See below video update for additional information about PPP Loan Forgiveness, including new information from the PPP Loan Forgiveness Application, Form 3508.
Check out today’s 15 minute coffee chat about the CARES Act, featuring Jaime Palmer with Central Bank of Boone County and Melinda McCubbin with Truman Wealth Advisors.
This COVID-19 update is to provide information about the recently passed Coronavirus Aid, Relief & Economic Security (CARES) Act, with respect to items affecting individual taxpayers and families. This $2 trillion economic stimulus act was signed into law March 27. The bill is unprecedented in scope and size. Additional guidance and regulations on this will be forthcoming.
Cash Payments (Recovery Rebates)
Cash payments will be distributed to eligible individuals and families: $1,200 will be sent to each individual (so $2,400 for a married couple), and $500 per child.
Eligible individuals are those with adjusted gross income of $75,000 (single) or $150,000 (married filing joint). Individuals with adjusted gross income over the thresholds may receive reduced payment amounts up to the adjusted gross income phase out limits of $99,000 (single) or $198,000 (married filing joint). Eligibility is determined based on the 2019 tax return that was filed. If the 2019 tax return has not been filed, the 2018 return will be used to determine eligibility. If neither 2018 nor 2019 has been filed, the Social Security records for 2019 will be used.
Payments will be deposited directly into the bank account shown on the filed tax return. If no information was provided, bank information will be able to be input into a Treasury Department web-based portal, so the individual can receive the payment more quickly (instead of waiting to receive a check). Be aware of potential COVID-19 scams to obtain your bank information – the IRS will not call you!
An individual who is ineligible in 2018, but who becomes eligible in 2019, may want to expedite their tax return filing for 2019. Any taxpayer that has not filed 2018 nor 2019 will want to file, and provide direct deposit information on the filed return, in order to expedite receiving their cash payment. These payments will be available through the rest of 2020.
The act provides an expansion of unemployment benefits including:
- Adding $600 per week to existing state unemployment benefits being received (up to four months)
- Waiving the waiting period for unemployment
- Providing 13 additional weeks of Federal benefits, if the state benefits run out
- Expands payment eligibility to those not traditionally eligible, including self-employed individuals, independent contractors, and others
- Temporary financing of short-term compensation programs
The 10% penalty on early distributions from qualified retirement plans for COVID-19 related purposes, up to $100,000, for 2020 will be waived. In addition, the withdrawal will not be taxed if it is repaid within three years or it will be taxed over three years.
The required minimum distributions for 2020 are temporarily waived.
Taxpayers who do not itemize may be eligible to have an above the line deduction for up to $300 for cash (not stock) donations to charities.
For taxpayers who itemize, the 60% limit on charitable deductions is suspended for 2020.
This was a massive piece of legislation. Be on the lookout for more guidance. If you need any assistance in navigating any of this please let me know.
This second COVID-19 update is to provide information about the recently passed Coronavirus Aid, Relief & Economic Security (CARES) Act. This $2 trillion economic stimulus act was signed into law last Friday, 3/27. The bill is unprecedented in scope and size. Additional guidance and regulations on this will be forthcoming.
Small Business Relief
There are several aspects of the bill aimed at helping small businesses that are struggling due to the COVID-19 epidemic. Below, I have highlighted some of the features.
Paycheck Protection Program (PPP)
This is one of the most buzzed about items of the CARES Act, mainly because it is unlike other loans or government programs. Borrowers will be able to self-certify that they qualify, and there are no personal guarantees required in order to receive funding. Additionally, a portion of the balance may be eligible for loan forgiveness (thereby converting part of the loan into a grant).
Lenders of the funds are approved SBA lenders. However, it is anticipated that most banks will likely be participating. Below are some more specifics on how this may work.
Borrowers are eligible if they have less than 500 employees. Certain industries may also be eligible, even if they have more than 500 employees. Non-profit organizations are also eligible. Self-employed individuals and independent contractors are also eligible to apply.
Eligible borrowers can be loaned up to 2.5x their average monthly payroll costs for the prior year (not to exceed $10 million). Payroll costs will be capped at $100,000 annualized for each employee.
Payroll costs include not only gross salaries and wages, but also paid leave (sick pay, paid vacation), health insurance expenses paid by the employer, retirement expenses, and state or local employer payroll taxes.
Excluded from payroll costs are compensation over $100,000 per individual (annually), compensation for employees not living in the United States, and qualified sick or expanded FMLA leave paid under the Families First Coronavirus Response Act.
For a sole proprietor or independent contractor, payroll costs include wages, commissions, income, or net earnings from self-employment, capped at $100,000 on an annualized basis. Independent contractors will likely file for their own PPP, but more guidance on this is coming.
