15 Jun Update on COVID-19 Related Programs
The COVID-19 pandemic has brought with it several opportunities for businesses to access an unprecedented amount of government stimulus in the form of loans, grants, and tax credits. Most business owners are familiar with the Paycheck Protection Program (PPP) and the Economic Injury Disaster Loan (EIDL), however, there are several other ways to benefit from the recent stimulus packages passed by Congress and signed by the President. Below is a summary of some of those opportunities, including an update on the new PPP rules enacted on June 5, 2020.
The Families First Coronavirus Response Act (FFCRA) requires certain employers to provide their employees with paid sick leave or expanded family and medical leave for specified reasons related to COVID-19. These provisions apply to employers with less than 500 employees. The FFCRA contains several provisions, however, we will concentrate on the paid sick leave for someone caring for a child (under the age of 18) whose school or child care provider is unavailable due to COVID-19. This provision seems to be most in use as all schools are closed. The FFCRA says a full-time employee is eligible for up to 12 weeks of leave at 40 hours a week, and a part-time employee is eligible for leave for the number of hours that the employee is normally scheduled to work over that period. Employees taking this leave shall be paid 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 12 weeks. The good news for employers is they can qualify for dollar-for-dollar reimbursement through tax credits for all qualifying wages paid under the FFCRA. Qualifying wages are those paid to an employee who takes leave under the Act for a qualifying reason, up to the appropriate per diem and aggregate payment caps. The credit is claimed against their quarterly tax deposits on IRS Form 941. If the tax deposits are not sufficient to cover the credit, then the employer can file IRS Form 7200 to receive an advance against future payments.
The PPP offered a forgivable loan to small businesses who use that loan for specific purposes. Those purposes are (1) payroll costs, (2) any payment of interest on any covered mortgage obligation, (3) any payment on any covered rent obligation, and (4) any covered utility payment. The Coronavirus Aid, Relief, and Economic Security Act (CARES Act) Section 1106 states that any amount of loan forgiveness shall be excluded from gross income. Generally, the discharge of indebtedness is taxable under section 61(a)(11) of the Internal Revenue Code (IRC). However, there is a catch. The Internal Revenue Service (IRS) issued guidance in Notice 2020-32 saying expenses paid by the forgivable loan are nondeductible for tax purposes. For example, if you received $35,000 in a PPP loan and used it for the expenses listed above thus getting 100% forgiveness, you may not use any of those expenses as a deduction when calculating your net income for tax purposes. As of the date of this writing, the IRS is being challenged by several groups on this position saying it was not the true intent of Congress.
The Employee Retention Credit is a refundable tax credit against certain employment taxes equal to 50 percent of the qualified wages an eligible employer pays to employees after March 12, 2020, and before January 1, 2021. For each employee, wages (including certain health plan costs) up to $10,000 can be counted to determine the amount of the 50% credit. Employers can get immediate credit for these wages by reducing the amount of federal employment taxes they deposit. If they don’t have enough in payroll tax deposits, they can file Form 7200 for an advance on the credit. In order to qualify for the credit, the establishment must have had the full or partial suspension of operations due to government order because of COVID-19, or experience a significant decline in revenues. The definition of a significant decline is in short a decrease in revenues of 50% in the quarter versus the same quarter in 2019. There are restrictions on employers who claim other credits. The two most frequently encountered are the following: (a) if you received a Paycheck Protection Program (PPP) loan, you are ineligible for this credit, and (b) if you received a credit for wages paid under the paid sick and family leave under the Families First Coronavirus Response Act (FFCRA), you may not use the same wages for this credit.
