During 2008/2009, the Great Recession, we learned some things. When the economy is hurt, there are some things we can do to be better prepared, and there are some actions we can take to benefit from the financial stress. During those times, the banks took steps to reduce or close lines of credit and end banking relationships. If you feel this might be an issue for you, and you would like to have more cash, then consider drawing down on your line of credit to hold the cash. This will generally give you the opportunity to get more cash in your bank before the bank would reduce your line of credit. Now, I have not heard from anyone that they banks are doing this yet, but we are going through some financially challenging times. Each individual should consider if this strategy is a good strategy for them and weigh the costs of the interest expenses. Perhaps after a couple of months you can repay the line of credit.
Keep your accounting up to date, as the banks might want to check your financial statements to continue your leading relationship.
Consider if you can benefit from any of the tax law updates, which we have written about. Did you have a net operating loss in 2018, and if so, contact us to discuss how you can get a refund. Were you limited in the amount of interest expense you could deduct in 2018? If so, contact us.
One item in the CARES Act that we did not write about, which was brought up by a client of ours, is that for 2020, the charitable deduction limitation is removed. The law previously stated that a taxpayer cannot take a charitable deduction in 2020 if the deduction exceeded 60% of their adjusted gross income (AGI), but with the CARES Act, that limitation has been removed. However, the requirements in general are that the donation must be in cash and typically must go to a 501(c)(3) charity. If you are interested in more information about this, please contact us so we can discuss the whole law and see if this could benefit you.
Some other items to consider:
Due to the stock marketing value dropping, this might be an opportunity to do some estate and gift tax planning with reduced values of securities. Contact us to discuss if you are interested.
If your business revenues have dropped, then most likely the value of your business has probably been reduced. This can provide an option to provide key employees with some equity participation at a reduced value if that will benefit the company. Again, each business is unique, so contact us to discuss.
We are hoping that the economy will be opening back up soon throughout the entire country. We are here to help, so contact us if you need our assistance.
This letter is to alert you to a beneficial change in the tax rules for many improvements to interior parts of nonresidential buildings (”qualified improvement property” or ”QIP”). You may recall that following the 2017 Tax Cuts and Jobs Act (”TCJA”), any QIP placed in service after Dec. 31, 2017 was not considered to be eligible for 100% bonus depreciation. Therefore, the cost of QIP had to be deducted over a 39-year period instead of entirely in the year the QIP was placed in service. That result was due to an inadvertent drafting error by Congress.
The 2020 Coronavirus Aid, Relief, and Economic Security Act (”CARES Act”) was signed into law on March 27, 2020. The CARES Act corrects the TCJA drafting error for QIP. Thus, most businesses are now allowed to claim 100% bonus depreciation for QIP, if certain other requirements are met. What also is helpful is that the correction is retroactive, and it reaches back to apply to any QIP placed in service after Dec. 31, 2017. Unfortunately, improvements related to the enlargement of a building, any elevator or escalator, or the internal structural framework continue to be outside of the definition of QIP.
In the current business climate, you may not be in a position to undertake new capital expenditures, even if needed as a practical matter and even if the substitution of 100% bonus depreciation for a 39-year depreciation period significantly lowers the true cost of QIP. But it’s good to know that when you are ready to undertake qualifying improvements, the generous subsidy of 100% bonus depreciation will be available.
And, the retroactive effect of the CARES Act presents favorable opportunities for qualifying expenditures you’ve already made. We can revisit and add to documentation that you’ve already provided me to identify QIP expenditures.
For not-yet-filed returns, we can simply reflect the favorable treatment for QIP on the return.
If you’ve filed returns that didn’t claim 100% bonus depreciation for what may prove to be QIP, we can investigate based on available documentation as discussed above. If there is QIP that was in fact eligible for 100% bonus depreciation, note that IRS has, for past retroactive favorable depreciation changes, provided taxpayers with detailed guidance for how the benefit is claimed. That is, IRS clarified how much flexibility taxpayers have in choosing between a one-time downward adjustment to income on their current returns or an amendment to the return for the year the QIP was placed in service.
If you had QIP in 2018, and you wish to amend the tax return to take the accelerated depreciation, we are waiting for guidance from the IRS to determine the method for the amendment. Typically bonus deprecation was required unless a taxpayer elected out. On the tax returns we prepared, we typically would have depreciated the QIP based on the law, which didn’t allow bonus deprecation and thus we typically wouldn’t have elected out of bonus depreciation. In addition, if you desire to amend, we will need to determine, how many returns will need to be amended.
If you would like us to amend your tax return, please let us know and we will schedule the return for amendment when we receive guidance from the IRS. We will monitor what your options are as anticipated IRS guidance for the QIP correction is released.
If you have any questions about the news shared above, or about how you can take advantage of it, please do not hesitate to contact us.
The novel coronavirus (COVID-19) crisis has touched so many lives, with both illnesses and hardships. In response to this crisis, our office is working remotely on all accounting and tax projects. The best method to contact us is to email us at [email protected]. We are focused on staying up to date on the tax, accounting and finance updates to assist everyone with these challenges. The final Coronavirus bill that was signed by President Trump on March 27, 2020 is H.R. 748 called the CARES Act. This passed bill was different than the Senate bill I wrote about on March 25, 2020. Some provisions are the same or similar.
Based on new information reviewed and the discussions with our clients, I’m providing an update.
Section 1102 Paycheck Protection Program Loans (PPL):
This is a section 7(a) SBA loan
VA Comment: Supposed to be a streamline process. When I speak with bankers, they advise that they are still waiting for guidance from SBA. See attached the U.S. Chamber of Commerce Coronavirus Emergency Loan Checklist.
Apparently, small business can apply starting April 3, 2020. However, banks need to be prepared. Most banks have sent out emails to their customer to begin compiling information regarding payroll, and health care costs.
Starting April 10, 2020, independent contractors and self-employed individuals can apply.
We are assuming the banks will want to look at and / or have the net self-employed income from your 2019 tax return or financial statements, and they may ask for 1099’s.
VA Update: Based on additional information received from tax discussions, it seems as if a taxpayer can apply for BOTH a PPL and an EIDL, however, if they apply for both, the EIDL can’t be used for payroll, and the PPL is supposed to be used for payroll.
Some businesses may need more money than just the PPL, so the EIDL will be required. Loans under $250,000 seems to require less information and no personal guarantee.
Government guarantees 100% of the loan through December 31, 2020
Guarantee drops to 75% for loans exceeding $150,000 and
85% for loans equal to or less than $150,000.
VA Comments: The Federal loan guarantee reduces at 12/31/2020, as I would expect that large portions of loans will be forgiven for payroll before 12/31/2020.
Eligible businesses are small business (500 or less of employees), nonprofit, veteran’s organization or tribal businesses.
Includes sole-proprietors, independent contractors, and self-employed individuals.
VA Comment: Seems like most every business has been negatively affected from COVID-19 and if a business has payroll, they will apply for the PPL.
How to Calculate the Loan Amount / Maximum Loan Amount:
In summary, average monthly payroll from 2019 multiplied by 2.5.
Sum of average total monthly payment by the applicant for payroll costs incurred during the 1-year period before the date on which the loan is made.
VA Comment: The current PPL application, just asks for “payroll costs” and the form doesn’t provide a definition of “payroll costs”, so we are suggesting looking at the summary of the bill that defines “payroll costs”. However, we have seen the banks asking for supporting information about “payroll costs”. These items are:
2019 Payroll, including the last 12 months
2019 Employees – 1099’s for 2019 employees and independent contractors that would otherwise be an employee of your business (Note: Do NOT include 1099s for services)
Health care costs. All insurance premiums paid by the business owner under a group health plan.
Retirement – your company retirement plan funding paid by the company.
Some banks, like Bank of America, have stated that they are currently only going to provide PPL’s for customers that have deposit and lending relationships.
Payroll Costs as defined in the bill.
Payroll Costs Included:
Salary, wage, commission, or similar compensation (not to exceed $100,000. So, if an employee earns $150,000 a year, the company can only use $100,000 a year for the calculation.)
Payment of cash tip or equivalent
Payment for vacation, parental family, medical or sick leave
Allowance for dismissal or separation
Payment required for the provision of group health care benefits including insurance premiums.
Payment of any retirement benefits; or
Payment of State or local tax assessed on the compensation of employees and
Payroll can’t exceed more than $100,000 a year.
Self-employed , Sole Proprietor.
The sum of payments of any compensation to or income of a sole proprietor or independent contractor that is wage, commission, income, net earnings from self-employment that isn’t more then $100,000.
VA Comments: If you’re self-employed and you pay yourself with draws, then the banks will probably want to see 2019 1099-MISC and various expenses from your business. If you have employees, then you would calculate as discussed above.
Excluded Payroll Costs:
An annual salary over $100,000 / year.
Payroll taxes
If a seasonal employer, there is an alternative calculation for an average 12-week period from February 15, 2019 and ending June 30, 2019.
Multiplied by 2.5. NOT to Exceed $10MM
VA Example: If average monthly payroll was $100,000, then multiple by 2.5 = $250,000.
If the business was not in business from February 15, 2019 to June 30, 2019, there is another calculation.
VA Comment: This loan calculation isn’t as rich as the senate proposed bill which was multiplied by 4. Also, the loan doesn’t seem to include payroll taxes for the employee or employer, so the loan seems to be just the net payroll. Not sure this will be a large enough loan for some small business.
Waives affiliation rules for businesses in hospitality and restaurant industries franchise.
VA Comment: This means that restaurant chains that have over 500 employees can treat each location has an individual borrow and they don’t need to consolidate.
Defines covered loan period as beginning on February 15, 2020 and ending on June 30, 2020.
Established the maximum 7(a) loan amount to $10MM through December 31, 2020 and provides a formula by which the loan amount is tied to payroll costs incurred by the business to determine the size of the loan.
