Update 2: Tax and Financial Updates due to Coronavirus

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

1. Businesses & Other Employers:
  1. 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.
  2. Deferral of employer portion of payments for certain payroll taxes.
  3. 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.
  4. Modification of the deduction limitation on business interest rules of IRC section 163(j).
  5. Qualified improvement property technical correction, allowing qualifying interior improvements of buildings to be immediately expenses rather than depreciated over 15 years.
  6. 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.
  7. Expansion of the ways the SBA can help small business.
    1. 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.
    2. The portion of the loan used to cover payroll and payments on pre-existing debt would be forgiven.
    3. Loans are supposed to be streamlined with SBA, and SBA approved banks.
    4. If a business doesn’t have payroll, or not a large amount of payroll, SBA will expand loans for:
      1. Payroll, supply chain disruption, mortgage payments, and other debt obligations.
      2. SBA express loans would be increased from $350k to $1MM.

Individuals:
1. 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.
2. Expansion of unemployment benefits, including self-employed, and gig-economy workers.
3. 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.
4. 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:

1. Division A – Small Business Interruption Loans
  1. SBA 7(a) Loan Program
    1. This is the most popular loan program with the SBA for small business.
    2. Covered period beginning on March 1, 2020 and ending on December 31, 2020.
    3. 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.
      1. 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.
      2. 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:
1. Payroll support, including paid sick, medical, family leave and costs related to the continuation of group health care benefits during the periods of leave.
  1. Employee salaries (calculating based on the average number of employees for each pay period)
  2. 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:
1. Was the borrower in operations on March 1, 2020; and
2. Had employee for whom the borrower paid salaries and payroll taxes.
3. Fees will be waived for these loans.
4. The Federal government will guarantee 100% of the loan.
Eligible Borrower means:
1. Small business concern; or
2. An organization made eligible by section (b) which discuses private or public nonprofit organizations with 500 or less employees.
  1. VA Comment: Prior to this bill, the SBA typically didn’t allow loans to non-profits.
3. Deferment of 7(a) Loan. The proposed bill requires the lender to provide complete deferment relief for impacted borrowers with 7(a) loans.
  1. VA Comments: This provision seems to state that payments for the covered loans would be deferred for a period of not more than 1year.
4. Express Loans will be increased from $350,000 to $1,000,000.
  1. Substantially affected by COVID-19 means:
    1. Supply chain disruptions
    2. Staffing challenges.
    3. A decrease in sales or customers; or
    4. Shuttered business.
      1. 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:
1. A 7(a) loan for the covered period which is beginning on March 1, 2020 to June 30, 2020.
2. 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.
  1. Payroll costs have limits.
    1. Compensation to an individual employee can’t exceed $33,333 during the covered period.
    2. Qualified sick leave wages for which a credit is allowed under section 7001 of the Families First Coronavirus Response Act; or
    3. Qualified family leave wages for which a credit is allowed under section 7003 of the Families First Coronavirus Response Act.
      1. 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.
      2. 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.
  2. 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.
1. 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.
1. 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.
1. 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:
  1. Net income tax liability, or
  2. $1,200 ($2,400 in the case of joint returns)
    1. The credit should not be less than $600
    2. $500 per qualifying children
  3. Eligible individuals are based on adjusted gross income (AGI) of
    1. $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.
  4. 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.
  5. 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.
1. 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.
2. 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.
1. 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.
1. 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:
1. 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.
2. 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.
  1. 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.
3. 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.
  1. 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.
4. A taxpayer may elect out of the 5-year NOL carry back. If elected, it can’t be changed. It is irrevocable.
  1. 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.
5. 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).
  1. 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.
6. 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.
  1. VA Comment: This means a taxpayer that this limitation would apply to will be allowed more of an interest deduction.
7. Technical correction for qualified Improvement Property: This bill corrected a prior law error.
  1. 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.
  2. Due to legislative oversight, the law accidentally excluded improvements property to be eligible from 100% bonus depreciation.
  3. 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.
8. Foreign controlled corporation/shareholder:
  1. The bill is changing the US owned foreign corporation from 10% to 50%.
9. 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.