Small business owners in Michigan can now apply for the State's Covid-19 Safety Grant Program. Totaling $2M, these grants will provide Michigan businesses with less than 250 employees, including eligible childcare centers, matchings funds of up to $10,000 to decrease the risk of Covid-19 spread through safety and health-related equipment purchased and training.
Applications are being accepted June 7th through June 18th, with awards being given shortly thereafter. Any applications submitted after the deadline will be held pending a potential third phase, if funds are still available.
To apply, businesses need to complete the Michigan COVID-19 Safety Grant application and include a copy of their Covid-19 safety plan as well as a description of how the funds will be used to improve workplace safety for employees, customers and their communities.
Additional information on grant funding can be found in the program brochure.
Funding may be used to:
Purchase supplies and materials such as face coverings, hand washing/hygiene stations, sneeze guards and physical barriers
Purchase personal Protective Equipment (PPE) including gowns, gloves and eye protection
Provide training to educate employees about the spread and dangers of Covid-19
These grants are intended to supplement costs of safety mitigation measures put in place by businesses during the height of the pandemic. This is a reimbursement program, and to be eligible for grant funding, goods must have been purchased on or after Jan. 1, 2021.
To learn more about the Covid-19 Workplace Safety Grants, visit michigan.gov.
Contact our St. Joseph office with any questions you might have regarding the Covid-19 Safety Grant Program or Michigan tax regulations.
The COVID-19 relief bill, signed into law on December 27, 2020, provides a further response from the federal government to the pandemic. It also contains numerous tax breaks for businesses. Here are some highlights of the Consolidated Appropriations Act of 2021 (CAA), which also includes other laws within it.
Business meal deduction increased
The new law includes a provision that removes the 50% limit on deducting business meals provided by restaurants and makes those meals fully deductible.
As background, ordinary and necessary food and beverage expenses that are incurred while operating your business are generally deductible. However, for 2020 and earlier years, the deduction is limited to 50% of the allowable expenses.
The new legislation adds an exception to the 50% limit for expenses of food or beverages provided by a restaurant. This rule applies to expenses paid or incurred in calendar years 2021 and 2022.
The use of the word “by” (rather than “in”) a restaurant clarifies that the new tax break isn’t limited to meals eaten on a restaurant’s premises. Takeout and delivery meals from a restaurant are also 100% deductible.
Note: Other than lifting the 50% limit for restaurant meals, the legislation doesn’t change the rules for business meal deductions. All the other existing requirements continue to apply when you dine with current or prospective customers, clients, suppliers, employees, partners and professional advisors with whom you deal with (or could engage with) in your business.
Therefore, to be deductible:
The food and beverages can’t be lavish or extravagant under the circumstances, and
You or one of your employees must be present when the food or beverages are served.
If food or beverages are provided at an entertainment activity (such as a sporting event or theater performance), either they must be purchased separately from the entertainment or their cost must be stated on a separate bill, invoice or receipt. This is required because the entertainment, unlike the food and beverages, is nondeductible.
Businesses, individuals benefit from provisions designed to keep the American economy afloat as uncertainty related to COVID19 continues.
After months of negotiations, Congress passed an appropriations bill for 2021 that includes $900 billion in relief that could assist businesses and individuals facing economic challenges related to the COVID19 pandemic. In part, the legislation augments the CARES Act passed earlier this year. President Trump signed the bill into law on Sunday, December 27, 2020.
Kruggel Lawton CPAs is monitoring the tax implications of the bill closely and will provide expert analysis and assistance for our clients in the coming weeks as we learn more information.
There are several key provisions and tax advantages that business owners and nonprofits will want to know. Kruggel Lawton will be offering a series of webinars designed to keep our clients informed. Be sure to look for communications and invitations to these online education sessions.
Here is some ofwhat we know now about what is included in the Consolidated Appropriations Act, 2021:
For Individuals
There will be a $300 per week supplemental job loss benefit from December through at least March 14. This benefit will be available in addition to standard unemployment benefits.
Individuals earning under $99,000 will receive up to $600 as a direct stimulus payment; married couples earning under $150,000 could receive up to $1,200. Families will receive $600 per child, but it does not include adult dependents.
Renters making less than $99K annually who are facing eviction could have the current “Eviction Moratorium” extended through January 31. $25 billion is provided in emergency assistance to renters who lost their income due to COVID19.
Americans receiving Supplemental Nutrition Assistance Program (SNAP) will have a temporary increase in benefits by 15% through June 2021.
An extension of federal student loan forbearance was not included in this bill, however the U.S Department of Education had previously extended the time period for federal student loan repayment suspension and 0% interest rate through January 31, 2021. This applies to payments on federal student loans owned by the Department of Education.
For Businesses and Nonprofits
Businesses who received Paycheck Protection Program (PPP) Loans forgiven will be allowed to deduct the costs covered by those loans on federal tax returns. The COVID-19 relief bill clarifies that “no deduction shall be denied, no tax attribute shall be reduced, and no basis increase shall be denied, by reason of the exclusion from gross income provided” by Section 1106 of the CARES Act.
An additional $284 billion will be added to the Paycheck Protection Program (PPP), re-opening for a second major round of applications after closing in August. These loans will be reserved for businesses with fewer than 300 employees that have experienced a 25% drop in revenue in any of the first three quarters of 2020 compared to the same quarter from 2019. The fourth quarter of 2020 compared to the fourth quarter of 2019 will also county for qualification, as long as the loan application is submitted after January 1, 2021. The loans will be capped at $2 million.
The legislation simplifies the process for PPP borrowers who have loans under $150,000. The borrower will simply need to complete a one-page form, including basic information on their finances and employment rates to receive forgiveness.
The PPP will be modified to include faith-based organizations, TV and radio news outlets, 501(c)6 nonprofits like chambers of commerce and visitors bureaus. $15 billion is earmarked for arts and entertainment institutions like stage theatres, museums, and other live venues and those who have faced 90% revenue losses will receive first priority funding. $12 billion is specifically earmarked for businesses operating in low-income and minority communities and an additional $20 billion is designated for extending the Economic Injury Disaster Loans grants program for businesses in low-income and minority communities.
Employers who deferred their workers’ payroll taxes will now have until the end of 2021 to increase the withholding to pay back the taxes owed, instead of April.
In an attempt to revive and support the restaurant industry, there will be a tax break for business meal expenses. Businesses will be able to deduct 100% of their business meals instead of 50% from January 1, 2021 through December 31, 2022.
This legislation does not provide protection for businesses against litigation regarding COVID19 exposure.
For State and Local Government
There is no new funding made available in this legislation specifically for state and local governments.
There is, however, $22 billion in funding for health-related expenses incurred by State, Local, Tribal, and Government territories.
On Friday, June 5, 2020, President Trump signed the Paycheck Protection Program Flexibility Act into law. The bill makes the following changes to the Paycheck Protection Program (PPP):
Extends the PPP loan “covered period” from 8 weeks after loan origination to the earlier of 24 weeks after loan origination or December 31, 2020 (and borrowers that received their loans before the enactment of this change can elect to use their original or alternative payroll 8-week covered period).
Extends the date for the rehire exception from June 30 to December 31, 2020.
Expands the rehire exception based on the non-availability of former employees and to apply the exception when the need for workers is reduced in order to comply with COVID-19 standards. Specifically, PPP loan forgiveness would not be reduced due to a lower number of full-time equivalent (FTE) employees for the following situations:
the employer is unable to rehire individuals who were employed by the employer on February 15, 2020, and
the employer shows the inability to hire similarly qualified employees for unfilled positions on or before December 31, 2020, or
the employer documents its inability to return to the same level of business activity as it had before February 15, 2020, due to having to comply new COVID-19 standards for sanitation, social distancing or other safety requirements during the period of March 1 through December 31, 2020.
Allows up to 40% of the loan proceeds to be used on mortgage interest, rent or utilities, while at least 60% of the PPP funds would have to be used for payroll costs (down from the 75% that was noted in guidance released by the SBA). This applies even if the borrower elects to use the 8-week covered or alternative payroll covered period. The SBA and Treasury clarified on June 8 that the 60% threshold is not a cliff and that partial forgiveness is available under 60%.
Provides a five-year term for all new PPP loans disbursed after these changes (loans disbursed before these changes would retain their original two-year term unless the lender and borrower renegotiate the term).
Changes the six-month deferral period for loan repayments and interest accrual to require payments on any unforgiven amounts to begin on the date on which the SBA remits the amount of forgiveness to the lender.
Loan forgiveness must be requested within 10 months after the end of the borrower's covered period; if it is not, the loan converts to a term loan.