Allowable use of the loan includes payroll support, such as employee salaries, paid sick or medical leave, insurance premiums, and mortgage, rent, and utility payments.
Provides delegated authority which is the ability for lenders to make determination on borrowers eligibility and creditworthiness without going through all SBA’s channels to all current 7(a) lenders who make these loans to small business and provides the same authority to lenders who join the program and make these loans.
Requires eligible borrowers to make a good faith certification that the loan is necessary due to the uncertainty of current economic conditions caused by COVID -19; they will use the funds to retain workers and maintain payroll. Lease and utility payments; and are not receiving duplicate funds for the same uses from another SBA program.
Waives both borrower and lender fees for participation in the Paycheck Protection Program (PPP).
Waives the credit elsewhere test for funds provided under this program.
Waives collateral and personal guarantee requirements under this program.
Any portion of the loan Not used for forgiveness purposes, the remaining loan balance will have a maturity of not more than 10 years, and the guarantee for that portion of the loan will remain intact.
Maximum interest rate will be 4%.
No prepayment fees.
Allows complete deferment of 7(a) loan payments for at least six months and no more than a year.
Increases SBA Express loan from $350,000 to $1MM through December 31, 2020.
If head count reduces 25% or more, it will hurt the loan forgiveness, or make the loan not forgiven at all.
Section 1106 Loan Forgiveness:
Borrower shall be eligible for loan forgiveness equal to the amount spent by borrower during an 8 week period after the origination date of the loan on payroll costs, interest payment on any mortgage incurred prior to February 15, 2020, payment of rent on any lease in force prior to February 15, 2020, and payment on any utility for which service began before February 15, 2020.
The loan forgiveness seems to be only for PPL / PPP loans.
Amount forgiven may not exceed the principal amount of the loan.
Eligible payroll costs do not include compensation above $100,000 in wages.
The amount forgiven will be reduced proportionally by any reduction in employees retained compared to the prior year and reduced by the reduction in pay of any employee beyond 25% of their prior year compensation.
Loan forgiveness / cancellation will not be included in borrower’s taxable income.
VA Update: We are reading that Treasury is now stating that 75% or more of the loan forgiveness needs to be for payroll. Thus, no more than 25% of the loan forgiveness can be for non-payroll.
Provides an advance of $10,000 to small business and non-profits that apply for SBA EIDL loans within three days of applying for the loan.
Expands eligibility for access to EIDL’s to include tribal business, cooperatives and ESOP’s with fewer than 500 employees or any individual operating as a sole proprietor or independent contractor during the covered period (January 31, 2020 to December 31, 2020. Private non-profits are also eligible for both grants and EIDL’s.
EIDL’s are loans up to $2MM that carry interest rates up to 3.75% for companies and up to 2.75% for nonprofits as well as principal and interest deferment up to 4 years.
The loans may be used for expenses that could have been met had the disaster not occurred, including payroll and other operating expenses.
The EIDL grant does not need to be repaid, even if the grantee is subsequently denied an EIDL.
It may be used to provide paid sick leave to employees, maintain payroll, meet increased production costs due to supply chain disruption or pay business obligations, including debts, rent and mortgage payments.
VA Update: If a business needs more money than they can get from the PPL, then they can apply for an EIDL for items other than payroll which the PPL would be used for.
Eligible grant recipients must have been in operation on January 31, 2020.
The business that received an EIDL between January 31, 2020 and June 30, 2020 as a result of COVID-19 disaster declaration, is eligible to apply for a PPP loan, or the business may refinance their EIDL into a PPP loan.
Typically, the $10,000 grant would be subtracted from the amount forgiven in the payroll protection plan.
Waived personal guarantee on advances and loans not exceeding $200,000.
The approval should be based on solely on the credit score of the applicant and no requirement for tax returns or tax return transcripts.
VA Update: For loans over $250,000, there seems to be more underwriting requirements. May require financial statements, and tax returns. However, we haven’t heard or seen if these rules are being applied.
Most of the financial assistance offered through the first bill called, HR 6201, FAMILIES FIRST CORONRAVIRUS RESPONSE ACT (discussed on our previous memo), and the CARES Act S. 3548 which concluded as HR 748 was included in my discussion below.
The tax and financial laws are changing daily, therefore I marked this memo with “V4” (version 4) on my memo above. There are various other social service updates, but our memos will focus mainly on finance, business and tax updates.
Highlights of the PROPOSED SENATE BILL S 3548, CORONAVIRUS AID, RELIEF AND ECONOMIC SECURITY ACT OR THE CARES ACT. March 19, 2020. This bill has NOT been passed in the Senate at this time, so it can change, and then the bill would need to go to the House and to the President. You can view the at https://www.congress.gov, search for HR 748.
Businesses & Other Employers:
Retention payroll tax credit for eligible employers that continue to pay employee wages while their operations are fully or partially suspended as a result of certain COVID-19 related government orders. A 50% refundable payroll tax credit on wages paid up to $10,000 during the crisis. The credit is available for employees retained by not currently working due to the crises for firms with more than 100 employees and for all employee wages for firms with 100 or fewer employees.
Delayed Employer-side Social Security payroll tax payments may be delayed until January 1, 2021 with 50% owned on December 31, 2021 and the other half due on December 31, 2022. Deferral of employer portion of payments for certain payroll taxes.
Net Operating Losses: Modification of net operating loss (NOL) and limitation rules. Will allow most NOL’s incurred in 2018, 2019, and 2020 to carry them back for refunds to 5 years. This carry back law was exempt for tax years beginning 2018 under the TCJA, but the CARE Act reverses it. Due to this financial crisis they are allowing NOL carry backs for these periods to be carried back. The Act also removed the 80% utilization of NOL’s for a carry forward, meaning an NOL could only reduce taxable income by 80%.
Business Interest Deduction: Modification of the deduction limitation on business interest rules of IRC section 163(j). The law temporarily changes the business interest deduction limit from 30% to 50% for tax years 2019 and 2020.
Qualified improvement property technical correction, allowing qualifying interior improvements of buildings to be immediately expensed (bonus depreciation or Section 179) rather than depreciated over 15 years for 2018 and future.
Payroll tax credit for eligible employers up to 50% refundable payroll tax credit on wages paid up to $10,000 during the crisis. The credit would be available to employers whose business were disrupted and retained employees, but they were not able to work. Employers with more than 100 employees and under 100 employees have slightly different calculations.
Business Loss Limitation Revision: For years after 12/31/2017, the business loss limitation is suspended. Previously, business losses couldn’t be used to offset non-business income (like wages, investment income) over $250,000 for individuals or $500,000 for married filing jointly.
VA Comments: For individuals that have business losses, and perhaps real estate losses from being a real estate professional, this law change may make it desirable to amend the 2018 tax return.
Individuals:
Recovery rebates of up to $1,200 for single and $2,400 for married couples filing jointly, plus $500 per qualifying child. Phaseouts of the rebates are based on adjusted gross income (AGI) starting at $75k for single, and $150k for married couples.
The rebates phase out at $99,999 for single and $199,000.
Expansion of unemployment benefits, including self-employed, and gig-economy workers. Unemployment insurance to include an additional $600 / week for an additional 13 weeks.
Waiver of the 10% penalty for COVID-19 related early distributions from IRAs, 401K and other retirement plans. However, taxability of the distribution will need to be considered.
Exclusion of certain employer payments of student loans up to $5,250 will not be treated as taxable income to the employee.
Temporary Relief Federal Student Loan: Deferral of student loan payments on principal and interest for 6 months through September 30, 2020.
Other Items:
Forbearance of Residential Mortgage Loan Payments (section 4023): Provides up to 90 days of forbearance for multifamily borrowers with a federally backed multifamily mortgage loan who have experienced a financial hardship. Borrowers receiving forbearance may not evict or charge late fees to tenants for the duration of the forbearance period.
Applicable mortgages include loans to real property designed for 5 or more families that are purchased, insured, or assisted by Fannie Mae, Freddie Mac, or HUD.
Additional Information regarding HR 748 CARES ACT ,
Relief for Individuals, Families, and Businesses. Rebates and Other individual Provisions.
Eligible individuals shall be allowed as credit against the tax for the first taxable year beginning in 2020 an amount equal to the lesser of:
Net income tax liability, or
$1,200 ($2,400 in the case of joint returns)
The credit should not be less than $600
$500 per qualifying children
Eligible individuals are based on adjusted gross income (AGI) of
$75,000 and $150,000 in the case of a joint return. Once a taxpayer AGI is either $75k or $150k the credit begins to be reduced and phased out. The phase out is $99k and $198k.
Delay in filing deadlines. In the case for returns for tax year 2019, due dates for April 15, 2020, are delayed to July 15, 2020. This isn’t in the HR 748 bill, but it is noted in IRS Notice 2020-18. An extension is not required. There is an automatic extension till July 15, 2020. However, if the tax return can’t be filed by July 15, 2020, an extension will need to be filed.
This means that IRA, HAS and MSA contributions are extended to July 15, 2020 also.
Individual ES Payments: Different from the Senate bill, 1st quarter estimated tax payments are delayed and due on July 15, 2020. 2nd quarter estimated tax payments are still due on June 15, 2020. This is stated on IRS Notice 2020-18 and Notice 2020-20.
Retirement Accounts: Early withdrawal penalties under IRC section 72(t) which is typically 10% for Federal and then some states add a lower penalty are waived if the early distributions are $100,000 or under.
Amounts distributed may be paid back. There is also a provision that allows taxpayers that took early distributions to make one or more contributions over a three-year period to contribute up to the amount of distributions they took.
Income inclusion of premature distribution. A taxpayer can spread the taxability of the premature distribution over 3 years.
Loans from retirement plans: The bill allows for an increase in loans and not to be treated as distributions. The loan amount is increased from $50,000 to $100,000.
Loan repayments will be delayed by 1 year.
Charitable Contributions: The allowance to deduct more charitable donations have been increased for both individuals and Corporations.
