John D. Martin, CPA
J. Martin & Company, PC
On Friday, March 27th, President Trump signed into law the Cares Act. With this passage and additional analysis on the Families First COVID-19 Response Act, we are beginning to receive guidance regarding the benefits that may become available to individuals and businesses. If you have time to read about some non-medical matters, here is a summary of the provisions of the two new laws which impact most of our clients.
Business Provisions in the CARES Act:
Small Business Loans: The law allows up to four weeks for the Small Business Administration’s general business loan program to develop a program to make more than $350 Billion available to small businesses. The loans will be made available to businesses who had less than 500 employees on average for the past twelve months. An applicant must have suffered “substantial economic injury” as a result of the COVID-19 and the applicant must not own property subject to a judgement lien owed by the US Government (other SBA Loans for example.) The loans must be used for Payroll Costs, Healthcare Benefits, Employee Salaries, Rent, Utilities and Interest on other debt obligations.
The loans will have a maximum maturity of 10 years at an interest rate not to exceed 4%. No personal guarantees are required and there will not be a prepayment penalty. The loan is limited to the average monthly payroll costs from February 15, 2019 to June 30, 2019 multiplied by 2.5 with provisions for self-employed individuals who do not have payroll costs. The loan could be forgiven without taxation under the rules to be developed.
Additional information can be found on the SBA website located here: https://www.sba.gov/page/coronavirus-covid-19-small-business-guidance-loan-resources
Employee retention credit for employers: Employers may qualify for a refundable employer retention credit for any quarter if the business operations have been fully or partially suspended as a result of a government order limiting commerce, travel or group meetings. The credit is also provided to employers who have experienced a greater than 50% reduction in quarterly receipts, measured on a year-over-year basis.
The amount is 50% of qualified wages paid to employees limited to $10,000 per employee. The credit is against social security payroll taxes and any excess is refundable in the same manner as a payroll tax overpayment refund (i.e., promptly).
An employer who takes out a Small Business Loan under direct assistance provisions located elsewhere in the Act is not eligible for the employee retention tax credit.
Delay of payment of employer payroll taxes: The CARES Act allows taxpayers to defer paying the employer portion of certain payroll taxes through the end of 2020. Thus, notwithstanding any other provision of law, the payment for social security taxes won’t be due until December 31, 2020.
Individual Tax Provisions in the CARES Act:
Individual Recovery Rebate/Credit: While there has been much excitement about the published $1,200 payments for each adult and $500 for each dependent child, it is important to realize this payment is a credit allowed towards your 2020 taxes. The amount of the credit is reduced (but not below zero) by 5% of the taxpayer’s adjusted gross income (AGI) in excess of: (1) $150,000 for a joint return, (2) $112,500 for a head of household, and (3) $75,000 for all other taxpayers. Everyone who was an eligible individual for 2019 is treated as having made an income tax payment for 2019 equal to the advance refund amount for 2019. The “advance refund amount” is the amount that would have been allowed as a credit for 2019 had the credit provision been in effect for 2019.
Children who are or can be claimed as dependents by their parents aren’t eligible individuals, even if they have enough income to have to file a return. It makes no difference if the parent chooses not to claim the child as a dependent, because the dependency deduction is still “allowable” to the parent.
The IRS will attempt to electronically deposit the credits into your account using the following information:
2019 tax information
2018 tax information
Social Security Benefit Statements
If the IRS is unable to make a payment using one of the methods above, they will issue a check. No later than 15 days after distributing a rebate payment, the IRS must mail a notice to the taxpayer’s last known address. Please confirm you received the payment when you receive the IRS notice and retain the payment notice. The payment will not be taxed. However, we anticipate you will be required to report that the advanced refund was received on your 2020 tax return.
No 10% additional tax for COVID-19-related retirement plan distributions: A distribution from a qualified retirement plan is subject to Federal Income Tax and a 10% additional tax unless it meets certain exceptions. The most common exception is distributions made after the age of 591/2.
COVID-19 impacted individuals may withdraw up to $100,000 in retirement funds without incurring a 10% penalty in 2020. Although no penalty is incurred on early withdrawals, such withdrawals remain subject to usual federal income taxation (payable over a 3 year period). Such federal income taxation may be avoided, however, if such withdrawn funds are repaid within 3 years.
To qualify for the favorable treatment, an individual must either be diagnosed with SARS-CoV-2 or COVID-19 by a test approved by the CDC, have a spouse or dependent diagnosed with one of the two diseases, or experience adverse financial consequences as a result of being quarantined, furloughed, or laid off or having work hours reduced, or being unable to work due to lack of child care.
RMD requirement waived for 2020: In general, the owner of a retirement plan or an Individual Retirement Account (IRA) is required to take minimum distributions annually once the owner reaches age 72. The Care act waives the required minimum distribution for most individuals.
