COVID-19 & CARES ACT RESOURCES
On March 27, 2020 the CARES Act - Coronavirus Aid, Relief, and Economic Security Act, was passed and signed into law. The information below is a summary of the key aspects of the CARES Act.
With the news surrounding COVID-19 changing so rapidly, we at WMB2 want to share the latest COVID-19 emergency news as it pertains to this tax season. WBM2 takes COVID-19 extremely seriously and our top priority is the health of our staff, clients, families and community. With this rapidly changing pandemic, we will do our best to keep you informed of the latest development. We encourage you to utilize the following resource links for the most up to date information:
2019 TAX SEASON FILING & PAYMENTS
The federal and most state tax agencies have extended the 2019 tax filing and payment deadlines as well as the 2020 Q1 and Q2 estimated tax payments to July 15, 2020 for individuals, trusts and estate, corporations and other non-corporate filers. 2019 IRA and HSA contribution deadlines have also been extended to July 15, 2020.
Click here for a link to an interactive state-by-state Covid-19 resource guide (provided by Paychex).
ECONOMIC STIMULUS DEPOSITS (RECOVERY REBATE)
On April 15th the IRS issued the first round of direct deposits to individuals who qualify for the economic stimulus relief. The CARES Act provides for a one-time recovery rebate, which is treated as advance refund of a 2020 tax credit and is not taxable. The rebate amount is:
• $1,200 for single filers and $2,400 for joint filers
• Plus an additional $500 credit for each child under the age of 17
Phase-out of the rebate amounts begins at $75,000 (single) and $150,000 (MFJ). No rebate is available for single and joint taxpayers with adjusted gross income over $99,000 or $198,000, respectively. The income thresholds are based on adjusted gross income for 2019 filed tax returns. If a 2019 has not been filed, then the threshold is based on the 2018 filed return. The rebate is not available to nonresident aliens, individuals who can be claimed as dependents, estates and trusts, or individuals without Social Security Numbers
If you have not received a direct deposit refund in the last two years and/or your address has changed, please go to the IRS website link to update your information click here.
SMALL BUSINESS ADMINSTRATION (SBA) LOANS - PPP & EIDL
There are currently two SBA loan options available for small businesses:
1. Paycheck Protection Program (PPP)
2. Economic Injury Disaster Loan (EIDL)
Click here for a link to a side-by-side comparison chart of the two types of loans (prepared by the NFIB).
Please note, determining whether a business is eligible for one or both of the loan programs can be complex. We recommend consulting a qualified small business loan professional to discuss your businesses’ eligibility and to determine which option is best for your business. More information can also be found on the SBA website here.
Although the 350 billion dollar small business PPP loan limit has been reached, another stimulus package with an estimated 250 billion dollars for small businesses is anticipated to be approved. Small businesses are encouraged to submit their PPP application and supporting documentation to their existing banks so the loan can be funded if or when an second stimulus bill is passed.
PAYCHECK PROTECTION PROGRAM (PPP)
To participate in the PPP loan program a business must be an eligible small business under the SBA regulations with 500 or less employees. PPP loans are federally guaranteed loans intended for companies to maintain payroll and other specific qualified business costs. The loans are unsecured, require no collateral or personal guarantee, and carry an interest rate of 0.5%. The funds must be used to cover the following “qualified business expenses” in order for to qualify for loan forgiveness:
• Payroll costs, including wages, taxes, retirement contributions and service fees*
• Medical and sick leave
• Group healthcare benefits and premiums
• Rent and utilities
• Mortgage interest expense and interest on debt previously incurred
*Payroll costs are capped at $100,000 on an annualized basis for each employee. Compensation does not include an employee whose principal place of residence is outside of the United States.
The maximum amount that can be borrowed for the PPP loan is equal to the lesser of $10 million or 2.5 times average monthly payroll costs. The following documents are needed to submit a PPP loan application:
1. 2019 Forms 940 and 941's, 2019 W-3 and 2020 Form 941 Q1
2. 2019 business tax return, 2019 financial statements and 2020 Q1 financial statements. A 2019 draft tax return will suffice if the business has not yet filed for 2019. For sole-proprietors, submit a 2019 Schedule C in place of a business tax return, using Line 31 on Schedule C to determine the montly average payroll costs.