VA Comments: Seems as if the individual 30% / 50% AGI limitation is temporary suspended. The 10% limitation for C Corporations seem to be increased to 25%.
Student Loan Temporary Relief: The bill states the Secretary shall suspend all payments due for loans under part D of title IV for Higher Education Act of 1965 for 3 months.
Business Provisions:
C Corporation estimated tax payments. Delay of estimated tax payments for Corporations. Like individuals, the required estimated tax payments for C Corporation is delayed till July 15, 2020.
Delay in Payment of Employer Payroll Taxes. The bill states that employers can delay payment of the employer portion of payroll taxes till December 31, 2021 for 50% of the deferral and the balance due on December 31, 2022. This also applies to the estimated payroll deposits.
VA Comment: If a small business is going to request and receive a loan for payroll and overhead, this deferral might not be necessary. If a defer is desired, a liability should be posted on the companies’ financial statements.
Net Operating Loss (NOL) Carrybacks: The NOL carry back was removed for tax years after 12/31/2017. This bill will allow NOL’s generated from year 2018, 2019, and 2020 to carry back and request a refund for up to a 5 year carry back period. The 80% limitation is removed also.
VA Comment: If you incurred a loss in 2018 or 2019, or expect a loss in 2020, please get us the information and quickly as possible so we can begin preparation of a NOL carryback. If your tax return had qualified improvement property and the return couldn’t take the deduction, this new bill corrects that prior error and that deduction might generate a taxable loss for a NOL carryback.
A taxpayer may elect out of the 5-year NOL carry back. If elected, it can’t be changed. It is irrevocable.
VA Comment: For tax returns with NOL’s for 2018 or 2019 that have been filed, the return needs to be amended within 120 days from the enactment of this bill regarding the NOL carryback provision.
Loss limitation for taxpayers other than Corporations: IRC section 461(l)(2) was added by the Tax Cuts and Jobs Act of 2017 and was effective for tax years 2018 to 2025 which disallowed any excess business loss for a non-corporate taxpayer. Generally, the law prohibited business losses to only be deducted against no more than $250,000 / $500,000 of non-business income. Any non-deductible business loss was carried forward. The bill removes those limits from being implemented till December 31, 2020 (previously applied on December 31, 2017).
VA Comment: We know this loss limitation occurred with some of our clients, and we will have to review affected taxpayers to ask them if they want us to amend their tax returns. The IRS will need to provide guidance on the amendment process.
Interest Deduction Limitation: The Tax Cuts and Jobs Act of 2017 enacted an interest deduction limitation. For taxpayers where it was applicable, taxpayers with gross sales over $25MM, the interest deduction was limited to 30% of the adjusted taxable income. The bill now increases the limitation amount for 30% to 50% for tax years 2019 and 2020.
VA Comment: This means a taxpayer that this limitation would apply to will be allowed more of an interest deduction.
Technical correction for qualified Improvement Property: This bill corrected a prior law error.
The Tax Cuts & Job Act (TCJA) removed investment barriers by allowing businesses to immediately deduct the cost of certain investments under a provision called 100% bonus depreciation.
Due to legislative oversight, the law accidentally excluded improvements property to be eligible from 100% bonus depreciation.
This bill corrects this error and thus the improvements would be eligible for bonus depreciation and should make this asset a 15-year recovery period.
Foreign controlled corporation/shareholder:
The bill is changing the US owned foreign corporation from 10% to 50%.
Limitation of Paid Leave: Section 110(b)(2)(B) of the Family and Medical Leave Act of 1993 is providing limitation. An employer shall not be required to pay more than $200 per day and a $10,000 in aggregate for each employee for paid leave under this section.
Other Considerations:
Lost Income/ Business Interruption insurance coverage: Our firm and clients have reviewed our insurance policies, and considered filing a claim for lost income or additional expense base on “Civil Authority”, in which the argument is that since the state government demanded the residents to stay at home, there has been some business interruption. In conversations with insurance brokers that the coverage is excluded for a “virus”. However, the argument is that the company didn’t close their business for a virus, as they probably didn’t close during influenza season, they closed because of the state government made a demand. As one can guess, lawsuits are already starting, so we are receiving information that if a business has lost of income or business interruption coverage, review your policy and consider filing a claim.
Please read our earlier memos dated March 17, 2020, March 25, 2020, and March 30, 2020, which were Versions 1 through 3. If you can’t find it, please contact us at [email protected] to request a copy or you can read it on our website at www.verticaladvisors.com under blogs.
Keep sending us your tax information, as we still need to prepare all the returns before the 9/15/2020 and 10/15/2020 due dates.
April 15, 2020 due dates have been delayed to July 15, 2020. If you need more time after that, and extension will need to be filed.
2019 taxes are due July 15, 2020, and 1st quarter estimated tax payments are due July 15, 2020. 2nd quarter ES payments are still due June 15, 2020.
Consider amending 2018 and/or 2019 tax returns for the following:
NOL’s: Now NOL’s from 2018 – 2020 can be carried back up to 5 years.
VA Comment: The election to file a NOL for a 2018 and / or a tax return already filed much be by the extended due date of the 2019 tax return. So, if a 2018 tax return needs to be filed to benefit from the 2018 NOL, that return needs to be prepared and filed before the 2019 tax return if filed.
Interest deduction limitations
Business loss limitations
Lastly, and as always, please contact us if you need assistance or have any questions. Contact us at [email protected]
Every company has faced unprecedented challenges in adjusting to life following the widespread outbreak of the coronavirus (COVID-19). Small businesses face particular difficulties in that, by definition, their resources — human, capital and otherwise — are limited. If this describes your company, one place you can look to for some assistance is the Small Business Administration (SBA).
New loan, relaxed criteria
The agency has announced that it’s offering Economic Injury Disaster Loans under the Coronavirus Preparedness and Response Supplemental Appropriations Act, which was recently signed into law.
Here’s how it works: The governor of a state or territory must first submit a request for Economic Injury Disaster Loan assistance to the SBA. The agency’s Office of Disaster Assistance then works with the governor to approve the request. Upon completion of this process, affected small businesses within the state gain access to information on how to apply for loan assistance.
To speed the process, the SBA has relaxed its usual disaster-loan criteria. A state or territory now needs to certify that at least five small businesses have suffered substantial economic injury anywhere in the state. Previously, at least one of the companies had to be in each of the disaster-declared counties or parishes.
Along similar lines, once the submission process is completed, Economic Injury Disaster Loans will be available across the state. Under previous criteria, only businesses in counties identified as disaster areas could obtain financial assistance. Given the expected widespread and economically drastic effect of the coronavirus, most states will have likely garnered approval by the time you read this.
Amount, interest and terms
Economic Injury Disaster Loans offer up to $2 million in financial assistance to help small businesses mitigate their revenue losses. You could use the money to pay overhead costs such as utilities and rent, keep up with accounts payable and cover payroll.
For qualifying small businesses, the interest rate is 3.75%. Some nonprofits may also be eligible for this assistance. For them, the interest rate is 2.75%. The specific loan terms will vary according to each borrower’s ability to pay. The agency does say that it “offers loans with long-term repayments in order to keep payments affordable.”
Mitigate and manage
Bear in mind that these loans are just one form of assistance offered by the SBA. Your small business may qualify for other loans, and there might be training programs that benefit your company. Our firm can help you assess your financial situation in light of the coronavirus crisis and formulate a strategy for mitigating and managing your risks going forward.
The novel coronavirus (COVID-19) crisis has touched so many lives, with both illnesses and hardships. In response to this crisis, our office is working remotely on all accounting and tax projects. The best method to contact us is to email us at [email protected]. We are focused on staying up to date on the tax, accounting and finance updates to assist everyone with these challenges. The final Coronavirus bill that was signed by President Trump on March 27, 2020 is H.R. 748 called the CARES Act. This passed bill was different than the Senate bill I wrote about on March 25, 2020. Some provision is the same or similar.
The Senate bill S. 3548 turned into H.R. 748, and this bill was passed by Congress and signed by President Trump on March 27, 2020. There have been some minor changes from the S.3548 bill, so I’ll discuss the highlights of the changes below.
Section 1102 Paycheck Protection Program Loans (PPP):
This is a section 7(a) SBA loan
VA Comment: Supposed to be a streamline process. When I speak with bankers, they advise that they are still waiting for guidance from SBA. See attached the U.S. Chamber of Commerce Coronavirus Emergency Loan Checklist.
Government guarantees 100% of the loan through December 31, 2020
Guarantee drops to 75% for loans exceeding $150,000 and
85% for loans equal to or less than $150,000.
VA Comments: The Federal loan guarantee reduces at 12/31/2020, as I would expect that large portions of loans will be forgiven for payroll before 12/31/2020.
Eligible businesses are small business (500 or less of employees), nonprofit, veteran’s organization or tribal businesses.
Includes sole-proprietors, independent contractors, and self-employed individuals.
How to Calculate the Loan Amount / Maximum Loan Amount:
In Summary, average monthly payroll from 2019 multiplied by 2.5.
Sum of average total monthly payment by the applicant for payroll costs incurred during the 1-year period before the date on which the loan is made.
Payroll Costs as defined in the bill.
Payroll Costs Included:
Salary, wage, commission, or similar compensation
Payment of cash tip or equivalent
Payment for vacation, parental family, medical or sick leave
Allowance for dismissal or separation
Payment required for the provision of group health care benefits including insurance premiums.
Payment of any retirement benefits; or
Payment of State or local tax assessed on the compensation of employees and
Payroll can’t exceed more than $100,000 a year.
Self-employed , Sole Proprietor.
The sum of payments of any compensation to or income of a sole proprietor or independent contractor that is wage, commission, income, net earnings from self-employment that isn’t more then $100,000.
VA Comments: If you’re self-employed and you pay yourself with draws, then the banks will probably want to see 2019 1099-MISC and various expenses from your business. If you have employees, then you would calculate as discussed above.
