President Trump Signs Into Law Cares Act

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.

Charitable Contributions

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.

CARES Act – Latest Summary of Income Tax Provisions

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

Employee Retention Credit for Employers

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.

COVID-19 Update: IRS Procedures Related to COVID-19 Leave Payments

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.

Background
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.

Self-Employed
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.

Rapid Refunds
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.

Non-Enforcement Period
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.

COVID-19 Resources, Updates and Outsourced Solutions

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:

  1. 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
  2. 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
  3. 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
  4. 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.

 

CARES Act – Details on Expansion of SBA 7(a) Loan Program

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.

COVID-19 Update: Stimulus Package – What’s in It?

Below is an initial summary of provisions of the stimulus package bill that should be of interest to our clients.  Please note the final bill has not been voted on by the Senate or House.  Even the fine print on this bill has fine print, so if it becomes law it will take days to fully digest.  Some or all of the below may not be part of the final bill.  We will provide full details upon enactment. 

Small businesses will be eligible to receive emergency loans if they keep their workers

The bill provides federally guaranteed loans available at community banks to small businesses that pledge not to lay off their workers. The loans would be available during an emergency period ending June 30 and would be forgiven if the employer continued to pay workers for the duration of the crisis. Small businesses will be able to take out loans of up to $10 million, and employers could use the money to pay employees making up to $100,000 a year.  Loans taken for this purpose are forgiven if the business does not lay off its employees (forgiveness is scaled down as layoffs rise). In order to be eligible for a loan, a firm must maintain an average monthly number of employees during the covered period that is no less than the number it had before the crisis began. What businesses are eligible or how these loans will be administered is not known at this time.

Business payroll tax relief

Employer-side Social Security payroll tax payments may be delayed until January 1, 2021, with 50 percent owed on Dec. 31, 2021 and the other half owed on Dec. 31, 2022.

Direct payments to taxpayers

The bill would provide a $1,200 refundable tax credit for individuals ($2,400 for joint taxpayers). This “credit” will entail a check based on your most recently filed tax return (2018 or 2019 tax return) direct-deposited to your bank account on file or sent via mail.  If you haven’t filed a tax return, the bill allows Treasury to use the information on your 2019 Form SSA-1099, Social Security Benefit Statement, Form RRB-1099, Social Security Equivalent Benefit Statement.

The rebate phases out at $75,000 for singles, $112,500 for heads of household, and $150,000 for joint taxpayers at 5 percent per dollar of qualified income, or $50 per $1,000 earned. It phases out entirely at $99,000 for single taxpayers and $198,000 for joint taxpayers. Additionally, taxpayers with children will receive a flat $500 for each child.

Other business provisions

The bill includes technical corrections to the depreciation treatment of qualified improvement property (QIP).

Firms may take net operating losses (NOLs) earned in 2018, 2019, or 2020 and carry back those losses five years. The NOL limit of 80 percent of taxable income is also suspended, so firms may use NOLs they have to fully offset their taxable income.

The net interest deduction limitation, which currently limits businesses’ ability to deduct interest paid on their tax returns to 30 percent of earnings before interest, tax, depreciation, and amortization (EBITDA), has been expanded to 50 percent of EBITDA for 2019 and 2020.

The bill also provides $562 million to ensure the Small Business Administration can cover Economic Injury Disaster Loans to businesses.

Retirement Plans

The bill waives the 10 percent early withdrawal penalty on retirement account distributions for taxpayers facing virus-related economic challenges. Withdrawn amounts are taxable over three years, but taxpayers can recontribute the withdrawn funds into their retirement accounts for three years without affecting retirement account caps. The bill also waives required minimum distribution rules for certain retirement plans in calendar year 2020.

Students with federal loans can suspend payments until Sept. 30, interest-free. Students who must drop out of school because of the virus also don’t have to pay loans for that time.

