Coronavirus Tax Updates 2020-21
Update – PPP Loan Forgiveness from SBA
Updates to PPP Loan Forgiveness from SBA were released June 17. Here is a summary from the Journal of Accountancy:
1) Revised loan application to incorporate changes form the PPP Flexibility Act.
The revised PPP Loan Forgiveness Application and instructions include a number of notable items. Among them are:
• Health insurance costs for S corporation owners cannot be included when calculating payroll costs; however, retirement costs for S corporation owners are eligible costs.
• Safe harbors for excluding salary and hourly wage reductions and reductions in the number of employees (full-time equivalents) from loan forgiveness reductions can be applied as of the date the loan forgiveness application is submitted. Borrowers don’t have to wait until Dec. 31 to apply for forgiveness to use the safe harbors.
• Borrowers that received loans before June 5 can choose between using the original eight-week covered period or the new 24-week covered period.
2) An EZ PPP Loan Forgiveness Application was released.
The EZ PPP Loan Forgiveness Application requires fewer calculations and less documentation than the full application. The EZ application can be used by borrowers that:
• Are self-employed and have no employees;
• Did not reduce the salaries or wages of their employees by more than 25% and did not reduce the number or hours of their employees; or
• Experienced reductions in business activity as a result of health directives related to COVID-19 and did not reduce the salaries or wages of their employees by more than 25%.
3) The SBA issued additional rules for determining payroll costs and owner compensation in calculating PPP loan forgiveness under the new 24-week covered period.
· The Paycheck Protection Flexibility Act tripled the duration during which PPP recipients could spend the funds and still qualify for loan forgiveness — a span of time called the covered period. The interim final rule (click here for link) adjusts and adds to previous guidance for calculating loan forgiveness under the original eight-week covered period.
· The PPP allows loan forgiveness for payroll costs — including salary, wages, and tips — for up to $100,000 annualized per employee, or $15,385 per individual over the eight-week period. The new interim final rule establishes the 24-week maximum for full loan forgiveness at $46,154 per individual.
· Owner compensation replacement calculations: While the employee compensation limit for the 24-week period is three times the eight-week limit, the interim final rule does not do the same with the owner compensation replacement for businesses that file Schedule C, Profit or Loss From Business, or Schedule F, Profit or Loss From Farming, tax returns. For those businesses, forgiveness for the owner compensation replacement is calculated for the eight-week period as 8 ÷ 52 × 2019 net profit, up to a maximum of $15,385. For the 24-week period, the forgiveness calculation is limited to 2.5 months’ worth (2.5 ÷ 12) of 2019 net profit, up to $20,833.
Update – PPP Changes Approved by Senate
Yesterday, the Senate approved changes to PPP loan forgiveness as approved by the House last week. The bill still needs approval from the President. We will be providing further updates, but wanted to get this out quickly.
Following is a summary of the legislation’s main points compiled by the AICPA:
- PPP borrowers can choose to extend the eight-week period to 24 weeks, or they can keep the original eight-week period. This flexibility is designed to make it easier for more borrowers to reach full, or almost full, forgiveness.
- The payroll expenditure requirement drops to 60% from 75%.but is now a cliff, meaning that borrowers must spend at least 60% on payroll or none of the loan will be forgiven. Currently, a borrower is required to reduce the amount eligible for forgiveness if less than 75% of eligible funds are used for payroll costs, but forgiveness isn’t eliminated if the 75% threshold isn’t met.
- Borrowers can use the 24-week period to restore their workforce levels and wages to the pre-pandemic levels required for full forgiveness. This must be done by Dec. 31, a change from the previous deadline of June 30.
- The legislation includes two new exceptions allowing borrowers to achieve full PPP loan forgiveness even if they don’t fully restore their workforce. Previous guidance already allowed borrowers to exclude from those calculations employees who turned down good faith offers to be rehired at the same hours and wages as before the pandemic. The new bill allows borrowers to adjust because they could not find qualified employees or were unable to restore business operations to Feb. 15, 2020, levels due to COVID-19 related operating restrictions.
- Borrowers now have five years to repay the loan instead of two. The interest rate remains at 1%.
- The bill allows businesses that took a PPP loan to also delay payment of their payroll taxes, which was prohibited under the CARES Act.
Update – Paycheck Protection Program 3-31-2020
Today, more information was released on the application process for the Paycheck Protection Program. Please see attached PDFs and the link below. The law indicates you calculate the loan on the 12 months prior to the date of the loan. However, the application supplied today requests information from 2019 only. Also the average monthly payroll on the application is not very descriptive. See the highlighted information on the borrower information fact sheet for a more detailed list of what is included.
This is a trying time that includes much confusion. As I understand it, banks are also still waiting on more information to move forward with the process.
CARES Act – Individuals
- Recovery Rebates
Eligible individuals are allowed a credit of $1,200 ($2,400 for joint filers), plus $500 for each qualifying child, for the first taxable year beginning in 2020. An eligible individual is:
- any individual who has a Social Security number and who is not a nonresident alien, and
- an individual who is not claimed as a dependent on another taxpayer’s return, or
- not an estate or trust.
The allowable credit is reduced by 5% of the eligible individual’s adjusted gross income in excess of $75,000 (all filers other than joint and head of household), $112,500 (head of household), or $150,000 (joint filers). The credit phases out entirely at $99,000 (all filers other than joint and head of household), $136,500 (head of household with one child), and $198,000 for joint filers. The threshold amount is based on 2018 adjusted gross income (unless a 2019 return has already been filed).
- Tax-Favored Withdrawals from Retirement Plans
Coronavirus-related distributions from eligible retirement plans are not subject to the 10% excise tax on early distributions. Distributions must be made on or after January 1, 2020 and before December 31, 2020 to an individual who is diagnosed with SARS-CoV-2 or COVID-19, whose spouse or dependent is so diagnosed, or who experiences financial hardship because of quarantine or other factors. Coronavirus related distributions may not exceed $100,000 in the aggregate for any taxable year. Taxpayers may elect to ratably spread the income over a 3-year period beginning with taxable year 2020. Taxpayers may also avoid income recognition by repaying the distribution to the retirement plan within three years of receipt.
- Temporary Waiver of Required Minimum Distribution Rules
Minimum distribution rules are waived for calendar year 2020 for IRAs and certain defined contribution plans. Waiver does not apply to required beginning dates in calendars year after 2020 and amounts which would otherwise be required to be distributed are not eligible rollover distributions. For distributions required to be made over a 5-year period that includes calendar year 2020, calculations of the distribution period shall disregard calendar year 2020.
- Charitable Contribution Deductions- Itemized Deductions
For the 2020 tax year, the deduction percentage limitation for charitable contributions of cash has been removed for individual taxpayers (the limit was previously 60%). This means that any qualified contribution is allowed to the extent that the aggregate of such contributions does not exceed the taxpayer’s adjusted gross income. This provision is applicable only to cash contributions.
- Charitable Contribution Deductions- Above-the-Line
For tax years beginning in 2020, eligible taxpayers are entitled to an above-the-line deduction of up to $300 for qualified charitable contributions. An eligible taxpayer is an individual that did not elect to itemize deductions. A qualified charitable contribution is a cash contribution to a qualified tax-exempt organization.
- Additional Unemployment Benefits
Unemployment compensation for eligible individuals will be the sum of whatever weekly benefit would be provided at the state level plus $600. This $600 increase is referred to as “Federal Pandemic Unemployment Compensation.”