Charitable Deductions: Individuals who do not itemize deductions can make up to a $300 cash donation to qualifying charities and deduct the donation from adjusted gross income. This deduction is available in addition to the standard deduction and is permanent beginning in 2020.
Families First Coronavirus Response Act (“FFCRA”)
On March 18, President Trump signed into law the Families First COVID-19 Response Act. FFCRA requires certain employers with less than 500 employees to provide their employees with paid sick leave or expanded family and medical leave for specified reasons related to COVID-19.
Employers are required to pay an employee up to 80 hours of their regular rate of pay if the employee is unable to work—either on-site or remotely—because the employee:
(1) is subject to a federal, state, or local quarantine or isolation order relating to COVID-19;
(2) has been advised to self-quarantine due by a health care provider;
(3) is seeking diagnosis after exhibiting COVID-19 symptoms;
(4) is caring for another individual subject to points 1 or 2 above;
(5) is caring for the employee’s child because the child’s school or paid care provider has been closed due to COVID-19 precautions; or
(6) is experiencing substantially similar conditions to those of COVID-19 as specified by the Secretary of Health and Human Services.
Employers must provide at least 80 hours of paid leave for full-time employees. Part-time employees are entitled to paid leave equal to the number of hours the employee works, on average, over a two-week period.
Employers must pay employees their regular rate of pay—capped at $511 per day and $5,110 in the aggregate per employee—for leave taken pursuant to items (1), (2), and (3) above (medical care or quarantine of employee). For leave taken pursuant to items (4), (5), and (6) above (school closures or care for others), employers must pay employees 2/3 of their regular rate—capped at $200 per day and $2,000 in the aggregate per employee.
Payroll tax credit for required paid sick leave (the payroll sick leave credit): The tax credit corresponding with the mandate is a credit against the employer’s 6.2% portion of the Social Security payroll tax. The credit amount generally tracks the $511/$5,110 and $200/$2,000 per-employee limits described above. The credit is electable and includes provisions that prevent double tax benefits. The credit applies to wages paid in a period beginning on a date determined by IRS that is no later than April 2, 2020 and ending on December 31, 2020.
Payroll tax credit for required paid family leave (the payroll family leave credit). The Act requires employers with fewer than 500 employees to provide both paid and unpaid leave (with an administrative exemption for less-than-50-employee businesses that the leave mandate puts in jeopardy). The leave generally is available when an employee must take off to care for the employee’s child under age 18 because of a COVID-19 emergency declared by a federal, state, or local authority that either closes a school or childcare place or makes a childcare provider unavailable. Generally, the first 10 days of leave can be unpaid and then paid leave is required, pegged to the employee’s pay rate and pay hours. However, the paid leave can’t exceed $200 per day and $10,000 in the aggregate per employee.
The tax credit corresponding with the EFMLEA mandate is a credit against the employer’s 6.2% portion of the Social Security payroll tax. The credit generally tracks the $200/$10,000 per employee limits described above. The other important rules for the credit, including its effective period, are the same as those described above for the payroll sick leave credit.
Self-employed individuals: The act provides sick leave credits and family leave credits for a self-employed person by treating the self-employed person as both an employer and an employee for credit purposes. Thus, with some limits, the self-employed person is eligible for credits to the extent that an employer would earn the payroll sick leave credit if the self-employed person were an employee. The Act mirrors the same limits above for an employee.
Exemption for employer’s portion of any Social Security. Wages paid as required sick leave payments because of EPSLA or as required family leave payments under EFMLEA aren’t considered wages for purposes of the employer’s 6.2% portion of the Social Security.
Filing and payment deadlines deferred.
After briefly offering more limited relief, the IRS almost immediately pivoted to a policy that provides the following to all taxpayers—meaning all individuals, trusts, estates, partnerships, associations, companies or corporations regardless of whether or how much they are affected by COVID-19:
- For a taxpayer with a Federal income tax return or a Federal income tax payment due on April 15, 2020, the due date for filing and paying is automatically postponed to July 15, 2020, regardless of the size of the payment owed.
- The taxpayer doesn’t have to file Form 4868 (automatic extensions for individuals) or Form 7004 (certain other automatic extensions) to get the extension.
- The relief is for (A) Federal income tax payments (including tax payments on self-employment income) and Federal income tax returns due on April 15, 2020 for the person’s 2019 tax year, and (B) Federal estimated income tax payments (including tax payments on self-employment income) due on April 15, 2020 for the person’s 2020 tax year.
- No extension is provided for the payment or deposit of any other type of Federal tax (e.g. estate or gift taxes) or the filing of any Federal information return.
- As a result of the return filing and tax payment postponement from April 15, 2020, to July 15, 2020, that period is disregarded in the calculation of any interest, penalty, or addition to tax for failure to file the postponed income tax returns or pay the postponed income taxes. Interest, penalties and additions to tax will begin to accrue again on July 16, 2020.
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