Excluded Payroll Costs:
An annual salary over $100,000 / year.
Payroll taxes
If a seasonal employer, there is an alternative calculation for an average 12-week period from February 15, 2019 and ending June 30, 2019.
Multiplied by 2.5. NOT to Exceed $10MM
VA Example: If average monthly payroll was $100,000, then multiple by 2.5 = $250,000.
If the business was not in business from February 15, 2019 to June 30, 2019, there is another calculation.
VA Comment: This loan calculation isn’t as rich as the senate proposed bill which was multiplied by 4. Also, the loan doesn’t seem to include payroll taxes for the employee or employer, so the loan seems to be just the net payroll. Not sure this will be a large enough loan for some small business.
Waives affiliation rules for businesses in hospitality and restaurant industries franchise.
VA Comment: This means that restaurant chains that have over 500 employees can treat each location has an individual borrow and they don’t need to consolidate.
Defines covered loan period as beginning on February 15, 2020 and ending on June 30, 2020.
Established the maximum 7(a) loan amount to $10MM through December 31, 2020 and provides a formula by which the loan amount is tied to payroll costs incurred by the business to determine the size of the loan.
Allowable use of the loan includes payroll support, such as employee salaries, paid sick or medical leave, insurance premiums, and mortgage, rent, and utility payments.
Provides delegated authority which is the ability for lenders to make determination on borrowers eligibility and creditworthiness without going through all SBA’s channels to all current 7(a) lenders who make these loans to small business and provides the same authority to lenders who join the program and make these loans.
Requires eligible borrowers to make a good faith certification that the loan is necessary due to the uncertainty of current economic conditions caused by COVID -19; they will use the funds to retain workers and maintain payroll. Lease and utility payments; and are not receiving duplicative funds for the same uses from another SBA program.
Waives both borrower and lender fees for participation in the Paycheck Protection Program (PPP).
Waives the credit elsewhere test for funds provided under this program.
Waives collateral and personal guarantee requirements under this program.
Any portion of the loan Not used for forgiveness purposes, the remaining loan balance will have a maturity of not more than 10 years, and the guarantee for that portion of the loan will remain intact.
Maximum interest rate will be 4%.
No prepayment fees.
Allows complete deferment of 7(a) loan payments for at least six months and no more than a year.
Increases SBA Express loan from $350,000 to $1MM through December 31, 2020.
Section 1106 Loan Forgiveness:
Borrower shall be eligible for loan forgiveness equal to the amount spent by borrower during an 8 week period after the origination date of the loan on payroll costs, interest payment on any mortgage incurred prior to February 15, 2020, payment of rent on any lease in force prior to February 15, 2020, and payment on any utility for which service began before February 15, 2020.
The loan forgiveness seems to be only for PPL / PPP loans.
Amount forgiven may not exceed the principal amount of the loan.
Eligible payroll costs do not include compensation above $100,000 in wages.
The amount forgiven will be reduced proportionally by any reduction in employees retained compared to the prior year and reduced by the reduction in pay of any employee beyond 25% of their prior year compensation.
Loan forgiveness / cancellation will not be included in borrower’s taxable income.
Provides an advance of $10,000 to small business and non-profits that apply for SBA EIDL loans within three days of applying for the loan.
Expands eligibility for access to EIDL’s to include tribal business, cooperatives and ESOP’s with fewer than 500 employees or any individual operating as a sole proprietor or independent contractor during the covered period (January 31, 2020 to December 31, 2020. Private non-profits are also eligible for both grants and EIDL’s.
EIDL’s are loans up to $2MM that carry interest rates up to 3.75% for companies and up to 2.75% for nonprofits as well as principal and interest deferment up to 4 years.
The loans may be used for expenses that could have been met had the disaster not occurred, including payroll and other operating expenses.
The EIDL grant does not need to be repaid, even if the grantee is subsequently denied an EIDL.
It may be used to provide paid sick leave to employees, maintain payroll, meet increased production costs due to supply chain disruption or pay business obligations, including debts, rent and mortgage payments.
Eligible grant recipients must have been in operation on January 31, 2020.
The business that received an EIDL between January 31, 2020 and June 30, 2020 as a result of COVID-19 disaster declaration, is eligible to apply for a PPP loan, or the business may refinance their EIDL into a PPP loan.
Typically, the $10,000 grant would be subtracted from the amount forgiven in the payroll protection plan.
Waived personal guarantee on advances and loans not exceeding $200,000.
The approval should be based on solely on the credit score of the applicant and no requirement for tax returns or tax return transcripts.
Most of the financial assistance offered through the first bill called, HR 6201, FAMILIES FIRST CORONRAVIRUS RESPONSE ACT (discussed on our previous memo), and the CARES Act S. 3548 which concluded as HR 748 was included in my discussion below.
The tax and financial laws are changing daily, therefore I marked this memo with “V3” (version 3) on my memo above. There are various other social service updates, but our memos will focus mainly on finance, business and tax updates.
Highlights of the PROPOSED SENATE BILL S 3548, CORONAVIRUS AID, RELIEF AND ECONOMIC SECURITY ACT OR THE CARES ACT. March 19, 2020. This bill has NOT been passed in the Senate at this time, so it can change, and then the bill would need to go to the House and to the President. You can view the at https://www.congress.gov, search for HR 748.
Businesses & Other Employers:
Retention payroll tax credit for eligible employers that continue to pay employee wages while their operations are fully or partially suspended as a result of certain COVID-19 related government orders. A 50% refundable payroll tax credit on wages paid up to $10,000 during the crisis. The credit is available for employees retained by not currently working due to the crises for firms with more than 100 employees and for all employee wages for firms with 100 or fewer employees.
Delayed Employer-side Social Security payroll tax payments may be delayed until January 1, 2021 with 50% owned on December 31, 2021 and the other half due on December 31, 2022. Deferral of employer portion of payments for certain payroll taxes.
Net Operating Losses: Modification of net operating loss (NOL) and limitation rules. Will allow most NOL’s incurred in 2018, 2019, and 2020 to carry them back for refunds to 5 years. This carry back law was exempt for tax years beginning 2018 under the TCJA, but the CARE Act reverses it. Due to this financial crisis they are allowing NOL carry backs for these periods to be carried back. The Act also removed the 80% utilization of NOL’s for a carry forward, meaning an NOL could only reduce taxable income by 80%.
Business Interest Deduction: Modification of the deduction limitation on business interest rules of IRC section 163(j). The law temporarily changes the business interest deduction limit from 30% to 50% for tax years 2019 and 2020.
Qualified improvement property technical correction, allowing qualifying interior improvements of buildings to be immediately expensed (bonus depreciation or Section 179) rather than depreciated over 15 years for 2018 and future.
Payroll tax credit for eligible employers up to 50% refundable payroll tax credit on wages paid up to $10,000 during the crisis. The credit would be available to employers whose business were disrupted and retained employees, but they were not able to work. Employers with more than 100 employees and under 100 employees have slightly different calculations.
Business Loss Limitation Revision: For years after 12/31/2017, the business loss limitation is suspended. Previously, business losses couldn’t be used to offset non-business income (like wages, investment income) over $250,000 for individuals or $500,000 for married filing jointly.
VA Comments: For individuals that have business losses, and perhaps real estate losses from being a real estate professional, this law change may make it desirable to amend the 2018 tax return.
Individuals:
Recovery rebates of up to $1,200 for single and $2,400 for married couples filing jointly, plus $500 per qualifying child. Phaseouts of the rebates are based on adjusted gross income (AGI) starting at $75k for single, and $150k for married couples.
The rebates phase out at $99,999 for single and $199,000.
Expansion of unemployment benefits, including self-employed, and gig-economy workers. Unemployment insurance to include an additional $600 / week for an additional 13 weeks.
Waiver of the 10% penalty for COVID-19 related early distributions from IRAs, 401K and other retirement plans. However, taxability of the distribution will need to be considered.
Exclusion of certain employer payments of student loans up to $5,250 will not be treated as taxable income to the employee.
Temporary Relief Federal Student Loan: Deferral of student loan payments on principal and interest for 6 months through September 30, 2020.
Other Items:
Forbearance of Residential Mortgage Loan Payments (section 4023): Provides up to 90 days of forbearance for multifamily borrowers with a federally backed multifamily mortgage loan who have experienced a financial hardship. Borrowers receiving forbearance may not evict or charge late fees to tenants for the duration of the forbearance period.
Applicable mortgages include loans to real property designed for 5 or more families that are purchased, insured, or assisted by Fannie Mae, Freddie Mac, or HUD.
Additional Information regarding HR 748 CARES ACT ,
Relief for Individuals, Families, and Businesses. Rebates and Other individual Provisions.
Eligible individuals shall be allowed as credit against the tax for the first taxable year beginning in 2020 an amount equal to the lesser of:
Net income tax liability, or
$1,200 ($2,400 in the case of joint returns)
The credit should not be less than $600
$500 per qualifying children
Eligible individuals are based on adjusted gross income (AGI) of
$75,000 and $150,000 in the case of a joint return. Once a taxpayer AGI is either $75k or $150k the credit begins to be reduced and phased out. The phase out is $99k and $198k.
Delay in filing deadlines. In the case for returns for tax year 2019, due dates for April 15, 2020, are delayed to July 15, 2020. This isn’t in the HR 748 bill, but it is noted in IRS Notice 2020-18. An extension is not required. There is an automatic extension till July 15, 2020. However, if the tax return can’t be filed by July 15, 2020, an extension will need to be filed.
This means that IRA, HAS and MSA contributions are extended to July 15, 2020 also.
Individual ES Payments: Different from the Senate bill, 1st quarter estimated tax payments are delayed and due on July 15, 2020. 2nd quarter estimated tax payments are still due on June 15, 2020. This is stated on IRS Notice 2020-18 and Notice 2020-20.
