The month of March has been a busy month for Congress and the President. Earlier this month, they passed and signed in to law the Families First Coronavirus Response Act (FFCRA) and just yesterday, March 27th, the Coronavirus Aid, Relief, and Economic Security (CARES) Act was passed and signed into law. See below for information that will probably impact you.
Families First Coronavirus Response Act (FFCRA)
Goes into effect April 2, 2020 – December 31, 2020. It is a paid sick leave and expanded family leave act that prohibits employers from requiring employees to exhaust accrued paid-time-off (PTO). Employees are entitled to utilize the Emergency Paid Sick Leave and Expanded Emergency FMLA.
Emergency Paid Sick Leave – (up to 10 days) - Eligible employees - those that are unable to work or telework because the employee is subject to local quarantine or isolation, has been advised to self-quarantine, or is experiencing symptoms of COVID-19.
Employers must provide all full-time employees with 80 hours of emergency paid leave related to the coronavirus to the extent the employee is unable to work.
If the employee is subject to a local quarantine or isolation order, has been advised to self-quarantine, or is experiencing symptoms of COVID-19, they are allowed 100% of pay. Maximum amount is $511/day or $5110 in total.
Expanded Emergency FMLA – (up to 10 weeks) - Eligible employees – those that have been employed for at least 30 calendar days and that employee is unable to work due to a need for leave to care for a child under the age of 18 of such employees if the school or place of care is unavailable due do the coronavirus.
If the employee is caring for an individual who is under quarantine, is caring for a child under 18 whose school or place of care is not available, then they are allowed 2/3 pay. Maximum amount is $200/day or $10,000 in the total.
Under this FMLA, the employee must use unpaid leave or use vacation/sick leave, but may elect to substitute the Emergency Paid Sick Leave for unpaid leave
Employers with 25 or more employees would be required to reinstate employees after the leave period ends. Employers with fewer than 25 employees do not have to reinstate an employee.
Workplace poster notice requirement must be posted.
Prohibits employers from discharging, disciplining, or discriminating against employees.
Small business exemption. Businesses with fewer than 50 employees may qualify for an exemption if the leave requirements jeopardize the viability of the business as a going concern.
To assist employers who are required to provide the leave discussed above, the employers are provided a refundable tax credit equal to 100% of both the “qualified family leave wages” that the employer is required to pay, and the Medicare tax paid on those wages. Credit is claimed on the quarterly 941s. Employers are not subject to social security tax on those employee wages.
In an effort to stabilize the economy and help businesses and families, the Coronavirus Aid, Relief, and Economic Security (CARES) Act was passed and signed into law yesterday. Some key points from that bill that will impact our clients:
$1,200 recovery rebates for individual taxpayers. The rebates are advance refunds of credits against 2020 taxes. They are equal to $1200/taxpayer, or $2,400 for joint filers. In addition, there is a $500 credit for each child.
Phaseout of the credit begins at an adjusted gross income of $75,000 for single filers, $112,500 for heads of households, and $150,000 for joint filers. The rebates are completely phased out for single filers over $99,000, HOH of $136,500, and joint filers over $198,000. The adjusted gross income numbers to be used will be 2018 unless a 2019 return is filed.
Individuals who have no income, as well as those whose income comes only from Social Security are also eligible for this credit. Individuals who haven’t filed a tax return in 2018 or 2019 may still receive an automatic advance based on their social security benefit statements (Form SSA-1099). Other individuals may be required to file a return to receive any benefits.
Children who are claimed as dependents (or can be) by their parents are not eligible for their own credit of $1,200.
Retirement Plan Penalties. The bill waives the 10% penalty on early withdrawals up to $100,000 from qualified retirement plans for coronavirus-related distributions. For purposes of the penalty waiver, a coronavirus-related distribution is to an individual diagnosed with COVID-19 or to an individual who experiences adverse financial consequences as result of quarantine, layoffs, etc.
Any income from the early withdrawal is subject to regular tax over a three-year period and the taxpayer may recontribute the withdrawn amounts back to the plan within the three years and it will be treated as a rollover (nontaxable) event.
RMD Requirements are waived for 2020. The CARES Act provides that RMD requirements do not apply for the calendar year 2020.
$300 “Above the line” deduction for charitable contributions. This allows a taxpayer to claim up to $300 of charitable contributions as a deduction – even if they don’t itemize. In addition, the CARES Act eliminates the percent of income limitations for individuals and corporations – 60% and 10% respectively.
Student Loans Paid by Employers. The bill allows an exclusion of up to $5,250 from income of payments made by the employer to an employee’s student loans.
Unemployment. Part of the act creates a temporary program (effective January 27, 2020 – December 31, 2020) that covers individuals who would not normally be eligible for unemployment benefits. This includes self-employed, independent contractors, gig workers, and part-time employment seekers.