In addition to PPP loan changes, the bill allows all employers, even those with forgiven PPP loans, to defer the payment of 2020 employer’s Social Security taxes, with 50% of the deferred amount being payable by December 31, 2021, and the balance due by December 31, 2022. Previously, the CARES Act prohibited such payroll tax deferral after a borrower’s PPP loan was forgiven.
We anticipate that Treasury will be providing an updated loan forgiveness application in the near future that reflects the changes from this bill.
Last week the SBA released additional guidance regarding the PPP loan forgiveness process. This webinar will address new, up to the minute guidance in detail, focusing on the knowns, the unknowns, and strategies for borrowers applying for forgiveness through their 8-week covered period.
On April 30, the IRS issued Notice 2020-32 providing guidance regarding the deductibility for federal income tax purposes of certain otherwise deductible expenses incurred in a taxpayer’s trade or business when the taxpayer receives a loan (covered loan) pursuant to the Paycheck Protection Program (PPP).
The PPP was established by Section 1102 of the Coronavirus Aid, Relief, and Economic Security (CARES) Act. Under the PPP, a recipient of a covered loan may use the proceeds to pay certain expenditures governed by Sections 162 and 163 (eligible Section 1106 expenses) including (1) payroll costs, (2) certain employee benefits relating to healthcare, (3) interest on mortgage obligations, (4) rent, (5) utilities, and (6) interest on any other existing debt obligations.
Under Section 1106(b) of the CARES Act, if certain conditions are met, a recipient of a covered loan can receive forgiveness of indebtedness on the loan (covered loan forgiveness) in an amount equal to the eligible Section 1106 expenses paid in the following eight-week “covered period” beginning on the covered loan’s origination date.
The Notice clarifies that no deduction will be allowed for an expense that is otherwise deductible if the payment of the expense results in forgiveness of a covered loan for which the income associated with the forgiveness is excluded from gross income under Section 1106(i) of the CARES Act.
The IRS indicated that Section 161 provides that, in computing taxable income under various Sections of the Code (i.e., Sections 162 and 163), otherwise-allowable deductions can be subject to applicable exceptions, including Section 265. Covered rent obligations, covered utility payments, and payroll costs consisting of wages and benefits paid to employees comprise typical trade or business expenses for which a deduction under Section 162 of the Code generally is appropriate. Covered interest under Section 163(a) includes certain interest paid or accrued during the taxable year on indebtedness, including interest paid or incurred on a mortgage obligation of a trade or business.
Section 265(a)(1) and Treas. Reg. § 1.265-1 disallow deductions of a taxpayer that are allocable to one or more classes of income (other than interest) that is exempt from income taxes. The purpose of Section 265 is to prevent a double tax benefit. Section 265(a)(1) applies to otherwise deductible expenses incurred for the purpose of earning or otherwise producing tax-exempt income. It also applies where the tax-exempt income is earmarked for a specific purpose and deductions are incurred in carrying out that purpose. In such event, it is proper to conclude that some or all of the deductions are allocable to the tax-exempt income.
Therefore, to the extent that Section 1106(i) of the CARES Act operates to exclude from gross income the amount of a covered loan forgiven, the application of Section 1106(i) results in a “class of exempt income” under Treas. Reg. § 1.265-1(b)(1). As a result, the Notice holds that Section 265(a)(1) disallows any otherwise allowable deduction under any provision of the Code, including Sections 162 and 163, for the amount of any payment of an eligible Section 1106 expense to the extent of the resulting covered loan forgiveness (up to the aggregate amount forgiven) because such payment is allocable to tax-exempt income, and the disallowance prevents a double tax benefit.
Kruggel Lawton can assist in answering questions that may arise from the Notice as there may be other unresolved questions, particularly related to partnerships and S corporations. While the outcome of the analysis provides a less than desirable result for taxpayers by effectively eliminating the income tax benefit of the exclusion from gross income, this Notice resolves a principal area of uncertainty in the tax treatment of eligible Section 1106 expenses.
The IRS has issued frequently asked questions (FAQs) on the payroll tax deferral opportunity provided by the Coronavirus, Aid, Relief, and Economic Security (CARES) Act (Public Law 116-136). Under that provision, employers of all sizes (including tax exempt/non-profit employers) can defer the deposit and payment of the employer's share of Social Security taxes. Self-employed individuals can also defer payment of some self-employment taxes.
Background
To help employers conserve cash while retaining their workforce, Section 2302 of the CARES Act allows all employers to defer depositing the employer’s share of Social Security taxes for payments due from March 27 (CARES Act enactment date) through December 31, 2020. Generally, employers are required to deposit timely 6.2% of employee wages up to $137,700 (which is the 2020 Social Security wage base), along with 1.45% of Medicare (or “hospital insurance”) taxes (with no wage base cap). But Section 2302 of the CARES act allows employers to defer depositing the 6.2% of wages, interest-free and penalty-free. Payment of half of the amount deferred is due on December 31, 2021, and the remainder is due on December 31, 2022.
KL Insight
Employers’ 1.45% Medicare tax cannot be deferred under the CARES Act and must be deposited unless it is being used to offset payroll tax credits allowed under the CARES Act or the Family First Coronavirus Response Act.
There is no application form or approval procedure to use the payroll tax deposit deferral. Rather, employers simply do not remit the amount that would otherwise be due. IRS will update the Form 941 for the second quarter of 2020 to track the deferred deposits.
While not addressed by the IRS in the recent FAQs, it appears that an employer who paid their social security tax liabilities due on or after March 27 could take advantage of the full deferral amount allowed by recovering the previously paid, but not required, amounts from other 2020 federal tax deposits. Employers using third party payroll-providers should discuss system capabilities and procedures for taking advantage of the allowed deferral and the possibility of recovering any previously paid amounts that were eligible for deferral.
Coordination With PPP Loan Forgiveness
There was some confusion over whether employers who obtain a Paycheck Protection Program (PPP) Small Business Administration (SBA) loan could use the payroll tax deferral, since Section 2302 of the CARES Act states that employers who obtain forgiveness of a PPP loan may not defer deposit of payroll taxes. The FAQs clarify that employers who obtain PPP loans may defer deposit of payroll taxes until such time that the employer receives a decision from its lender that all or any portion of their PPP loan is forgiven.
Once loan forgiveness has occurred, the employer must resume timely payroll tax deposits. The FAQs confirm that the amount that was deferred through the date that the loan was forgiven will continue to be deferred. Accordingly, half of the deferred amount will be due on December 31, 2021, and the other half will be due on December 31, 2022.
KL Insight
To maximize the payroll tax deferral opportunity, employers with PPP loans may wish to consider delaying their request for PPP loan forgiveness until December 31, 2020. PPP loans are for two years, at 1% interest and do not require any payments during the first six months. Employers can request PPP loan forgiveness for qualified payroll costs and certain other expenses incurred during an eight-week period beginning on the date they receive the loan proceeds (lenders must disburse proceeds within 10 days after the loan is approved). Lenders generally have up to 60 days to consider the loan forgiveness. There does not appear to be any time limit for when an employer could submit its request for loan forgiveness, and many will wait until after June 30, 2020, to take advantage of provisions that maximize loan forgiveness.
For example, if an employer submits a request for loan forgiveness on July 15, 2020, the lender could forgive the loan anytime through September 15, 2020. Assume the loan is forgiven on August 15, the employer could no longer defer payroll taxes from August 15 through December 31, 2020. But if the employer does not request loan forgiveness until December 15 (and assuming the lender does not forgive the loan until early 2021), the employer could continue deferring payroll taxes through December 31, 2020.
New programs and relief measures are becoming available to business owners through enactment of the Families First Coronavirus Response Act and the CARES Act. We've teamed up with Gibson and Lake City Bank to help you navigate relief opportunities and resources. Join us for a free webinar taking place Thursday, April 2, from 10:30 a.m.-Noon ET as we discuss:
SBA loan programs to help manage cash flow
Payroll and HR considerations for employers
Tax implications to have on your radar
Insurance considerations
Risk management resources
Weren't able to make it? CLICK HERE to view a recording of the webinar.
Much has been written about how the CARES Act and Families First Coronavirus Response Act (FFCRA) will help businesses. Nonprofit organizations are included in those relief efforts. We've shared some high level insights into how nonprofits can benefit.
Applies to the employer’s 6.2% portion of the Social Security tax due from 3/28/20 to 12/31/20
-50% payable by December 31, 2021
-Remaining 50% payable by December 31, 2022
Note: deferred payroll tax payments not permitted if the organization has received debt forgiveness on an SBA loan (PPP loan)
EMPLOYEE RETENTION CREDIT
Applies when an organization has been partially or fully shutdown or with a 50% decrease in gross receipts in a quarter compared to prior year.