Unemployment benefits

Lawmakers agreed to an expansion of unemployment benefits that would extend jobless insurance by 13 weeks and include a four-month enhancement of benefits. The program was broadened to include freelancers, furloughed employees and gig workers.  Most people who lost their jobs can already file for state unemployment insurance, and millions have tried to do that already, overwhelming state systems. This Senate bill will give an extra $600 per week for up to four months to people already receiving their states’ unemployment insurance.  The bill also temporarily expands unemployment insurance to people who would like to work but can’t because they are sick or are caring for a family member who is, including people who are self-employed or who don’t have an extensive work history.

COVID-19 Update: Key Provisions of the Families First Coronavirus Response Act

The Families First Coronavirus Response Act (the Act) was signed into law last week to further combat the economic impact of the COVID-19 outbreak. Some key provisions of the Act are provided below.

Affected employers must be prepared to implement the Act’s leave programs “not later than 15 days after the date of enactment” of March 18th, 2020. Thus, the effective date would be April 2, 2020, with the Act remaining in effect until December 31, 2020.

The new law grants two weeks of paid sick leave and up to 12 weeks of paid family and medical leave.

Under the Act part-time employees also get paid sick leave equivalent to the number of hours they typically work during a two-week period. For example, if a person usually works 20 hours a week they are eligible for up to 40 hours of pay.

Sick leave is to be paid at the usual pay rate capped at $511 per day (or $200 per day at only 2/3 of pay if it is due to childcare and not quarantine/symptoms).

Family leave is to be paid at two-thirds of the usual pay rate capped at $200 per day. Paid family and medical leave would compensate employees earning up to about $75,000 a year for the three-month period.

Emergency Paid Sick Leave

Under the Act, full-time employees will immediately become entitled to up to 80 hours of emergency paid leave only for the following circumstances:

To self-quarantine after a diagnosis of COVID-19 (in which case the paid leave must be equal to the employee’s regular rate of pay);

To obtain a medical diagnosis or care if the employee is experiencing symptoms of COVID-19 (in which case the paid leave must be equal to the employee’s regular rate of pay);

To comply with orders from public health officials or healthcare professionals not to report to work due to the employee being exposed to COVID-19 or experiencing COVID-19 symptoms (in which case the paid leave must be equal to the employee’s regular rate of pay);

To care for a family member who is self-quarantined, obtaining a medical diagnosis or care after experiencing COVID-19 symptoms, and/or complying with an order from a public health official or healthcare professional (in which case the paid leave must be equal to 2/3 of the employee’s regular rate of pay); or

To care for a child whose school or childcare provider is closed due to COVID-19 (in which case the paid leave must be equal to 2/3 of the employee’s regular rate of pay).

The Act provides that this emergency paid sick leave will be in addition to any other paid leave options that the employer provides (including paid sick leave) to employees, the employer will not be able to require an employee to first exhaust other paid leave, and an employer will not be permitted to change other leave policies in light of the Act.

The Act also includes anti-retaliation protections for employees who use the paid sick leave and/or complain of violations of the same.

Emergency Paid Family and Medical Leave

Under the Act, employees will be entitled to job-protected paid family and medical leave if they are unable to work (or telework) and have to care for a child (under age 18) whose school or child care provider is closed due to COVID-19.

Unlike traditional FMLA which applies only to employees who, among other things, have been employed for 12 months, the only prerequisite for leave under the Act is that the employee has been employed for 30 calendar days.

The Act provides that the first 10 days of the leave will be unpaid (unless the employee chooses to use other paid leave, such as emergency paid sick leave available under the Act, during the 10-day period). For the remainder of the leave, the employee must be paid 2/3 of his or her regular rate of pay. Unlike regular FMLA leave, the employer will not be permitted to require the substitution of paid leave.

Family leave is to be paid at two-thirds of the usual pay rate capped at $200 per day.

Under the Act, employees will still only be entitled to a combined 12 weeks of leave (paid and unpaid) during any 12-month period for FMLA-covered reasons.