Retirement Accounts: Early withdrawal penalties under IRC section 72(t) which is typically 10% for Federal and then some states add a lower penalty are waived if the early distributions are $100,000 or under.
Amounts distributed may be paid back. There is also a provision that allows taxpayers that took early distributions to make one or more contributions over a three-year period to contribute up to the amount of distributions they took.
Income inclusion of premature distribution. A taxpayer can spread the taxability of the premature distribution over 3 years.
Loans from retirement plans: The bill allows for an increase in loans and not to be treated as distributions. The loan amount is increased from $50,000 to $100,000.
Loan repayments will be delayed by 1 year.
Charitable Contributions: The allowance to deduct more charitable donations have been increased for both individuals and Corporations.
VA Comments: Seems as if the individual 30% / 50% AGI limitation is temporary suspended. The 10% limitation for C Corporations seem to be increased to 25%.
Student Loan Temporary Relief: The bill states the Secretary shall suspend all payments due for loans under part D of title IV for Higher Education Act of 1965 for 3 months.
Business Provisions:
C Corporation estimated tax payments. Delay of estimated tax payments for Corporations. Like individuals, the required estimated tax payments for C Corporation is delayed till July 15, 2020.
Delay in Payment of Employer Payroll Taxes. The bill states that employers can delay payment of the employer portion of payroll taxes till December 31, 2021 for 50% of the deferral and the balance due on December 31, 2022. This also applies to the estimated payroll deposits.
VA Comment: If a small business is going to request and receive a loan for payroll and overhead, this deferral might not be necessary. If a defer is desired, a liability should be posted on the companies’ financial statements.
Net Operating Loss (NOL) Carrybacks: The NOL carry back was removed for tax years after 12/31/2017. This bill will allow NOL’s generated from year 2018, 2019, and 2020 to carry back and request a refund for up to a 5 year carry back period. The 80% limitation is removed also.
VA Comment: If you incurred a loss in 2018 or 2019, or expect a loss in 2020, please get us the information and quickly as possible so we can begin preparation of a NOL carryback. If your tax return had qualified improvement property and the return couldn’t take the deduction, this new bill corrects that prior error and that deduction might generate a taxable loss for a NOL carryback.
A taxpayer may elect out of the 5-year NOL carry back. If elected, it can’t be changed. It is irrevocable.
VA Comment: For tax returns with NOL’s for 2018 or 2019 that have been filed, the return needs to be amended within 120 days from the enactment of this bill regarding the NOL carryback provision.
Loss limitation for taxpayers other than Corporations: IRC section 461(l)(2) was added by the Tax Cuts and Jobs Act of 2017 and was effective for tax years 2018 to 2025 which disallowed any excess business loss for a non-corporate taxpayer. Generally, the law prohibited business losses to only be deducted against no more than $250,000 / $500,000 of non-business income. Any non-deductible business loss was carried forward. The bill removes those limits from being implemented till December 31, 2020 (previously applied on December 31, 2017).
VA Comment: We know this loss limitation occurred with some of our clients, and we will have to review affected taxpayers to ask them if they want us to amend their tax returns. The IRS will need to provide guidance on the amendment process.
Interest Deduction Limitation: The Tax Cuts and Jobs Act of 2017 enacted an interest deduction limitation. For taxpayers where it was applicable, taxpayers with gross sales over $25MM, the interest deduction was limited to 30% of the adjusted taxable income. The bill now increases the limitation amount for 30% to 50% for tax years 2019 and 2020.
VA Comment: This means a taxpayer that this limitation would apply to will be allowed more of an interest deduction.
Technical correction for qualified Improvement Property: This bill corrected a prior law error.
The Tax Cuts & Job Act (TCJA) removed investment barriers by allowing businesses to immediately deduct the cost of certain investments under a provision called 100% bonus depreciation.
Due to legislative oversight, the law accidentally excluded improvements property to be eligible from 100% bonus depreciation.
This bill corrects this error and thus the improvements would be eligible for bonus depreciation and should make this asset a 15-year recovery period.
Foreign controlled corporation/shareholder:
The bill is changing the US owned foreign corporation from 10% to 50%.
Limitation of Paid Leave: Section 110(b)(2)(B) of the Family and Medical Leave Act of 1993 is providing limitation. An employer shall not be required to pay more than $200 per day and a $10,000 in aggregate for each employee for paid leave under this section.
Please read our memo dated March 17, 2020 and March 35, 2020 which were Versions 1 and 2. If you can’t find it, please contact us at [email protected] to request a copy or you can read it on our website at www.verticaladvisors.com under blogs.
Action Items:
Get your information ready for a loan if you need it. We are expecting PPL loans to be processed quicker than other SBA loans. However, we don’t know yet. See the US Chamber of Commerce publication attached. If you need assistance, please contact us.
Keep sending us your tax information, as we still need to prepare all the returns before the 9/15/2020 and 10/15/2020 due dates.
April 15, 2020 due dates have been delayed to July 15, 2020. If you need more time after that, and extension will need to be filed.
2019 taxes are due July 15, 2020, and 1st quarter estimated tax payments are due July 15, 2020. 2nd quarter ES payments are still due June 15, 2020.
Consider amending 2018 and/or 2019 tax returns for the following:
NOL’s: Now NOL’s from 2018 – 2020 can be carried back up to 5 years.
VA Comment: The election to file a NOL for a 2018 and / or a tax return already filed much be by the extended due date of the 2019 tax return. So, if a 2018 tax return needs to be filed to benefit from the 2018 NOL, that return needs to be prepared and filed before the 2019 tax return if filed.
Interest deduction limitations
Business loss limitations
Lastly, and as always, please contact us if you need assistance or have any questions.
The novel coronavirus (COVID-19) crisis has touched so many lives, with both illnesses and hardships. In response to this crisis, our office is working remotely on all accounting and tax projects. The best method to contact us is to email us at [email protected]. We are focused on staying up to date on the tax, accounting and finance updates to assist everyone with these challenges. Things are changing hourly, and discussions on the news don’t completely explain the law as written. So, we are explaining in as much detail as we can for the moment. Our focus on this memo are certain provisions we feel are important to our clients.
I read on the Wall Street Journal app this morning at 8:00 a.m. PST today, March 26, 2020, that the Senate passed Senate bill S.3548, the CARES Act. However, when I looked for the formal acknowledgement on www.congress.gov at 3:30 p.m. PST on March 26, 2020, the status doesn’t say it was passed. So, my discussions are based on the actual bill text that is assumed to be passed by the Senate.
Most of the financial assistance offered through the first bill called, HR 6201, FAMILIES FIRST CORONRAVIRUS RESPONSE ACT (discussed on our previous memo), and the CARES Act S. 3548 which is expected to pass the senate, the house and be signed by the president have financial and accounting information requirements necessary for the financial assistance. Accordingly, we are available to assist any client in the SBA application process for financial assistance.
The tax and financial laws are changing daily, therefore I marked this memo with “V2” (version 2) on my memo above. There are various other social service updates, but our memos will focus mainly on finance, business and tax updates.
Highlights of the PROPOSED SENATE BILL S 3548, CORONAVIRUS AID, RELIEF AND ECONOMIC SECURITY ACT OR THE CARES ACT. March 19, 2020. This bill has NOT been passed in the Senate at this time, so it can change, and then the bill would need to go to the House and to the President. You can view the introduced bill at https://www.congress.gov/bill/116th-congress/senate-bill/3548
Businesses & Other Employers:
Retention tax credit for eligible employers that continue to pay employee wages while their operations are fully or partially suspended as a result of certain COVID-19 related government orders.
Deferral of employer portion of payments for certain payroll taxes.
Modification of net operating loss (NOL) and limitation rules. Will allow some NOL’s incurred in 2018, 2019, and 20120 to carry them back for refunds to 5 years. This carry back law was exempt for tax years beginning 2018 under the new tax laws that Trump and Congress enacted. Due to this financial crisis they are not allowing NOL carry backs for these periods to be carried back.
Modification of the deduction limitation on business interest rules of IRC section 163(j).
Qualified improvement property technical correction, allowing qualifying interior improvements of buildings to be immediately expenses rather than depreciated over 15 years.
Payroll tax credit for eligible employers up to 50% refundable payroll tax credit on wages paid up to $10,000 during the crisis. The credit would be available to employers whose business were disrupted and retained employees, but they were not able to work. Employers with more than 100 employees and under 100 employees have slightly different calculations.
Expansion of the ways the SBA can help small business.
Loans for small employers with 500 employers or less, including non-profits would be eligible to apply for loans. The size of the loan would be tied to the applicant’s average monthly payroll, mortgage, rent, utilities payment and other debt obligations over the previous year.
The portion of the loan used to cover payroll and payments on pre-existing debt would be forgiven.
Loans are supposed to be streamlined with SBA, and SBA approved banks.
If a business doesn’t have payroll, or not a large amount of payroll, SBA will expand loans for:
Payroll, supply chain disruption, mortgage payments, and other debt obligations.
SBA express loans would be increased from $350k to $1MM.
Individuals:
Recovery rebates of up to $1,200 for single and $2,400 for married couples filing jointly, plus $500 per qualifying child. Phaseouts of the rebates are based on adjusted gross income (AGI) starting at $75k for single, and $150k for married couples.
Expansion of unemployment benefits, including self-employed, and gig-economy workers.
Waiver of the 10% penalty for COVID-19 related early distributions from IRAs, 401K and other retirement plans. However, taxability of the distribution will need to be considered.
Exclusion of certain employer payments of student loans.
Additional Information regarding the PROPOSED SENATE BILL S 3548, CORONAVIRUS AID, RELIEF AND ECONOMIC SECURITY ACT OR THE CARES ACT. March 19, 2020. This bill has NOT been passed in the Senate at this time, so it can change, and then the bill would need to go to the House and to the President. You can view the introduced bill at https://www.congress.gov/bill/116th-congress/senate-bill/3548 . These additional steps can cause other changes. However, based on the proposed S 3548 bill, I’m providing some additional details listed below:
Division A – Small Business Interruption Loans
SBA 7(a) Loan Program
This is the most popular loan program with the SBA for small business.
