March 27, 2020
MK&SH has been monitoring the various economic and tax incentives available and will continue to provide information as timely as we can. While this is not a comprehensive list of all the benefits available to individuals and businesses experiencing hardship as a result of the COVID-19 Pandemic, we hope that you find the below summary of recently enacted Federal legislation useful:
Provisions Affecting Individuals
2020 Recovery Rebate for Individuals: The CARES Act created IRC Section 6428 which allows for individuals to receive checks from the government which serves as an advance payment of a credit to be claimed on taxpayers 2020 income tax returns. The specifics are as follows:
- The payment amount is $1,200 for single taxpayers ($2,400 for joint taxpayers). Those with dependents will receive an addition $500 per child.
- The IRS will use your latest filed tax return to determine eligibility.
- The payment begins to phase out if your adjusted gross income exceeds $75,000 for single taxpayers ($150,000 for joint taxpayers). The phaseout is a $5 reduction in payment for every $100 exceeding the AGI limits. Complete phase occurs for Single taxpayers at $99,000 and for Married Filing Joint taxpayers without dependents at $198,000.
- The payments will be made between now and December 31, 2020.
- The credit will be recomputed on the taxpayers 2020 tax return and compared to the amount received.
Special Rules for Use of Retirement Funds: Taxpayers may withdraw up to $100,000 during 2020 from their retirement plans as a “coronavirus-related distribution” without the imposition of the 10% penalty for early withdraw. A coronavirus-related distribution is one that is made to an individual who is diagnosed with SRS-COV-2 or COVID-19 by a test approved by the CDC, or whose spouse or dependent is diagnosed with one of these two diseases. Or someone who experiences adverse financial consequences as a result of being furloughed, quarantined, laid off, having reduced work hours, or being unable to work due to lack of childcare. This distribution will still be subject to income taxes over a 3-year period beginning with such taxable year the distribution is made. The amount distributed from the retirement plan may be repaid during a 3-year period beginning on the day after the distribution was received.
Loan from Retirement Plans Temporarily Increased: For the 180-day period beginning on the CARES Act enactment date, the original cap of $50,000 on loans from qualified retirement plans will be increased to $100,000. If the repayment due date of the retirement loan occurs between the date of enactment and December 31, 2020, then such due date will be delayed for one year.
Temporary Waiver of Required Minimum Distribution Rules Certain Retirement Plans: For calendar year 2020 the requirements under 401(a) will not require minimum distributions to be taken by the beneficiaries.
Individual Charitable Contribution Deductions Expanded: For tax years beginning in 2020, Individuals may deduct up to $300 in cash payments made to qualifying charities as an above the line deduction. This means a deduction can be claimed even though you claim the standard deduction and do not itemize.
Exclusion for Employer Payments of Student Loans: Generally, if someone pays a debt on your behalf that is considered taxable income. Under the CARES Act an employer can now pay up to $5,250 in 2020 towards an employee’s student loan obligation on a tax-free basis. However, this provision modifies the existing IRC 127 which permits the employer to pay up to $5,250 of qualified educational expenses on behalf of the employee. There is now only one limit for the education benefit, so an employer cannot also pay direct tuition expenses and provide aid on student loan assistance in excess of $5,250.
Provisions Affecting Businesses and Employers:
Changes to the Net Operating Loss Rules: In the CARES Act: Congress temporarily reversed the NOL tax law changes that went into effect January 1, 2018 under the TCJA. Now the following will apply:
- Losses from 2018, 2019 and 2020, will be permitted to be carried back for up to five years. As was previously the case, a taxpayer will be permitted to forgo the carryback, and instead carry the loss forward.
- Losses carried to 2019 and 2020 will be permitted to offset 100% of taxable income, as opposed to 80% under the TCJA.
Excess Business Loss Provision under Section 461(l) Temporarily Suspended: This newer provision went into effect in January 1, 2018 and it limited the amount of “net business losses” to $250K for Single Filers and $500K for those Married Filing Joint. This provision has been suspended retroactively back to the date of enactment through December 31, 2020. Therefore, taxpayers who had losses limited under this provision in 2018 and 2019 can file and amended return to claim a refund.
Reduction in Business Interest Limitation under Section 163(j): This provision limited a business’ ability to deduct interest expense to 30% of “adjusted taxable income” with any excess interest expense to be carried forward. Under the CARES Act this limitation has been adjusted to 50% of taxable income for 2019 and 2020. Furthermore, businesses will be able to use the 2019 adjusted taxable income to compute their limitation in 2020.
