When Congress passed the Coronavirus Aid, Relief and Economic Security Act (CARES Act), it provided for economic impact payments of up to $1,200 per person be sent to taxpayers. When the Internal Revenue Service (IRS) issued those payments, it referred back to a taxpayer’s 2018/2019 income tax returns to see if a particular individual qualified based on their gross income in those years. One important fact was overlooked – whether the individual was still alive when the economic impact payment was issued. The IRS has now provided guidance if a deceased individual received a payment – basically, the IRS wants its money back. (more…)
The novel coronavirus (COVID-19) pandemic may have you thinking about how you can help those whose health and financial security has been imperiled by the virus. Naturally, charities fighting COVID-19 will welcome your donations now. But you may also want to think about making a more lasting gift. With a charitable remainder trust (CRT) you may be able to support a favorite nonprofit and also enjoy lifetime income and current tax benefits. Learn more about how CRT might fit into your estate plan. (more…)
Governor Ralph Northam signed into law amendments to the state budget approved at the recent reconvened session of the Virginia General Assembly. The amendments include a waiver of interest on income tax payments, so long as the payment is made on or before June 1, 2020 (the revised tax payment due date).
A recap of the important dates is as follows:
Individual and corporate income tax payments are now due June 1, 2020.
• Applies to payments originally due between April 1 and June 1, 2020.
o Individual and corporate taxable year (TY) 2019 tax due payments
o Individual and corporate extension payments for TY 2019
o First estimated income tax payments for TY 2020
• No penalties, interest, or addition to tax will be charged if payments are made by June 1, 2020.
For more details, visit https://www.tax.virginia.gov/news/coronavirus-updates
We will provide additional information as it becomes available. View additional firm updates and resources related to COVID-19 anytime at https://www.kwccpa.com.
As COVID-19 continues to impact the world, businesses and individuals are now confronting significant and unique challenges. Successful navigation of these challenges will require comprehensive planning. In addition to our traditional services, we are also offering assistance in these areas. KWC CPAs has created teams with expertise to address specific issues within recent COVID-19 legislation to help our clients meet the tax, financial, and business challenges that coronavirus is creating. We have also created timely client resources and are prepared to help you navigate these complex issues.
Services we are providing to clients currently include:
- Assistance with Paycheck Protection Program Loans under the CARES Act (see update below)
- Consult regarding potential loan forgiveness of Paycheck Protection Program Loans
- Payroll tax deposit delays
- Payroll tax credits under the Families First Coronavirus Response Act (FFCRA)
- Employee retention credits
- Income tax considerations for 2020 of recent COVID-19 tax laws, potential amendments of 2018 and 2019 tax returns to apply for refunds.
- Recovery rebates
- Unemployment Benefits (see update below)
- Small Business Administration (SBA) Economic Injury Disaster Loans
Paycheck Protection Program Loans under the CARES Act
This program has been of great interest by our business and sole proprietor clients. The legislation is very complex, but an understandable summary is provided here by the US Chamber of Commerce.
Banks are currently working with the SBA to administer these loans. To our knowledge at this moment, there is not an application form for this loan available. But you can and should be gathering documentation we anticipate will be required.
Those interested and eligible to apply for the loans should be gathering the following information:
- Calculate the average monthly payroll costs as defined in the Act for the last 12 months. This is in many cases a complex process due to the definitions of payroll costs in the Act including limitations on compensation over $100,000 to each employee/contractor. Once average monthly payroll costs are calculated that amount multiplied by 2.5 is the maximum amount of loan that can be requested. Note that many conditions apply to the amount of the loan that may end up being forgiven.
- Determine how many full-time equivalent employees/contractors you had from February 15, 2019 to June 30, 2019 and from January 1, 2020 to February 29, 2020. The lower of the two will be used in loan forgiveness calculation. The average number of full-time equivalent employees is determined by calculating the average number of full-time equivalent employees for each pay period falling within a month.
- Create a budget for all expenses that commenced 2/15/2020 and run until 6/30/2020. This budget should be as detailed as possible and include all operating costs (Payroll, Insurance, Utilities, Rent/Mortgage Interest, etc.).
