Craig Swindlehurst CPA, Tax Manager at Larson & Company, specializes in tax planning and preparation for individuals, small businesses, and captive insurance companies.

The Coronavirus Aid, Relief, and Economic Security Act, or CARES, was quickly passed and ratified in a bipartisan effort to relieve some of the strain from the economic fallout due to the impact of the COVID-19 outbreak. We have highlighted below what we feel are the most important aspects of the act for businesses.

(1)  Tax Due Dates & Payments – Income Tax Returns & Income Tax Payments

  • The due date for tax returns normally due on April 15 is now July 15.  Any payments normally due on April 15 (2019 extension, 2020 1st quarter estimated tax) are also now due on July 15.  The 2020 second quarter estimated tax payments are currently still due on June 15.

 

(2)  Requirement to Provide Paid Sick & Family Leave

General Information

  • This applies to all companies with fewer than 500 employees (“Qualified Employers”), but there is language that says that employers with under 50 employees may be exempt from this requirement.  However, there is no additional guidance on what the requirements of exemption are available at this time.  Guidance has been promised in the coming weeks.
  • Qualified Employers are required to pay sick or family leave to their employees who are unable to work or telework because of one of these six circumstances:
    • #1 – The employee is subject to a Federal, State, or local quarantine or isolation order related to COVID-19
    • #2 – The employee has been advised by a health care provider to self-quarantine related to COVID-19
    • #3 – The employee is experiencing COVID-19 symptoms and is seeking a medical diagnosis
    • #4 – The employee is caring for an individual subject to an order described in #1 or #2
    • #5 – The employee is caring for a child whose place of care is closed (or child care is unavailable) for reasons related to COVID-19
    • #6 – The employee is experiencing any other substantially-similar condition specified by the Secretary of Health and Human Services, in consultation with the Secretaries of Labor and Treasury

Duration & Amount of Payments

  • For all circumstances except #5 Qualified Employers are required to provide up to 80 hours or paid leave for full-time employees.  Part-time employees are also eligible to receive pay at a reduced hour level, consistent with the hours they regularly work.
  • For circumstance #5 Qualified Employers are require to provide up to 12 weeks of paid leave.
  • The amount required to be paid is different depending on the circumstance of the employee.
    • For circumstances #1, 2, and 3 the paid leave is equal to the greater of the employee’s (1) regular pay rate, or (2) the applicable minimum wage, but capped at $511 per day and $5,110 in the aggregate.
    • For scenarios #4 and 6 the paid leave is equal to the greater of (1) 2/3 of their regular pay rate, or (2) 2/3 of the applicable minimum wage, but capped at $200 per day and $2,000 in the aggregate.
    • For scenario #5 the numbers are the same as scenarios #4 and 6, but the payments could last up to 12 weeks and reach a maximum of $12,000.
  • Note that a Qualified Employer is required to provide notice to all of their employees about their rights under this act.  See the attached flyer provided by the Department of Labor that can be distributed to your employees.

 

(3)  Payroll Tax Credit for Sick and Family Leave Paid

  • If a Qualified Employer pays sick or family leave as noted above, they will be entitled to a refundable tax credit against payroll taxes equal to 100% of those wages.  In essence, the government is requiring Qualified Employers to pay the family and sick leave, and then they will be reimbursing them for all of it through payroll tax credits.
  • The challenge for a Qualified Employer is tracking which employees are unable to work due to the circumstances above, making sure they are provided with the appropriate pay, and claiming the corresponding tax credit.  There is still uncertainty concerning the mechanics of claiming the credit on payroll tax returns.
  • This tax credit can also be claimed by self-employed taxpayers, and will be reported on 2020 tax returns as an offset to regular income taxes.

 

(4)  Employee Retention Tax Credits

  • This credit is available to (1) businesses that were partially or fully suspended during any calendar quarter during 2020 because of an order from an appropriate government authority, or (2) businesses that remain open, but during any quarter of 2020 gross receipts for the quarter were 50% less than what they were during the same quarter in 2019.
  • If a company qualifies due to the second point above continue to qualify until their gross receipts exceed 80% of their gross receipts for the same calendar quarter in the prior year.
  • For each eligible quarter, the credit will offset a company’s 6.2% share of Social Security payroll taxes equal to 50% of the “qualified wages” paid to each employee for the quarter, not to exceed $10,000 of wages per employee across all quarters.
  • For an employer with more than 100 employees, “qualified wages” includes only wages that were paid by the employer to an employee not providing services due to the two circumstances above.
  • For an employer with less than 100 employees, “qualified wages” includes wages paid to all employees, whether they are providing services or not.
  • This credit is unavailable if an employer takes out a Payroll Protection Loan under 7(a) of the Small Business Act as described below.

