covid-19 tax stimulus

COVID-19 Tax Stimulus

By Jason Watson, CPA

Posted March 26, 2020

Updated March 27, 2020 11:43AM, House Passes CARES Act, Sent to President Trump

Updated March 27, 2020 5:46PM, President Trump Signs Bill

There’s been a flurry of activity surrounding the COVID-19 tax stimulus with changes in tax filing deadlines, paid sick leave, tax credits, stimulus payments and all kinds of other stuff. We have attempted, to the best of our abilities during a challenging tax season, to synthesize all the changes into one spot. Some of this we ripped off from other authorities and some is actually original thought. Some of this comes from the WSJ, NATP and the IRS, plus the Committee on Finance’s short-paper.

Also… please forgive us… the information is coming hard and fast… from several different sources. Let’s not forget that we remain in the middle of tax season and taking time to get this stuff out is tough.

Right now we have-

  1. Families First Coronavirus Response Act (FFCRA)… done. Here’s DOL summary.
  2. Coronavirus Aid, Relief and Economic Security Act (CARES Act) including Paycheck Protection Program
  3. IRS Notice 2020-18 delaying tax filing and payment dates.
  4. SBA Disaster Loans to include COVID-19 per state declaration.

We encourage you to come back to this post often as we receive further guidance. Here we go-

Coronavirus Stimulus Bill

The short title is “Coronavirus Aid, Relief, and Economic Security Act” or the “CARES Act.” The person or committee that come up with these names is amazing. TARP, SECURE, and now CARES. As of March 25, 2020, the bill had passed the Senate and was being sent back to the House. Therefore, some of these details might be modified, but the general gist is this-

  • $367 billion loan program for small businesses with interest free options and incentives not to layoff workers.
  • $500 billing lending fund for industries (such as airlines), cities and states. Airlines specifically received an additional $29 billion in grants and another $29 billion in loan guarantees.
  • Health care providers would secure $130 billion which includes grants to help fight the coronavirus and make up for dollars they have lost by delaying elective surgeries and other procedures to focus on the outbreak.
  • $150 billion for states and local governments.
  • Boosts unemployment insurance maximum benefits another $600 per week for the next four months (this is interesting since Colorado is already at $618 while Alabama is at $275… states vary wildly). It also expands benefits to free-lancers, gig workers and other similar one-person operators. A side note, this $600 “boost” in unemployment benefits that was highly contested since in some cases people would earn more not working, but it prevailed anyway.

Those are the big numbers. There are other devils in the details. By comparison, the $2 trillion stimulus package dwarfs the 2008 financial crisis package of $700 billion.

COVID-19 Tax Stimulus Payments

According to WSJ’s article titled Coronavirus Stimulus Payments which summed it up quite well-

The plan provides $1,200 for each adult and $500 for each child under 17. A married couple with two children would get $3,400. The payments go to almost any adult with a Social Security number, as long as they aren’t dependents of someone else. Those adults get the payments for the children in their household.

Payments start phasing out for those with income above $75,000 in adjusted gross income for individuals, $112,500 for heads of household (often single parents) and $150,000 for married couples. The payments start shrinking above those levels.

For those with no children, the benefit disappears at $99,000 for individuals and $198,000 for married couples.

The government will use 2019 tax returns to set the payment amounts and 2018 tax returns if 2019 isn’t available. According to some economists payments will be in May (versus April 6 which is touted by the White House). What is unknown is if you qualify under 2018 but not 2019, do you still receive the payment? Or vise-versa? Or, if you qualify under 2018’s income amounts, receive the payments, file 2019’s tax returns which do not qualify because of income phaseouts, do you have to return the payments?

You can read Section 2201 from the Committee on Finance.

COVID-19 Student Loans

The CARES Act included five provisions surrounding student loans-

  1. People can stop making payments on student loans through September 30, 2020. Your balance is frozen.
  2. No interest on student loans through September 30, 2020.
  3. Skipping payments through September 30, 2020 counts towards the public service loan forgiveness program.
  4. Detailed elsewhere in our blog post, employers can provide up to $5,250 of student loan payments tax-free to the borrower.
  5. Suspension of debt collection for student loans.

This applies to federal student loans only, and not private student loans. Also, there was chatter about student loan forgiveness, but that was nixed.

Other COVID-19 Tax Stimulus Rebates and Provisions

These are selected excerpts from the Committee on Finance’s short paper on the CARES Act.