- Complete SBA Form 1919 (pages 2 and 3 only)
- Gather all organizational documents such as Articles of Incorporation or Formation and any amendments, By-laws, LLC & partnership operating agreements, minutes of all owners meetings for the past two years, any buy/sell agreements, stock certificates, stock register/ledger, etc., schedule of ownership for LLCs & partnerships, etc.
Expansion of Unemployment Benefits by the CARES Act
Under Section 2014 of the Act, individuals who are otherwise eligible for unemployment benefits under state or federal law will receive $600 per week, in addition to their regular unemployment compensation under state law, through July 2020.
Under Section 2105, if a state waives its standard one-week waiting period requirement, thus paying recipients as soon as they become unemployed, the federal government will fund the cost of that first week of benefits.
Under Section 2107, if individuals remain unemployed after their state employment benefits are exhausted, the federal government will fund up to 13 weeks of additional unemployment benefits – thereby increasing to 39 weeks the 26-week maximum common under most states’ unemployment laws – at a weekly rate of $600 during that 13-week period.
Under Sections 2108 and 2109, the Act will provide funding to states that currently have or choose to implement a Short-Time Compensation (STC) program for employers that reduce their employees’ hours in lieu of a lay-off and whereby the employees thus receive a pro-rated unemployment benefit. The federal government will fund 100% of the costs for states that currently have a STC program and 50% for those states that choose to implement one, in each case through Dec. 31, 2020.
On March 27, 2020, President Trump signed into law the Coronavirus Aid, Relief and Economic Security (CARES) Act, which provides relief to taxpayers affected by the novel coronavirus (COVID-19). The CARES Act is the third round of federal government aid related to COVID-19. We have summarized the top provisions in the new legislation below, with more detailed alerts on individual provisions to follow. Click here for a link to the full text of the bill.
2020 Recovery Refund Checks for Individuals
The CARES Act provides eligible individuals with a refund check equal to $1,200 ($2,400 for joint filers) plus $500 per qualifying child. The refund begins to phase out if the individual’s adjusted gross income (AGI) exceeds $75,000 ($150,000 for joint filers and $112,500 for head of household filers). The credit is completely phased out for individuals with no qualifying children if their AGI exceeds $99,000 ($198,000 for joint filers and $136,500 for head of household filers).
Eligible individuals do not include nonresident aliens, individuals who may be claimed as a dependent on another person’s return, estates, or trusts. Eligible individuals and qualifying children must all have a valid social security number. For married taxpayers who filed jointly with their most recent tax filings (2018 or 2019) but will file separately in 2020, each spouse will be deemed to have received one half of the credit.
A qualifying child (i) is a child, stepchild, eligible foster child, brother, sister, stepbrother, or stepsister, or a descendent of any of them, (ii) under age 17, (iii) who has not provided more than half of their own support, (iv) who has lived with the taxpayer for more than half of the year, and (v) who has not filed a joint return (other than only for a claim for refund) with the individual’s spouse for the taxable year beginning in the calendar year in which the taxable year of the taxpayer begins.
The refund is determined based on the taxpayer’s 2020 income tax return but is advanced to taxpayers based on their 2018 or 2019 tax return, as appropriate. If an eligible individual’s 2020 income is higher than the 2018 or 2019 income used to determine the rebate payment, the eligible individual will not be required to pay back any excess rebate. However, if the eligible individual’s 2020 income is lower than the 2018 or 2019 income used to determine the rebate payment such that the individual should have received a larger rebate, the eligible individual will be able to claim an additional credit generally equal to the difference of what was refunded and any additional eligible amount when they file their 2020 income tax return.
Individuals who have not filed a tax return in 2018 or 2019 may still receive an automatic advance based on their social security benefit statements (Form SSA-1099) or social security equivalent benefit statement (Form RRB-1099). Other individuals may be required to file a return to receive any benefits.
The CARES Act provides that the IRS will make automatic payments to individuals who have previously filed their income tax returns electronically, using direct deposit banking information provided on a return any time after January 1, 2018.
Above-the-line deductions: Under the CARES Act, an eligible individual may take a qualified charitable contribution deduction of up to $300 against their AGI in 2020. An eligible individual is any individual taxpayer who does not elect to itemize his or her deductions. A qualified charitable contribution is a charitable contribution (i) made in cash, (ii) for which a charitable contribution deduction is otherwise allowed, and (iii) that is made to certain publicly supported charities.
