What Now?
This article will highlight portions of the governmental economic stimulus packages enacted in March 2020 as best understood at the drafting of this article.
COVID-19 Law Changes
There were a couple of important legislations passed before Easter related to COVID-19: the big federal stimulus package (CARES Act or the Act) and the Families First Coronavirus Response Act (FFCRA). In case you are not now familiar with the many provisions in these laws, the following is a brief summary:
Families First Coronavirus Response Act (FFCRA)
It requires certain employers to provide their employees with paid sick leave or expanded family and medical leave for specified reasons related to COVID-19. The Department of Labor’s (Department) Wage and Hour Division (WHD) administers and enforces the new law’s paid leave requirements. These provisions will apply from April 1, 2020, the effective date, through December 31, 2020.
Generally, the Act provides that employees of covered employers are eligible for:
Two weeks (up to 80 hours) of paid sick leave at the employee’s regular rate of pay where the employee is unable to work because the employee is quarantined (pursuant to Federal, State, or local government order or advice of a health care provider), and/or experiencing COVID-19 symptoms and seeking a medical diagnosis; or
Two weeks (up to 80 hours) of paid sick leave at two-thirds the employee’s regular rate of pay because the employee is unable to work because of a bona fide need to care for an individual subject to quarantine (pursuant to Federal, State, or local government order or advice of a health care provider), or care for a child (under 18 years of age) whose school or child care provider is closed or unavailable for reasons related to COVID-19, and/or the employee is experiencing a substantially similar condition as specified by the Secretary of Health and Human Services, in consultation with the Secretaries of the Treasury and Labor..
Up to an additional 10 weeks of paid expanded family and medical leave at two-thirds the employee’s regular rate of pay where an employee, who has been employed for at least 30 calendar days, is unable to work due to a bona fide need for leave to care for a child whose school or child care provider is closed or unavailable for reasons related to COVID-19
For sick pay described above, eligible employers may receive a refundable sick leave credit for sick leave at the employee's regular rate of pay, up to $511 per day and $5,110 in the aggregate, for a total of 10 days and for employees paid sick leave at two-thirds the employee’s regular rate the credit is up to $200 per day and $12,000 in the aggregate (over a 12-week period).
FFCRA created tax credits on employer-side Social Security payroll taxes to offset paid family and sick leave related to the coronavirus. FFCRA also provides a refundable income tax credit (including against the taxes on self-employment income and net investment income) for sick leave incurred by a self-employed person by treating the self-employed person both as an employer and an employee for credit purposes. Thus, with some limits, the self-employed person is eligible for a sick leave credit to the extent that an employer would have earn the payroll sick leave credit if the self-employed person were an employee. This could be an overlooked benefit for some ranchers,
There is an administrative exemption which may apply for less-than-50-employee businesses that the “sick leave” mandate puts in jeopardy. This will have to be documented by the employer and meet criteria set forth by the Department of Labor. Since sick leave payments under the mandate are refundable credits it makes sense to not claim the exemptions unless you simply cannot secure the cash to make them.
This credit is different from and unrelated to the 50 percent refundable tax credit on employee wages that firms can receive. The refundable wage tax credit is not dependent on employees taking qualified sick or family leave and was created as part of the CARES Act. If a firm takes a loan through the Small Business Association (SBA) Paycheck Protection Program, it is not eligible to take the 50 percent of employee wages payroll tax credit but can still take the sick leave credit.
CARES Tax Provisions for Individuals
Hopefully by now you have received your Individual recovery rebate/credit funds,
$1,200 ($2,400 for eligible individuals filing a joint return) plus $500 for each qualifying child of the taxpayer. If not, you may be over the phaseout limit of the credit. The amount of the credit was reduced (but not below zero) by 5% of the taxpayer's adjusted gross income (AGI) in excess of: $150,000 for a joint return, $112,500 for a head of household, and $75,000 for all other taxpayers.