The program for all eligible individuals (employees and self-employed people) is contingent on them being unable to work because they have COVID-19, a member of their house has COVID-19, they are caring for a person in their house with COVID-19, they were scheduled to start a job, but couldn’t because of COVID-19, etc.
The amount of the benefit is equal to the amount they would otherwise be entitled to under Federal or State law, PLUS an additional amount of $600/week.
Waiting periods established by state unemployment laws are also removed.
Employee retention credit for employers. The CARES Act provides for a refundable payroll tax credit for 50% of wages paid by eligible employers to certain employees for the period of March 12, 2020 – January 1, 2021.
For employers who have an average number of full-time employees in 2019 of 100 or fewer, all employee wages are eligible regardless of whether the employee is furloughed. For those employers with more than 100 employees, only the wages of the employees furloughed or face reduced hours are eligible for the credit.
Wages include health benefits and is capped at the first $10,000 in wages paid by the employer to an eligible employee. Wages do NOT include amounts taken into account for the payroll credits under the FFCRA Act discussed earlier.
Delay in payment of employer payroll taxes. Taxpayers are allowed to defer paying the employer portion of Social Security taxes through the end of 2020. Half of these taxes would be due on December 31, 2021 with the remainder due on December 31, 2022.
The credit is NOT available to employers receiving Small Business Loans under the Act (see later discussion).
Temporary Repeal of Taxable Income Limitation for Net Operating Losses (NOL’s). The CARES Act removes the 80% of current year income limitation. NOLS can fully offset income for tax years 2018, 2019, or 2020. In addition, the excess business loss limitation is eliminated for tax years 2018, 2019, and 2020.
NOL Carrybacks. The CARES Act provides that NOLs that arise in tax years 2019 and 2020 can be carried back to each of the five years preceding the tax year of loss.
Business Interest Expense Limitation. The limitation of the business interest expense deduction to 30% of adjusted taxable income is increased to 50% for 2019 and 2020. For partnerships, this increase only applies to 2020.
Qualified Improvement Property. Congress corrected a flaw in the TCJA Act from a few years ago. The CARES Act makes all qualified improvement property (qualified leasehold improvements, qualified restaurant property, and qualified retail improvement property) 15-year property and eligible for 100% bonus depreciation. These amendments are effective for property placed in service after December 31, 2017.
Paycheck Protection Program (SBA Loans and Forgiveness)
Included within the CARES Act is the Paycheck Protection Program. These are SBA loans guaranteed 100% by the SBA. Eligible businesses are those with not more than 500 employees. Certain sole proprietors, independent contractors, and self-employed people are also eligible.
Covered period is February 15 – June 30 2020.
The loans allowed are basically up to 2.5 times the average monthly payroll costs based on prior year’s payroll costs.
Permissible uses are:
Salary costs (salaries, wages, commissions, tips, vacation, medical/sick leave, employer paid health care premiums, compensation to an independent contractor),
interest payments on mortgages,
interest on existing debt.
Salaries not included are sick leave wages or family leave wages, for which a tax credit is allowed under FFCRA (see earlier discussion).
The borrower must support its prior payroll costs and certify that “the uncertainty of current economic conditions makes necessary the loan request to support the ongoing operations of the eligible recipient, acknowledging that funds will be used to retain workers and maintain payroll, make mortgage payments, lease payments, and utility payments.”
The borrowers that qualify for the loans will be able to forgive only the portion of the loan used for the payment of salary costs, interest payments on mortgages, rent, and utilities during the 8-week period after the origination date of the loan.
A self-employed individual, independent contractor, or sole proprietorship can apply for these loans by submitting documentation to establish they are eligible – payroll tax filings, Forms 1099-MISC, and income and expenses from the business.
There are no personal guarantees and no recourse to principals, except for misuse of proceeds. There is no collateral, no SBA fees, and no prepayment fee.
The loans are eligible for forgiveness. Remaining balances after forgiveness can have a 10-year maximum term and a maximum rate of 4%.
Payment deferments are available for six months to one year.
The forgiveness of the loan amount is NOT includible in gross income as it normally is.
Amounts in excess of principal are not forgiven.
Forgiveness is reduced proportionately by any reduction in employees retained during the period of 2/15/2020 -4/26/2020 as compared to either the prior year or the period of 1/1/2020 – 2/29/2020 (average employees per month).
If borrowers re-hire workers that have already been laid off within the last 30 days, they will not be penalized or have the loan forgiveness reduced as long as they hire the employees back on or before June 30, 2020.
Forgiveness is reduced proportionately by any reduction in pay of any employees beyond 25% of their prior year compensation.
Employee compensation in excess of $100K is not eligible for forgiveness.
Tipped employees – businesses may receive forgiveness for “additional” wages paid to those employees.