This above-the-line charitable deduction may not be used to make contributions to a non-operating private foundation or to a donor advised fund.
Modification of limitations on cash contributions: Currently, individuals who make cash contributions to publicly supported charities are permitted a charitable contribution deduction of up to 60% of their AGI. Any such contributions in excess of the 60% AGI limitation may be carried forward as a charitable contribution in each of the five succeeding years.
The CARES Act temporarily suspends the AGI limitation for qualifying cash contributions, instead permitting individual taxpayers to take a charitable contribution deduction for qualifying cash contributions made in 2020 to the extent such contributions do not exceed the excess of the individual’s contribution base over the amount of all other charitable contributions allowed as a deduction for the contribution year. Any excess is carried forward as a charitable contribution in each of the succeeding five years. Taxpayers wishing to take advantage of this provision must make an affirmative election on their 2020 income tax return.
This provision is useful to taxpayers who elect to itemize their deductions in 2020 and make cash contributions to certain public charities. As with the aforementioned above-the-line deduction, contributions to non-operating private foundations or donor advised funds are not eligible.
For corporations, the CARES Act temporarily increases the limitation on the deductibility of cash charitable contributions during 2020 from 10% to 25% of the taxpayer’s taxable income. The CARES Act also increases the limitation on deductions for contributions of food inventory from 15% to 25%.
Compensation, Benefits, and Payroll Relief
The law temporarily increases the amount of and expands eligibility for unemployment benefits, and it provides relief for workers who are self-employed. Additionally, several provisions assist certain employers who keep employees on payroll even though the employees are not able or needed to work. The cornerstone of the payroll protection aid is a streamlined application process for SBA loans that can be forgiven if an eligible employer maintains its workforce at certain levels. Additionally, certain employers affected by the pandemic who retain their employees will receive a credit against payroll taxes for 50% of eligible employee wages paid or incurred from March 13 to December 31, 2020. This employee retention credit would be provided for as much as $10,000 of qualifying wages, including health benefits. Eligible employers may defer remitting employer payroll tax payments that remain due for 2020 (after the credits are deducted), with half being due by December 31, 2021, and the balance due by December 31, 2022. Employers with fewer than 500 employees are also allowed to give terminated employees access to the mandated paid federal sick and child care leave benefits for which the employer is 100% reimbursed by the government through payroll tax credits if the employer rehires the qualifying employees.
Any benefit that is driven off the definition of “employee” raises the issue of partner versus employee. The profits interest member that is receiving a W-2 may not be eligible for inclusion in the various benefit computations.
Eligible individuals can withdraw vested amounts up to $100,000 during 2020 without a 10% early distribution penalty, and income inclusion can be spread over three years. Repayment of distributions during the next three years will be treated as tax-free rollovers of the distribution. The bill also makes it easier to borrow money from 401(k) accounts, raising the limit to $100,000 from $50,000 for the first 180 days after enactment, and the payment dates for any loans due the rest of 2020 would be extended for a year.
Individuals do not have to take their 2020 required minimum distributions from their retirement funds. This avoids lost earnings power on the taxes due on distributions and maximizes the potential gain as the market recovers.
Two long-awaited provisions allow employers to assist employees with college loan debt through tax free payments up to $5,250 and restores over-the-counter medical supplies as permissible expenses that can be reimbursed through health care flexible spending accounts and health care savings accounts.
Deferral of Net Business Losses for Three Years
Section 461(l) limits non-corporate taxpayers in their use of net business losses to offset other sources of income. As enacted in 2017, this limitation was effective for taxable years beginning after 2017 and before 2026, and applied after the basis, at-risk, and passive activity loss limitations. The amount of deductible net business losses is limited to $500,000 for married taxpayers filing a joint return and $250,000 for all other taxpayers. These amounts are indexed for inflation after 2018 (to $518,000 and $259,000, respectively, in 2020). Excess business losses are carried forward to the next succeeding taxable year and treated as a net operating loss in that year.
The CARES Act defers the effective date of Section 461(l) for three years, but also makes important technical corrections that will become effective when the limitation on excess business losses once again becomes applicable. Accordingly, net business losses from 2018, 2019, or 2020 may offset other sources of income, provided they are not otherwise limited by other provisions that remain in the Code. Beginning in 2021, the application of this limitation is clarified with respect to the treatment of wages and related deductions from employment, coordination with deductions under Section 172 (for net operating losses) or Section 199A (relating to qualified business income), and the treatment of business capital gains and losses.