3. Completed PPP application with calculated average monthly payroll cost and PPP loan amount.
To download a pdf of the PPP application, click here.
A borrower of a PPP loan is eligible for loan forgiveness if the following conditions are met:
1. 75% of the loan funds are used for payroll costs.
2. The remaining 25% of the loan funds are used for specific qualified business expenses - rent, utilities, group healthcare benefits, interest on debt and mortgage interest.
3. Loan funds must be used for qualified business expenses within eight weeks from the loan origination date.
The amount of loan forgiveness may be reduced if the borrower reduces the number of employees or if certain lower-paid employees receive a reduction in compensation during the 8-week period following the origination of the loan. The reduction in loan forgiveness does not apply if the borrower restores their workforce count and amount of salaries and wages by June 30, 2020. Forgiven loans will not give rise to cancellation of indebtedness income.
Substantiating documentation will be required to be submitted in order to receive loan forgiveness. We recommend physically segregating the PPP loan funds in order to streamline the recordkeeping process to ensure loan forgiveness. Businesses will need to submit substantiating documentation starting at six weeks after the loan origination date.
To apply for the PPP loan, please contact your existing business bank or financial institution. Most banks have added the PPP loan application to their websites.
ECONOMIC INJURY DISASTER LOAN (EIDL)
The EIDL loan provides for longer-term loans to companies who have been impacted by a federally declared disaster. These loans carry favorable borrowing terms as well as interest rates, approximately 10 years loans with interest rates capped at 4%. An important distinction with this loan is that there is no loan forgiveness, even for qualified business expenses.
To qualify for the EIDL program, the applicant must have suffered “substantial economic injury” from COVID-19. The EIDL program is based upon a businesses’ actual economic injury determined by the Small Business Administration.
Click here to apply for the EIDL loan through the SBA website.
Please also see the information below with regard to employee retention credits and payroll tax credits. These credits cannot be taken in conjunction with the EDIL or PPP loans.
TAX IMPACT OF THE CARES ACT ON BUSINESSES
NET OPERATING LOSSES
The new bill allows for a five-year carryback of net operating losses arising in 2018, 2019, or 2020. Businesses can amend or modify prior year tax returns to 2013 in order to take advantage of the carryback; however, refunds for amended tax returns can only be claimed for the 2016 through current tax years. The July 15, 2020 filing deadline applies to 2016 amended tax returns claiming a refund.
The bill also eliminates loss limitation rules applicable to sole proprietors and pass-through entities and allows them to take advantage of the new NOL carryback provision. Additionally, the bill allows for NOLs arising before January 1, 2021 to fully offset income. Under the previous law, NOLs were limited to 80% of taxable income
BUSINESS LOSS LIMITATION FOR NON-CORPORATE TAXPAYERS
The prior loss limitation under IRC Sec. 461(l) disallowed non-corporate taxpayers from deducting active net business losses in excess of $250,000 for single filers or $500,000 for married filing joint filers, instead treating the excess losses as a net operating loss carryforward. Under the new bill, this limitation has been retroactively suspended and will be enforced for tax years beginning after December 31, 2020. For tax years beginning before December 31, 2020 effective date, there is no active net business loss limitation.
BUSINESS INTEREST EXPENSE (§163(j))
IRC Sec. 163(j) limitation allows for deductible business interest expense subject to a limit equal to business interest income for the year plus 30% of the taxpayer’s adjusted taxable income for the year. The new bill increased the limitation to 50% of a taxpayer’s adjusted income and is effective for both the 2019 and 2020 tax years.
In addition, for the purposes of computing the 2020 limitation, taxpayers may elect to use either 2019 or 2020 adjusted gross income in order to take advantage of the increased AGI percentage provision.