Correction for Depreciable Life of Qualified Improvement Property (QIP): QIP is generally defined as any improvement made to the interior portion of a nonresidential building any time after the building was placed in service. A technical correction was needed from the TCJA which stated that the depreciable life of QIP should be changed from 39 to 15 years, making QIP eligible for 100% bonus depreciation. As part of the CARES Act this correction is being made retroactively to January 1, 2018. Taxpayers that had placed QIP in service during 2018 and 2019 should consider filing amended returns to claim the greater deduction.
Employer COVID-19 Relief via Payroll Tax Credits and Payment Deferral
Delay of Employer Payroll Tax and Self Employment Taxes
To further assist businesses during this time of need business may elect to defer payment of 50% of the 6.2% Social Security employer payroll tax that would otherwise be due between enactment date and December 31, 2020.
Instead employers can remit 50% of the employer’s Social Security payroll taxes due for 2020 in two installments as follows:
- 25% on December 31, 2021
- 25% on December 31, 2022
This deferral is not eligible to any business that takes out a payroll protection loan that is forgiven.
Details have not been made available as to how this practice will be reflected on 2020 payroll tax filings.
Paid Sick and Family Leave Credits
The Families First Coronavirus Response Act requirements to provide paid leave take effect April 1, 2020. The ability to claim payroll tax credits in connection with this paid leave also takes effect as of April 1, 2020 and goes through December 31, 2020.
Private-sector employers with fewer than 500 employees, and public-sector employers in general, are required under the Coronavirus Response Act to provide employees, regardless of how long they have worked for their employer, with paid sick leave if any of six situations related to coronavirus is applicable to the employee. This is the first national requirement for employers to provide paid sick leave under any circumstance.
The paid sick leave would be available to full-time employees for up to 80 hours and to part-time employees for the average number of hours that they work, or are expected to work, over a two-week period. Employers cannot require employees to use other types of employer-provided paid leave before the employee uses nationally required paid sick leave related to COVID-19.
The six situations related to coronavirus for which an employee is eligible for this paid sick leave are those in which the employee cannot be at a worksite in person or telework because:
- a federal, state, or local quarantine or isolation order related to COVID-19 has limited the employee’s ability to travel;
- a health-care provider advised the employee to self-quarantine because of concerns regarding COVID-19;
- the employee is experiencing symptoms associated with COVID-19 and is in the process of determining whether he or she has contracted the virus;
- the employee is caring for someone who is subject to a governmental quarantine or isolation order for COVID-19 or whose health-care provider advised that person to self-quarantine because of COVID-19;
- the employee needs to care for his or her child because of the closure of the child’s school or child-care facility, or the unavailability of a child-care provider, because of COVID-19 considerations (although this is separate from similar leave available via an extension to the Family and Medical Leave Act, discussed later in this article); and
- the employee is experiencing a situation that was specified by the Department of Health and Human Services as substantially similar to any of the five aforementioned situations.
In general, for the first three situations, the amount of paid sick leave regarding COVID-19 that an employee would need to be paid per hour is the greatest amount among the employee’s regular hourly rate of pay as determined under the Fair Labor Standards Act, the federal hourly minimum wage of $7.25, or the applicable hourly minimum wage of the state or locality where the employee is considered to be employed. However, for the fourth, fifth, and sixth situations, the employee would be entitled to two-thirds of the amount of paid sick leave to which he or she would have been entitled had the first, second, or third reasons been applicable. The amount of paid sick leave provided for the first three situations cannot exceed $511 a day and a total of $5,110. The amount of paid sick leave provided for the fourth, fifth, or sixth situations cannot exceed $200 a day and a total of $2,000.
What are the Tax Credits Available to the Employer?
Required Paid Sick Leave:
Employers receive a Paid Sick Leave Tax Credit for the first three situations that cannot exceed $511 a day and a total of $5,110. The Paid Sick Leave Tax Credit for the fourth, fifth, or sixth situations cannot exceed $200 a day and a total of $2,000.
Required Pay Family Leave:
In addition to the sick leave credit, for an employee who is unable to work because of a need to care for a child whose school or child care facility is closed or whose child care provider is unavailable due to the Coronavirus, eligible employers may receive a refundable child care leave credit. This credit is equal to two-thirds of the employee’s regular pay, capped at $200 per day or $10,000 in the aggregate. Up to 10 weeks of qualifying leave can be counted towards the required pay family leave credit. Eligible employers are entitled to an additional tax credit determined based on costs to maintain health insurance coverage for the eligible employee during the leave period.
How do Employers Claim these Credits? When employers pay their employees, they are required to withhold from their employees’ paychecks federal income taxes and the employees’ share of Social Security and Medicare taxes. The employers then are required to deposit these federal taxes, along with their share of Social Security and Medicare taxes, with the IRS and file quarterly payroll tax returns with the IRS. Under guidance that will be released by IRS, eligible employers who pay qualifying sick or child care leave will be able to retain an amount of the payroll taxes equal to the amount of qualifying sick and child care leave that they paid, rather than deposit them with the IRS.