Section 163(j) Amended for Taxable Years Beginning in 2019 and 2020
The CARES Act amends Section 163(j) solely for taxable years beginning in 2019 and 2020. With the exception of partnerships, and solely for taxable years beginning in 2019 and 2020, taxpayers may deduct business interest expense up to 50% of their adjusted taxable income (ATI), an increase from 30% of ATI under the TCJA, unless an election is made to use the lower limitation for any taxable year. Additionally, for any taxable year beginning in 2020, the taxpayer may elect to use its 2019 ATI for purposes of computing its 2020 Section 163(j) limitation. This will benefit taxpayers who may be facing reduced 2020 earnings as a result of the business implications of COVID-19. As such, taxpayers should be mindful of elections on their 2019 return that could impact their 2019 and 2020 business interest expense deduction. With respect to partnerships, the increased Section 163(j) limit from 30% to 50% of ATI only applies to taxable years beginning in 2020. However, in the case of any excess business interest expense allocated from a partnership for any taxable year beginning in 2019, 50% of such excess business interest expense is treated as not subject to the Section 163(j) limitation and is fully deductible by the partner in 2020. The remaining 50% of such excess business interest expense shall be subject to the limitations in the same manner as any other excess business interest expense so allocated. Each partner has the ability, under regulations to be prescribed by Treasury, to elect to have this special rule not applied. No rules are provided for application of this rule in the context of tiered partnership structures.
Net Operating Losses Carryback Allowed for Taxable Years Beginning in 2018 and Before 2021
The CARES Act provides for an elective five-year carryback of net operating losses (NOLs) generated in taxable years beginning after December 31, 2017, and before January 1, 2021. Taxpayers may elect to relinquish the entire five-year carryback period with respect to a particular year’s NOL, with the election being irrevocable once made. In addition, the 80% limitation on NOL deductions arising in taxable years beginning after December 31, 2017, has temporarily been pushed to taxable years beginning after December 31, 2020. Several ambiguities in the application of Section 172 arising as a result of drafting errors in the Tax Cuts and Jobs Act have also been corrected. As certain benefits (i.e., charitable contributions, Section 250 “GILTI” deductions, etc.) may be impacted by an adjustment to taxable income, and therefore reduce the effective value of any NOL deduction, taxpayers will have to determine whether to elect to forego the carryback. Moreover, the bill provides for two special rules for NOL carrybacks to years in which the taxpayer included income from its foreign subsidiaries under Section 965. Please consider the impact of this interaction with your international tax advisors. However, given the potential offset to income taxed under a 35% federal rate, and the uncertainty regarding the long-term impact of the COVID-19 crisis on future earnings, it seems likely that most companies will take advantage of the revisions. This is a technical point, but while the highest average federal rate was 35% before 2018, the highest marginal tax rate was 38.333% for taxable amounts between $15 million and $18.33 million. This was put in place as part of our progressive tax system to eliminate earlier benefits of the 34% tax rate. Companies may wish to revisit their tax accounting methodologies to defer income and accelerate deductions in order to maximize their current year losses to increase their NOL carrybacks to earlier years.
Alternative Minimum Tax Credit Refunds
The CARES Act allows the refundable alternative minimum tax credit to be completely refunded for taxable years beginning after December 31, 2018, or by election, taxable years beginning after December 31, 2017. Under the Tax Cuts and Jobs Act, the credit was refundable over a series of years with the remainder recoverable in 2021.