The biggest part of this program comes from the loan forgiveness aspect. Borrowers may be eligible for the loan to be forgiven for qualified expenses in the 8-week period starting on the loan origination date, from 2/15/20 – 6/30/20.
Expenses that are eligible for the loan forgiveness include payroll costs (as defined above), mortgage interest payments, rent, or utility payments. Note – all items must have been in effect prior to 2/15/20. It is anticipated that due to high demand, at least 75% of the forgiven amount must have been used for payroll.
In order to qualify for the loan forgiveness, the number of employees must be retained, and generally at the same pay rates. So, the amount of the loan that will be forgiven will be reduced by any reduction in the number of employees compared to the same time frame from 2019. The borrower may elect to compare the number of employees during the 8-week period to the first two months of 2020 (1/1 – 2/29/20). The amount of the loan forgiveness will also be reduced if any employee’s pay is reduced more than 25% of their compensation. In short, in order to qualify for loan forgiveness, payroll and staff must be maintained.
If the borrower had previously laid off employees, they will not be penalized provided the laid-off employees are rehired before June 30, 2020.
Loan payments will be deferred for 6 months. The amount of the loan that is not forgiven will have a 2-year term and be at 1% fixed rate.
Loan applications will be accepted starting April 3 for small businesses and sole proprietors. Loan applications will be accepted starting April 10 for independent contractors and self-employed individuals. Applications may be made through any existing SBA lender or through most banks. Due to expected high demand, I would recommend gathering documentation and applying earlier to ensure funds are available.
As a part of the application, borrowers must certify that the economic uncertainty makes the loan necessary to support ongoing operations; that the funds will be used to retain workers and maintain payroll or to make mortgage, lease, and utility payments; and the borrower has not received another loan under the program. Borrowers may also need to include the anticipated uses of the funds (between the eligible expense categories).
Emergency Economic Injury Disaster Loans (EIDL)
Eligibility is expanded to sole proprietors and independent contractors. In addition to small businesses, non-profit organizations and cooperatives are also eligible.
These grants provide an option for a $10,000 cash advance that does not have to be paid back if used for the below items.
- Providing sick leave to employees unable to work as a result of COVID-19
- Maintaining payroll to keep employees
- Increased materials cost due to supply chain interruptions as a result of COVID-19
- Rent or mortgage payments
- Repayment of obligations that cannot be met due to a loss of revenue from COVID-19
Note that if participating in the Paycheck Protection Program a business cannot also double dip with the Emergency EIDL Grants.
Employee Retention Credit
A credit is allowed against applicable employment taxes for each calendar quarter, for 50% of qualified wages up to $10,000. So, the maximum credit for each employee is $5,000.
In order to qualify for the credit, a 2020 trade or business must have:
- Fully or partially suspended business due to government orders limiting commerce, travel, or group meetings due to COVID-19 or
- Received gross receipts for at least one calendar quarter that are less than 50% of gross receipts received during the same calendar quarter of the prior year. This decline in gross receipts test continues until gross receipts are greater than 80% of the prior year quarter.
If the business had more than 100 employees in 2019, an employee must be unable to provide services due to the above criteria.
If the business had 100 or less employees in 2019, the credit is allowed regardless of whether or not the employee is able to provide the services, as long as the business meets one of the above criteria.
Note that wages used for this credit cannot be double dipped and used for other tax credits, or if receiving other small business interruption loan relief.
Delayed Payment of Employer Payroll Taxes
The employer portion of social security tax from 3/27/20 to 12/31/20 can be delayed.
50% of the delayed amount must be deposited by 12/31/21, with the remaining 50% due by 12/31/22.
There is similar relief available for the employer share (50%) of self-employment tax.
Note that this provision is not available for businesses that have debt forgiven under the PPP SBA loan act.
Net Operating Losses
Net operating losses generating in 2018, 2019, or 2020 are temporarily eligible to be carried back five years.
Additionally, the limitation on the net operating loss deduction to 80% of taxable income is suspended for 2020.
Qualified Improvement Property
Improvements that are made to buildings can be immediately written off (instead of depreciating over 39 years).
In addition to the above provisions, the act provides additional provisions to large corporations, health care provisions, education provisions (including a deferment of student loan payments for 6 months through 9/30/20), and other funding provisions and clarifications. A separate post with more details on the individual provisions of this act will be released shortly.
This was a massive piece of legislation. Be on the lookout for more guidance. If you need any assistance in navigating any of this, including the Paychecks Protection Provision Act, please let me know.