Coronavirus Tax Updates 2020
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.”
CARES Act – Businesses
- Paycheck Protection Program (PPP) Loan Forgiveness
Please see our website for a summary of this provision of the Act.
- SBA- Emergency Injury Disaster Loan (EIDL)
If you have applied for and received this loan, it can be refinanced as part of the Paycheck Protection Loan. You are NOT allowed to have both an outstanding EIDL and an outstanding PPP loan. Three days after applying for this loan, you are allowed a $10,000 advance, which does not have to be repaid even if you do not ultimately qualify for the loan. The $10,000 advance does not have to be repaid as long as it is used on allowable expenses:
- providing paid sick leave to employees unable to work due to the direct effect of COVID–19;
- maintaining payroll to retain employees during business disruptions or substantial slowdowns;
- meeting increased costs to obtain materials unavailable from the applicant’s original source due to interrupted supply chains;
- making rent or mortgage payments; or
- repaying obligations that cannot be met due to revenue losses.
- Employee Retention Credit
Employers receive a refundable quarterly payroll tax credit equal to 50% of qualified wages paid to an employee. For purposes of the credit, up to $10,000 of qualified wages per employee are considered. Excess credits are refundable.
Eligible employers include those:
(1) whose trade or business is fully or partially suspended during the calendar quarter due to orders from an appropriate governmental authority limiting commerce, travel, or group meetings (for commercial, social, religious, or other purposes) due to COVID-19, or
(2) who have a 50% decrease in gross receipts for the same calendar quarter in the prior year.
This credit does not apply to governmental employers.
Applies to wages paid after March 12, 2020, and before January 1, 2021.
This credit is not available if you received Paycheck Protection Program loan.
- Delay of Payment of Employer Payroll Taxes
Employers and self-employed taxpayers may delay payment of the employer portion of payroll taxes (Social Security and Medicare) through the end of 2020. Fifty percent of any payroll taxes deferred under this provision must be paid by December 31, 2021, with the remaining fifty percent paid by December 31, 2022.
This deferral is not available if you received Paycheck Protection Program loan.
- Business Losses (NOLs)
The CARES Act amends IRC §172(b) to allow for the carryback of losses arising in taxable years ending after December 31, 2017 and before January 1, 2021 to each of the five taxable years preceding the taxable year of such loss (however, real estate investment trusts (REITs) are not permitted such carrybacks).
The CARES Act does not alter the indefinite carryforward of NOLs arising in those years. The CARES Act also amends IRC §172(a) to remove the income limitation so that NOLs can be used to offset 100% of taxable income (disregarding the NOL deduction itself). The amendment applies to tax years beginning before January 1, 2021 (previously, tax years beginning after December 31, 2017, were subject to an 80% limitation).
- Limitations on Excess Business Losses
The CARES Act removes the limitation on excess business losses for taxpayers other than corporations for tax years beginning after December 31, 2017, and before January 1, 2021.
The Act also makes technical corrections to the excess business loss provisions to clarify:
(1) that net operating losses and the qualified business income deduction under §199A are not included in calculating an excess business loss; and
(2) the extent to which capital gains are included to determine the amount of an excess business loss.
- Qualified Improvement Property
The CARES Act corrected the technical omission which required qualified improvement property to be depreciated as 39-year, nonresidential real property, unless it separately qualified as 15-year property. This removed qualified improvement property from eligibility for bonus depreciation. The CARES Act corrects prior Congressional oversight by defining qualified improvement property as 15-year property, thus making it eligible for bonus depreciation and allowing 100 percent of improvements to be deducted in the year incurred. This is effective for property place in service after September 27, 2017 and the change can be made by amending prior year returns or on the 2019 return due July 15, 2020.
- Subsidy of Existing Small Business Administration Loans
The CARES Act contains certain provisions to assist businesses with existing SBA business loans, which includes 7(a) and 504 loans.
The provision provides that the SBA will pay all principal, interest and fees on all existing SBA loan products for six months. The CARES Act does not currently have any requirement for businesses to qualify for the subsidy except that the SBA loan must have existed prior to enactment of the legislation.
This loan payment subsidy specifically excludes loans made pursuant to the Paycheck Protection Plan and will not apply to disaster relief loans applied for under the SBA.
Part of the CARES Act approved and signed on March 27, 2020
Covered loan is a loan guaranteed under paragraph (36) of section 7(a) of Small Business Act. Eligible participants are employers with less than 500 employees including sole proprietors, independent contractors and eligible self-employed individuals.
A recipient of a covered loan shall be eligible for forgiveness of indebtedness on a covered loan in an amount equal to the sum of the following costs incurred and payments made during the covered period (8-week period beginning on the date of the origination of a covered loan):
1) Payroll costs
a) salary, wage, commission, or similar compensation;
b) payment of cash tip or equivalent
c) payment for vacation, parental, family, medical, or sick leave;
d) allowance for dismissal or separation;
e) payment required for the provisions of group health care benefits, including insurance premiums;
f) payment of any retirement benefit; or
g) payment of State or local tax assessed on the compensation of employees; and
h) the sum of payments of any compensation to or income of a sole proprietor or independent contractor that is a wage, commission, income, net earnings from self-employment, or similar compensation and that is in an amount that is not more than $100,000 in 1 year, as prorated for the covered period; and
i) SHALL NOT include the compensation of an individual employee in excess of annual salary of $100,000 as prorated for the covered period, social security taxes, compensation to employees living outside of US and sick leave wages or FMLA wages covered by Families First Coronavirus Response Act.