Technical Correction to Qualified Improvement Property
The CARES Act contains a technical correction to a drafting error in the Tax Cuts and Jobs Act that required qualified improvement property (QIP) to be depreciated over 39 years, rendering such property ineligible for bonus depreciation. With the technical correction applying retroactively to 2018, QIP is now 15-year property and eligible for 100% bonus depreciation. This will provide immediate current cash flow benefits and relief to taxpayers, especially those in the retail, restaurant, and hospitality industries. Taxpayers that placed QIP into service in 2019 can claim 100% bonus depreciation prospectively on their 2019 return and should consider whether they can file Form 4464 to quickly recover overpayments of 2019 estimated taxes. Taxpayers that placed QIP in service in 2018 and that filed their 2018 federal income tax return treating the assets as bonus-ineligible 39-year property should consider amending that return to treat such assets as bonus-eligible. For C corporations, in particular, claiming the bonus depreciation on an amended return can potentially generate NOLs that can be carried back five years under the new NOL provisions of the CARES Act to taxable years before 2018 when the tax rates were 35%, even though the carryback losses were generated in years when the tax rate was 21%. With the taxable income limit under Section 172(a) being removed, an NOL can fully offset income to generate the maximum cash refund for taxpayers that need immediate cash. Alternatively, in lieu of amending the 2018 return, taxpayers may file an automatic Form 3115, Application for Change in Accounting Method, with the 2019 return to take advantage of the new favorable treatment and claim the missed depreciation as a favorable Section 481(a) adjustment.
Effects of the CARES Act at the State and Local Levels
As with the Tax Cuts and Jobs Act, the tax implications of the CARES Act at the state level first depends on whether a state is a “rolling” Internal Revenue Code (IRC) conformity state or follows “fixed-date” conformity. For example, with respect to the modifications to Section 163(j), rolling states will automatically conform, unless they specifically decouple (but separate state ATI calculations will still be necessary). However, fixed-date conformity states will have to update their conformity dates to conform to the Section 163(j) modifications. A number of states have already updated during their current legislative sessions (e.g., Idaho, Indiana, Maine, Virginia, and West Virginia). Nonetheless, even if a state has updated, the effective date of the update may not apply to changes to the IRC enacted after January 1, 2020 (e.g., Arizona). A number of other states have either expressly decoupled from Section 163(j) or conform to an earlier version and will not follow the CARES Act changes (e.g., California, Connecticut, Georgia, Missouri, South Carolina, Tennessee (starting in 2020), Wisconsin). Similar considerations will apply to the NOL modifications for states that adopted the 80% limitation, and most states do not allow carrybacks. Likewise, in fixed-dated conformity states that do not update, the Section 461(l) limitation will still apply resulting in a separate state NOL for those states. These conformity questions add another layer of complexity to applying the tax provisions of the CARES Act at the state level. Further, once the COVID-19 crisis is past, rolling IRC conformity states must be monitored, as these states could decouple from these CARES Act provisions for purposes of state revenue.
The Coronavirus Aid, Relief, and Economic Security (CARES) Act, H.R. 748, contains a host of tax measures as part of a $2 trillion aid package designed to help the economy as it suffers from the effects of the coronavirus pandemic. While the focus of the legislation is not tax, a large number of tax provisions are included in the bill.
Recovery rebates: The bill provides for payments to taxpayers — “recovery rebates” — which are being treated as advance refunds of a 2020 tax credit. Under this provision, individuals will receive a tax credit of $1,200 ($2,400 for joint filers) plus $500 for each qualifying child. The credit is phased out for taxpayers with adjusted gross income (AGI) above $150,000 (for joint filers), $112,500 (for heads of household), and $75,000 for other individuals. The credit is not available to nonresident aliens, individuals who can be claimed as a dependent by another taxpayer, and estates and trusts. Taxpayers will reduce the amount of the credit available on their 2020 tax return by the amount of the advance refund payment they receive.
Payroll tax credit refunds: The bill provides for advance refunding of the payroll tax credits enacted last week in the Families First Coronavirus Response Act, P.L. 116-127. The credit for required paid sick leave and the credit for required paid family leave can be refunded in advance using forms and instructions the IRS will provide. The IRS is instructed to waive any penalties for failure to deposit payroll taxes under Sec. 3111(a) or 3221(a) if the failure was due to an anticipated payroll tax credit.
Employee retention credit: The bill creates an employee retention credit for employers that close due to the coronavirus pandemic. Eligible employers are allowed a credit against employment taxes equal to 50% of qualified wages (up to $10,000 in wages) for each employee. Eligible employers are employers who were carrying on a trade or business during 2020 and for which the operation of that business is fully or partially suspended due to orders from an appropriate governmental authority limiting commerce, travel, or group meetings due to the COVID-19 outbreak. Employers that have gross receipts that are less than 50% of their gross receipts for the same quarter in the prior year are also eligible, until their gross receipts exceed 80% of their gross receipts for the same calendar quarter in the prior year. For employers with more than 100 employees, wages eligible for the credit are wages that the employer pays employees who are not providing services due to the suspension of the business or a drop in gross receipts. For employers with 100 or fewer employees, all wages paid qualify for the credit.