Payroll tax credit for required paid family leave

Subject to certain limitations, the bill provides an employer payroll tax credit that equals 100% of the qualified family leave wages paid by the employer under the portion of the bill known as the Emergency Family and Medical Leave Expansion Act (Division C of the bill). The Emergency Family and Medical Leave Expansion Act requires employers with fewer than 500 employees to provide public health emergency leave under the Family and Medical Leave Act (FMLA), P.L. 103-3, when an employee is unable to work or telework due to a need for leave to care for a son or daughter under age 18 because the school or place of care has been closed, or the child care provider is unavailable, due to a public health emergency related to COVID-19. (Employers with fewer than 50 employees can be exempted from the requirement.)

The credit is available for eligible wages paid during a period that begins on a date starting on a date within 15 days of enactment (to be designated by Treasury) and through Dec. 31, 2020. The credit would apply against the employer portion of Sec. 3111(a) old age, survivors, and disability insurance (OASDI) taxes or Sec. 3221(a) Tier 1 Railroad Retirement Act excise taxes. The credit is generally available for up to $200 in wages for each day an employee receives qualified family leave wages. A maximum of $10,000 in wages per employee would be eligible for the credit. The amount of the credit is increased by the amount of the Sec. 3111(b) Medicare tax imposed on the qualified family leave wages for which credit is allowed.

If an employer claims the credit, the employer’s gross income will be increased by the amount of the credit (meaning the credit is not taken into account for purposes of determining any amount allowable as a payroll tax deduction, deduction for qualified family leave wages, or deduction for health plan expenses), and no credit will be allowed for wages for which a Sec. 45S family and medical leave credit is claimed. The credit would not apply to the federal government, the government of any state or any subdivision of a state, or any agencies or instrumentalities of these entities. Employers also could elect not to apply the new provision for any calendar quarter.

The credit would not apply to the U.S. government, the government of any state or any subdivision of a state, or any agencies or instrumentalities of the foregoing. Employers can elect not to apply the new provision for any calendar quarter.

The credit can be increased by certain qualified health plan expenses of the employer that are allocable to qualified family leave wages for which the credit is allowed.

Payroll tax credit for required paid sick leave

Subject to certain limitations, the bill provides an employer payroll tax credit that equals 100% of the qualified sick leave wages paid by the employer under the portion of the bill known as the Emergency Paid Sick Leave Act (Division E of the bill). The Emergency Paid Sick Leave Act requires employers with fewer than 500 employees to provide up to 80 hours of paid sick time through the end of this year if the employee is unable to work due to being quarantined or self-quarantined or having COVID-19 or because the employee is caring for someone who is quarantined or self-quarantined or has COVID-19 or if the employee is caring for children whose school has been closed because of COVID-19 precautions. (Employers with fewer than 50 employees can be exempted from the requirement.)

The credit is effective for sick leave wages paid starting on a date within 15 days of enactment (to be designated by Treasury) and through Dec. 31, 2020. The credit will apply against Sec. 3111(a) OASDI taxes or Sec. 3221(a) Tier 1 Railroad Retirement Act excise taxes. The credit is generally available for up to $511 in wages (for workers who are quarantined or self-quarantined or who have COVID-19) and wages of up to $200 for other workers for each day an employee receives qualified sick leave pay. The credit would be available for up to 10 days per calendar quarter. The amount of the credit is increased by the amount of the Sec. 3111(b) Medicare tax imposed on the qualified sick leave wages for which credit is allowed.

To prevent double benefits, employers’ gross income will be increased by the amount of the credit (meaning the credit is not taken into account for purposes of determining any amount allowable as a payroll tax deduction, deduction for qualified sick leave wages, or deduction for health plan expenses), and no credit will be allowed for wages for which a Sec. 45S family and medical leave credit is claimed. The credit would not apply to the federal government, the government of any state or any subdivision of a state, or any agencies or instrumentalities of these entities. Employers also could elect not to apply the new provision for any calendar quarter.