-For the gross receipts factor, applies until the organization returns to 80% of prior year
Must apply to all aspects of nonprofit organization
Introduces a 50% refundable tax credit for 50% of the wages (including employer’s health plan expenses) paid by the employer up to $10,000 per employee (max $5,000 per employee)
- If an employer has > 100 employees, it applies to the employees not providing services
- If an employer has < 100 employees, applies to all employees paid during the eligible period
Organization not eligible if receive a PPP loan
Provides for advance payment of the credit
PAYCHECK PROTECTION PROGRAM
NOTE: Some of this information may change as regulations are finalized and implemented. We will update as new details become available.
Applies to 501(c)(3) organizations, not to 501(c)(6) organizations
-No apparent exclusion of faith-based organizations (including churches)
For organizations with < 500 employees
-1 person = 1 employee for purposes of the 500 test
Loan
-Amount = lesser of 2.5 months of average payroll (including health benefits) or $10,000,000
-Made by local and national SBA lenders, all FDIC-insured institutions
-Relaxed requirements
-Convert to grants equal to the amount spent on payroll, rent, interest on mortgage, and utilities for the 8 weeks after loan origination if the organization maintains staff levels from March 1 through June 30
Forgiveness
-Amount of loan forgiven is reduced proportionally if the employer reduces the number of Full Time Equivalents (FTEs) or if wages are reduced by > 25%
-If the organization has already reduced the workforce, the organization can call back the employees and restore wages within a 30-day window and maintain levels through June 30 to qualify.
Provides up to $2M of working capital loan
-Based on credit scores
-No tax returns necessary
-Can obtain up to $200,000 without a personal guarantee
-No collateral for loans < $25,000
Interest rate is 2.75% for nonprofits
Payments are deferred up to 1 year
Organization can obtain $10,000 emergency grant within 3 days, no repayment required
-Can obtain and take the $10,000 emergency grant without accepting the EIDL loan
Interacts with PPP loan – if EIDL rolled into a PPP loan, the $10,000 will be deducted from the forgivable loan amount
Organizations < 500 employees are required to provide 10 days of sick leave to:
-Employees who have been diagnosed with COVID-19
-Employees who are caring for a family member with COVID-19
-Employees who are caring for a child during a school closure
Pay
-Pay is at employee’s regular rate up to max of $511/day when the employee has been diagnosed with COVID-19
-Max pay is 2/3 of employee’s rate up to max of $200 per day if caring for a family member
-Payment up to the maximum is reimbursed by the federal government in full
-Leave is in addition to other leave programs provided by the employer
-Businesses with < 50 employees may be exempt from providing leave to care for a child whose school or daycare is closed if providing leave threatens the viability of the business
-Not available if an employee can work from home
Organizations with < 500 employees must provide up to 10 weeks of paid leave if an employee needs to care for a child due to school or daycare closure
Pay
-Max pay is 2/3 of employee’s rate up to max of $200 per day, not to exceed $10,000 in the aggregate
-Leave is in addition to other leave programs provided by the employer
-Payment up to the maximum is reimbursed by the federal government in full
-Businesses with < 50 employees may be exempt if providing leave threatens the viability of the business
-Not available if an employee can work from home
Paid Sick Leave and FMLA Exception: If you can prove one of the following items would occur, you can exempt yourself from FFCRA Paid Sick Leave and FMLA items just mentioned:
The provision of paid sick leave or expanded family and medical leave would result in the small business’s expenses and financial obligations exceeding available business revenues and cause the small business to cease operating at a minimal capacity;
The absence of the employee or employees requesting paid sick leave or expanded family and medical leave would entail a substantial risk to the financial health or operational capabilities of the small business because of their specialized skills, knowledge of the business, or responsibilities; or
There are not sufficient workers who are able, willing, and qualified, and who will be available at the time and place needed, to perform the labor or services provided by the employee or employees requesting paid sick leave or expanded family and medical leave, and these labor or services are needed for the small business to operate at a minimal capacity.
SEPARATE BENEFITS FOR INDIVIDUALS INCLUDED IN THE CARES ACT
Cash gifts - $300 above the line deduction for charitable deductions, may not be to donor advised fund or supporting organization
100% Charitable Deduction Limit – For 2020, cash gifts to charity (excluding donor advised funds and supporting organizations) are deductible to 100% of AGI. Gift may be for any purpose.
$100,000 IRA Rollover – Owners may withdraw up to $100,000 and recontribute that amount to the IRA within three years for certain circumstances that involve coronavirus. The IRA owner, spouse or a dependent must be diagnosed with COVID-19, the business of the IRA owner must have been closed or damaged due to COVID-19, the IRA owner must have been laid off due to COVID-19, or the IRA owner must be unable to work as well as provide required child care due to COVID-19. Eliminates the pre-age 59 ½ penalty tax on the $100,000 IRA withdrawals and subsequent re-contribution. If not re-contributed within three years, the distribution becomes subject to tax.
Required Minimum Distribution (RMD) Waiver – RMD is waived for IRA and other qualified retirement plan owners for 2020.
Student Loans – Individuals with federally insured loans may benefit from a provision that delays payments for a six-month period. Student loans are not forgiven, but there is no interest or penalty assessed during the six-month period.
Unemployment Benefits - $600 additional amount added to per week amount received by individuals under state unemployment rules. Result could be unemployment payments of over $1,000 per week for a four-month period resulting from combination of federal and state unemployment payments. The state benefits may extend for an additional ten weeks.
The recently passed CARES Act creates a specific loan program through the Small Business Administration to help small businesses retain employees and pay critical expenses in this challenging time. Under the Paycheck Protection Program (PPP), the SBA's current 7(a) loan guaranty program is expanded and modified to provide up to $349 billion of federally guaranteed loans for small businesses. Loans will be made through local lenders and some or all may qualify to be converted to “grants.”
NOTE: Some of this information may change as regulations are finalized and implemented. We will update as new details become available.
The Internal Revenue Service (IRS) has extended the federal income tax payment AND filing deadline to July 15, 2020, as part of a growing effort to stem the financial pain from the coronavirus pandemic. All taxpayers and businesses will have this additional time to file and make payments without interest or penalties. As is the case every year, you can request that the IRS grant a six-month extension to file your returns. If you wish to extend, please notify your Kruggel Lawton tax professional.
Other deadlines also extended to July 15 include:
Quarterly estimated federal income tax payments previously due on April 15
Individual Retirement Account and Health Savings Account contributions for the 2019 tax year
Filing of Forms 709 (United States Gift and Generation-Skipping Transfer Tax Return) and making payments of Federal gift and generation-skipping transfer tax due
Several states have also issued payment and/or filing extensions of their own:
Individual tax filings and payments, along with estimated payments originally due by April 15, 2020, are now due on or before July 15, 2020. Individual returns included are the IT-40, IT-40PNR, IT-40RNR, IT-40ES, ES-40 and SC-40.
Corporate tax filings and payments, along with estimated payments originally due by April 15 or April 20 are now due on or before July 15, 2020. Those originally due on May 15, 2020, are now due on August 17, 2020. Returns included are the
IT-20, IT-41, IT-65, IT-20S, FIT-20, URT-1, IT-6, IT-6WTH, FT-QP and URT-Q.
Penalties will be waived for 60 days for property tax paid after May 11 (July 10, 2020). This waiver does not apply to tax payments which have been escrowed by financial institutions on behalf of property taxpayers.
Personal property tax returns for the 2020-Pay-2021 tax cycle will remain May 15. However, a taxpayer may on or before May 15 request a 30
day extension (June 14, 2020).
Second quarter (2020) estimates, typically due June 15, have NOT been extended at this time.
MICHIGAN
Small businesses scheduled to make their monthly sales, use and withholding tax payments on March 20 can postpone filing and payment requirements until April 20. The state Treasury Department will waive all penalties and interest for 30 days. More info here.
All Michigan state tax filing and payment deadlines have been moved to July 15, 2020. View the press release.
TENNESSEE
The Tennessee Department of Revenue (DOR) has extended the due date for filing and paying franchise and excise tax from April 15, 2020 to July 15, 2020. Taxpayers will have until July 15 to file returns and make any payments (including quarterly estimated payments) originally due on April 15, 2020. Interest and late filing penalties will not be applied to returns filed and payments made on or before this extended due date. The October 15, 2020, six-month extension date for the calendar year 2019 return remains unchanged. This notice applies to franchise and excise tax only.