Section 2202. Special Rules for Use of Retirement Funds

Consistent with previous disaster-related relief, the provision waives the 10-percent early withdrawal penalty for distributions up to $100,000 from qualified retirement accounts for coronavirus-related purposes made on or after January 1, 2020. In addition, income attributable to such distributions would be subject to tax over three years, and the taxpayer may recontribute the funds to an eligible retirement plan within three years without regard to that year’s cap on contributions.

Updated: This was modified to be zero-tax liability if paid back in three years if you took a distribution because of the coronavirus. Basically you can borrow $100,000 from your IRA or company 401k, and pay it back within 3 years without consequence. MarketWatch is calling these CVDs… corona virus distributions. Nice.

A coronavirus-related distribution is a distribution of up to $100,000 from an eligible retirement plan, including an IRA, that is made on or after 1/1/20 and before 12/31/20 to an individual:

  • Who is diagnosed with COVID-19 by a test approved by the Centers for Disease Control and Prevention.
  • Whose spouse or dependent (generally a qualifying child or relative who receives more than half of his or her support from you) is diagnosed with COVID-19 by such a test.
  • Who experiences adverse financial consequences as a result of being quarantined, furloughed, laid off, or having work hours reduced due to COVID-19.
  • Who is unable to work because of lack of child care due to COVID-19 and experiences adverse financial consequences as a result.
  • Who owns or operates a business that has closed or had operating hours reduced due to COVID-19 and has experienced adverse financial consequences as a result.
  • Who has experienced adverse financial consequences due to other COVID-19-related factors to be specified in future IRS guidance.

Section 2203. Temporary Waiver of RMDs

The provision waives the required minimum distribution rules for certain defined contribution plans and IRAs for calendar year 2020.

covid-19 tax stimulusSection 2204. Allowance for Partial Above the Line Deduction for Charitable Contributions

The provision encourages Americans to contribute to churches and charitable organizations in 2020 by permitting them to deduct up to $300 of cash contributions, whether they itemize their deductions or not.

Section 2206. Exclusion for Certain Employer Payments of Student Loans

The provision enables employers to provide a student loan repayment benefit to employees on a tax-free basis. Under the provision, an employer may contribute up to $5,250 annually toward an employee’s student loans, and such payment would be excluded from the employee’s income.

Section 2301. Employee Retention Credit for Employers Subject to Closure Due to COVID-19

The provision provides a refundable payroll tax credit for 50 percent of wages paid by employers to employees during the COVID-19 crisis. The credit is available to employers whose (1) operations were fully or partially suspended, due to a COVID-19-related shut-down order, or (2) gross receipts declined by more than 50 percent when comparedto the same quarter in the prior year.

Section 2302. Delay of Payment of Employer Payroll Taxes

The provision allows employers and self-employed individuals to defer payment of the employer share of the Social Security tax they otherwise are responsible for paying to the federal government with respect to their employees. Employers generally are responsible for paying a 6.2-percent Social Security tax on employee wages. The provision requires that the deferred employment tax be paid over the following two years, with half of the amount required to be paid by December 31, 2021 and the other half by December 31, 2022. The Social Security Trust Funds will be held harmless under this provision.

Section 2303. Modifications for Net Operating Losses

The provision relaxes the limitations on a company’s use of losses. Net operating losses (NOL) are currently subject to a taxable-income limitation, and they cannot be carried back to reduce income in a prior tax year. The provision provides that an NOL arising in a tax year beginning in 2018, 2019, or 2020, can be carried back five years. The provision also temporarily removes the taxable income limitation to allow an NOL to fully offset income. These changes will allow companies to utilize losses and amend prior year returns, which will provide critical cash flow and liquidity during the COVID-19 emergency.

These are the biggies from the Committee on Finance summary that we feel most people care about. You can read the full text here. Caution: These provisions have not been approved by the House yet (as of 7:09PM, March 26, 2020).

Tax Credits for Small Businesses

There are two credits for small businesses that are included in the COVID-19 tax stimulus and are available now-

  • Paid Sick Leave Credit
  • Child Care Leave Credit

According the Department of Labor and their summary of the Families First Coronavirus Response Act (FFCRA)

The act requires certain employers to provide their employees with paid sick leave or expanded family and medical leave for specified reasons related to COVID-19.[1] The Department of Labor’s (Department) Wage and Hour Division (WHD) administers and enforces the new law’s paid leave requirements. These provisions will apply from the effective date through December 31, 2020.

