification
For years after 2017 certain companies that average $26,000,000 or more in sales are limited in the amount of interest that may be deducted. This number is limited to 30% of adjusted taxable income. The law is amended for 2019 and 2020 to allow 50%, instead of 30%, of adjusted taxable income.
Qualified Property Improvement
Due to a technical error in the Tax Cuts and Jobs Act qualified improvement property, which is defined as any improvement to a nonresidential building’s interior that is not attributable to the enlargement of the building, any elevator or escalator or the internal framework of a building, was not permitted an immediate write-off under the bonus depreciation regulations. This error has been corrected and is treated as if it became law upon the enactment of the Tax Cuts and Jobs Act. Taxpayers may file amended income tax returns to take advantage of this corrected provision.
This guide has been slightly edited for brevity.