The Tennessee DOR is not receiving walk-in customers at their regional and downtown offices from March 20 through April 12, 2020.
Keep an eye on the Tennessee DOR website for future news releases and tax filing/payment updates.
OTHER STATES
The AICPA is actively following state tax filing guidance in the wake of the COVID-19 pandemic. This PDF publication is updated daily and includes information for all states.
A FRAUD WARNING FROM THE IRS
If you receive calls, emails, or other communications claiming to be from the Treasury Department and offering COVID-19 related grants or stimulus payments in exchange for personal financial information, or an advance fee, tax, or charge of any kind, including the purchase of gift cards, please do not respond. These are scams. Please contact the FBI at www.ic3.gov so that the scammers can be tracked and stopped.
On March 27, 2020, President Trump signed into law the Coronavirus Aid, Relief and Economic Security (CARES) Act, which provides relief to taxpayers affected by the novel coronavirus (COVID-19). The CARES Act is the third round of federal government aid related to COVID-19. We have summarized the top provisions in the new legislation below, with more detailed alerts on individual provisions to follow. Click here for a link to the full text of the bill.
The CARES Act provides eligible individuals with a refund check equal to $1,200 ($2,400 for joint filers) plus $500 per qualifying child. The refund begins to phase out if the individual’s adjusted gross income (AGI) exceeds $75,000 ($150,000 for joint filers and $112,500 for head of household filers). The credit is completely phased out for individuals with no qualifying children if their AGI exceeds $99,000 ($198,000 for joint filers and $136,500 for head of household filers).
Eligible individuals do not include nonresident aliens, individuals who may be claimed as a dependent on another person’s return, estates, or trusts. Eligible individuals and qualifying children must all have a valid social security number. For married taxpayers who filed jointly with their most recent tax filings (2018 or 2019) but will file separately in 2020, each spouse will be deemed to have received one half of the credit.
A qualifying child (i) is a child, stepchild, eligible foster child, brother, sister, stepbrother, or stepsister, or a descendent of any of them, (ii) under age 17, (iii) who has not provided more than half of their own support, (iv) who has lived with the taxpayer for more than half of the year, and (v) who has not filed a joint return (other than only for a claim for refund) with the individual’s spouse for the taxable year beginning in the calendar year in which the taxable year of the taxpayer begins.
The refund is determined based on the taxpayer’s 2020 income tax return but is advanced to taxpayers based on their 2018 or 2019 tax return, as appropriate. If an eligible individual’s 2020 income is higher than the 2018 or 2019 income used to determine the rebate payment, the eligible individual will not be required to pay back any excess rebate. However, if the eligible individual’s 2020 income is lower than the 2018 or 2019 income used to determine the rebate payment such that the individual should have received a larger rebate, the eligible individual will be able to claim an additional credit generally equal to the difference of what was refunded and any additional eligible amount when they file their 2020 income tax return.
Individuals who have not filed a tax return in 2018 or 2019 may still receive an automatic advance based on their social security benefit statements (Form SSA-1099) or social security equivalent benefit statement (Form RRB-1099). Other individuals may be required to file a return to receive any benefits.
The CARES Act provides that the IRS will make automatic payments to individuals who have previously filed their income tax returns electronically, using direct deposit banking information provided on a return any time after January 1, 2018.
Charitable Contributions
Above-the-line deductions: Under the CARES Act, an eligible individual may take a qualified charitable contribution deduction of up to $300 against their AGI in 2020. An eligible individual is any individual taxpayer who does not elect to itemize his or her deductions. A qualified charitable contribution is a charitable contribution (i) made in cash, (ii) for which a charitable contribution deduction is otherwise allowed, and (iii) that is made to certain publicly supported charities.
This above-the-line charitable deduction may not be used to make contributions to a non-operating private foundation or to a donor advised fund.
Modification of limitations on cash contributions: Currently, individuals who make cash contributions to publicly supported charities are permitted a charitable contribution deduction of up to 60% of their AGI. Any such contributions in excess of the 60% AGI limitation may be carried forward as a charitable contribution in each of the five succeeding years.
The CARES Act temporarily suspends the AGI limitation for qualifying cash contributions, instead permitting individual taxpayers to take a charitable contribution deduction for qualifying cash contributions made in 2020 to the extent such contributions do not exceed the excess of the individual’s contribution base over the amount of all other charitable contributions allowed as a deduction for the contribution year. Any excess is carried forward as a charitable contribution in each of the succeeding five years. Taxpayers wishing to take advantage of this provision must make an affirmative election on their 2020 income tax return.
This provision is useful to taxpayers who elect to itemize their deductions in 2020 and make cash contributions to certain public charities. As with the aforementioned above-the-line deduction, contributions to non-operating private foundations or donor advised funds are not eligible.
For corporations, the CARES Act temporarily increases the limitation on the deductibility of cash charitable contributions during 2020 from 10% to 25% of the taxpayer’s taxable income. The CARES Act also increases the limitation on deductions for contributions of food inventory from 15% to 25%.
Compensation, Benefits, and Payroll Relief
The law temporarily increases the amount of and expands eligibility for unemployment benefits, and it provides relief for workers who are self-employed. Additionally, several provisions assist certain employers who keep employees on payroll even though the employees are not able or needed to work. The cornerstone of the payroll protection aid is a streamlined application process for SBA loans that can be forgiven if an eligible employer maintains its workforce at certain levels. Additionally, certain employers affected by the pandemic who retain their employees will receive a credit against payroll taxes for 50% of eligible employee wages paid or incurred from March 13 to December 31, 2020. This employee retention credit would be provided for as much as $10,000 of qualifying wages, including health benefits. Eligible employers may defer remitting employer payroll tax payments that remain due for 2020 (after the credits are deducted), with half being due by December 31, 2021, and the balance due by December 31, 2022. Employers with fewer than 500 employees are also allowed to give terminated employees access to the mandated paid federal sick and child care leave benefits for which the employer is 100% reimbursed by the government through payroll tax credits if the employer rehires the qualifying employees.
Any benefit that is driven off the definition of “employee” raises the issue of partner versus employee. The profits interest member that is receiving a W-2 may not be eligible for inclusion in the various benefit computations.
Eligible individuals can withdraw vested amounts up to $100,000 during 2020 without a 10% early distribution penalty, and income inclusion can be spread over three years. Repayment of distributions during the next three years will be treated as tax-free rollovers of the distribution. The bill also makes it easier to borrow money from 401(k) accounts, raising the limit to $100,000 from $50,000 for the first 180 days after enactment, and the payment dates for any loans due the rest of 2020 would be extended for a year.
Individuals do not have to take their 2020 required minimum distributions from their retirement funds. This avoids lost earnings power on the taxes due on distributions and maximizes the potential gain as the market recovers.
Two long-awaited provisions allow employers to assist employees with college loan debt through tax free payments up to $5,250 and restores over-the-counter medical supplies as permissible expenses that can be reimbursed through health care flexible spending accounts and health care savings accounts.
Deferral of Net Business Losses for Three Years
Section 461(l) limits non-corporate taxpayers in their use of net business losses to offset other sources of income. As enacted in 2017, this limitation was effective for taxable years beginning after 2017 and before 2026, and applied after the basis, at-risk, and passive activity loss limitations. The amount of deductible net business losses is limited to $500,000 for married taxpayers filing a joint return and $250,000 for all other taxpayers. These amounts are indexed for inflation after 2018 (to $518,000 and $259,000, respectively, in 2020). Excess business losses are carried forward to the next succeeding taxable year and treated as a net operating loss in that year.
The CARES Act defers the effective date of Section 461(l) for three years, but also makes important technical corrections that will become effective when the limitation on excess business losses once again becomes applicable. Accordingly, net business losses from 2018, 2019, or 2020 may offset other sources of income, provided they are not otherwise limited by other provisions that remain in the Code. Beginning in 2021, the application of this limitation is clarified with respect to the treatment of wages and related deductions from employment, coordination with deductions under Section 172 (for net operating losses) or Section 199A (relating to qualified business income), and the treatment of business capital gains and losses.
Section 163(j) Amended for Taxable Years Beginning in 2019 and 2020
The CARES Act amends Section 163(j) solely for taxable years beginning in 2019 and 2020. With the exception of partnerships, and solely for taxable years beginning in 2019 and 2020, taxpayers may deduct business interest expense up to 50% of their adjusted taxable income (ATI), an increase from 30% of ATI under the TCJA, unless an election is made to use the lower limitation for any taxable year.