Generally, the Act provides that covered employers must provide to all employees:[2]

  • Two weeks (up to 80 hours) of paid sick leave at the employee’s regular rate of pay where the employee is unable to work because the employee is quarantined (pursuant to Federal, State, or local government order or advice of a health care provider), and/or experiencing COVID-19 symptoms and seeking a medical diagnosis; or
  • Two weeks (up to 80 hours) of paid sick leave at two-thirds the employee’s regular rate of pay because the employee is unable to work because of a bona fide need to care for an individual subject to quarantine (pursuant to Federal, State, or local government order or advice of a health care provider), or care for a child (under 18 years of age) whose school or child care provider is closed or unavailable for reasons related to COVID-19, and/or the employee is experiencing a substantially similar condition as specified by the Secretary of Health and Human Services, in consultation with the Secretaries of the Treasury and Labor.

A covered employer must provide to employees that it has employed for at least 30 days:[3]

  • Up to an additional 10 weeks of paid expanded family and medical leave at two-thirds the employee’s regular rate of pay where an employee is unable to work due to a bona fide need for leave to care for a child whose school or child care provider is closed or unavailable for reasons related to COVID-19.

Covered Employers

The paid sick leave and expanded family and medical leave provisions of the FFCRA apply to certain public employers, and private employers with fewer than 500 employees.[4] Most employees of the federal government are covered by Title II of the Family and Medical Leave Act, which was not amended by this Act, and are therefore not covered by the expanded family and medical leave provisions of the FFCRA. However, federal employees covered by Title II of the Family and Medical Leave Act are covered by the paid sick leave provision.

Small businesses with fewer than 50 employees may qualify for exemption from the requirement to provide leave due to school closings or child care unavailability if the leave requirements would jeopardize the viability of the business as a going concern.

Qualifying Reasons for Leave

Under the FFCRA, an employee qualifies for paid sick time if the employee is unable to work (or unable to telework) due to a need for leave because the employee:

  1. is subject to a Federal, State, or local quarantine or isolation order related to COVID-19;
  2. has been advised by a health care provider to self-quarantine related to COVID-19;
  3. is experiencing COVID-19 symptoms and is seeking a medical diagnosis;
  4. is caring for an individual subject to an order described in (1) or self-quarantine as described in (2);
  5. is caring for a child whose school or place of care is closed (or child care provider is unavailable) for reasons related to COVID-19; or
  6. is experiencing any other substantially-similar condition specified by the Secretary of Health and Human Services, in consultation with the Secretaries of Labor and Treasury.

Under the FFCRA, an employee qualifies for expanded family leave if the employee is caring for a child whose school or place of care is closed (or child care provider is unavailable) for reasons related to COVID-19.

The IRS shockingly has some good examples. Here is a snippet from their website

If an eligible employer paid $5,000 in sick leave and is otherwise required to deposit $8,000 in payroll taxes, including taxes withheld from all its employees, the employer could use up to $5,000 of the $8,000 of taxes it was going to deposit for making qualified leave payments. The employer would only be required under the law to deposit the remaining $3,000 on its next regular deposit date.

If an eligible employer paid $10,000 in sick leave and was required to deposit $8,000 in taxes, the employer could use the entire $8,000 of taxes in order to make qualified leave payments and file a request for an accelerated credit for the remaining $2,000.

Equivalent child care leave and sick leave credit amounts are available to self-employed individuals under similar circumstances. These credits will be claimed on their income tax return and will reduce estimated tax payments.

The credit will offset payroll taxes and more guidance is being released.

Paycheck Protection Program

While this remains wonderful information, we have carved this out to a separate blog post entirely titled Paycheck Protection Program. We’ve added more analysis and re-arranged some things.

As mentioned above, the CARES Act includes a $350 billion loan program titled Paycheck Protection Program for businesses with fewer than 500 employees (including sole proprietors, independent contractors and anyone otherwise self-employed). Under the bill, entities can use the funds to make payroll and cover other expenses, including rent, utilities, mortgage interest and interest on other debt obligations, from February 15, 2020 to June 30, 2020. Eligible entities may borrow up to $10 million, based on a formula tied to 2.5 times average monthly payroll, covering employees making up to $100,000 per year.