QUALIFIED IMPROVEMENT PROPERTY (QIP)
Congress made a long-awaited technical correction for qualified improvement property, which under the TCJA had reverted to 39 year property. The new bill allows for QIP to be depreciated over 15 years with 100% deduction of the property in the year placed in service. This is a retroactive change and is thus effective for property acquired and placed in service after September 27, 2017.
Qualified improvement property is defined as non-load bearing building leasehold improvements to an interior portion of nonresidential real property.
EMPLOYEE RETENTION CREDIT
This credit is designed to encourage businesses to retain employees on their payroll. Businesses may receive a refundable tax credit for 50% of up to $10,000 in wages paid by an eligible employer whose business has been financially impacted by Covid-19. The credit is available on a quarterly basis, with a maximum allowable total credit per employee of $5,000 between the applicable period of March 12, 2020 and before January 1, 2021.
The credit is available to all employers regardless of size, including tax-exempt organizations. Qualifying employers must fall into one of the following two categories:
1. Business is fully or partially suspended by a government order due to Covid-19.
2. Employer’s gross receipts are below 50% of the comparable quarter in 2019. Once the employer’s gross receipts exceed 80% of a comparable quarter in 2019, they no longer qualify for the credit after the end of that quarter.
For businesses with 100 or fewer full-time employees in 2019, the credit is based on wages paid to all employees, regardless if they worked or not. If the employees worked full time and were paid for full time work, the employer still receives the credit. Employers can be immediately reimbursed for the credit by reducing their required deposits of payroll taxes that have been withheld from employees' wages by the amount of the credit.
Note, businesses are not eligible for both the employee retention credit and loan forgiveness with a PPP loan from the SBA.
Click here for more information on the employee retention credit.
PAYROLL TAX DEFERRAL
Employers are eligible to defer paying the 6.2% Social Security portion of payroll taxes and 50% of the equivalent payroll taxes incurred by self-employed persons. The taxes are deferred through the end of 2020, with 2020 deferred amounts due in two equal installments: the first due end of 2021 and the second due at the end of 2022.
Note, deferral is not available if the taxpayer receives loan forgiveness via a SBA loan.
TAX IMPACT OF THE CARES ACT ON INDIVIDUALS
RECOVERY REBATE - SEE ECONOMIC STIMULUS DEPOSIT INFORMATION LISTED ABOVE
CHARITABLE CONTRIBUTION DEDUCTIONS
Individuals who do not itemize their deductions are allowed up to a $300 above-the-line charitable contributions for the 2020 tax year for cash contributions made to public charities. For individuals who itemize, the adjusted gross income limitation for cash donations has been increased from 60% to 100% for donations made to public charities in 2020. Contributions made to a donor advised fund DAF do not qualify for the above-the-line deduction.
EARLY RETIREMENT PLAN DISTRIBUTIONS
The 10% early withdrawal penalty for Coronavirus related distributions up to $100,000 from qualified retirement plans (401K’s, IRAs, etc.) has been suspended for 2020. Coronavirus-related distribution is defined as a 2020 calendar year distribution to:
1. An individual (or the spouse of an individual) diagnosed with COVID-19 with a CDC-approved test OR;
2. An individual who experiences adverse financial consequences as a result of quarantine, business closure, layoff, or reduced hours due to the virus.
Income attributable to an early withdrawal is subject to tax over a three-year period. Taxpayers may recontribute amounts withdrawn from a qualified retirement plan without regard to annual caps on contributions if made within three years. Temporary loans from retirement plans that are repaid within 60-days will not be subject to income tax.
REQUIRED MINIMUM, DISTRIBUTIONS (RMD's)
All required minimum distributions for 2020 have been suspended, regardless of whether the taxpayer has been affected by the coronavirus pandemic.
We understand there is growing uncertainty surrounding the development of Covid-19 and we want you to know WMB2, LLP is available to assist and advise you during this time. Please do not hesitate to reach out to us if you have questions about submitting applications for financial assitance.