Employee Retention Credit
The CARES Act provides for an Employee Retention Credit for the employer’s share of Social Security payroll taxes for any business that is forced to suspend or close its operations due to COVID-19 and continues to pay their employees during the shutdown.
Qualifying Businesses: You will qualify if your business operations were fully or partially suspended during any calendar quarter during 2020 because of order from an appropriate government authority OR your business remained open but during any quarter in 2020 your gross receipts for that quarter were less than 50% than what they were in the same quarter for 2020.
Computing the Payroll Tax Credit: For each eligible quarter in 2020 the qualifying business will receive a refundable credit against the employer’s 6.2% share of the Social Security payroll taxes. The credit will be equal to 50% of the “qualified wages” paid to each employee for that quarter. The “qualifying wage” is determined by the size of your business.
- If you had more than 100 employees during 2019, then your wages are limited to ONLY the wages paid for that quarter during the period the business was shut down.
- If you had less than 100 employees during 2019, then your qualified wage amount includes the amounts paid during shut down for that quarter AND any wages paid for each quarter in 2020 where the business has suffered a 50% or more reduction in gross receipts for that quarter compared to 2019.
- No matter how many employees you have, qualified wages include any “qualified health plan expenses” allocable to wages such as payments made to maintain a group health plan.
- In all cases the amount of qualified wages for each employee for ALL quarters cannot exceed $10,000.
- Any wages taken in account to determine the new payroll tax credit for the Family Medical Leave or Sick Leave as part of the Coronavirus Relief Act may NOT also be considered in determining qualifying wages for the Employee Retention Credit.
- If the employer has taken out a payroll protection loan under Section 7(a) of the Small Business Act, then they are NOT eligible for this credit.
***The maximum employee retention tax credit per employee for 2020 is $620. ***
Small Business Loan Expansion under CARES Act
Paycheck Protection Program
The CARES Act created a new loan category under the Small Business Act, which provides loans and possible loan forgiveness, to small businesses. The new loans are referred to as “paycheck protection loans.” Small businesses have until June 30, 2020 to apply for the loan. The maximum maturity date is 10 years at an interest rate of 4% or less, and the standard fees imposed under SBA are waived. The loan is fully guaranteed by SBA, and no personal guarantee is required. There is an immediate deferment of loan payments for six months and potentially up to one year. The loan proceeds may be used to cover payroll costs, health benefits, rent, utilities, mortgage interest, and interest on other debt instruments.
Businesses with less than 500 employees or individuals who operate as a sole proprietorship or independent contractor. There is no exclusion if the business has access to credit elsewhere.
- The loan amount is the lesser of $10 million dollars or the sum of:
- The average total monthly payments for payroll costs incurred over the prior one-year period before the date of the loan multiplied by 2.5, and
- Any outstanding amount of a loan issued under Emergency EIDL program after January 31, 2020 that has been refinanced into a paycheck protection loan.
- Payroll costs include compensation, salary, wages, commissions, and tips paid to employees or subcontractors, limited to $100,000 per individual. Payroll costs also include other items such as leave pay and group health care benefits (including insurance premiums). Social Security and Medicare tax payments for which a tax credit is claimed are excluded.
A portion of the loan may be eligible for forgiveness on amounts used to pay payroll costs, mortgage interest, rent and utilities during the eight-week period beginning on the date of the loan. The forgiveness of debt under the Paycheck Protection Program will be non-taxable and excluded from gross income. An application must be submitted to qualify for loan forgiveness and must include documentation verifying number of employees, wage rates and cancelled checks. The amount of forgiveness will be reduced if the business had a 25% or more reduction in workforce or wages.
Economic Injury Disaster Loan Expanded
The CARES Act also expands access to Economic Injury Disaster Loans under the Small Business Act to include sole proprietors and ESOPs. Loans under this category are available for reasons other than the payment of payroll costs. Additionally, applicants may receive up to a $10,000 advance on the loan under a new Emergency Grant. The advance is not required to be repaid, even if Disaster Loan is denied. Visit the SBA website for additional information.
Existing SBA Loan Subsidy
The CARES Act provides a subsidy for existing SBA loans that are not under the Paycheck Protection Program. The subsidy provides that the SBA will pay six months of principal, interest and fees on qualifying loans.
We have presented a lot of new detailed information in this article pertaining the economic relief efforts underway. There may additional resources available at the State and Local level as well. Please call us so we can help you determine which benefits you or your business may be eligible for.