The credit can be increased by certain qualified health plan expenses of the employer that are allocable to qualified sick leave wages for which the credit is allowed.

Comparable tax credits for self-employed individuals

If you are a self-employed individual who is affected by the coronavirus emergency, the Act allows you to claim a refundable credit against your federal income-tax bill, including the self-employment tax. If the credit exceeds your bill, the government will issue you a payment for the excess.

The credit equals: 1) 100% of the self-employed person’s sick-leave equivalent amount plus 2) 67% of the sick-leave equivalent amount for taking care of a sick family member or taking care of your child following the closing of the child’s school.

The sick-leave equivalent amount equals the lesser of: 1) your average daily self-employment (SE) income or 2) $511 per day for up to 10 days (up to $5,110 in total) to care for yourself due to the coronavirus or $200 per day for up to 10 days (up to $2,000 in total) to care for a sick family member or your child following the closing of the child’s school due to the coronavirus.

In addition, you can claim a coronavirus emergency family-leave credit for up to 50 days. The credit amount would equal the number of qualified family-leave days multiplied by the lesser of 1) $200 or 2) your average daily SE income. The maximum total family-leave credit would be $10,000 (50 days times $200 per day).

These credits for self-employed individuals are only allowed for days during the period beginning on a date specified by the Secretary of the Treasury and ending on Dec. 31, 2020. The beginning date will be within 15 days of the March 18 date the Act became law.

Warning: To properly claim the credits, self-employed individuals must maintain whatever documentation the IRS requires in future guidance. Your tax professional can help with that.

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.

COVID-19 Update: Federal Tax Filing Deadline Extended to July 15

Treasury Secretary Steven Mnuchin announced on Friday that tax returns normally due on April 15 will not be due until July 15 this year. The news came in a tweet, and the IRS has not yet issued official guidance on the move.

The Treasury secretary’s tweet read, “At [President Donald Trump’s] direction, we are moving Tax Day from April 15 to July 15. All taxpayers and businesses will have this additional time to file and make payments without interest or penalties.”

On Wednesday, the IRS had announced in Notice 2020-17 that it was pushing back the deadline for federal tax payments due on 2019 and first quarter 2020 taxes (up to $1 million for individuals and up to $10 million for corporations) that were due on April 15 to July 15, but it did not at that time postpone any filing deadlines.

It is important to note that state tax filing deadlines do not necessarily comply with IRS. For example Maryland has delayed its filing and payment deadlines until July 15th, while Virginia and DC have not as of yet.

At KWC CPAs we will continue to work as diligently as possible under the circumstances to complete your tax return as soon as possible. Even if April 15th is not a hard deadline, we encourage you to not use the extended deadline to delay providing us your tax information.

The safety and well-being of our clients and staff are the highest priority. Our thoughts remain with everyone affected by the COVID-19 crisis.

COVID-19, Proposed Tax Payment Delay

UPDATED MARCH 18, 2020

On Tuesday, Treasury Secretary Mnuchin announced that the White House economic stimulus plan included a 90-day penalty and interest free delay for payment of tax due. The tax due which may be deferred is limited to $1 million for individuals and $10 million for corporations.

It is important to note that the Treasury Secretary did not announce a change to the filing deadline of April 15. This may differ from what is being reported by some news outlets where articles may be written by non-tax professionals who are unaware of the difference in filing deadlines and payment deadlines. There was also no guidance on whether first quarter 2020 estimated tax payments will be delayed. We are awaiting official written guidance from the IRS. State income tax filing delays are in flux with limited official information available.

The American Institute of CPAs has reached out to the IRS to gain additional clarity on both the payment delays and the expectation for the filing deadline.

At KWC offices we have implemented social distancing and many of us are working remotely. The offices are open to receive mail and deliveries, we are available by phone or e-mail and you may use our client portal to send us information electronically. We are strongly discouraging any in person meetings with clients at this time.

The safety and well-being of our clients and staff are the highest priority. Our thoughts remain with everyone affected by the COVID-19 crisis.