Additionally, for any taxable year beginning in 2020, the taxpayer may elect to use its 2019 ATI for purposes of computing its 2020 Section 163(j) limitation. This will benefit taxpayers who may be facing reduced 2020 earnings as a result of the business implications of COVID-19. As such, taxpayers should be mindful of elections on their 2019 return that could impact their 2019 and 2020 business interest expense deduction.
With respect to partnerships, the increased Section 163(j) limit from 30% to 50% of ATI only applies to taxable years beginning in 2020. However, in the case of any excess business interest expense allocated from a partnership for any taxable year beginning in 2019, 50% of such excess business interest expense is treated as not subject to the Section 163(j) limitation and is fully deductible by the partner in 2020. The remaining 50% of such excess business interest expense shall be subject to the limitations in the same manner as any other excess business interest expense so allocated. Each partner has the ability, under regulations to be prescribed by Treasury, to elect to have this special rule not applied. No rules are provided for application of this rule in the context of tiered partnership structures.
Net Operating Losses Carryback Allowed for Taxable Years Beginning in 2018 and Before 2021
The CARES Act provides for an elective five-year carryback of net operating losses (NOLs) generated in taxable years beginning after December 31, 2017, and before January 1, 2021. Taxpayers may elect to relinquish the entire five-year carryback period with respect to a particular year’s NOL, with the election being irrevocable once made. In addition, the 80% limitation on NOL deductions arising in taxable years beginning after December 31, 2017, has temporarily been pushed to taxable years beginning after December 31, 2020.
Several ambiguities in the application of Section 172 arising as a result of drafting errors in the Tax Cuts and Jobs Act have also been corrected. As certain benefits (i.e., charitable contributions, Section 250 “GILTI” deductions, etc.) may be impacted by an adjustment to taxable income, and therefore reduce the effective value of any NOL deduction, taxpayers will have to determine whether to elect to forego the carryback.
Moreover, the bill provides for two special rules for NOL carrybacks to years in which the taxpayer included income from its foreign subsidiaries under Section 965. Please consider the impact of this interaction with your international tax advisors. However, given the potential offset to income taxed under a 35% federal rate, and the uncertainty regarding the long-term impact of the COVID-19 crisis on future earnings, it seems likely that most companies will take advantage of the revisions.
This is a technical point, but while the highest average federal rate was 35% before 2018, the highest marginal tax rate was 38.333% for taxable amounts between $15 million and $18.33 million. This was put in place as part of our progressive tax system to eliminate earlier benefits of the 34% tax rate. Companies may wish to revisit their tax accounting methodologies to defer income and accelerate deductions in order to maximize their current year losses to increase their NOL carrybacks to earlier years.
Alternative Minimum Tax Credit Refunds
The CARES Act allows the refundable alternative minimum tax credit to be completely refunded for taxable years beginning after December 31, 2018, or by election, taxable years beginning after December 31, 2017. Under the Tax Cuts and Jobs Act, the credit was refundable over a series of years with the remainder recoverable in 2021.
Technical Correction to Qualified Improvement Property
The CARES Act contains a technical correction to a drafting error in the Tax Cuts and Jobs Act that required qualified improvement property (QIP) to be depreciated over 39 years, rendering such property ineligible for bonus depreciation. With the technical correction applying retroactively to 2018, QIP is now 15-year property and eligible for 100% bonus depreciation. This will provide immediate current cash flow benefits and relief to taxpayers, especially those in the retail, restaurant, and hospitality industries.
Taxpayers that placed QIP into service in 2019 can claim 100% bonus depreciation prospectively on their 2019 return and should consider whether they can file Form 4464 to quickly recover overpayments of 2019 estimated taxes.
Taxpayers that placed QIP in service in 2018 and that filed their 2018 federal income tax return treating the assets as bonus-ineligible 39-year property should consider amending that return to treat such assets as bonus-eligible.
For C corporations, in particular, claiming the bonus depreciation on an amended return can potentially generate NOLs that can be carried back five years under the new NOL provisions of the CARES Act to taxable years before 2018 when the tax rates were 35%, even though the carryback losses were generated in years when the tax rate was 21%. With the taxable income limit under Section 172(a) being removed, an NOL can fully offset income to generate the maximum cash refund for taxpayers that need immediate cash.
Alternatively, in lieu of amending the 2018 return, taxpayers may file an automatic Form 3115, Application for Change in Accounting Method, with the 2019 return to take advantage of the new favorable treatment and claim the missed depreciation as a favorable Section 481(a) adjustment.
Effects of the CARES Act at the State and Local Levels
As with the Tax Cuts and Jobs Act, the tax implications of the CARES Act at the state level first depends on whether a state is a “rolling” Internal Revenue Code (IRC) conformity state or follows “fixed-date” conformity. For example, with respect to the modifications to Section 163(j), rolling states will automatically conform, unless they specifically decouple (but separate state ATI calculations will still be necessary). However, fixed-date conformity states will have to update their conformity dates to conform to the Section 163(j) modifications.
A number of states have already updated during their current legislative sessions (e.g., Idaho, Indiana, Maine, Virginia, and West Virginia). Nonetheless, even if a state has updated, the effective date of the update may not apply to changes to the IRC enacted after January 1, 2020 (e.g., Arizona).
A number of other states have either expressly decoupled from Section 163(j) or conform to an earlier version and will not follow the CARES Act changes (e.g., California, Connecticut, Georgia, Missouri, South Carolina, Tennessee (starting in 2020), Wisconsin).
Similar considerations will apply to the NOL modifications for states that adopted the 80% limitation, and most states do not allow carrybacks. Likewise, in fixed-dated conformity states that do not update, the Section 461(l) limitation will still apply resulting in a separate state NOL for those states.
These conformity questions add another layer of complexity to applying the tax provisions of the CARES Act at the state level. Further, once the COVID-19 crisis is past, rolling IRC conformity states must be monitored, as these states could decouple from these CARES Act provisions for purposes of state revenue.
The Families First Coronavirus Response Act (FFCRA) became law on March 18, 2020. Among other things, the Act requires employers with “fewer than 500 employees” to provide two new benefits: (1) federal emergency paid sick leave and (2) federal emergency paid family and medical leave (FMLA). Here we will address some of the major requirements of the new law.
Main Points
The effective date is April 1 and applies to eligible leave taken between April 1, 2020 and December 31, 2020.
Employers will not be eligible for refundable tax credits for paid time off provided before April 1, 2020. Also, if covered employers have provided paid leave for coronavirus-related reasons before April 1, they are still obligated to provide the two weeks of emergency paid sick leave beginning on April 1 for eligible employees.
Currently-employed individuals who are unable to work should be treated for payroll purposes under companies’ existing paid time off (primarily paid sick leave and vacation) policies prior to April 1. If they qualify for paid time off and have earned/accrued paid time off available, they should receive that. If that’s unavailable or run out, we are not aware of any obligation for an employer to provide additional paid time off UNTIL the new FFCRA regulations take effect.
For employees laid off before April 1, there are no additional requirements of employers that we can see in this new Act.
Regarding the calculation of wages, the rate of pay will be based on a six-month average. Overtime premiums are not included in this calculation.
Employers may not discharge, discipline, or otherwise discriminate against any employee who takes paid sick leave under the FFCRA and files a complaint or institutes a proceeding under or related to the FFCRA.
Impacted Employers
The paid sick leave and expanded family and medical leave provisions of the FFCRA apply to certain public employers and private employers with fewer than 500 employees.
Small businesses with fewer than 50 employees may qualify for exemption from the requirement to provide leave due to school closings or childcare unavailability if the leave requirements would jeopardize the viability of the business as a going concern. To elect this small business exemption, employers should document why their business with fewer than 50 employees meets the criteria set forth by the Department of Labor, which will be addressed in more detail in forthcoming regulations.
Qualifying Reasons for Employee Leave
Under the FFCRA, an employee qualifies for paid sick time if the employee is unable to work (or unable to telework) due to a need for leave because the employee:
is subject to a Federal, State, or local quarantine or isolation order related to COVID-19;
has been advised by a health care provider to self-quarantine related to COVID-19;
is experiencing COVID-19 symptoms and is seeking a medical diagnosis;
is caring for an individual subject to an order described in (1) or self-quarantine as described in (2);
is caring for a child whose school or place of care is closed (or childcare provider is unavailable) for reasons related to COVID-19; or
is experiencing any other substantially-similar condition specified by the Secretary of Health and Human Services, in consultation with the Secretaries of Labor and Treasury.
Under the FFCRA, an employee qualifies for expanded family leave if the employee is caring for a child whose school or place of care is closed (or childcare provider is unavailable) for reasons related to COVID-19.