2) Any payment of interest on any covered mortgage obligation defined as any indebtedness or debt instrument incurred in the ordinary course of business that—(A) is a liability of the borrower; (B) is a mortgage on real or personal property; and (C) was incurred before February 15, 2020)
3) Any payment on any covered rent obligation defined as rent obligated under a leasing agreement in force before February 15, 2020
4) Any covered utility payment defined as payment for a service for the distribution of electricity, gas, water, transportation, telephone, or internet access for which service began before February 15, 2020
Maximum covered loan shall be the lesser of:
1) Sum of average total monthly payments by the applicant for payroll costs incurred during the 1 year period before the date on which the loan is made multiplied by 2.5 and the outstanding amount of a loan under subsection (b)(2) that was made during the period beginning on January 31, 2020 and ending on the date on which covered loans are made available to be refinanced under the covered loan; OR
If the eligible recipient was not in business during the period between February 15, 2019 and June 30, 2019, then use the monthly average from January 1, 2020 to February 29, 2020.
The loan proceeds may be used for the same items that lead to loan forgiveness.
LIMITS ON AMOUNTS OF FORGIVENESS
Shall not exceed principal.
Will be reduced based on reduction in number of employees. Multiply the forgiveness amount by the ratio of average # of full-time equivalent employees per month of covered period to either the average # of full-time equivalent employees February 15, 2019 to June 30, 2019 or January 1, 2020 to February 29, 2020. There is a different calculation for seasonal employees.
Will be reduced based on reduction of wages of any employee during the covered period that is in excess of 25% of total wages of the employee during the most recent full quarter during which the employee was employed before the covered period. Excluded employees: any employee who received during any single pay period in 2019, wages annualizing to a rate of pay more than $100,000.
Forgiveness amount increased for additional wages paid to tipped workers.
The amount of loan forgiveness shall be determined without regard to a reduction in number of full time equivalents or reduction in wages during the period of February 15, 2020 and ending on the date that is 30 days after the date of enacting bill if the reduction(s) is/are eliminated by June 30, 2020.
Documentation will have to be presented to be approved for forgiveness.
OTHER FACTS ABOUT COVERED LOANS:
1) Non-recourse if proceeds used for purposes authorized
2) Fees will be waived
3) Remain eligible for other loans
4) No personal guarantee required
5) No collateral required
6) BORROWER REQUIREMENTS.— CERTIFICATION.—An eligible recipient applying for a covered loan shall make a good faith certification— a) that the uncertainty of current economic conditions makes necessary the loan request to support the ongoing operations of the eligible recipient; b) acknowledging that funds will be used to retain workers and maintain payroll or make mortgage payments, lease payments, and utility payments; c) that the eligible recipient does not have an application pending for a loan under this subsection for the same purpose and duplicative of amounts applied for or received under a covered loan; and d) during the period beginning on February 15, 2020 and ending on December 31, 2020, that the eligible recipient has not received amounts under this subsection for the same purpose and duplicative of amounts applied for or received under a covered loan.
MATURITY FOR LOANS WITH REMAINING BALANCE AFTER APPLICATION OF FORGIVENESS—With respect to a covered loan that has a remaining balance after reduction based on the loan forgiveness amount under section 1106 of the CARES Act—
1) the remaining balance shall continue to be guaranteed by the Administration under this subsection; and
2) the covered loan shall have a maximum maturity of 10 years from the date on which the borrower applies for loan forgiveness under that section.
INTEREST RATE REQUIREMENTS—A covered loan shall bear an interest rate not to exceed 4 percent
The Federal income tax filing deadline has been extended until July 15, 2020.
At Tideline, we are trying to continue as normally as possible (and allowed). That said, we also want to operate with the appropriate amount of caution. Effective Monday, March 23, we will limit access to our office to employees only. For meetings, we will use Zoom or some similar on-line format. We have a lock box in the parking lot for you to drop off tax information. When returns are complete, we will contact you regarding delivery. The choices for delivery are parking lot pick up at our office, US Postal Service, UPS, Fed Ex, portal or in special cases, courier. As is normal, the package will include mailing envelopes where applicable. We are required to receive signed e-file forms before we submit returns electronically.
If you have a scheduled appointment, we will contact you to make alternate arrangements.
Please call or email us with questions and/or concerns.
In addition to Federal extensions, SC has also extended filing deadlines:
The South Carolina Department of Revenue (SCDOR) is offering more time to file returns and pay taxes due April 1, 2020 – June 1, 2020 to assist taxpayers during the COVID-19 outbreak. Tax returns and payments due April 1 – June 1 will now be due June 1, 2020. Penalty and interest will not be charged if payment is made by June 1. This includes South Carolina Individual Income Taxes, Corporate Income Taxes, Sales and Use Tax, Admissions Tax, and other taxes filed and paid with the SCDOR. The SCDOR is automatically applying this tax relief for all applicable returns and payments; you don’t need to take any additional action.