Coronavirus 2019 (Covid-19) Tax Update 2

Posted in News

On March 27, 2020, President Trump signed into law the Coronavirus Aid, Relief, and Economic Security (CARES) Act, a stimulus bill that includes a loan program to keep small businesses afloat during mandated COVID-19-related closures.

Here are the details:

 

1. Stimulus Check to Individual Taxpayers

  • Maximum $1,200 for a Single taxpayer ($2,400 for married couple) + $500 per each qualifying children
  • Income Phaseout – when adjusted gross income (AGI) is over $75,000 for a single taxpayer (Single), $150,000 for a married couple filing a joint return (MFJ), $112,500 for Head of Household (HH), the stimulus check is reduced by 5% of your AGI above the start of the income phaseout. Taxpayers with AGI over $99,000 (Single), $198,000 (MFJ) , $146,500 (HH) will not receive stimulus payments from the Internal Revenue Service (IRS)
  • The IRS will use your 2019 tax return to determine the amount of your check.  If you have not filed a 2019 tax return, the IRS will use 2018 tax return to determine the amount.  If your only income is social security income and are not required to file a tax return, the IRS will use Form SSA-1099 or RRB-1099 to determine the amount
  • You must have a valid social security number to receive the payment. Nonresident alien is not eligible to receive this payment
  • The IRS will make a direct deposit to the account information listed on the latest tax return filed.  If there’s no such information, a conventional paper check will be mailed to the address on file
  • The stimulus is an advance of a refundable tax credit on your 2020 taxes.  Depending on the income level on 2020 tax return, you could be asked to pay back the difference without interest on overpaid amount or you will get the difference added to your tax refund next year
  • The IRS plans to develop a web-based portal for individuals to provide their banking information to the IRS online, so that individuals can receive payments immediately as opposed to checks in the mail
  • The IRS also recommends that people who is not typically required to file a tax return should file a simple tax return to receive an economic impact payment.  Instruction on how to file a simple return will soon be provided by the Service

 

2. The Paycheck Protection Program (PPP)

  • Lender: banks that does SBA 7(a) Loans, underwritten by the SBA
  • You are eligible if:
    1) Your business or entity (including non-profit) was in operation on February 15, 2020
    2) Your business had 500 or fewer employees
  • No collateral is required from either the business or its owners.  SBA guarantees 100%
  • Annual interest will not exceed 4% and term of the loan is 10 years.  There is no loan fee and no prepayment penalty
  • The maximum loan size lesser of $10 million or 2.5x the average monthly “payroll” costs, measured over the 12 months preceding the loan origination date plus Economic Injury Disaster loan amount that would be refinanced into PPP loan
  • Payroll includes salaries, commissions, tips, certain employee benefits (including health insurance and retired benefits), state and local taxes and certain type of compensation to sole proprietors or independent contractors. Payroll costs specifically exclude compensation of an individual employee in excess of an annual salary of $100,000, foreign employees, FICA, income tax withholdings, and paid sick leave due to COVID-19
  • Loan funds may be used for payroll costs, costs related to group health care benefits during periods of paid sick, medical, or family leave, and insurance premiums, employee salaries, commissions, or similar compensations (except as excluded above), payments of interest on any mortgage (but not payment or prepayment of principal), rent, utilities, and interest on any other debt obligations that were incurred before February 15, 2020

 

3. Loan Forgiveness of the Paycheck Protection Program (PPP)

  • You can apply to your lender to forgive your loan for the amount of payroll costs plus payments of mortgage interest, rent and utilities incurred during the 8-week period after the loan is disbursed
  • The amount that can be forgiven is proportionate to maintaining employees and wages (based on the average number of full-time equivalent employees)
  • Forgiven amounts will not constitute cancellation of indebtedness income for federal tax purpose
  • You must apply through your lender for forgiveness and provide documentation of payroll related documents, payment records of rent, mortgage interest, utilities, and other debt, and certification of the business that funds were used for payments that are applicable to loan forgiveness program requirements

 