Covered period beginning on March 1, 2020 and ending on December 31, 2020.
Listening to Secretary of the Treasury Steve Mnuchin on March 25, 2020, he stated he expects the loans to be processed by all FDIC banks in a simple format and expect loans to be processed in a day. That would be wonderful.
He did state that they expect to have the money and process ready to provide the funds by 3 weeks which would be around April 15, 2020, but it depends on Congress, and a lot of moving parts.
Secretary of the Treasury also stated the following:
The loans are supposed to be for 8 weeks of payroll, and overhead.
VA Comment:We need to get details on what is included in payroll and overhead, but the Secretary’s discussion seems prudent. However, the proposed S.3548 bill states to take the average monthly payroll for the prior year, plus included overhead and multiple by 4. Can’t exceed $10MM. So, I don’t read the 8 weeks of payroll. Perhaps that was his quick explanation.
This part of the law is for companies with no more than 500 employees.
The maximum loan amount would be the lesser of:
The average total monthly payments for payroll, mortgage payments, rents payments and payments on any other debt obligations incurred during the 1 year period before the date on which the loan is made, except if the employer is seasonal, then they would use the average monthly payments between March 1, 2019 and ending June 20, 2019
Then multiple by 4.
or;$10,000,000.
VA Comment:If you are considering requesting financial relief, then I recommend you get your numbers and support ready for the application process. Plus, you will need to make sure you have enough cash to get you to the date of receiving the financial assistance which is expected to be around April 15, 2020. I would expect that we should have payroll reports that support the numbers on a worksheet that calculates the average, plus your average other included overhead expenses. Being prepared should allow you to get the financial assistance quicker.
Allowable Uses of Program Loans:
Payroll support, including paid sick, medical, family leave and costs related to the continuation of group health care benefits during the periods of leave.
Employee salaries (calculating based on the average number of employees for each pay period)
Mortgage payments
Rent (including rent under a lease agreement)
Utilities and
Other debt obligations that were incurred before the covered period.
Loan Considerations: The proposed bill is requiring that the lending institution only consider the following:
Was the borrower in operations on March 1, 2020; and
Had employee for whom the borrower paid salaries and payroll taxes.
Fees will be waived for these loans.
The Federal government will guarantee 100% of the loan.
Eligible Borrower means:
Small business concern; or
An organization made eligible by section (b) which discuses private or public nonprofit organizations with 500 or less employees.
VA Comment: Prior to this bill, the SBA typically didn’t allow loans to non-profits.
Deferment of 7(a) Loan. The proposed bill requires the lender to provide complete deferment relief for impacted borrowers with 7(a) loans.
VA Comments: This provision seems to state that payments for the covered loans would be deferred for a period of not more than 1year.
Express Loans will be increased from $350,000 to $1,000,000.
Substantially affected by COVID-19 means:
Supply chain disruptions
Staffing challenges.
A decrease in sales or customers; or
Shuttered business.
VA Comment: If you have a business that doesn’t have any payroll, or not much payroll, then perhaps an SBA 7(a) loan for lost revenue would be the best option. An impacted industry might be owners of rental properties. They might not have much payroll, so a loan might be necessary to offset the loss or deferral of rents. I believe the spirt of this financial package is to get money into the hands of businesses and individuals so they can pay rent.
No Prepayment Penalty for loans made on or before December 31, 2020.
Loan Forgiveness:
A 7(a) loan for the covered period which is beginning on March 1, 2020 to June 30, 2020.
An eligible recipient shall be eligible for forgiveness of indebtedness on a covered 7(a) loan in an amount equal to the cost of maintaining payroll continuing during the covered period.
Payroll costs have limits.
Compensation to an individual employee can’t exceed $33,333 during the covered period.
Qualified sick leave wages for which a credit is allowed under section 7001 of the Families First Coronavirus Response Act; or
Qualified family leave wages for which a credit is allowed under section 7003 of the Families First Coronavirus Response Act.
VA Comments: It seems that the loan forgiveness is not meant to forgive loans used for compensation, sick or family leave in which the employer would receive a credit also. Seems like they don’t want a double dip. If a company utilizes the credit method, there will need to be an adjustment.
VA Comments: The borrower will probably have to provide financial statements, and federal, state employee records, and unemployment insurance filings, and a certification. If there is NO documentation, then there will be no forgiveness. This should be done prior to apply for the forgiveness.
Upon application for the loan forgiveness, the lender will require documentation to support the loan forgiveness within 15 days, so be prepared when you start the process. The lender will provide a forgiveness decision within 15 days.
Treatment of Amounts Forgiven: Amounts which have been forgiven under the law shall be considered canceled indebtedness by lenders, BUT Not Taxable.
VA Comment: The bill states the forgiveness of debt will be treated as cancelation of indebtedness. However, a section in the proposed bill under “Taxability” states, Cancelation of indebtedness under this section shall be excluded from gross income for purpose of the Internal Revenue Code of 1986.
If there is a reduction of employees, then there can be a reduction of the loan forgiveness.
VA Comment: I read or heard that the forgiveness of any part of the debt wouldn’t negatively affect the credit score of the borrower, but I didn’t read that provision in this bill. This might be an issue that needs to be corrected.
Relief for Individuals, Families, and Businesses. Rebates and Other individual Provisions.
Eligible individuals shall be allowed as credit against the tax for the first taxable year beginning in 2020 an amount equal to the lesser of:
Net income tax liability, or
$1,200 ($2,400 in the case of joint returns)
The credit should not be less than $600
$500 per qualifying children
Eligible individuals are based on adjusted gross income (AGI) of
$75,000 and $150,000 in the case of a joint return. Once a taxpayer AGI is either $75k or $150k the credit begins to be reduced and phased out. The phase out is $99k and $198k.
Delay in filing deadlines. In the case for returns for tax year 2019, due dates for April 15, 2020, are delayed to July 15, 2020.
Individual ES Payments: Different from the prior communication from Treasury, this bill states that individual estimated tax payments are not due before October 15, 2020.
Retirement Accounts: Early withdrawal penalties under IRC section 72(t) which is typically 10% for Federal and then some states add a lower penalty are waived if the early distributions are $100,000 or under.
Amounts distributed may be paid back. There is also a provision that allows taxpayers that took early distributions to make one or more contributions over a three-year period to contribute up to the amount of distributions they took.
Income inclusion of premature distribution. A taxpayer can spread the taxability of the premature distribution over 3 years.
Loans from retirement plans: The bill allows for an increase in loans and not to be treated as distributions. The loan amount is increased from $50,000 to $100,000.
Loan repayments will be delayed by 1 year.
Charitable Contributions: The allowance to deduct more charitable donations have been increased for both individuals and Corporations.
VA Comments: Seems as if the individual 30% / 50% AGI limitation is temporary suspended. The 10% limitation for C Corporations seem to be increased to 25%.
Student Loan Temporary Relief: The bill states the Secretary shall suspend all payments due for loans under part D of title IV for Higher Education Act of 1965 for 3 months.
Business Provisions:
C Corporation estimated tax payments. Delay of estimated tax payments for Corporations. Like individuals, the required estimated tax payments for C Corporation is delayed till October 15, 2020.
Delay in Payment of Employer Payroll Taxes. The bill states that employers can delay payment of the employer portion of payroll taxes till December 31, 2021 for 50% of the deferral and the balance due on December 31, 2022. This also applies to the estimated payroll deposits.
VA Comment: If a small business is going to request and receive a loan for payroll and overhead, this deferral might not be necessary. If a defer is desired, a liability should be posted on the companies’ financial statements.
Net Operating Loss (NOL) Carrybacks: The NOL carry back was removed for tax years after 12/31/2017. This bill will allow NOL’s generated from year 2018, 2019, and 2020 to carry back and request a refund for up to a 5 year carry back period. The 80% limitation is removed also.
VA Comment: If you incurred a loss in 2018 or 2019, or expect a loss in 2020, please get us the information and quickly as possible so we can begin preparation of a NOL carryback. If your tax return had qualified improvement property and the return couldn’t take the deduction, this new bill corrects that prior error and that deduction might generate a taxable loss for a NOL carryback.
A taxpayer may elect out of the 5-year NOL carry back. If elected, it can’t be changed. It is irrevocable.
VA Comment: For tax returns with NOL’s for 2018 or 2019 that have been filed, the return needs to be amended within 120 days from the enactment of this bill regarding the NOL carryback provision.
Loss limitation for taxpayers other than Corporations: IRC section 461(l)(2) was added by the Tax Cuts and Jobs Act of 2017 and was effective for tax years 2018 to 2025 which disallowed any excess business loss for a non-corporate taxpayer. Generally, the law prohibited business losses to only be deducted against no more than $250,000 / $500,000 of non-business income. Any non-deductible business loss was carried forward. The bill removes those limits from being implemented till December 31, 2020 (previously applied on December 31, 2017).
VA Comment: We know this loss limitation occurred with some of our clients, and we will have to review affected taxpayers to ask them if they want us to amend their tax returns. The IRS will need to provide guidance on the amendment process.
Interest Deduction Limitation: The Tax Cuts and Jobs Act of 2017 enacted an interest deduction limitation. For taxpayers where it was applicable, taxpayers with gross sales over $25MM, the interest deduction was limited to 30% of the adjusted taxable income. The bill now increases the limitation amount for 30% to 50% for tax years 2019 and 2020.
VA Comment: This means a taxpayer that this limitation would apply to will be allowed more of an interest deduction.
Technical correction for qualified Improvement Property: This bill corrected a prior law error.
The Tax Cuts & Job Act (TCJA) removed investment barriers by allowing businesses to immediately deduct the cost of certain investments under a provision called 100% bonus depreciation.