Calculation of Pay Based on Reason for Leave
For leave reasons (1), (2), or (3): employees taking leave are entitled to pay at either their regular rate or the applicable minimum wage, whichever is higher, up to $511 per day and $5,110 in the aggregate (over a two-week period).
For leave reasons (4) or (6): employees taking leave are entitled to pay at 2/3 their regular rate or 2/3 the applicable minimum wage, whichever is higher, up to $200 per day and $2,000 in the aggregate (over a two-week period).
For leave reason (5): employees taking leave are entitled to pay at 2/3 their regular rate or 2/3 the applicable minimum wage, whichever is higher, up to $200 per day and $12,000 in the aggregate (over a 12-week period).
Businesses and tax-exempt organizations with fewer than 500 employees that are required to provide emergency paid sick and childcare leave through December 31, 2020, under the Families First Coronavirus Response Act (FFCRA), can claim a refundable federal tax credit to recover 100% of those payments. The IRS also said that the cost of providing such leave can include the cost of continuing health care coverage during the federally mandated sick and childcare leave period.
IRS Information Release (IR) 2020-57 (March 20, 2020) outlines the system that will promptly reimburse employers for the benefits required under the Act.
Source of Tax Credit Refunds
Employers can deduct the cost of providing such leave from their total federal tax deposit amount from all employees (not just from those who take the federally mandated leave). Specifically, employers can deduct the cost of providing such leave from: (1) federal income taxes withheld from all employees’ pay; (2) the employees’ share of Social Security and Medicare taxes; and (3) the employer’s share of Social Security and Medicare taxes.
Self-Employed
Equivalent tax credits are available to self-employed individuals for federally mandated paid sick and childcare leave. But self-employed individuals will deduct their tax credits from their estimated tax payments or can claim a refund on their federal income tax return (i.e., their 2020 Form 1040).
As a result, employers (including self-employed individuals) will have more cash in-hand (by not remitting taxes that are otherwise due) to cover the cost of providing the federal paid sick and childcare leave.
Rapid Refunds
If the payroll tax off-set is not enough to cover 100% of those costs, employers can request a refund of their tax credit for any remaining amount. The IRS expects to process such refunds within two weeks.
Qualifying Reasons for Employee Leave
Under the FFCRA, an employee qualifies for paid sick time if the employee is unable to work (or unable to telework) due to a need for leave because the employee:
is subject to a Federal, State, or local quarantine or isolation order related to COVID-19;
has been advised by a health care provider to self-quarantine related to COVID-19;
is experiencing COVID-19 symptoms and is seeking a medical diagnosis;
is caring for an individual subject to an order described in (1) or self-quarantine as described in (2);
is caring for a child whose school or place of care is closed (or childcare provider is unavailable) for reasons related to COVID-19; or
is experiencing any other substantially-similar condition specified by the Secretary of Health and Human Services, in consultation with the Secretaries of Labor and Treasury.
Calculation of Pay Based on Reason for Leave
For leave reasons (1), (2), or (3): employees taking leave are entitled to pay at either their regular rate or the applicable minimum wage, whichever is higher, up to $511 per day and $5,110 in the aggregate (over a two-week period).
For leave reasons (4) or (6): employees taking leave are entitled to pay at 2/3 their regular rate or 2/3 the applicable minimum wage, whichever is higher, up to $200 per day and $2,000 in the aggregate (over a two-week period).
For leave reason (5): employees taking leave are entitled to pay at 2/3 their regular rate or 2/3 the applicable minimum wage, whichever is higher, up to $200 per day and $12,000 in the aggregate (over a 12-week period).
On March 20, 2020, the U.S. Treasury Department, Internal Revenue Service (IRS), and the U.S. Department of Labor (Labor) announced that small and midsize employers can begin taking advantage of two new refundable payroll tax credits, designed to immediately and fully reimburse them, dollar-for-dollar, for the cost of providing Coronavirus-related leave to their employees. This relief to employees and small and midsize businesses is provided under the Families First Coronavirus Response Act (Act), signed by President Trump on March 18, 2020.
The Act will help the United States combat and defeat COVID-19 by giving all American businesses with fewer than 500 employees funds to provide employees with paid leave, either for the employee's own health needs or to care for family members. The legislation will enable employers to keep their workers on their payrolls, while at the same time ensuring that workers are not forced to choose between their paychecks and the public health measures needed to combat the virus.
For COVID-19 related reasons, employees receive up to 80 hours of paid sick leave and expanded paid child care leave when employees' children's schools are closed or child care providers are unavailable.
Complete Coverage
Employers receive 100% reimbursement for paid leave pursuant to the Act.
Health insurance costs are also included in the credit.
Employers face no payroll tax liability.
Self-employed individuals receive an equivalent credit.
Fast Funds
Reimbursement will be quick and easy to obtain.
An immediate dollar-for-dollar tax offset against payroll taxes will be provided
Where a refund is owed, the IRS will send the refund as quickly as possible.
Small Business Protection
Employers with fewer than 50 employees are eligible for an exemption from the requirements to provide leave to care for a child whose school is closed, or child care is unavailable in cases where the viability of the business is threatened.
Easing Compliance
Requirements subject to 30-day non-enforcement period for good faith compliance efforts.
To take immediate advantage of the paid leave credits, businesses can retain and access funds that they would otherwise pay to the IRS in payroll taxes. If those amounts are not sufficient to cover the cost of paid leave, employers can seek an expedited advance from the IRS by submitting a streamlined claim form that will be released next week.
Background
The Act provided paid sick leave and expanded family and medical leave for COVID-19 related reasons and created the refundable paid sick leave credit and the paid child care leave credit for eligible employers. Eligible employers are businesses and tax-exempt organizations with fewer than 500 employees that are required to provide emergency paid sick leave and emergency paid family and medical leave under the Act. Eligible employers will be able to claim these credits based on qualifying leave they provide between the effective date and December 31, 2020. Equivalent credits are available to self-employed individuals based on similar circumstances.
Paid Leave
The Act provides that employees of eligible employers can receive two weeks (up to 80 hours) of paid sick leave at 100% of the employee's pay where the employee is unable to work because the employee is quarantined, and/or experiencing COVID-19 symptoms, and seeking a medical diagnosis. An employee who is unable to work because of a need to care for an individual subject to quarantine, to care for a child whose school is closed or child care provider is unavailable for reasons related to COVID-19, and/or the employee is experiencing substantially similar conditions as specified by the U.S. Department of Health and Human Services can receive two weeks (up to 80 hours) of paid sick leave at 2/3 the employee's pay. An employee who is unable to work due to a need to care for a child whose school is closed, or child care provider is unavailable for reasons related to COVID-19, may in some instances receive up to an additional ten weeks of expanded paid family and medical leave at 2/3 the employee's pay.
Paid Sick Leave Credit
For an employee who is unable to work because of Coronavirus quarantine or self-quarantine or has Coronavirus symptoms and is seeking a medical diagnosis, eligible employers may receive a refundable sick leave credit for sick leave at the employee's regular rate of pay, up to $511 per day and $5,110 in the aggregate, for a total of 10 days.
For an employee who is caring for someone with Coronavirus, or is caring for a child because the child's school or child care facility is closed, or the child care provider is unavailable due to the Coronavirus, eligible employers may claim a credit for two-thirds of the employee's regular rate of pay, up to $200 per day and $2,000 in the aggregate, for up to 10 days. Eligible employers are entitled to an additional tax credit determined based on costs to maintain health insurance coverage for the eligible employee during the leave period.
Child Care Leave Credit
In addition to the sick leave credit, for an employee who is unable to work because of a need to care for a child whose school or child care facility is closed or whose child care provider is unavailable due to the Coronavirus, eligible employers may receive a refundable child care leave credit. This credit is equal to two-thirds of the employee's regular pay, capped at $200 per day or $10,000 in the aggregate. Up to 10 weeks of qualifying leave can be counted towards the child care leave credit. Eligible employers are entitled to an additional tax credit determined based on costs to maintain health insurance coverage for the eligible employee during the leave period.
Prompt Payment for the Cost of Providing Leave
When employers pay their employees, they are required to withhold from their employees' paychecks federal income taxes and the employees' share of Social Security and Medicare taxes. The employers then are required to deposit these federal taxes, along with their share of Social Security and Medicare taxes, with the IRS and file quarterly payroll tax returns (Form 941 series) with the IRS.
Under guidance that will be released next week, eligible employers who pay qualifying sick or child care leave will be able to retain an amount of the payroll taxes equal to the amount of qualifying sick and child care leave that they paid, rather than deposit them with the IRS.
The payroll taxes that are available for retention include withheld federal income taxes, the employee share of Social Security and Medicare taxes, and the employer share of Social Security and Medicare taxes with respect to all employees.