4. Economic Injury Disaster Loan (EIDL) and Emergency Economic Injury Grant

  • As a general guide, small businesses (SB) and not-for-profit (NFP)entities with less than 500 employees and $35 million in revenue would typically qualify
  • Low Interest (3.75% for SB and 2.75% for NFP) up to 30 years
  • First payment is due one year after the loan origination date
  • The maximum loan size is $2 million
  • Loan up to $25,000 does not require collateral
  • Applicants who apply for this loan may request an advance up to $10,000 from the SBA.  The advance will be distributed within 3 days.  Applicants are not required to repay this advance if they are subsequently denied a loan
  • You can apply online at https://covid19relief.sba.gov/ by 9/30/2020

 

5. Small Business Debt Relief Program

  • This program immediately provides relief to small businesses with non-disaster SBA loans, in particular 7(a), 504, and microloans. Under this program, SBA will cover all loan payments on these SBA loans, including principal, interest, and fees, for six months.
  • 7(a) loans not made under the PPP, 504 loans, and microloans are eligible.
  • Disaster loans are not eligible

 

6. Payroll Tax Deferral Care Act

  • Employers, both SBs AND NFPs, are eligible to defer their portion of Social Security and Medicare (6.2%) taxes
  • Deferrals is not provided to employers receiving assistance through the SBA PPP
  • Employers may defer payroll taxes through the end of 2020
  • The first 50 percent of the deferred amount must be paid before 12/31/2021
  • The second 50 percent of the deferral amount must be paid before 12/31/2022

 

7. Refundable Employee Retention Credit for Employers Subject to Closure or Experiencing Economic Hardship

  • This provision provides a refundable payroll tax credit for 50 percent of wages paid by eligible employers to certain employees during the COVID-19 crisis
  • This credit is applicable to:
    1) Whose operations have been fully or partially suspended as a result of government order or
    2) Employers who have experienced a greater than 50 percent reduction in quarterly receipts, measured on a year-over-year basis
  • This credit is provided for wages and compensation, including health benefits, and is provided for the first $10,000 in wages and compensation paid by the employer to an eligible employee
  • This credit is not available to employers receiving assistance through the PPP

 

8. Modification of Net Operating Losses (NOLs)

  • The CARES Act allows NOLs arising in tax year 2018, 2019 and 2020 to be carried back five years
  • The 80 percent limitation created by The Tax Cuts and Jobs Act (the TCJA) has been eliminated for the tax years beginning before January 1, 2021
  • For NOL created in 2018, taxpayer now can carry back as far back as tax year 2013

 

9. Technical Amendment Regarding Qualified Improvement Property – 100 percent Bonus Depreciation

  • The CARES Act eliminated drafting error on the TCJA and allows now to claim bonus depreciation for the cost associated with improving facilities instead of having to depreciate those improvements over the 39-year life of the building
  • This change applies to 2018 and 2019 as if it was always in the law
  • Taxpayers should determine whether to amend prior year tax returns

 

10. IRA and Retirement Planed Changed in the CARES Act

  • The 10 percent penalty for taking early distributions from qualified retirement plans, including IRAs and 401(k)s, is waived
  • The waiver applies to distributions taken between January 1, 2020 and December 31, 2020
  • Up to $100,000 of distributions can avoid the penalty

 

11. Waiver of Required Minimum Distribution for 2020

  • Required minimum distributions (RMDs) by those who have reached 72 are suspended for 2020

 

12. Change in The Distribution Amount from Certain Qualified    Retirement Plan

  • The CARES Act allows certain 401(k) plan participants to take a coronavirus-related distribution from their retirement plan account up to $100,000.

 

13. Charitable Contribution

  • To incentivize charitable contributions, the CARES Act provides as above-the-line deduction for “qualified charitable contributions” up to $300 for individuals who do not itemize deductions
  • The CARES Act also increases the income limitation on charitable deductions by suspending the 50 percent adjusted gross income limitation for 2020. Thus, individuals may deduct qualified contribution in 2020 up to 100 percent of their AGI.  Any excess are carried forward to future years

 

14. Interest Expense Limitation

  • The CARES Act temporarily increases the amount of interest expense that businesses may deduct on their tax returns, by increasing the adjusted taxable income limitation from 30% to 50% for 2019 and 2020. In addition, the CARES Act allows a taxpayer to elect to treat its 2020 adjusted income as if it were the same amount as its 2019 adjusted taxable income for purposes of applying the interest expense limitation