Kutchins, Robbins & Diamond LTD.

Certified Public Accountants

847-240-1040

Coronavirus (COVID-19) Tax and Employment Legislation Updates

Please note:  This article will be updated daily with information regarding the coronavirus in the U.S. and the state of Illinois. Last updated on April 20, 2020.

 

 

Congress has recently enacted two sweeping economic stimulus laws related to the coronavirus threat.

1. Families First Coronavirus Recovery Act (FFCRA), which contains two major provisions:
  • Emergency Paid Sick Leave Act
  • Emergency Family and Medical Leave Expansion Act

2. The Coronavirus Aid, Relief, and Economic Security (CARES) Act

These provisions are aimed at encouraging businesses to maintain workers on their payrolls by providing immediate, short-term financing and access to cash flow through tax credits and expanded SBA assistance programs.

 

Upcoming topics will focus on the new payroll tax credits, additional SBA financing options and the income tax aspects of this legislation.

 

Jump to:

 

Tax Filing Due Date Moved

On March 20th, 2020, Treasury Secretary Steven Mnuchin announced that federal tax filing deadline will be extended. The move to extend this year’s filing deadline to July 15th from April 15th follows the IRS’s formal announcement that certain 2019 tax year payments could be deferred without interest or penalties. For a taxpayer with a Federal income tax return or a Federal income tax payment due on April 15, 2020, the due date for filing and paying is automatically postponed to July 15, 2020, regardless of the size of the payment owed. This deferment applies to all taxpayers, including individuals, trusts and estates, corporations and other non-corporate tax filers as well as those who pay self-employment tax. This relief also includes estimated tax payments for tax year 2020 that are due on April 15th, 2020. Penalties and interest will begin to accrue on any remaining unpaid balances as of July 16th, 2020.

 

The taxpayer doesn’t have to file Form 4686 (automatic extensions for individuals) to receive the extension.

 

No extension is provided for the payment or deposit of any other type of Federal tax (e.g. estate or gift taxes) or the filing of any Federal information return.

 

In addition, some states are announcing business and individual income tax return filing extensions including late payment and/or late filing penalty relief. Please see the following website for the references provided by the AICPA.


https://www.aicpa.org/content/dam/aicpa/advocacy/tax/downloadabledocuments/coronavirus-state-filing-relief.pdf


The Families First Coronavirus Response Act (H.R. 6201)

The Act guarantees free testing for (COVID-19), establishes emergency paid sick leave, expends family and medical leave, enhances unemployment insurance, expands food security initiatives, and increased federal Medicaid funding. The Act includes the four tax credits, including the Emergency Paid Sick Leave Act (EPSLA) and the Emergency Family and Medical Leave Expansion Act (EFMLEA) .


Emergency Paid Sick Leave Act (EPSLA):


The Emergency Paid Sick Leave Act (EPSLA) division of the Act generally requires private employers with fewer than 500 employees to provide 80 hours of paid sick time to employees who are unable to work for virus-related reasons (with an administrative exemption for less-than-50-employee businesses that the leave mandate puts in jeopardy). The pay is up to $511 per day with a $5,110 overall limit for an employee directly affected by the virus and up to $200 per day with a $2,000 overall limit for an employee that is a caregiver.


The tax credit corresponding with the EPSLA mandate is a credit against the employer’s 6.2% portion of the Social Security (OASDI) payroll tax (or against the Railroad Retirement tax). The credit amount generally tracks the $511/$5,110 and $200/$2,000 per-employee limits described above. The credit can be increased by (1) the amount of certain expenses in connection with a qualified health plan if the expenses are excludible from employee income and (2) the employer’s share of the payroll Medicare hospital tax imposed on any payments required under the EPSLA. Credit amounts earned in excess of the employer’s 6.2% Social Security (OASDI) tax (or in excess of the Railroad Retirement tax) are refundable. The credit is electable and includes provisions that prevent double tax benefits (for example, using the same wages to get the benefit of the credit and of the current law employer credit for paid family and medical leave). The credit applies to wages paid in a period (1) beginning on a date determined by IRS that is no later than April 2, 2020 and (2) ending on December 31, 2020.


Income tax sick leave credit for the self-employed (self-employed sick leave credit). The Act provides a refundable income tax credit (including against the taxes on self-employment income and net investment income) for sick leave to 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 earn the payroll sick leave credit if the self-employed person were an employee.


