Dear Pieper Law LLC Clients,
We hope that you are keeping yourself, your loved ones, and your community safe from COVID-19 (commonly referred to as the Coronavirus). Along with those paramount health concerns, you may be wondering about some of the recent tax changes meant to help everyone coping with the Coronavirus fallout. In addition to the summary of IRS actions and earlier-enacted federal tax legislation that we sent via email over the course of the last week, we now wanted to update you on the tax-related provisions in the Coronavirus Aid, Relief, and Economic Security (CARES) Act, Congress's gigantic economic stimulus package that the President signed into law on March 27, 2020.
INDIVIDUAL TAX UPDATES
Recovery Rebates for Individuals
To help individuals stay afloat during this time of economic uncertainty, the government will send up to $1,200 payments to eligible taxpayers and $2,400 for married couples filing joints returns. An additional $500 additional payment will be sent to taxpayers for each qualifying child dependent under age 17 (using the qualification rules under the Child Tax Credit).
Rebates are gradually phased out, at a rate of 5% of the individual's adjusted gross income over $75,000 (singles or marrieds filing separately), $122,500 (head of household), and $150,000 (joint). There is no income floor or ''phase-in''-all recipients who are under the phaseout threshold will receive the same amounts. Tax filers must have provided, on the relevant tax returns or other documents (see below), Social Security Numbers (SSNs) for each family member for whom a rebate is claimed. Adoption taxpayer identification numbers will be accepted for adopted children. SSNs are not required for spouses of active military members. The rebates are not available to nonresident aliens, to estates and trusts, or to individuals who themselves could be claimed as dependents.
The rebates will be paid out in the form of checks or direct deposits. Most individuals won't have to take any action to receive a rebate. The IRS will compute the rebate based on a taxpayer's tax year 2019 return (or tax year 2018, if no 2019 return has yet been filed). If no 2018 return has been filed, IRS will use information for 2019 provided in Form SSA-1099, Social Security Benefit Statement, or Form RRB-1099, Social Security Equivalent Benefit Statement.
Rebates are payable whether or not tax is owed. Thus, individuals who had little or no income, such as those who filed returns simply to claim the refundable earned income credit or child tax credit, qualify for a rebate.
Waiver of 10% early distribution penalty.
The additional 10% tax on early distributions from IRAs and defined contribution plans (such as 401(k) plans) is waived for distributions made between January 1 and December 31, 2020 by a person who (or whose family) is infected with the Coronavirus or who is economically harmed by the Coronavirus (a qualified individual). Penalty-free distributions are limited to $100,000, and may, subject to guidelines, be re-contributed to the plan or IRA. Income arising from the distributions is spread out over three years unless the employee elects to turn down the spread out. Employers may amend defined contribution plans to provide for these distributions. Additionally, defined contribution plans are permitted additional flexibility in the amount and repayment terms of loans to employees who are qualified individuals.
Waiver of required distribution rules.
Required minimum distributions that otherwise would have to be made in 2020 from defined contribution plans (such as 401(k) plans) and IRAs are waived. This includes distributions that would have been required by April 1, 2020, due to the account owner's having turned age 70 1/2 in 2019.
Charitable deduction liberalizations.
The CARES Act makes four significant liberalizations to the rules governing charitable deductions:
· Individuals will be able to claim a $300 above-the-line deduction for cash contributions made, generally, to public charities in 2020. This rule effectively allows a limited charitable deduction to taxpayers claiming the standard deduction.
· The limitation on charitable deductions for individuals that is generally 60% of modified adjusted gross income (the contribution base) doesn't apply to cash contributions made, generally, to public charities in 2020 (qualifying contributions). Instead, an individual's qualifying contributions, reduced by other contributions, can be as much as 100% of the contribution base. No connection between the contributions and COVID-19 activities is required.
· Similarly, the limitation on charitable deductions for corporations that is generally 10% of (modified) taxable income doesn't apply to qualifying contributions made in 2020. Instead, a corporation's qualifying contributions, reduced by other contributions, can be as much as 25% of (modified) taxable income. No connection between the contributions and COVID-19 activities is required.