Retirement plans: Taxpayers can take up to $100,000 in coronavirus-related distributions from retirement plans without being subject to the Sec. 72(t) 10% additional tax for early distributions. Eligible distributions can be taken up to Dec. 31, 2020. Coronavirus-related distributions may be repaid within three years. For these purposes, an eligible taxpayer is one who has been diagnosed with SARS-CoV-2 virus or COVID-19 disease or whose spouse or dependent has been diagnosed with SARS-CoV-2 virus or COVID-19 disease or who experiences adverse financial consequences from being quarantined, furloughed, or laid off, or who has had his or her work hours reduced, or who is unable to work due to lack of child care. Any resulting income inclusion can be taken over three years. The bill also allows loans of up to $100,000 from qualified plans, and repayment can be delayed.
The bill temporarily suspends the required minimum distribution rules in Sec. 401 for 2020.
The bill delays 2020 minimum required contributions for single-employer plans until 2021.
Charitable deductions: The bill creates an above-the-line charitable deduction for 2020 (not to exceed $300). The bill also modifies the AGI limitations on cash charitable contributions for 2020, to 100% of AGI for individuals and 25% of taxable income for corporations. The bill also increases the food contribution limits to 25%.
Payroll tax delay: The bill delays payment of 50% of 2020 employer payroll taxes until Dec. 31, 2021; the other 50% will be due Dec. 31, 2022. For self-employment taxes, 50% will not be due until those same dates.
Net operating losses: The bill temporarily repeals the 80% income limitation for net operating loss deductions for years beginning before 2021. For losses arising in 2018, 2019, and 2020, a five-year carryback is allowed (taxpayers can elect to forgo the carryback).
Excess loss limitations: The bill repeals the Sec. 461(l) excess loss limitation. Sec. 461(l) was added to the Code by the law known as the Tax Cuts and Jobs Act, P.L. 115-97, and it disallows excess business losses of noncorporate taxpayers if the amount of the loss exceeds $250,000 ($500,000 for married taxpayers filing jointly).
Corporate alternative minimum tax (AMT): The bill modifies the AMT credit for corporations to make it a refundable credit for 2018 tax years.
Interest limitation: For tax years beginning in 2019 and 2020, Sec. 163(j) is amended to increase the adjusted taxable income percentage from 30% to 50%. Also, taxpayers can elect to use 2019 income in place of 2020 for the computation.
Qualified improvement property: The bill also makes technical corrections regarding qualified improvement property under Sec. 168 by making it 15-year property.
Aviation taxes: Various aviation excise taxes are suspended until 2021.
Health plans: The rules for high-deductible health plans (HDHPs) are amended to allow them to cover telehealth and other remote care services without charging a deductible.
Source: Journal of Accountancy
Eligible employers may claim a credit against Social Security taxes for each calendar quarter equal to 50% of qualified wages up to $10,000 per employee. If the credit for the quarter exceeds the employer’s Social Security tax liability, the excess is refunded.
Eligible employers operating a business during 2020 must have experienced either:
- A partial or full suspension of the operation of their trade or business during the calendar quarter due to governmental orders that limited commerce, travel, or group meetings due to COVID-19
- A significant decline in gross receipts from 2019
A significant decline begins with the quarter in which the gross receipts for the quarter were less than 50% of those in the same quarter in the prior calendar year. The decline ends with the quarter in which gross receipts are greater than 80% of the gross receipts for the same quarter in the prior calendar year.
Qualified wages for employers with 100 or fewer employees qualify for the entire credit. For employers with more than 100 employees, the wages eligible for the credit are the wages paid to employees who aren’t providing services due to circumstances described above.
Employers who take advantage of the payroll protection loan—Section 1102 of the act—aren’t eligible. Also, qualified wages don’t include amounts paid for the sick leave credit or The Family and Medical Leave Act (FMLA) credit enacted by HR 6201.