The CARES Act allows employers to defer the deposit and payment of the employer’s share of Social Security taxes (not Medicare). The deferral applies to deposits and payments of the employer’s share of Social Security tax that would otherwise be required to be made during the period beginning on March 27, 2020, and ending December 31, 2020. If the employer received a PPP loan, they may still use this provision with one change. After the bank informs the employer the PPP loan was forgiven, no Social Security tax deposits may be deferred from that date forward. Previously deferred amounts will continue to be deferred. The due dates for the deferred amounts are 50% on December 31, 2021, and the balance on December 31, 2022. California also provides for a deferral of payroll taxes. The Employment Development Department (EDD) has said that an employer may request up to a 60-day extension of time to file their state payroll reports and/or deposit payroll taxes without penalty or interest. The extension to file and pay may be granted under Section 1111.5 of the California Unemployment Insurance Code (CUIC). A written request for an extension must be received within 60 days from the original delinquent date of the payment or return. UPDATE: On June 5, 2020, the president has signed into law an amendment to the original PPP Act (details below) which allows companies to defer the Social Security tax whether or not they received the PPP.
On June 5, 2020, President Trump signed HR 7010, the Paycheck Protection Program Flexibility Act of 2020 (PPPFA). The PPPFA made several changes to the PPP program which are outlined below:
- The covered period (the dates which your payroll will be evaluated for forgiveness) starts on the date your loan was originated and ends 24 weeks after and no later than December 31, 2020. The original period was 8 weeks. Borrowers who obtained their loan prior to June 5 may still use the 8 week period.
- The PPP originally required borrowers to restore reductions in full-time equivalent (FTE) employees and wages to avoid reduction in forgiveness by June 30, 2020. That has now changed to December 31, 2020.
- The requirement to rehire FTE employees in order to achieve full forgiveness had an exception in the previous version of the PPP. If you could document that you tried to rehire the employee and the employee refused, you were exempt from the provision. However, the PPPFA changed this provision to add that you must also have had the inability to hire similarly qualified employees. The PPPFA did add an additional provision separate from the previous one in this paragraph which would exempt an employer from this requirement. If the employer is able to document their inability to return to previous business levels as at February 15, 2020 due to safety regulations related to COVID-19 from various government agencies, they are exempt from this provision.
- The required use of the funds to be eligible for forgiveness was a minimum of 75% spent on payroll with 25% spent on other qualifying costs. The PPPFA has changed that to be 60% payroll and 40% other qualifying costs.
- All principal, interest, and fees on the PPP loan may be deferred until the date on which the forgiveness amount is sent to the lender. If the borrower fails to apply for forgiveness within 10 months after the last day of the covered period, the borrower must make payments of principal, interest, and fee beginning 10 months after expiration of the covered period.
- The maturity of the loan has been changed from 2 years to 5 years. If you receive the loan after June 5, you automatically qualify for the 5 years. If you received the loan before June 5th, you need your lender’s permission to extend the loan.
- Owner employees were originally capped at an annualized salary of $100K which worked out to be $15,385 based on an 8-week covered period. As the covered period has increased to 24 weeks, the capped salary amount has also increased to $46,155.
The IRS extended all payments and filing dates to July 15, 2020, including estimated payments. Taxpayers should be careful though, any amount owed on July 15 for 2019 tax year, will need to be paid along with first and second-quarter estimates for 2020. This could cause a major cashflow issue at a time when business has been considerably reduced. There are ways the taxpayer can reduce the burden. The income tax owed for 2019 can be put on a payment plan with the IRS for several years. The taxpayer will need to apply and get approval from the IRS and pay interest and penalties, but it will reduce the immediate need for cash. The estimated payments are generally produced by tax software that uses the taxpayer’s prior year income and provides quarterly estimated payment coupons. Whereas this is a safe harbor provision with the IRS (if you make these payments properly there will be no penalty for failing to make estimated payments), there is another way to calculate it. If you pay 90% of your 2020 income tax, you have paid it correctly. Most taxpayers will make less in 2020 than in 2019 due to the pandemic and can reduce their estimated payments to their current annualized income.
Shahen Derderian is a Certified Public Accountant in Los Angeles and has been in private practice for over 15 years. He provides financial and tax advice to high net worth families and their businesses.