PPP Payroll Costs Include

What is considered payroll? According to the code-

(aa) the sum of payments of any compensation with respect to employees that is a—

(AA) salary, wage, commission, or similar compensation;

(BB) payment of cash tip or equivalent;

(CC) payment for vacation, parental, family, medical, or sick leave;

(DD) allowance for dismissal or separation;

(EE) payment required for the provisions of group health care benefits, including insurance premiums;

(FF) payment of any retirement benefit; or

(GG) payment of State or local tax assessed on the compensation of employees; and

(bb) the sum of payments of any compensation to or income of a sole proprietor or independent contractor that is a wage, commission, income, net earnings from self-employment, or similar compensation and that is in an amount that is not more than $100,000 in 1 year, as prorated for the covered period; and

(II) shall not include—

(aa) the compensation of an individual employee in excess of an annual salary of $100,000, as prorated for the covered period;

(bb) taxes imposed or withheld under chapters 21, 22, or 24 of the Internal Revenue Code of 1986 during the covered period;

(cc) any compensation of an employee whose principal place of residence is outside of the United States;

(dd) qualified sick leave wages for which a credit is allowed under section 7001 of the Families First Coronavirus Response Act (Public Law 116–127); or

(ee) qualified family leave wages for which a credit is allowed under section 7003 of the Families First Coronavirus Response Act (Public Law 116–127); and

SBA Loan Forgiveness

According to the CARES Act, payments can be deferred by up to a year, and businesses will be able to apply for forgiveness of the loan (or a portion of it), based on the amount used during the eight weeks following loan approval. The loan forgiveness amount, which is excluded from taxable income, is equal to the payroll costs, mortgage interest payments, rent, and utility payments incurred or paid by a recipient during the covered period. So… not just payroll, which is nice!

PPP forgiveness calculations is two-step process; what did you spend, and is there a required adjustment for changes in your staffing.

Paycheck Protection Program Forgiveness Amount (Step 1)

The amount of forgiveness is the amount spent for eight weeks following loan “closing” on payroll, rent, utilities and mortgage interest (any business loan interest, not just real estate). Here are some more defined terms from the code-

(2) the term “covered mortgage obligation” means any indebtedness or debt instrument incurred in the ordinary course of business that—

(A) is a liability of the borrower;
(B) is a mortgage on real or personal property; and
(C) was incurred before February 15, 2020;

(3) the term “covered period” means the 8-week period beginning on the date of the origination of a covered loan;

(4) the term “covered rent obligation” means rent obligated under a leasing agreement in force before February 15, 2020;

(5) the term “covered utility payment” means payment for a service for the distribution of electricity, gas, water, transportation, telephone, or internet access for which service began before February 15, 2020;

So amounts that you spend on payroll, interest, rent and utilities during the covered period might be forgiven. Any amount not forgiven would have a maximum interest rate of 4%. The bill also waives typical SBA loan requirements that credit must be unavailable elsewhere and that the borrower must personally guarantee the amount or provide collateral. This is huge!

Additionally, small businesses applying for a loan will be eligible for up to a $10,000 emergency grant — which would be subtracted from the forgiven loan amount — that would be issued within three days of the application being received.

Paycheck Protection Program Employee Reductions (Step 2)

The following is straight from the H.R.748 text under Section 1106, and is referencing the loan forgiveness calculations based on employees or pay reductions-

(2) REDUCTION BASED ON REDUCTION IN NUMBER OF EMPLOYEES.—

(A) IN GENERAL.—The amount of loan forgiveness under this section shall be reduced, but not increased, by multiplying the amount described in subsection (b) by the quotient obtained by dividing—

(i) the average number of full-time equivalent employees per month employed by the eligible recipient during the covered period; by

(ii)

(I) at the election of the borrower—

(aa) the average number of full-time equivalent employees per month employed by the eligible recipient during the period beginning on February 15, 2019 and ending on June 30, 2019; or

(bb) the average number of full-time equivalent employees per month employed by the eligible recipient during the period beginning on January 1, 2020 and ending on February 29, 2020; or

(II) in the case of an eligible recipient that is seasonal employer, as determined by the Administrator, the average number of full-time equivalent employees per month employed by the eligible recipient during the period beginning on February 15, 2019 and ending on June 30, 2019.

(B) CALCULATION OF AVERAGE NUMBER OF EMPLOYEES.—For purposes of subparagraph (A), the average number of full-time equivalent employees shall be determined by calculating the average number of full-time equivalent employees for each pay period falling within a month.