The federal government is trying to get much-needed cash into the hands of employers and employees affected by COVID-19 as quickly as possible. To do so, it is utilizing employers’ existing payroll systems to minimize the employers’ cash flow hardship that might otherwise have occurred from having to pay new, mandatory federal paid sick and child care leave to certain employees. Specifically, the IRS has just clarified that employers can subtract the cost of the new mandated paid leave (plus the cost of keeping affected employees’ health care coverage in place during that leave) from any payroll taxes that are otherwise due to the IRS.
IRS Information Release (IR) 2020-57 (March 20, 2020) outlines the system that will promptly reimburse employers for the benefits required under the Act. IR 2020-57 also states that eligible employers are entitled to an additional tax credit based on costs to maintain health insurance coverage for the eligible employee during the mandated federal paid sick and child care leave period.
Businesses and tax-exempt organizations with fewer than 500 employees that are required to provide emergency paid sick and child care leave through December 31, 2020, under the Families First Coronavirus Response Act (Act) (H.R. 6201), can claim a refundable federal tax credit to recover 100% of those payments. Equivalent credits are available to self-employed individuals based on similar circumstances.
Mechanics of Tax Credit Refunds
Generally, employers are required to withhold federal income, Social Security and Medicare taxes from their employees’ paychecks. Normally, employers must timely remit to the IRS the withheld taxes, along with the employer’s share of Social Security and Medicare taxes. But the IRS will release guidance the week of March 23 allowing employers who pay mandated federal paid sick or child care leave to decrease their federal payroll tax deposit by the cost incurred. The IRS also said that the cost of providing such leave can include the cost of continuing health care coverage during the federally mandated sick and child care leave period.
Source of Tax Credit Refunds
Employers can deduct the cost of providing such leave from their total federal tax deposit amount from all employees (not just from those who take the federally mandated leave). Specifically, employers can deduct the cost of providing such leave from: (1) federal income taxes withheld from all employees’ pay; (2) the employees’ share of Social Security and Medicare taxes; and (3) the employer’s share of Social Security and Medicare taxes.
Equivalent tax credits are available to self-employed individuals for federally mandated paid sick and child care leave. But self-employed individuals will deduct their tax credits from their estimated tax payments or can claim a refund on their federal income tax return (i.e., their 2020 Form 1040).
As a result, employers (including self-employed individuals) will have more cash in-hand (by not remitting taxes that are otherwise due) to cover the cost of providing the federal paid sick and child care leave.
IR 2020-57 also said that if the payroll tax off-set is not sufficient to cover 100% of those costs, employers can request a refund of their tax credit for any remaining amount. The IRS expects to process such refunds within two weeks.
Examples. Here are two examples from IR 2020-57:
Example 1: If an eligible employer paid $5,000 in federally mandated paid sick or child care leave and is otherwise required to deposit $8,000 in payroll taxes, including taxes withheld from all its employees, the employer could use up to $5,000 of the $8,000 of taxes that it was otherwise going to deposit to make the qualified leave payments. The employer would only be required under the law to deposit the remaining $3,000 on its next regular deposit date.
Example 2: If an eligible employer paid $10,000 in federally mandated paid sick or child care leave and was required to deposit $8,000 in taxes, the employer could use the entire $8,000 of taxes that it was otherwise going to deposit to make qualified leave payments and could file a request for an accelerated refund for the remaining $2,000.
New Small Business Exemption
According to IR 2020-57, small businesses with fewer than 50 employees will be eligible for an exemption from the federally mandated child care leave if complying with those requirements would jeopardize the ability of the business to continue as a going concern. The exemption will be available on the basis of simple and clear criteria, which the U.S. Department of Labor will provide in emergency guidance.
IR 2020-57 says that the U.S. Department of Labor will issue a temporary non-enforcement policy that provides a period of time for employers to come into compliance with the Act. For at least the initial 30 days (i.e., through April 20), the Labor Department will not bring any enforcement action against any employer for violating the Act, so long as the employer acted reasonably and in good faith to comply with the Act.
by Connie Hammell, CPA, CGMA – Client Advisory Services Team Leader/Principal
We want to let you know that we are here and will continue to assist you in your accounting and advisory matters during these uncertain times. We also want to remind you of additional updates, resources and outsourced accounting options available to you.
KWC Updates and Resources
The main page of our website has been repurposed to provide the latest updates and resources available. Since information is changing rapidly, we will also continue to send out select email communications on topics of use to you.