Accordingly, the self-employed person can receive an income tax credit with a maximum value of $5,110 or $2,000 per the payroll sick leave credit. However, those amounts are decreased to the extent that the self-employed person has insufficient self-employment income determined under a formula or to the extent that the self-employed person has received paid sick leave from an employer under the Act. The credit applies to a period (1) beginning on a date determined by the IRS that is no later than April 2, 2020 and (2) ending on December 31, 2020.

 

The Emergency Family and Medical Leave Expansion Act (EFMLEA)

 

The EFMLEA division of the Act requires employers with fewer than 500 employees to provide both paid and unpaid leave (with an administrative exemption for less-than-50-employee businesses that the leave mandate puts in jeopardy). The leave generally is available when an employee must take off to care for the employee’s child under age 18 because of a COVID-19 emergency declared by a federal, state, or local authority that either (1) closes a school or childcare place or (2) makes a childcare provider unavailable. Generally, the first 10 days of leave can be unpaid and then paid leave is required, pegged to the employee’s pay rate and pay hours. However, the paid leave can’t exceed $200 per day and $10,000 in the aggregate per employee.


The tax credit corresponding with the EFMLEA mandate is a credit against the employer’s 6.2% portion of the Social Security (OASDI) payroll tax (or against the Railroad Retirement tax). The credit generally tracks the $200/$10,000 per employee limits described above. The other important rules for the credit, including its effective period, are the same as those described above for the payroll sick leave credit.


Income tax family leave credit for the self-employed (self-employed family leave credit). The Act provides to the self-employed a refundable income tax credit (including against the taxes on self-employment income and net investment income) for family leave similar to the self-employed sick leave credit discussed above. Thus, a self-employed person is treated as both an employer and an employee for purposes of the credit and is eligible for the credit to the extent that an employer would earn the payroll family leave credit if the self-employed person were an employee.


Accordingly, the self-employed person can receive an income tax credit with a maximum value of $10,000 as per the payroll family leave credit. However, under rules similar to those for the self-employed sick leave credit, that amount is decreased to the extent that the self-employed person has insufficient self-employment income determined under a formula or to the extent that the self-employed person has received paid family leave from an employer under the Act. The credit applies to a period (1) beginning on a date determined by IRS that is no later than April 2, 2020 and (2) ending on December 31, 2020.


Exemption for employer’s portion of any Social Security (OASDI) payroll tax or railroad retirement tax arising from required payments. Wages paid as required sick leave payments because of EPSLA or as required family leave payments under EFMLEA aren’t considered wages for purposes of the employer’s 6.2% portion of the Social Security (OASDI) payroll tax or for purposes of the Railroad Retirement tax.

 

Coronavirus, Aid, Relief, and Economic Security (CARES) Act

Hardship Distributions - The Act waives the Code Section 72(t) additional 10% tax on early withdrawals up to $100,000 from retirement plan or IRA for an individual:

  • who is diagnosed with COVID-19
  • whose spouse or dependent is diagnosed with COVID-19
  • who experiences adverse financial consequences as a result of being quarantined, furloughed, laid off, having work hours reduced, being unable to work due to lack of child care due to COVID-19, closing or reducing hours of a business owned or operated by the individual due to COVID-19
  • other factors as determined by the Treasury Secretary

The CARES Act doubles the current retirement plan loan limits to the lesser of $100,000 or 100% of the participant’s vested account balance in the plan. Individuals with prior loans from their plans can delay their loan repayments up to one year.


Retirement plans can adopt these rules immediately, even if the plan does not currently allow for hardship distributions or loans, provided the plan is amended on or before the last day of the first plan year beginning on or after January 1, 2020 or later if prescribed by the Treasury Secretary.

 

PPP - Forgivable Loans

Due to the immediate concerns of businesses regarding cash flow to meet payroll needs, this section will focus on the SBA Paycheck Protection Program (PPP Loans) established by Title I of the CARES Act. The information presented here is current as of March 29, 2020. Additional terms and conditions may be issued as guidance becomes available in the coming days.

 

PPP Loans - Immediate Access to Operating Capital

The CARES Act created a new loan program under SBA, known as the Paycheck Protection Program (PPP). This is a new class of forgivable loans for businesses that meet the criteria.

Who Qualifies?

• Any business, nonprofit organization, veterans organization or Tribal business concern that:
  • Was in operation as of February 15, 2020;
  • Employs no more than 500 employees (both full-time and part-time), or such higher number as the SBA may set for their industry based on NAICS code;
  • Paid employees or independent contractors;
  • Makes a good faith certification that the uncertainty of current economic conditions makes the loan request necessary to support ongoing operations.