Due to legislative oversight, the law accidentally excluded improvements property to be eligible from 100% bonus depreciation.
This bill corrects this error and thus the improvements would be eligible for bonus depreciation and should make this asset a 15-year recovery period.
Foreign controlled corporation/shareholder:
The bill is changing the US owned foreign corporation from 10% to 50%.
Limitation of Paid Leave: Section 110(b)(2)(B) of the Family and Medical Leave Act of 1993 is providing limitation. An employer shall not be required to pay more than $200 per day and a $10,000 in aggregate for each employee for paid leave under this section.
Please read our memo dated March 17, 2020 which was Version 1. If you can’t find it, please contact us at [email protected] to request a copy or you can read it on our website at www.verticaladvisors.com under blogs.
Lastly, and as always, please contact us if you need assistance or have any questions.
The novel coronavirus (COVID-19) crisis has touched so many lives, both with illness and hardship. In response to this crisis, our office is working remotely on all accounting, and tax projects. The best method to contact us is to email us at [email protected]. We are focused on staying up to date on tax, accounting and finance updates to assist everyone with these challenges.
The tax and financial laws are changing daily, therefore I marked “V1” (version 1) on my memo above. There are various other social service updates, but our memos will focus mainly on finance, business and tax updates.
CONGRESS PASSED HR 6201, FAMILIES FIRST COONRAVIRUS RESPONSE ACT, which is highlighted below. However, this bill hasn’t passed the Senate as of March 17, 2020 at 7 p.m. PST.
Employer tax credits: The Act provides tax credits to employers to cover wages paid to employees while they are taking time of under the bill’s sick leave and family leave programs.
The sick leave credit for each employee would be equal to his wages, limited to $511 per day while the employee is receiving paid sick leave to care for themselves, or $200 if the sick leave is to care for a family member or child whose school is closed. An additional limit applies to the number of days per employee: the excess of 10 days over the aggregate number of days considered for all preceding calendar quarters.
The family leave credit for each employee is limited to $200 per day with a maximum of $10,000.
The credits are refundable to the extent they exceed the employer’s payroll tax.
Employers don’t receive the credit if they’re also receiving the credit for paid family and medical leave in IRC Sec. 45S. These rules apply only to wages paid with respect to the period beginning on a date selected by the Secretary of the Treasury which is during the 15-day period beginning on the date of the enactment of the Act and ending on December 31, 2020. (Act Sec. 7001; Act Sec. 7003)
Comparable credits for self-employed: The Act provides for similar refundable credits against the self-employment tax. It covers 100% of self-employed individual’s sick leave equivalent amount, or 67% of the individual’s sick-leave equivalent amount if they are taking care of sick family member or taking care of a child following the child’s school closing. The sick leave equivalent amount is the lesser of average daily self-employment income, or $51/ day to care for the self-employed individual, or $200 / day to care for a sick family member or child following a school closing.
Self-employed individuals could receive family leave credit for as many as 50 days multiplied by the lesser of $200 or their average self-employment income.
These rules apply only to days occurring during the period beginning on a date selected by the Secretary of the Treasury, which is during the 15-day period beginning on the date of the enactment of this Act and ending on December 31, 2020.
Employer FICA exclusion: Under the Act, sick leave and family and medical leave paid under the Act will not be considered wages under IRC section 3111(a) (employer tax and disability insurance portion of FICA ; 2%).
VA Note: The seems to mean the employer tax will not be required to be paid on qualified sick leave, family and medical leave, so make sure you inform your payroll processor.
Income Tax Updates as of March 17, 2020:
Federal April 15, 2020 Deadline for Tax Due Payment is extended to July 15, 2020:
This change was announced on March 17, 2020 in the afternoon by Treasury Secretary Steven Mnuchin.
Treasury Secretary Steven Mnuchin announced that taxpayers owing a payment to the IRS may defer the payment for 90 days.
Individual can defer up to $1MM and Corporations may defer up to $10MM.
The $1MM limit for individuals was established to cover small businesses and passthrough entities.
No interest and penalties will be charged on these deferred payments.
The Treasury Secretary is recommending filing tax returns timely even if you owe money as the taxpayer would still get the payment extension with no interest or penalties as discussed above.
If you have a refund, you should file timely to get the refund quicker.
VA Note:Please contact us if you have an urgent need for tax returns with refunds.
Currently, I’m reading that the tax returns are still due April 15, 2020, but the date for payment of taxes is extended to July 15, 2020. So, at this time, April 15, 2020 extensions are still required to be processed.
This may change, perhaps they will also add that extensions will not be required, so stay tuned.
Many details remain unclear with respect to this relief and no official written guidance has been released as of March 17, 2020.
State Tax Filing Guidance for Coronavirus Pandemic:
California: California has extended the due date to file returns and pay tax until June 15, 2020, which includes partnerships which were due on March 15, 2020, but it doesn’t discuss S Corporations, but I’m assuming that is an oversight.
IRS Notice 2020-17 is accessible from the link above. This notice is dated March 13, 2020. Some of the highlights are as follows:
President Trump issued an emergency declaration under the Robert T. Stafford Disaster Relief and Emergency Assistance Act in response to the Coronavirus pandemic (Emergency Declaration).
VA Note:Please consider reviewing your business insurance for any loss of revenue or extra expense reimbursement due to this emergency declaration act. Perhaps this “Emergency Declaration” will allow some coverage.
The Emergency Declaration instructed to Secretary of the Treasury “to provide relief from tax deadlines to Americans who have been adversely affected by the OVID-19 emergency pursuant to IRC section 7508A(a). This code section is entitled, “Authority to postpone certain deadlines by reason of Presidentially declared disaster or terroristic or military actions.” Pursuant to IRC section 7508A(a), a period of up to one year may be given. Currently, the relief for tax payments as discussed above is 90 days.
The relief granted by the Federal government is federal income tax payments due on April 15, 2020.
The relief provided is available solely with respect to Federal income tax payments (including payments of tax on self-employment income) due on April 15, 2020 in respect of an affected taxpayer’s 2019 taxable year, and federal estimated income tax payments due on April 15, 2020.
VA Note: Our interpretation is April 15, 2020 tax due payments for 2019 tax liabilities and 2020 1st quarter estimated tax payments are provided a 90-day relief, to July 15, 2020. There doesn’t seem to be any extension/relief for other taxes like payroll taxes. However, some employers will find relief related to employer payroll tax as discussed above. As of this current notice, interest and penalties would begin on July 16, 2020.
SBA Relief/Small Business Loans: Small businesses will probably need cash/financing assistance to get us through this COVID-19 shutdown period. Currently, it seems SBA financial assistance is based on a state by state decision. Let’s discuss the current options
Faster, easier Qualification process for states seeking SBA disaster Assistance.
Expanded Statewide access to SBA Disaster Assistance loans for Small business. SBA disaster assistance loans are typically only available to small businesses within counties identified as disaster areas by a Governor. Under the revised criteria issues on March 17, 2020, disaster assistance loans will be available statewide following an economic injury declaration. This will apply to current and future disaster assistance declaration related to Coronavirus.
Process for Accessing SBA’s Coronavirus (COVID-19) Disaster Relief Lending:
SBA is offering designated states ad territories low interest federal disaster loans for working capital to small businesses suffering substantial economic injury as a result of COVID-19. Upon request received from a state’s Governor, SBA will issue under its own authority, Supplemental Appropriations.
Any such Economic Injury Disaster Loan assistance declaration issued by SBA makes loans available statewide to small businesses and private, non-profit organizations to help alleviate economic injury caused by COVID-19.
One a declaration is made, the information on the application process for Economic Injury Disaster loan assistance will be made available to affected small businesses within the state.
The loans may be used to pay fixed debts, payroll, accounts payable and other bills that can’t be paid because of the disaster impact. The interest rate is 3.75% for small businesses and 2.75% for non-profit.
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 borrowers’ ability to repay.
COVID 19 / Coronavirus application is “Economic Injury”
Select your State and County
Selection Disaster Name which should be Coronavirus.
You must certify and accept a truthful clause
You need to accept statement required by EO, which includes information being available for specific reasons.
Filings Requirements:
Disaster Business Loan Application
Need FEIN
Need insurance information for flood, hazard, or business interruption.
If you every had a federal loan (like an SBA loan), they will want that information.
Personal Financial Statements SBA form 413
Schedule of Liabilities SBA form 2202
Request for Tax Return transcripts
Business Tax Returns
You will need to be prepared with financial and tax information for the application.
Unemployment Options
This is an option in which a business owner can terminate employees due to some purposes or reason which is based on their state law and employment contracts, like furloughed due to Coronavirus, and the employee would file for state unemployment insurance/income.
Political Discussion / Financial Thoughts:
I think all of us, as business owners, need to communication with our Congress person and Senator. I think one of the best ways to get money to small business is for the Federal Government to utilize SBA to provide loans to small businesses. The application needs to be streamlined. The loans to small businesses would provide financial help to keep those businesses going. Governments needs to be concerned with borrowers not taking advantage of the program could provide some sort of income tax incentives to the business owner in addition to the ones already passed. Here are my initial thoughts:
Use SBA to provide disaster loans to small business. I’m sure SBA can get cash to business owners better than Treasury cutting checks to taxpayers.
The SBA funds can be used to pay employees, rent, loans, utilities and necessary/fixed overhead would be a tax deduction and a refundable tax credit.
This should provide business owners with an incentive to use the money correctly, because if they don’t, then they will still be on the hook for the loan.
Profits will most likely be down, and cash spent to keep employees working and businesses paying the bills, should help the economy. These payments, which the IRS can define later, would be a tax deduction and a refundable credit.
The refundable credit should trigger a tax refund, and that money can be used to pay back the SBA loan.
If things work out correctly, businesses stay open, employees get paid, employee benefits stay in place, overhead gets paid, and this should help us through this pandemic. Then the IRS could provide tax forms with the 2020 tax returns, in which qualified disaster expenses would be a tax deduction and a refundable credit. The IRS can audit these calculations.