General information related to delivery options (especially as they relate to getting your tax season materials to your advisor) are available on our website by clicking here. We are strongly discouraging any in-person meetings with clients at this time. The safety of our clients, employees and community partners is our main concern during these difficult times.
Outsourcing/Remote Options Available
We are in uncharted territory; every day seems to bring another challenge for us to work through on the fly. Everyone is stressed (I haven’t seen chicken in the grocery store in weeks and now my kids are home from school for the rest of the year!).
In our offices we opted to switch to a predominantly remote workforce overnight, in line with the prevailing medical guidelines. Similarly, many of our clients are now exploring options to mitigate disruptions to their accounting/work processes and have requested that we provide additional information on what services are available.
Are you finding this in your own company? Are you wondering how on earth the bills will get paid if no one is in the office to write the check, sign and mail it? You are not alone. In addition to those questions, clients are also concerned during this time about remote options for processing payroll and coordinating benefits for employees (including health coverage continuation) and collecting payments from clients (setting up for electronic payment as opposed to being reliant on someone being physically in the office to collect and deposit checks).
The current situation we all find ourselves in may be an unexpected (but necessary) opportunity to re-envision your company’s infrastructure and ensure you minimize interruptions to your workflow.
Here are some things to consider:
- A remote accounting department decreases your risk of disruption – you have a remote team that is familiar with your company instead of one or two people in house that are subject to the same environmental factors you are
- Cloud-based services are accessible anywhere should you be unable to work from your physical office – whether it is billing your clients and receiving deposits, paying your people or paying the bills, 100% of your accounting function can be cloud-based
- Plug & play apps can be utilized, increasing employee satisfaction by reducing the time needed to collect and process expense reimbursements – returning funds to your employees faster
- A remote team of highly qualified CPAs and individuals with decades of industry experience give you access to immediate results and advice at a fraction of the cost
If you are ready to make a change or see what other options are out there, we are ready to help you. Whether that entails building a system for you to manage internally or outsourcing your accounting function, we are confident we can help you take that next step and put you in a stronger position for the future.
For more information on our outsourced services and system solutions, visit our Client Advisory Services team page at www.kwcadvisors.com.
The CARES Act provides additional funding to the Small Business Administration (SBA) for its 7(a)-loan program. These funds are anticipated to be available to small businesses by the end of next week, though there is not currently a way to apply for these loans on the SBA website.
We encourage you to contact your bank for information they may have on applying for loans. We believe that many of our small business clients should strongly consider applying for these loans.
Some details of the the CARES Act provisions are as follows:
Eligibility: Business, non-profit or veterans organizations that employs 500 or fewer employees measured per physical location or, if applicable and larger, the employee size standard established for the industry. Sole proprietors, independent contractors, and eligible self-employed individuals (as defined in Congress’s last COVID-19 bill, the Families First Coronavirus Response Act (Families First Act)) are eligible for loan recipients, subject to some documentation requirements to substantiate eligibility. There are also special provisions for the restaurant and hotel industries (NAICS codes beginning with 72, Accommodation and Food Services sector).
Loan Amounts: lesser of 2.5 times average monthly payroll costs (defined below) based upon the year immediately preceding the date of loan or $10 million.
Payroll costs: Salary, wage, commissions, tips or similar compensation payments to the extent that it would not exceed an annualized amount of $100,000 to the individual employee. Payroll costs for this purpose include paid vacation, parental, family, medical or sick leave (other than payments for which credit allowed under FFCRA), payments for provision of group health benefits, including premiums, and retirement benefits, and state and local taxes assessed on compensation of employees.
Allowable use of loan proceeds: Payroll costs, continuation group health benefits during periods of leave, interest portion of mortgage payments, rent, utilities and interest on other obligations entered into before February 15, 2020.
Amount of loan that is forgivable tax free: All payments made during the period for payroll costs, interest on covered mortgage, covered rent and covered utilities. The amount forgiven is reduced for decreases in full-time equivalent employees and decreases of more than 25% in compensation to employees making less than $100,000 on annualized basis. Reductions in FTE’s or compensation occurring between February 15, 2020 and 30 days after enactment of the Act are not taken into consideration if restored by June 30, 2020.
The maximum repayment term for the loan amounts not forgiven is 10 years.