• Sole proprietorships, independent contractors, and self-employed individuals are eligible.


• A business that obtained an SBA Disaster Recovery loan after January 31, 2020, is allowed to refinance that loan and roll it into a PPP loan.


• Only one PPP loan is allowed per borrower.

 

How Much Can I Get?

 

The maximum PPP loan available is the lesser of:

  • $10 million or
  • 2.5 times the average monthly payroll costs for the previous 12 months
    • Payroll costs include:
      • Salaries, wages, commissions, tips, vacation pay, family or medical or sick leave pay, separation pay;
      • Group health care benefits including insurance premiums;
      • Retirement benefits;
      • State and local taxes assessed on employee compensation;
      • Payments to independent contractors.
    • Annual compensation in excess of $100,000 to any employee or independent contractor, prorated for the period February 15, 2020 to June 30, 2020, is not included in payroll costs.
    • Seasonal businesses use the average monthly payroll costs for the 12-week period beginning either February 15, 2019 or March 1, 2019 (chosen by the borrower).
    • Businesses not operational in 2019 use the average monthly payroll costs for January and February 2020.
    • Payroll costs do not include any amounts subject to the Emergency Paid Sick Leave Credit or the Emergency Family and Medical Leave Credit – see guidance on tax credits to come.
    • Payments must be made to US residents.

What Are the Terms?

• The interest rate shall not exceed 4% per annum.
• The term is up to ten years, for any portion of the loan that cannot be forgiven.
• No payments of principal or interest for six months to one year.
• No personal guarantees needed.
• No SBA or bank fees.

What Can I Use the Money For?

• PPP loans can be used to pay:

  • Payroll costs;
  • Group healthcare continuation costs for employees on paid sick, family or medical leave;
  • Mortgage interest on loans incurred prior to February 15, 2020;
  • Rent or leases in existence prior to February 15, 2020;
  • Utilities, phone and internet access for services begun prior to February 15, 2020;
  • Interest on any other debt obligations incurred prior to February 15, 2020. 
Do I Have to Pay It Back?

• PPP loans will be forgiven to the extent that the proceeds are used to pay the above expenses during the eight weeks following the date of the loan, with the exception of interest on debt obligations other than mortgages.

• Borrowers will have to submit an application for forgiveness and related documentation such as payroll tax returns, cancelled checks, 1099-MISC, 1099-NEC, payment receipts and account transcripts, to their lender, who will be required to calculate the amount forgiven within 60 days.

• Reductions to the amount of loan forgiveness:
  • The amount forgiven is reduced based on the failure to maintain the average number of full-time equivalent employees when compared to either the period February 15, 2019 to June 30, 2019 or January 1, 2020 to February 29, 2020 (chosen by the borrower)
  • The amount forgiven is reduced to the extent compensation for any individual making less than $100,000 per year is reduced by more than 25% when measured against the most recent full quarter that individual was employed.
  • There is no reduction in the amount forgiven for failures corrected by June 30, 2020.

• Forgiven PPP loans will NOT constitute taxable cancellation of indebtedness income for federal income tax purposes.

How Do I Get a PPP Loan?

• The loans will be disbursed through federally insured banks and credit unions, institutions of the Farm Credit System and other specialized lenders.

• The loans will be 100% guaranteed by SBA, so there is no underwriting risk for the banks.

• Guidance on the application process and disbursement of proceeds will be issued no later than April 11, 2020.

• The program is intended to require very little documentation for underwriting purposes. At a minimum, applicants should have records of payroll costs, lease or mortgage payments and utility payments for the preceding twelve months, as well as organizational documents to prove existence prior to February 15, 2020. Additional documentation may be necessary as guidelines are issued.  

 

Loan Application & Fact Sheet 

On March 31, 2020, the SBA has released an information sheet for borrowers and a draft copy of the loan application, both of which can be found below. Small businesses and sole proprietors can apply for the loans beginning April 3. Independent contractors and self-employed individuals can apply April 10. We expect banks to release their lists of required documentation shortly. Please carefully review the documents below and let us know if you have any questions. 

 

PPP Loan Application
PPP Loan Fact Sheet

 

Spending and Forgiveness

Over the past two weeks, the SBA has approved and guaranteed over 1 million PPP loans to small businesses. Much attention and clarification was focused on determining eligibility for the loans and calculating the appropriate loan amount. Now that loans have moved to the funding stage, it makes sense to review the parameters for use of the loan proceeds and the loan forgiveness provisions.