If there are not sufficient payroll taxes to cover the cost of qualified sick and child care leave paid, employers will be able file a request for an accelerated payment from the IRS. The IRS expects to process these requests in two weeks or less. The details of this new, expedited procedure will be announced next week.
Examples
If an eligible employer paid $5,000 in sick leave and is otherwise required to deposit $8,000 in payroll taxes, including taxes withheld from all its employees, the employer could use up to $5,000 of the $8,000 of taxes it was going to deposit for making qualified leave payments. The employer would only be required under the law to deposit the remaining $3,000 on its next regular deposit date.
If an eligible employer paid $10,000 in sick leave and was required to deposit $8,000 in taxes, the employer could use the entire $8,000 of taxes in order to make qualified leave payments and file a request for an accelerated credit for the remaining $2,000.
Equivalent child care leave and sick leave credit amounts are available to self-employed individuals under similar circumstances. These credits will be claimed on their income tax return and will reduce estimated tax payments.
Small Business Exemption
Small businesses with fewer than 50 employees will be eligible for an exemption from the leave requirements relating to school closings or child care unavailability where the requirements would jeopardize the ability of the business to continue. The exemption will be available on the basis of simple and clear criteria that make it available in circumstances involving jeopardy to the viability of an employer's business as a going concern. Labor will provide emergency guidance and rulemaking to clearly articulate this standard.
Non-Enforcement Period
Labor will be issuing a temporary non-enforcement policy that provides a period of time for employers to come into compliance with the Act. Under this policy, Labor will not bring an enforcement action against any employer for violations of the Act so long as the employer has acted reasonably and in good faith to comply with the Act. Labor will instead focus on compliance assistance during the 30-day period.
For More Information
For more information about these credits and other relief, visit Coronavirus Tax Relief on IRS.gov. Information regarding the process to receive an advance payment of the credit will be posted next week.
The U.S. Small Business Administration (SBA) is offering low-interest federal disaster loans for working capital (up to $2 million) to small businesses suffering substantial economic injury as a result of the Coronavirus (COVID-19).
Economic Injury Disaster Loans (EIDL) are available statewide in Indiana, Michigan, and Tennessee to small businesses and private, non-profit organizations to help alleviate economic injury caused by COVID-19. Other approved states can be found here.
EIDL loans may be used to pay fixed debts, payroll, accounts payable and other bills that can’t be paid because of the disaster’s impact. The interest rate is 3.75% for small businesses. The interest rate for non-profits is 2.75%.
SBA offers loans with long-term repayments in order to keep payments affordable, up to a maximum of 30 years. Terms are determined on a case-by-case basis, based upon each borrower’s ability to repay.
EIDL funds come directly from the U.S. Treasury - applicants do not go through a bank to apply. There is no cost to apply and no obligation to take the loan if approved. Applicants can have an existing SBA Disaster Loan and still qualify for an EIDL, but the loans cannot be consolidated.
If interested, we recommend that businesses apply online as soon as possible due to anticipated high demand. If you do not have access to a computer or smartphone, please call 1‐800‐659‐2955 for assistance. Applicants will receive an answer within 21 days from SBA on approval, and another two weeks to process paperwork and disburse funds. Total estimated timeline is 4-6 weeks to fund if approved.
CLICK HERE to download the Three Step Disaster Loan Process Guide
This guide outlines each step in the application process, including required documents you'll need to submit with your application. The biggest reason for delays in processing is due to missing information. Make sure to complete all filing requirements before submitting the application and forms.
Employers are scrambling to find ways to help their employees who are impacted by the novel coronavirus (COVID-19). Help is available. Now that the COVID-19 has been declared a national emergency,[1] Internal Revenue Code Section 139 can be used to allow employers to make tax-free payments or reimbursements to employees as “qualified disaster payments.” Below are some frequently asked questions about how employers can use Section 139 immediately to help employees cope with COVID-19.
Q1: What is a “qualified disaster payment”?
A1: Qualified disaster payments are payments that are not otherwise reimbursed by insurance made by an employer to an employee that are reasonably expected by the employer to:
Reimburse or pay reasonable and necessary personal, family, living, or funeral expenses incurred as a result of a qualified disaster; and
Reimburse or pay reasonable and necessary expenses incurred for the repair or rehabilitation of a personal residence or repair or replacement of its contents to the extent that the need for such repair, rehabilitation, or replacement is attributable to a qualified disaster.
The payments should not include non-essential, luxury, or decorative items or services.
KL INSIGHT: Wage replacement (such as paid sick or other leave) would not be covered by Section 139, so such payments would still be taxable wages and would remain subject to income and payroll tax withholding and reporting.
Q2: What expenses might be considered to be eligible as a qualified disaster payment with respect to COVID-19?
A2: With respect to COVID-19 circumstances, it appears that employers can pay for, reimburse, or provide in-kind benefits reasonably believed by the employer to result from the COVID-19 national emergency that are not covered by insurance. For example, it appears that employers could pay for, reimburse or provide employees with tax-free payments for over-the-counter medications, hand sanitizers, home disinfectant supplies, child care or tutoring due to school closings, work-from-home expenses (like setting up a home office, increased utilities expense, higher internet costs, printer, cell phone, etc.), increased costs from unreimbursed health-related expenses and increased transportation costs due to work relocation (such as taking a taxi or ride-sharing service from home instead of using public mass transit).
Q3: What is the federal tax treatment of qualified disaster payments?
A3: Qualified disaster payments are federal tax-free to employees and are fully deductible to the employer. Such payments are not considered “gifts.” There is no federal reporting or disclosure, so such payments are not reported on Form W-2 or 1099 and are not subject to federal income or payroll tax withholding.
Q4: What is the state tax treatment of qualified disaster payments?
A4: Generally, state treatment for income tax withholding purposes will mirror the federal treatment of qualified disaster relief payments. That is, states generally exclude qualified disaster relief payments from the definition of wages for state income tax withholding purposes, either expressly or by applying the federal definition of “wages” for state income tax withholding purposes. However, qualified disaster relief payments may still be considered “wages” for purposes of state unemployment insurance tax. Employers should determine on a state-by-state basis whether certain income tax withholding and/or unemployment insurance tax contribution obligations may arise in connection with such payments.
Q5: Is there a cap on how much an employer can provide to an employee as a qualified disaster payment?
A5: No. Section 139 does not impose any limit on the amount or frequency of qualified disaster payments that an employer can make to any individual employee or to all employees in the aggregate.
Q6: Must employers have a written plan to make qualified disaster payments to employees?
A6: No. Employers are not required to have a written program for qualified disaster payments. But having such a program is recommended, so employers can inform employees about the parameters of the employer’s program in the COVID-19 context. Such a program might include a description of who is eligible, what expenses will be reimbursed (perhaps up to a “per employee” maximum), how and when payments will be made, etc.
Q7: Are employees required to substantiate their expenses to prove that they are eligible for qualified disaster payment treatment?
A7: No. Employees are not required to provide receipts or other proof supporting their expenses. However, employers could require such proof as part of its written program, perhaps using rules similar to the long-standing IRS “accountable plan” rules.
[1] COVID-19, was designated as an emergency under the Stafford Act on March 13, 2020. Although there is some debate over the legal technicalities of that declaration, it appears that Section 139 relief has been triggered. Specifically, Rev. Rul. 2003-29 says that for Section 165(i) (which is cross-referenced in Section 139), an “emergency” is treated as a “disaster.” In addition, an IRS Chief Counsel Memorandum dated June 28, 2019, states “A Federally declared disaster includes a major disaster declaration under section 401 of the Stafford Act and an emergency declaration under section 501 of the Stafford Act.”
The Families First Coronavirus Response Act (H.R. 6201) became law on March 18, 2020. The Act guarantees free testing for the novel coronavirus (COVID-19), establishes emergency paid sick leave, expands family and medical leave, enhances unemployment insurance, expands food security initiatives, and increases federal Medicaid funding.
The Act includes up to 80 hours of emergency paid sick leave for workers who are unable to work while they are sick or complying with COVID-19 restrictions or caring for school age children due to the closure of schools or child care facilities, as well as paid family and medical leave that employees will be able to use to care for family members (not for personal illness) for up to 12 weeks. The first 10 days of emergency family and medical leave may be unpaid, unless employees opt to use accrued paid time off for those days.
The mandatory paid leave provisions apply to employers with fewer than 500 employees and government employers, with exceptions for health care workers and first responders. Self-employed individuals would be eligible for the new benefits provided under the Act. It is not clear if individuals who have self-employment income from their partnership or limited liability company would be eligible for the new self-employed benefits, as the Act does not specifically address those situations. Employers with 500 or more employees would not be subject to those rules. Employers who are required to provide paid time off would need to initially bear the costs of paying their employees, but the federal government would provide payroll tax credits to help cover those costs.