· For contributions of food inventory made in 2020, the deduction limitation increases from 15% to 25% of taxable income for C corporations and, for other taxpayers, from 15% to 25% of the net aggregate income from all businesses from which the contributions were made.
Exclusion for employer payments of student loans.
An employee currently may exclude $5,250 from income for benefits from an employer-sponsored educational assistance program. The CARES Act expands the definition of expenses qualifying for the exclusion to include employer payments of student loan debt made before January 1, 2021.
Tax Break for remote care services provided by high deductible health plans.
For plan years beginning before 2021, the CARES Act allows high deductible health plans to pay for expenses for tele-health and other remote services without regard to the deductible amount for the plan.
Tax Break for nonprescription medical products.
For amounts paid after December 31, 2019, the CARES Act allows amounts paid from Health Savings Accounts and Archer Medical Savings Accounts to be treated as paid for medical care even if they aren't paid under a prescription. And, amounts paid for menstrual care products are treated as amounts paid for medical care. For reimbursements after December 31, 2019, the same rules apply to Flexible Spending Arrangements and Health Reimbursement Arrangements.
BUSINESS TAX UPDATES
Employee retention credit for employers.
Eligible employers can qualify for a refundable credit against, generally, the employer's 6.2% portion of the Social Security (OASDI) payroll tax (or against the Railroad Retirement tax) for 50% of certain wages (below) paid to employees during the COVID-19 crisis.
The credit is available to employers carrying on business during 2020, including non-profits (but not government entities), whose operations for a calendar quarter have been fully or partially suspended as a result of a government order limiting commerce, travel or group meetings. The credit is also available to employers who have experienced a more than 50% reduction in quarterly receipts, measured on a year-over-year basis relative to the corresponding 2019 quarter, with the eligible quarters continuing until the quarter after there is a quarter in which receipts are greater than 80% of the receipts for the corresponding 2019 quarter. For the sake of clarity, we’ve provided a simplified example below.
EXAMPLE: You operate a longstanding business in Colorado. Your business generated gross receipts of $100,000 from April through June of 2019 and had net income of $50,000 after payment to your employees. Due to the Coronavirus, your business generated gross receipts of $30,000 (which constitutes more than a 50% reduction in quarterly receipts, measured on a year-over-year basis relative to Q2 2019). You elected to retain your staff and pay them $50,000 (which resulted in a net loss for the quarter of $20,000). Based on the foregoing, your business would be eligible for a payroll tax credit equivalent to 6.2% of your W-2 wages paid (e.g. - $50,000 x 6.2% = $3,100).
For employers with more than 100 employees in 2019, the eligible wages are wages of employees who aren't providing services because of the business suspension or reduction in gross receipts described above.
For employers with 100 or fewer full-time employees in 2019, all employee wages are eligible, even if employees haven't been prevented from providing services. The credit is provided for wages and compensation, including health benefits, and is provided for the first $10,000 in eligible wages and compensation paid by the employer to an employee. Thus, the credit is a maximum $5,000 per employee.
Wages don't include (1) wages taken into account for purposes of the payroll credits provided by the earlier Families First Coronavirus Response Act for required paid sick leave or required paid family leave, (2) wages taken into account for the employer income tax credit for paid family and medical leave (under Code Sec. 45S ) or (3) wages in a period in which an employer is allowed for an employee a work opportunity credit (under Code Sec. 51 ). An employer can elect to not have the credit apply on a quarter-by-quarter basis.
The IRS has authority to advance payments to eligible employers and to waive penalties for employers who do not deposit applicable payroll taxes in reasonable anticipation of receiving the credit. The credit is not available to employers receiving Small Business Interruption Loans. The credit is provided for wages paid after March 12, 2020 through December 31, 2020.
Delayed payment of employer payroll taxes.
Taxpayers (including self-employeds) will be able to defer paying the employer portion of certain payroll taxes through the end of 2020, with all 2020 deferred amounts due in two equal installments, one at the end of 2021, the other at the end of 2022. Taxes that can be deferred include the 6.2% employer portion of the Social Security (OASDI) payroll tax and the employer and employee representative portion of Railroad Retirement taxes (that are attributable to the employer 6.2% Social Security (OASDI) rate). The relief isn't available if the taxpayer has had debt forgiveness under the CARES Act for certain loans under the Small Business Act as modified by the CARES Act (see below). For self-employeds, the deferral applies to 50% of the Self-Employment Contributions Act tax liability (including any related estimated tax liability).