The Act changed a number of retirement related provisions:
Code Sec. 72(t) 10% additional tax does not apply to any coronavirus-related distribution, up to $100,000 made on or after January 1, 2020, and before December 31, 2020, from an eligible retirement fund
Retirement minimum distribution (RMD) requirement waived for 2020
The Act made changes to the charitable deduction:
$300 above-the-line charitable deduction for any individual who does not elect to itemize deductions beginning in 2020
Modification of limitations on individual cash charitable contributions during 2020
The Act made changes to the types of educational payments that are excluded from employee gross income made before January 1, 2021. The payments are subject to the overall $5,250 per employee limit for all educational payments. To prevent a double benefit, student loan repayments for which the exclusion is allowable can't be deducted under Code Sec 221
CARES Tax Provisions for Business
The Act contains up to $350 Billion in relief for small businesses via loans and loan forgiveness. The maximum amount of SBA 7a loans, the most typical type of SBA loan, has been doubled to $10 million for 2020. Proceeds may be applied to employee salaries, paid medical or sick leave, insurance premiums, mortgage payments and any other debt obligations. Other requirements have been simplified and expanded. The big item is CARES provides for forgiveness of a loan made under its terms in an amount equal to the cost of continued payroll costs for the period from February 15, 2020 to June 30, 2020. “Payroll Costs” are defined broadly, and include the cost of insurance and other benefits. For employees earning over $100,000, only the first $100,000 is considered for forgiveness. Any compensation of an employee whose principal place of residence is outside the U.S. is not includable. The bill mentions specifically self-employed knowing that these taxpayers generally have no payroll (instead, owner draws) but the taxpayer should still apply. The lender will request tax return and the amount of the loan will be based on income to the taxpayer rather than payroll. All else is the same. Application fees are waived, and provided a business was in operation on February 15, 2020, there is a presumption that the business was affected by COVID-19. Loan repayment is deferred for no less than 6 months, and up to a year. The Act creates a new Emergency Grant to allow a business that has applied for a disaster loan to get an immediate advance of up to $10,000. The advance can be used to maintain payroll, and is not required to be repaid, even if the borrower’s request for a 7(b) loan is denied. Express Disaster Bridge Loan allows small businesses who currently have a business relationship with an SBA Express Lender to access up to $25,000 with less paperwork same day turnaround which
will be repaid in full or in part by proceeds from a future 7(b) loan. The Act also provides benefits to those with loans under Section 7(a) of the Small Business Act OTHER THAN the new paycheck protection loans (i.e., traditional 7(a) loans), in the form of a government subsidy. The SBA will pay the principal and interest of new traditional 7(a) loans issued prior to September 27, 2020. The SBA will pay the principal and interest of current traditional 7(a) loans for a period of six months.
The Act created tax credit for 50% of wages paid by eligible employers to certain employees during the COVID-19 crisis. The credit is available to employers, including non-profits, whose operations have been fully or partially suspended as a result of a government order limiting commerce, travel, or group meetings. The credit is also provided to employers who have experienced a greater than 50% reduction in quarterly receipts, measured on a year-over-year basis. For employers who had an average number of full-time employees in 2019 of 100 or fewer, all employee wages are eligible, regardless of whether the employee is furloughed. For employers who had a larger average number of full-time employees in 2019, only the wages of employees who are furloughed or face reduced hours as a result of their employers' closure or reduced gross receipts are eligible for the credit. The term "wages" includes health benefits and is capped at the first $10,000 in wages paid by the employer to an eligible employee.
No double dipping, wages do not include amounts taken into account for purposes of the payroll credits, for required paid sick leave or required paid family leave in the FFCRA, nor for wages taken into account for the Code Sec. 45S employer credit for paid family and medical leave. Also, no credit is available with respect to an employee for any period for which the employer is allowed a Work Opportunity Credit (Code Sec. 21) with respect to that employee. The credit is not available to employers receiving Small Business Interruption Loans under Sec. 1102 of the Act. (i.e., the 7(a) loans). Decision must be made to get the loan (basically a grant) or take the wage credit.
IRS is granted authority to advance payments to eligible employers and to waive applicable penalties for employers who do not deposit applicable payroll taxes in anticipation of receiving the credit.
Other Business provisions of the Act are:
Allows taxpayers to defer paying the employer portion of certain payroll taxes through the end of 2020.
Temporarily removes the taxable income limitation to allow an NOL to fully offset income and provides that NOLs arising in a tax year beginning after Dec. 31, 2018 and before Jan. 1, 2021 can be carried back to each of the five tax years preceding the tax year of such loss. It also temporarily modifies the loss limitation for noncorporate taxpayers so they can deduct excess business losses arising in 2018, 2019, and 2020.
Allows corporations to claim 100% of AMT credits in 2019
Temporarily and retroactively increases the limitation on the deductibility of interest expense under Code Sec. 163(j)(1) from 30% to 50% for tax years beginning in 2019 and 2020. Special rules for partnerships. Under a special rule for partnerships, the increase in the limitation will only apply to partners in partnerships in 2020).
Provides a technical correction to the TCJA, which makes QI Property 15-year property for depreciation purposes eligible for 100% Bonus Depreciation.
Made modification of limitations on corporate cash charitable contributions during 2020
Summary
The aforementioned laws are unprecedented. This is a very summarized overview of the government’s actions related to its efforts to protect the U.S. economy. There are many unknowns that will be addressed over time. The laws require quick action and are complicated. By the time you are reading this article you should have received your Individual recovery rebate funds. Remember, “cash is king,” so preserve as much as you can. However, many actions need to be taken. Do I qualify for tax credit for 50% of wages if I meet the 50% reduction in quarterly receipts, measured on a year-over-year basis? The wage credit is not available to employers receiving Small Business Interruption Loans under Sec. 1102 of the Act. (i.e., the 7(a) loans). Decision must be made to get the loan (basically a grant) or take the wage credit. Other issues like when should I make my payroll and income tax payments and which ones are subject to deferral? Should I elect to carryback NOL’s? Should I be paying sick leave and take the payroll tax credit or claim exemption? Note this sick leave credit does not affect any SBA payroll loan eligibility. How does all of this impact your on-going business operations? Have you taken the time to review your operating plan for areas that need to be adjusted for the changing market? Do not delay addressing these opportunities. Your tax adviser should be able to help you answer some of these questions.