BACKGROUND: Currently, the federal Family Medical Leave Act of 1993 (FMLA) provides eligible employees up to 12 work weeks of unpaid leave a year and requires group health benefits to be maintained during the leave as if employees continued to work instead of taking leave. Employees are also entitled to return to their same or an equivalent job at the end of their FMLA leave. Special rules apply to military personnel.
To be eligible for FMLA, an employee is required to have been employed by their employer for a year, worked for 1,250 hours, and worked in a location where there are 50 other employees within a 75-mile radius. The FMLA applies to all private sector employers who employ 50 or more employees for at least 20 workweeks in the current or preceding calendar year (including joint employers and successors of covered employers). Many states have enacted laws that are similar to federal FMLA, which apply to smaller employers who may be exempt from federal FMLA. The FMLA also applies to federal, state and local employers. These current provisions remain available for qualifying employees.
Employer Mandates
Emergency Paid Sick Leave Through December 31, 2020, the Act requires employers with fewer than 500 employees and government employers to provide all employees (including union employees and regardless of how long the individual worked for the employer, but excluding health care workers and first responders) with 80 hours (e.g, 10 business days) of emergency paid sick leave for full-time workers (pro-rated for part-time employees or employees with varying work schedules) for employees who are unable to work or telework because the employee:
Is subject to a federal, state, or local COVID-19 quarantine or isolation order;
Has been advised by a health care provider to self-quarantine because of COVID-19;
Is experiencing COVID-19 symptoms and is seeking a medical diagnosis;
Is caring for an individual subject to or advised to quarantine or isolation;
Is caring for a son or daughter whose school or place of care is closed, or child care provider is unavailable, due to COVID-19 precautions; or
Is experiencing substantially similar conditions as specified by the Secretary of Health and Human Services, in consultation with the Secretaries of Labor and Treasury.
Generally, employers would pay employees at their regular rate of pay for emergency sick leave, capped at $511 per day ($5,110 in the aggregate) if the leave is taken for an employee’s own illness or quarantine (i.e., for the first three bullets above). Employers would pay employees two-thirds of their regular rate of pay for emergency sick leave, capped at $200 per day ($2,000 in the aggregate) if the leave is taken to care for others or due to school closures (i.e., for the last three bullets above).
An employer cannot require an employee to use other paid leave before using this paid leave. Employers would not be able to require employees to find replacement workers to cover their shifts if employees use emergency paid sick leave. The federal government is supposed to provide a model notice within seven days after enactment, which employers would be required to post at their workplace, informing employees of their right to emergency paid sick leave. The U.S. Department of Labor is directed, within 15 days after enactment, to issue guidelines on how to calculate the amount of emergency paid sick leave. The Department of Labor also has the authority to issue regulations to exempt small businesses with fewer than 50 employees from having to provide emergency paid sick leave to employees who need to care for a son or daughter whose school or place of care is closed, or child care provider is unavailable, due to COVID-19 precautions if the imposition of such requirements would jeopardize the viability of the business as a going concern.
Employers would face penalties for failing to comply with the new emergency paid sick leave rules and are prohibited from discriminating against employees who take emergency paid sick leave. Eligible employees could use emergency paid sick leave before using new, emergency paid family and medical leave created by the Act.
FMLA Amendments The Act would add provisions to the FMLA to provide employees (including union employees) who have been employed for at least 30 days by employers with fewer than 500 employees or government employers, with the right take up to 12 weeks of job-protected leave through December 31, 2020, if the employee is unable to work or telework due to having to care for a child under age 18 if the child’s school or place of child care has been closed (or the child care provider is unavailable), due to the COVID-19 public health emergency. Employers may elect to exclude health care workers and first responders from taking this public health emergency FMLA.
The first 10 days of FMLA under these new provisions may be unpaid. Employees can use other paid time off such as vacation, sick days, sabbatical, or emergency paid sick leave to cover that gap, but employers cannot require employees to use their accrued paid time off before using these 12 weeks of extended FMLA leave. Employers would pay employees two-thirds of their regular rate of pay for this emergency FMLA leave, capped at $200 per day ($10,000 in the aggregate per employee). Adjustments would be made to the amount of paid time off for employees with varying schedules.
The Act gives the U.S. Department of Labor authority to issue regulations that would exclude certain health care providers and emergency responders from being able to take emergency family and medical leave. The Department of Labor also has the authority to issue regulations to exempt small businesses with fewer than 50 employees from the emergency family and medical leave requirements if the imposition of such requirements would jeopardize the viability of the business as a going concern. The Act would also exempt employers with fewer than 50 employees in a 75-mile radius from civil damages in an FMLA lawsuit.
Under the Act, covered employers (those with less than 500 employees) are required to hold an employee’s job open for them until the end of the leave period. However, an exception applies to employers with fewer than 25 employees if the employee’s position no longer exists due to economic conditions or other changes in the employer’s operations that affect employment and are caused by the COVID-19 crisis, and the employer made reasonable efforts to restore the employee’s job. And, if those efforts failed, the employer agrees to reinstate the employee if an equivalent position becomes available within a year.
The Act creates new, refundable payroll tax credits for employers to help cover the costs of this new paid sick and family leave.
Payroll Tax Credits
To assist employers who are required to provide emergency paid sick leave or FMLA leave under the programs described above, the Act provides for a refundable tax credit applicable against the employer’s portion of Social Security or Railroad Retirement Tax Act (RRTA) tax for amounts paid under those programs. The credit is equal to 100% of the compensation paid in each calendar quarter to employees who are not working for the reasons enumerated above, subject to the following limitations:
For payments to an employee who needs time off for self-isolation, diagnosis, or care of a COVID-19 diagnosis, or compliance with a health care provider’s recommendation or order, the credit is capped at $511 of eligible wages per employee per day. For payments to an employee who needs time off to care for a family member who has been exposed to or diagnosed with the COVID-19, or a child under age 18 whose school or place of care has been closed, the credit is capped at $200 of eligible wages per employee per day. The credit for emergency paid sick leave wages is only available for a maximum of 10 days per employee over the duration of the program. For expanded FMLA, the credit is capped at $200 of eligible wages per employee per day and $10,000 for all calendar quarters.
Both of the credits are increased by any amounts paid or incurred by the employer to maintain a group health plan, to the extent those expenses are (1) excluded from the employee’s gross income under the tax code and (2) “properly allocable” to the respective qualified sick or FMLA wages required to be paid under the Act. The exact method of allocation will be provided by regulation at a later date, but the Act provides that the allocation will be treated as properly made if done “on the basis of being pro rata among covered employees and pro rata on the basis of periods of coverage.”
If the credit exceeds the employer’s total liability for Social Security or RRTA tax for all employees for any calendar quarter, the excess is refundable to the employer. The employer may choose not to apply the credit. Further, to prevent a double benefit, the employer cannot obtain a deduction for the amount of the credit. In addition, employers may not receive the credit in connection with wages for which a credit is allowed under Section 45S (credit for paid family and medical leave).
Similar rules apply to a self-employed individual that allow a refundable tax credit against the individual’s self-employment tax. The credit is capped at the lesser of the amounts that apply to eligible wages per employee or the individual’s lost self-employment income. The House-passed version of the Act provides guidance on how to determine the individual’s lost income due to the corona virus.
Notably, required payments for emergency paid sick leave or FMLA under the Act will not be considered wages for purposes of calculating the employer’s portion of the Social Security or RRTA tax. In addition, the tax credits available to an employer are increased by the amount of the employer’s liability for Medicare tax on wages paid under the Act, effectively exempting the emergency sick leave and FMLA payments from that tax as well. In this way, the Act provides employers with two tax benefits: (1) refundable credits against the employer's portion of Social Security or RRTA tax; and (2) an exemption from, or credit against, the employer's portion of Social Security or RRTA and Medicare taxes on the wages required to be paid under the Act.
However, the law does not exempt these payments from the definition of wages for the purpose of other taxes (including the employee’s portion of Social Security, RRTA and Medicare taxes).
The Act ensures there is no negative impact to the Social Security program caused by the tax credit or the exemption of sick pay and family leave pay from Social Security tax by authorizing a transfer of funds from the General Fund to the Social Security and disability insurance trust funds to replace the lost employer contributions. The tax provisions discussed herein will apply beginning on a date to be determined by the Secretary of the Treasury after the enactment of the Act and ending on December 31, 2020.