Net operating loss liberalizations.
The 2017 Tax Cuts and Jobs Act (the 2017 Tax Law) limited NOLs arising after 2017 to 80% of taxable income and eliminated the ability to carry NOLs back to prior tax years. For NOLs arising in tax years beginning before 2021, the CARES Act allows taxpayers to carryback 100% of NOLs to the prior five tax years, effectively delaying for carrybacks the 80% taxable income limitation and carryback prohibition until 2021.
The Act also temporarily liberalizes the treatment of NOL carryforwards. For tax years beginning before 2021, taxpayers can take an NOL deduction equal to 100% of taxable income (rather than the present 80% limit). For tax years beginning after 2021, taxpayers will be eligible for: (1) a 100% deduction of NOLs arising in tax years before 2018, and (2) a deduction limited to 80% of taxable income for NOLs arising in tax years after 2017.
Technical correction to restore faster write-offs for interior building improvements.
The CARES Act makes a technical correction to the 2017 Tax Law that retroactively treats (1) a wide variety of interior, non-load-bearing building improvements (qualified improvement property (QIP)) as eligible for bonus deprecation (and hence a 100% write-off) or for treatment as 15-year MACRS property or (2) if required to be treated as alternative depreciation system property, as eligible for a write-off over 20 years. The correction of the error in the 2017 Tax Law restores the eligibility of QIP for bonus depreciation, and in giving QIP 15-year MACRS status, restores 15-year MACRS write-offs for many leasehold, restaurant and retail improvements.
Accelerated payment of credits for required paid sick leave and family leave.
The CARES Act authorizes IRS broadly to allow employers an accelerated benefit of the paid sick leave and paid family leave credits allowed by the Families First Coronavirus Response Act by, for example, not requiring deposits of payroll taxes in the amount of credits earned.
Certain SBA loan debt forgiveness isn't taxable.
Amounts of Small Business Administration Section 7(a)(36) guaranteed loans that are forgiven under the CARES Act aren't taxable as discharge of indebtedness income if the forgiven amounts are used for one of several permitted purposes. The loans have to be made during the period beginning on February 15, 2020 and ending on June 30, 2020.
SBA LOAN SUMMARY
We have received numerous emails and telephone calls regarding each of your businesses eligibility for the SBA Economic Injury Disaster Loan (EIDL), Small Business Emergency EIDL Grant, and Paycheck Protection Loan. For your convenience, we have provided a summary of the terms, eligible entities, required documentation provided to us by our local chamber of commerce. We are not loan officers so please bear with us as we are familiarizing ourselves with the intricacies of the loan application process in this evolving business climate. Please consult with your local business banker with technical non-tax guidance. For more details on the loans and the online application, visit:
SBA Economic Injury Disaster Loan (EIDL)
WHAT: Working capital loans to help small businesses, small agricultural cooperatives, small businesses engaged in aquaculture, and most private, non-profit organizations of all sizes meet their ordinary and necessary financial obligations that cannot be met as a direct result of the outbreak of COVID-19. These loans are intended to assist through the disaster recovery period.
● Loans made directly by SBA
● Loan amount determined by the amount of economic loss, up to $2M
● Term up to 30 years
● Interest rate: 3.75 for businesses, 2.75 for nonprofits
● Most small businesses including Sole Proprietors, Partnerships, LLC, Corporation, Joint Venture, Association, Trust, Cooperative, a small agricultural cooperative, aquaculture, and most private non-profits.
● Applicants must meet the SBA requirements of a small business (500 employees or fewer).
● The size of the applicant alone (without affiliates) must not exceed the size standard for the industry in which the applicant is primarily engaged and;
● The size of the applicant combined with its affiliates must not exceed the size standard designated for either the primary industry of the applicant alone or the primary industry of the applicant and its affiliates, whichever is higher.