 

The information contained in this post is current as of April 20, 2020. The CARES Act says the SBA has until 30 days after enactment, or April 27, 2020, to issue final guidance regarding loan forgiveness, although many banks are telling customers the date will be April 30, 2020. This document will be updated as this guidance is issued.

Can I Still Apply for a PPP Loan?

  • The Paycheck Protection Program is authorized to run through June 30, 2020. Small businesses are supposed to be able to apply up to that date.
  • The initial appropriation in the CARES Act was $349 billion. As of this update, loan approvals under the program have reached that limit, and the SBA is no longer accepting loan applications from the approved lenders until additional appropriations are made to the program.
  • The federal government has indicated a willingness to appropriate an additional $250 billion for the program. It is likely that funding for this program will be extended this coming week. However, at this time, it is unknown when that appropriation will happen.  If you did not receive a PPP loan from the initial funding we urge you to be proactive with your bank to ensure they have your application and documentation ready when additional funds are appropriated.

Is the Program As Confusing As People Make It Sound?

Yes – but don’t worry, we are going to unpack all the details below. First, there are a few key terms that everyone who has either received or wants to apply for a PPP loan need to understand.

Key Definitions

Payroll Costs 

  • Payments to U.S. legal residents for:
    • GROSS salaries, wages, commissions, tips, vacation pay, family or medical or sick leave pay, separation pay and bonuses;
    • Group healthcare benefits including insurance premiums (employer’s share only);
    • Retirement benefits (employer’s share only);
    • State and local taxes assessed on employee compensation (generally these are state unemployment taxes);
    • Self-employment income of partners in a partnership;
    • Owner Compensation Replacement for a sole proprietor or independent contractor, also known as net earnings from self-employment.
  • Compensation, such as gross salaries, wages, net earnings from self-employment and partner self-employment income, is capped at $100,000 on an annualized basis for any individual, prorated for the eight-week period. This works out to 8/52 times $100,000, or $15,385 per person.
  • Payroll costs do not include any amounts used to claim the Emergency Paid Sick Leave Credit or the Emergency Family and Medical Leave Credit.
  • For a sole proprietor or independent contractor, healthcare insurance premiums and retirement benefits are not included.

Full-Time Employees and Full-Time Equivalents (FTE)

  • The definitions are the same as they were for determining Obamacare era penalties.
  • Full-time employee: an employee who is employed on average at least 30 hours per week or 130 hours per month.
  • Full-time equivalent employee (FTE): a combination of employees, each of whom individually is not a full-time employee because they are not employed on average at least 30 hours per week, but who, in combination, are counted as the equivalent of a full-time employee.
    • For example, two employees, each of whom works 15 hours per week, are the equivalent of one full-time employee.
  • To determine total FTEs, take the aggregate hours worked by non-full-time employees in a month and divide by 130, then add that result to the number of full-time employees.

So I Received a Loan - What Can I Use the Money For?

During the eight weeks immediately following the initial loan disbursement, PPP loans can be used to pay:

  • Payroll costs;
    • We recommend that any payments to partners made from the loan funds should be classified as guaranteed payments, so that there is no question that they constitute self-employment income to the partner.
    • We recommend that actual checks are written to partners in a partnership and that self-employed individuals write themselves checks over the 8 week period to prove payroll. It is likely that a “book entry” will not qualify as sufficient documentation.
  • Group healthcare continuation costs for employees on paid sick, family or medical leave.
  • Mortgage interest on loans incurred prior to February 15, 2020.
    • Includes real or personal property.
    • Property must be used in the business.
    • Includes loans for vehicles and other equipment used in the business.
  • Rent or leases in existence prior to February 15, 2020. This appears to include non-facility leases such as machinery and equipment leases and copier leases.
  • Utility payments for services begun prior to February 15, 2020, which includes:
    • Gas, electric and water;
    • Telephone and internet;
    • Fuel for business vehicles.
  • Interest on any other debt obligations incurred prior to February 15, 2020. Keep in mind that loan proceeds used for this purpose will not be forgiven.
  • Refinance an Economic Injury Disaster Loan made between 1/30/20-4/3/20.
  • At least 75% of the loan proceeds MUST be used for payroll costs. Stated another way, no more than 25% of the loan proceeds can be used for mortgage interest, rent and utilities and interest on any other debt obligations
  • No prepayments are allowed on these costs.
  • These costs must be incurred and paid during the 8 week period. Therefore arrearages are not eligible expenses.
  • Sole proprietors and independent contractors can only claim mortgage interest and utilities for their home office space if these are deductions taken on their Schedule C filings (Form 8829)

Will My Loan Be Forgiven?