Refundable credits would provide business owners with cash upon filing tax returns, and thus the refund can be directly applied to SBA loans.
Refundable credits would also reduce the need or amount for 2020 estimated tax payments.
Yes, this is going to be an expensive taxpayer assistance package, but we the taxpayers pay the tax, and this time we need help. Based on my quick research, the TARP (Trouble Asset Relief Program) cost the taxpayers around $40 billion. Congress MUST act to save the US economy. Allowing the banks and small business to help should make the process easier.
If a financial assistance program isn’t provided, I expect employees will be laid off and businesses will go out of business. Loans won’t be paid, landlords won’t be paid, etc. It would be a ripple effect.
I recommend everyone contact their Congress person and / or Senator to such a strategy similar to the above. Business owners don’t want to go into debt to keep the doors open.
Hopefully this process or something similar will keep the economy sustained and reduce the chances of uprising. If people can’t work to earn money, they need a process to pay for food, housing, and bills. Plus, this should create an incentive for people to abide by the disaster request/requirements.
In many industries, offering a 401(k) plan is a competitive necessity. If you don’t offer one and a competitor does, it could mean the difference in a job candidate’s decision to accept their offer over yours. It could even send employees heading for the door.
Assuming you do offer a 401(k), the challenge then becomes plan maintenance and compliance. Just as you presumably visit your doctor annually for a checkup, you should review the administrative processes and fiduciary procedures associated with your plan at least once a year. Let’s look at some important areas of consideration as advised by top business consultant:
Investments. Study your plan’s investment choices to determine whether the selections available to participants are appropriate. Does the lineup offer options along the risk-and-return spectrum for all ages of participants? Are any pre-mixed funds, which are based on age or expected retirement date, appropriate for your employee population?
If the plan includes a default investment for participants who have failed to direct investment contributions, check the option to ensure that it continues to be appropriate. If your company plan doesn’t have a written investment policy in place or doesn’t use an independent outside consultant to assist in selecting and monitoring investments, consider incorporating these into your investment procedures.
Fees. 401(k) plan fees often come under criticism in the media and can aggravate employees who follow their accounts closely. Calculate the amount of current participant fees associated with your plan’s investments and benchmark them against industry standards.
Investment managers. Have you documented in writing the processes your plan has in place for the selection and monitoring of investment managers? If not, doing so in consultation with an attorney is highly advisable. If you have, reread the documents to ensure they’re still accurate and comprehensive.
Administrator. Solicit and monitor participant feedback on the administrator so that you know about grumblings before they grow into heated complaints. Further, put criteria in place to assess the plan administrator’s performance on an ongoing basis and to benchmark performance against industry standards.
Compliance. Are your plan’s administrative procedures in compliance with current regulations? If you intend your plan to be a participant-directed individual account plan, are all the provisions of ERISA Section 404(c) being followed? Have there been any major changes to 401(k) regulations over the last year? These are just a few critical questions to ask and answer.
A 401(k) is usually among the most valued benefits a business can offer its employees, but you’ve got to keep a close and constant eye on its details. We’d be happy to help you assess the costs and other financial details of your company’s plan.
The Setting Every Community Up for Retirement Enhancement (SECURE) Act is the first significant retirement-related legislation in more than a dozen years. It brings many changes that affect employers of all sizes, including some that could be particularly beneficial for smaller employers that sponsor retirement plans. Some of the changes, however, may increase the burden on employers. Here are some of the most important developments for employers, many of which took effect for plan years beginning after December 31, 2019. Please read and see how it can help you design tax strategies for this year
Greater access to multiple employer plans
Multiple employer plans (MEPs) allow small and midsize unrelated businesses to team up to provide their employees a defined contribution plan, such as a 401(k) or SIMPLE IRA plan. By pooling plan participants and assets in one large plan, rather than several separate plans, it’s possible for small businesses to give their workers access to the same low-cost plans offered by large employers. Employers enjoy reduced fiduciary duties and administrative burdens by using outside administrators to manage the plan.
Currently, MEPs generally are limited to participating employers that share some commonality — for example, being in the same industry or geographic location or using the same professional employer organization. The SECURE Act creates a new type of “open MEP” that covers employees of employers with no relationship other than their joint participation in the MEP. These pooled employer plans (PEPs) will be administered by a pooled plan provider (PPP), such as a financial services company. The PPP also will be the named fiduciary of the plan, but each employer is responsible for choosing and monitoring the PPP.
PEPs will be permitted for plan years starting in 2021 or later. The U.S. Department of Labor and the IRS are expected to provide guidance before then, as PEPs generally are subject to the same Employee Retirement Income Security Act (ERISA) and Internal Revenue Code rules as single-employer plans.
In addition, the SECURE Act eliminates the so-called “one bad apple” rule that deterred some employers from taking advantage of MEPs. Under the rule, a regulatory violation by one employer participant (such as failing to make contributions to the plan on schedule) could jeopardize the MEP’s tax-qualified status. The SECURE Act lays out certain requirements that a PEP can satisfy to protect its status in such a situation.
The SECURE Act also provides an alternative to MEPs for small employers seeking the economies of scale they provide regarding administration. It allows a group of plans with a common plan administrator to file a consolidated Form 5500 annual report, with a single audit report, if certain conditions are met.
Looser notice and amendment rules on safe harbor plans
As of January 1, 2020, plan sponsors no longer are required to give notice to plan participants before the beginning of the plan year when the sponsor is making qualified nonelective contributions — that is, contributions an employer makes regardless of whether an employee contributes — of at least 3% to all eligible participants. The requirement to provide advance notice when making safe harbor matching contributions continues.
Plan sponsors also can amend 401(k) plans that don’t use a matching contribution safe harbor to include a 3% nonelective contribution safe harbor any time before the 30th day before the end of the plan year. The amendment can be made later than that only if it provides for a qualified nonelective contribution of at least 4% of compensation, rather than 3%, and the amendment is done no later than the close of the following plan year.
Annuity options
Annuities can help reduce the risk that retirees will run out of money before the last years of their lives, when health care expenses can run high. But many employers have been reluctant to offer annuities for fear of facing lawsuits alleging breach of fiduciary duty if the annuity providers they selected run into financial problems down the road. The SECURE Act preempts this hurdle by immunizing employers from liability if they choose a provider that meets certain requirements, starting December 20, 2019.
The SECURE Act, however, also requires employers to include a lifetime income disclosure on a plan participant’s benefit statements at least annually. The disclosure will show the estimated monthly payments the participant would receive if the total account balance were used to purchase an annuity for the participant and his or her surviving spouse. Before employers can implement this requirement, the U.S. Department of Labor must issue applicable guidance.
Participation by part-time employees
Employers generally have been allowed to exclude employees who work fewer than 1,000 hours per year from defined contribution plans, including 401(k) plans. Starting in 2021, the SECURE Act generally expands the rule by requiring employers to allow not just those who work at least 1,000 hours in one year (about 20 hours per week) to participate, but also those who work at least 500 hours in three consecutive years and are at least age 21 at the end of the three-year period.
Employer contributions aren’t a requirement of the new participation rules for part-time employees. And employers can exclude the latter category of part-time employees from testing under the nondiscrimination and coverage rules, as well as from the application of the top-heavy rules.
Expanded tax credits
The SECURE Act establishes a new tax credit of up to $500 per year to offset start-up costs for new 401(k) and SIMPLE IRA plans with an eligible automatic contribution arrangement (EACA), beginning in 2020. This credit is on top of the plan start-up credit already available and is available for three years. It’s also available to employers that convert an existing plan to one with an EACA.
The new law also boosts the amount of the credit available for small employer pension plan start-up costs. (A “small employer” is one with no more than 100 employees.) The new law changes the calculation of the flat dollar amount limit on the credit to the greater of 1) $500 or 2) the lesser of:
$250 multiplied by the number of non-highly compensated employees who are eligible to participate in the plan, or
$5,000.
Like the automatic enrollment tax credit, it’s available beginning in 2020 and applies for up to three years.
Higher automatic enrollment safe harbor cap
Even before the SECURE Act, employers could automatically enroll employees in a 401(k) plan under a safe harbor with a qualified automatic contribution arrangement (QACA). However, elective deferrals for QACAs have been limited to 10% of compensation.
The SECURE Act increases the maximum amount of an employee’s compensation that can be automatically deferred after the employee’s first plan year, from 10% to 15%. (The cap for the first year in the plan is 10%.) The increase is effective for plan years beginning after December 31, 2019.
Adoption deadlines
Previously, many types of retirement plans were required to be set up during the tax year for which they were to take effect. The SECURE Act extends the adoption deadline for a tax year to the due date of the employer’s tax return (including extensions), providing more flexibility to make contributions and reduce tax liabilities.
Costlier penalties
The SECURE Act increases the penalties for failing to file retirement plan tax returns, as follows:
The penalty for failing to file a Form 5500 is $250 per day, not to exceed $150,000 (up from $25 per day, with a maximum of $15,000).
The penalty for failing to file a registration statement (IRS Form 8955-SSA) is $10 per participant per day, not to exceed $50,000 (up from $1 per participant per day, with a maximum of $5,000).
The penalty for failure to provide a notification of change of certain information (for example, the plan name, sponsor or administrator) is $10 per day, not to exceed $10,000 (up from $1 per day, with a maximum of $1,000).
The penalty for failing to provide a required withholding notice is $100 for each failure, not to exceed $50,000 for all failures during any calendar year (up from $10 for each failure, with a maximum of $5,000).
The penalty hikes apply for filings, registrations and notifications required after December 31, 2019.
Promising, but complicated
These and other changes in the SECURE Act are intended to make it easier and less expensive for employers to offer retirement plans to their employees. (The law also contains a number of significant changes for individuals.) The applicable laws and regulations can prove tricky to navigate. Please contact us with any questions regarding the SECURE Act.