● Business has a physical presence within the declared disaster area
● Businesses directly affected by COVID-19 and have suffered or are likely to suffer substantial economic injury
● Business must be independently owned and operated
● Businesses that offer services directly related to the businesses in the declaration
● Other businesses indirectly related the industry that are likely to be harmed by losses in their community (Example: Manufacturer of widgets may be eligible as well as the wholesaler and retailer of the product)
● Unable to obtain credit elsewhere
● Business that is not considered small under SBA guidelines
● Lending and investment concerns (except for real estate investments held for rental)
● Loan packagers who derive more than 1/3 of their annual volume from the preparation of applications seeking financial assistance from the SBA
● Multi-level sales distribution (Pyramid)
● Speculative Activities
● Agricultural Enterprises: If the primary activity of the business (including its affiliates) is as defined in Section 18(b)(1) of the Small Business Act, neither the business nor its affiliates are eligible for EIDL assistance.
● Religious Organizations
● Charitable Organizations and non profit organizations that are not considered a Private Non-Profit
● Gambling Concerns (Ex: Concerns that derive more that 1/3 of their annual gross revenue from legal gambling activities)
● Casinos & Racetracks (Ex: Businesses whose purpose for being is gambling (e.g., casinos, racetracks, poker parlors, etc.) are not eligible for EIDL assistance regardless of 1/3 criteria above.
● Cannabis Industry
● Consumer and Marketing Cooperatives
● Political or lobbying concerns
● Pawn shops
● Real estate developers
● Life insurance companies
● Concerns engaged in illegal activities (as defined by Federal guidelines)
● Government-owned concerns (except for businesses owned or controlled by a Native American tribe)
● Concerns with principals incarcerated, on parole or probation
● Concerns engaged in live performances of, or the sale of products, services of a prurient sexual nature
● Businesses considered as hobbies
● Businesses not located in the declared disaster area
● Business has credit available elsewhere
● Concerns involved in change in ownership situations
● Concerns established post-disaster
● Feedlot operators
● Agricultural enterprises
● Members of congress
WHAT IS REQUIRED TO APPLY:
● Completed SBA loan application (SBA Form 5).
● Tax Information Authorization (IRS Form 4506T) for the applicant, principals and affiliates.
● Complete copies of the most recent Federal Income Tax Return.
● Schedule of Liabilities (SBA Form 2202).
● Personal Financial Statement (SBA Form 413).
● Income, balance sheet, and cash flow documents.
● Other Information may also be requested.
Small Business Emergency EIDL Grants
WHAT: Small Business Emergency EIDL Grants are direct grants for businesses that apply for but do not qualify for the EIDL program.
● Grants for businesses that apply for but do not qualify for the EIDL
● Program loans equal to two and a half months of payroll, up to $10 million.
● No personal guarantee on awards of $200,000 or less for EIDL loans
● The loans will convert to grants if businesses use them to maintain employees.
● Businesses will be able to apply for loans through local and national lenders ELIGIBLE ENTITIES:
● Business with not more than 500 employees
● Sole proprietorship, with or without employees, and independent contractors
● A cooperative with not more than 500 employees
○ ESOP with not more than 500 employees; or a tribal small business concern, with not more than 500 employees.
● Private nonprofit organizations
● Small agricultural cooperatives INELIGIBLE ENTITIES:
● Businesses that are affiliated to larger businesses
○ May disqualify VC or PE funded businesses
● Businesses that engage in activities not legal under federal law (Marijuana)
Paycheck Protection Loans
WHAT: The Coronavirus Aid, Relief, and Economic Security (CARES) Act allocated
$350 billion to help small businesses keep workers employed amid the pandemic and economic downturn. Known as the Paycheck Protection Program, the initiative provides 100% federally guaranteed loans to small businesses that maintain their payroll during this emergency. Importantly, these loans may be forgiven if borrowers maintain their payrolls during the crisis or restore their payrolls afterward.
● 100 percent guaranteed SBA loans, a portion of which SBA will forgive based on allowable expenses for the borrower.