  • PPP loans will be forgiven to the extent that the proceeds are used to pay the above expenses during the eight weeks following the date of the loan, with the exception of interest on debt obligations other than mortgages.
  • Borrowers will have to submit an application for forgiveness and related documentation such as payroll tax returns, cancelled checks, payment receipts and account transcripts, to their lender, who will be required to calculate the amount forgiven within 60 days. If you don’t apply for loan forgiveness, you won’t get it. Forgiveness is a proactive process and not automatic.
  • Reductions to the amount of loan forgiveness:
    • The amount forgiven is reduced based on the failure to maintain the average number of FTEs during the covered period (the 8 week period) when compared to a base period that the borrower gets to choose. (See below for the exception to this.) The choices are:
      • February 15, 2019, to June 30, 2019, or
      • January 1, 2020, to February 29, 2020.
    • The amount forgiven is reduced to the extent compensation for any individual making less than $100,000 per year is reduced by more than 25% when measured against the most recent full quarter that individual was employed.
    • If you have reduced your FTE’s between 2/15/20 and 4/26/20 as compared to your FTE’s on 2/15/20 there is no reduction in the amount forgiven if there is restoration of full-time employment and salary levels by June 30, 2020.
      • You can re-hire or replace individuals to get back to the needed FTE headcount.
      • You must increase the compensation of the same individuals who took pay cuts back to pre-pay cut levels.
    • Payments for non-payroll costs in excess of 25% of the loan will not be forgiven.
    • Grants received under the EIDL program will reduce the amount forgiven to the extent of the grant amount.
    • Amounts used for interest on debt other than mortgage obligations will not be forgiven.
    • Any amounts used for any expenses not listed above will not be forgiven.

 

Forgiven PPP loans will NOT constitute taxable cancellation of indebtedness income for federal income tax purposes.


How Do I Prove What I Spent the Money On?

 

*We recommend you open a separate bank account for the loan funds.*

  • Keep clear records of all checks written from the account – date, payee, purpose.
  • Keep receipts for items such as fuel for business autos and other utility payments.
  • Keep detailed records of payroll payments.
    • If you have a separate payroll account into which you normally transfer funds for payroll from a general checking account, transfer only the exact amount of the pay needed on the pay date from the separate loan funds account, so that you have a clear trail of the payroll costs paid.
    • If you use a payroll service, the transfers should match the cash requirements reports they provide.
    • Payment of the employer portion of FICA and Medicare taxes is not a permissible use of the funds. If you have a separate source of cash, you should transfer the funds to cover those federal taxes to the payroll account from the cash not in the loan funds account.
  • Keep detailed records of changes in your workforce.
  • You may be able to set up and run special reports from your accounting software for the 8-week period.
  • Submit copies of all records along with bank statements to your lender.
  • It is possible that the forgiveness process will involve an audit verification. It is unclear at this time what is involved in an audit verification.

If A Portion Is Not Forgiven - What Are the Terms?
• The interest rate will be 1% per annum.
• The term is two years.
• No payments of principal or interest for six months – interest still accrues during this deferment.
• No personal guarantees needed.
• No collateral required.
• No SBA or bank fees.

 

Required Minimum Distributions Suspended

The CARES Act provides that 2020 required minimum distributions (RMD’s), including distributions for a required beginning date in 2020 and distributions for a required beginning date in 2019 that have not yet been made in 2020, are waived for qualified plans and IRA’s.

 

This is primarily due to the decimated market values.


RMDs for participants who turned age 70-1/2 in 2019 and have not yet received their 2019 distribution also may be waived.


Beginning in 2020, the SECURE Act changed the new age at which RMDs must start to age 72. The increase in age does not apply to individuals who turned 70 ½ in 2019.


Qualified Charitable Distributions (QDCs) from IRAs are not affected by the SECURE Act; as a result, QCDs may still be taken from IRAs as early as age 70 ½ in 2020 and later.


Planning Point:

The income qualification for the $1,200/$2,400 cash payments from the government will be based upon 2020 income. If you waive any unpaid RMD’s from 2019 or your 2020 RMD’s, this may help get you below the $75,000/$150,000 thereby avoid a cutback in the tax credits allowed on your 2020 return.

 

Contact KRD Today If You Have Questions Related to Coronavirus Legislation

If you have questions or need assistance to implement any of the provisions of this legislation, please don’t hesitate to contact any KRD team member. We will certainly do our best to help explain its provisions and how it impacts your specific situation.

Back to Blog