 

(5)  Payroll Tax Deferral

  • The government will be allowing companies to defer the payment of the 6.2% employer payroll tax for the remainder of 2020.  50% of the tax due would be payable on December 31, 2021, and the other 50% would be payable on December 31, 2022.
  • This gives businesses that have cash flow needs a chance to retain cash now in a time of crisis and then pay it back later.
  • Self-employed individuals are also able to defer paying 50% of their own self-employment tax from the date of enactment through the end of 2020.  Half of the deferral amount would similarly be payable on December 31, 2021, and the other half would be payable on December 31, 2022.
  • This deferral is unavailable if an employer takes out a Payroll Protection Loan under 7(a) of the Small Business Act as described below.

 

(6)  Small Business Loans (Paycheck Protection Loans)

General Information

  • The government has set aside $350 billion for small business loans available to employers with fewer than 500 employees.  These loans are available during a covered period of February 15, 2020 through June 30, 2020.
  • The amount of the loan is limited to the lesser of:
    • The sum of (1) average monthly payroll costs for the 1-year period ending on the date the loan was made, multiplied by 2.5, and (2) any disaster loan taken out after January 31, 2020 that has been refinanced into a paycheck protection loan, and
    • $10 million
  • The loans have a maximum maturity of 10 years and an interest rate not to exceed 4%.  The standard fees typically imposed under Section 7 of the Small Business Act are waived, and the loans are fully guaranteed by the federal government (no personal guarantee is required by the business owner).  There are no prepayment penalties, and the typical SBA requirement that borrowers not be able to obtain credit elsewhere is waived.
  • Borrowers must certify that the loan is necessary due to the uncertainty of current economic conditions and that they will use the funds to retain workers, maintain payroll, or make lease, mortgage, and utility payments.
  • The SBA has no recourse against any borrower for non-payment of the loan, except where the borrower has used the loan proceeds for a non-allowable purpose.

Loan Forgiveness / Deferral of Payments

  • Any portion of the loans that, during the 8-week covered period, are used for (1) payroll costs (does not include payroll tax or compensation above $100k to any one employee), (2) mortgage interest, (3) rent, or (4) any qualified sick or family leave noted above can be forgiven on a tax-free basis.  This means that a company receiving loan forgiveness will not have to record taxable cancellation of debt income.
  • The amount of tax-free loan forgiveness can be reduced if the employer (a) reduces its workforce during the 8-week covered period when compared to prior periods, or (b) reduces the salary or wages paid to an employee by more than 25% during the covered period.
  • Payments of principal, interest, and fees on these loans will be deferred for at least 6 months, but not more than 1 year.  The SBA will also pay the principal, interest, and associated fees on certain pre-existing SBA loans for 6 months.

 

(7)  Changes to Net Operating Loss Rules

  • The CARES Act provides two benefits related to net operating losses.
  • First, it allows losses arising in 2018, 2019, and 2020 to be carried back up to five years.  Taxpayers will be able to elect to forgo the carryback, and instead carry the losses forward.
  • Second, it repeals the 80% income limitation for net operating loss deductions for years beginning before 2021.  This means any losses carried to 2019 or 2020 will be permitted to offset 100% of taxable income rather than the 80% previously allowed.

 

(8)  Alternative Minimum Tax Credits

  • Starting in tax year 2018, C-Corporate taxpayers were able to recover unused AMT credits over a period of 4 years – from 2018 through 2021.
  • The CARES Act modifies this by making all AMT credits immediately refundable.

 

(9)  Technical Correction for Qualified Improvement Property

  • Under the Tax Cuts & Jobs Act (TCJA), qualified improvement property had a depreciable life of 39 years.  This made it ineligible for bonus depreciation, since statute dictates that only assets with a life of 20 years or less is eligible for bonus depreciation.
  • The CARES Act provides a technical correction to the depreciable life of qualified improvement property, changing the depreciable life from 39 years to 15 years.  The change is retroactive to January 1, 2018.  As such, taxpayers are entitled to file amended returns to accelerate depreciation on qualified improvement property placed in service on prior year tax returns.

 

This is a lot of information and we have tried to highlight the items that we thought might be more applicable to our clients.  There are many other provisions as well, and if you hear of any about which you have questions please let us know and we will be happy to try and answer the questions as best we can.  If there are items above that you would like us to look into more, let us know and we can try and help.  Note that we are still waiting for a lot of the practical application for these provisions, so there will be questions that we won’t be able to answer right away but it still doesn’t hurt to ask them.

Our offices are open to employees only, but many of our employees have chosen to work from home for the foreseeable future. Please feel free to e-mail us with any questions you may have.