● Loans to be made by approved private sector SBA lenders between Feb 15 and December 31, 2020
○ Private Lender does not need to consider repayment ability for eligibility, instead: the borrower must be in operation by Feb 15, 2020, and have W2 employees or 1099 contractors
○ Lenders must defer payments on principal interest and fees for at least 6 months and up to a year
● The maximum loan amount is $10M
● Permitted use of proceeds are salary, benefits, payroll costs, payments on mortgages or existing loans, rent, and utilities
● Delegated Authority private lender makes credit decisions without normal full SBA review
● These loans can be stacked with EIDL loans to cover other costs besides permitted proceeds if there is need
● Loan recipient must certify they were hurt by economic conditions and will use proceeds as permitted
● Prepayment penalties and affiliation rules for accommodation, food services, and franchises are waived.
● A small business with fewer than 500 employees
● A small business that otherwise meets the SBA’s size standard
● A 501(c)(3) with fewer than 500 employees
● An individual who operates as a sole proprietor
● An individual who operates as an independent contractor
● An individual who is self-employed who regularly carries on anytrade or business
● A Tribal business concern that meets the SBA size standard
● A 501(c)(19) Veterans Organization that meets the SBA size standard
In addition, some special rules may make you eligible:
● If you are in the accommodation and food services sector (NAICS 72), the 500-employee rule is applied on a per physical location basis
● If you are operating as a franchise or receive financial assistance from an approved Small Business Investment Company the normal Affiliation rules do not apply
● Businesses or nonprofits that have laid-off workers (and not rehired them by April)
● Businesses with over 500 employees
● Businesses that intend to use the loan for Immediate cash flow needs
● Businesses that cannot maintain payroll for six months due to ongoing economic impacts of the virus would not be able to receive forgiveness
● Businesses that are affiliated to larger businesses (may disqualify VC or PE funded businesses) except those waived
● Businesses that engage in activities not legal under federal law (Marijuana)
WHAT IS REQUIRED TO APPLY:
In evaluating eligibility, lenders are directed to consider whether the borrower was in operation before February 15, 2020, and had employees for whom they paid salaries and payroll taxes or paid independent contractors. Lenders will also ask you for a good faith certification that:
● The uncertainty of current economic conditions makes the loan request necessary to support ongoing operations
● The borrower will use the loan proceeds to retain workers and maintain payroll or make mortgage, lease, and utility payments
● The borrower does not have an application pending for a loan duplicative of the purpose and amounts applied for here
● From Feb. 15, 2020, to Dec. 31, 2020, the borrower has not received a loan duplicative of the purpose and amounts applied for here (Note: There is an opportunity to fold emergency loans made between Jan. 31, 2020 and the date this loan program becomes available into a new loan)
If you are an independent contractor, sole proprietor, or self-employed individual, lenders will also be looking for certain documents (final requirements will be announced by the government) such as payroll tax filings, Forms 1099-MISC, and income and expenses from the sole proprietorship
For borrowers who already have SBA 7A loans in place before COVID-19, $17 billion is allocated to have SBA step in and make six months of principal and interest payments for all SBA backed business loans.
● Available for all 7a loans (including Community Advantage Loans) loan except Paycheck Protection Loans
● The SBA shall pay all principal and interest on existing 7a, 504 and microloans made before this act was passed that are not on deferment for 6 months starting with the next payment
● For deferred loans, the SBA payments start after the deferment period ends
● Lenders may extend the maturity for loans by one year even beyond normal statutory max when deferment occurs
● NOTE: This is for borrowers who already had 7a loans in place before COVID-19
● Available for all existing 7a, 504 and microloans (including Community Advantage Loans) loan except Paycheck Protection Loans
● This is for borrowers who already had SBA loans in place before COVID-19 INELIGIBLE ENTITIES:
● Does not apply to new 7a loans made after this act was passed which are covered by EIDL Loans or Paycheck Protection Loans
● Businesses that engage in activities not legal under federal law (Marijuana)
IRS INFORMATION SITE
Ongoing information on the IRS and tax legislation response to COVID- 19 can be found at https://www.irs.gov/coronavirus.
We will be pleased to hear from you at any time with questions about the above information or any other matters, related to COVID-19 or not. We wish all of you the very best in a difficult time.
Pieper Law LLC