(3) REDUCTION RELATING TO SALARY AND WAGES.—

(A) IN GENERAL.—The amount of loan forgiveness under this section shall be reduced by the amount of any reduction in total salary or wages of any employee described in subparagraph (B) during the covered period that is in excess of 25 percent of the total salary or wages of the employee during the most recent full quarter during which the employee was employed before the covered period.

(B) EMPLOYEES DESCRIBED.—An employee described in this subparagraph is any employee who did not receive, during any single pay period during 2019, wages or salary at an annualized rate of pay in an amount more than $100,000.

There is no reduction if a borrower re-hires the employees who earlier were terminated. Check out (aa) and (bb) above again; if you grew in the second half of 2019, and then laid some employees off in March 2020, it might not negatively affect the loan forgiveness calculation.

Subsection (b) is referenced at the start of this verbiage and it is the amount of forgiveness eligibility. As detailed above, and repeated here, the specific text reads-

(b) Forgiveness.—An eligible recipient shall be eligible for forgiveness of indebtedness on a covered loan in an amount equal to the sum of the following costs incurred and payments made during the covered period:

(1) Payroll costs.
(2) Any payment of interest on any covered mortgage obligation (which shall not include any prepayment of or payment of principal on a covered mortgage obligation).
(3) Any payment on any covered rent obligation.
(4) Any covered utility payment.

So, let’s break this down. Some time in the future when you are applying for loan forgiveness (which sounds like a trip to the dentist), you need to compute the monies spent on the big four (see above)… and then determine a ratio to be applied if you experienced an employee / wage reduction.

What is WCG Doing?

Like everyone, we are very concerned about the short-term future economy and resulting cash flow. Our predictive confidence is zero; we just don’t know. We anticipate obtaining a PPP loan for about $350,000 and we estimated that our expenses above (payroll, rent, utilities and interest) will be about $260,000 for an eight-week period. That amount should be forgiven leaving a $90,000 loan at 4% amortized for 10 years with 6 months of deferred payments.

Paycheck Protection Plan Application

This is different than the SBA Economic Injury Disaster Loan program (see below). The loan described above is administered through private institutions such as banks, where as the loan described below is a direct loan through the Small Business Administration.

Quick stats-

  • No collateral.
  • No personal guarantees (non-recourse debt).
  • 4% interest on remaining loan balance after forgiveness, amortized 10 years.
  • No prepayment penalty.

Borrowers will be required to certify-

  • The uncertain economic conditions make necessary the loan to support ongoing operations.
  • The proceeds will be used for the purposes discussed above.
  • The recipient does not have an application and has not received another loan for the same purpose or duplicative amounts.

The button below is a 2-page PDF from Central Bank & Trust, a Colorado bank that WCG is using for PPP, that does a lot of SBA lending including the PPP loan (Paychecks Protection Program). And… the U.S. Chamber put together a scratch-and-sniff straightforward PDF. Check them out-

SBA Disaster Loan Assistance

The Small Business Administration has had SBA disaster loans in place for several years, but they were usually thought of in the context of hurricanes, fires, floods, etc. However, given the vagueness of the laws (which is good), the SBA economic injury disaster loans are available to small business owners affected by COVID-19.

More states are being added daily to the list of eligible states. While your state might not be eligible today, it is quite possible all 50 states plus District of Columbia will be included. Use the buttons below to get the most recent information.

Tax Returns and Payments Extended

Under IRS Notice 2020-18, tax returns that were due April 15, 2020 are automatically extended to July 15, 2020. In addition, taxpayers can also defer federal income tax payments due on April 15, 2020, to July 15, 2020, without penalties and interest, regardless of the amount owed. This supersedes IRS Notice 2020-17.

IRA payments and Q1 2020 estimated income tax payments are also deferred.

What about states? Forbes has been compiling a wonderful list and it is available here. Here is a snippet for California and Colorado-

California

FTB is postponing until July 15 the filing and payment deadlines for all individuals and business entities for 2019 tax returns, 2019 tax return payments, 2020 1st and 2nd quarter estimate payments, 2020 LLC taxes and fees, and 2020 Non-wage withholding payments.

Colorado

The income tax payment deadline has been extended for all Colorado taxpayers by 90 days until July 15, 2020. All income tax returns that were required to be filed by April 15, 2020 are granted a six-month extension, and are due on or before October 15, 2020.

Forbes also has a list of states who have closed their tax offices or departments. For example, Colorado offices are closed thru April 18. No word on California yet (as of 5:46PM mountain on March 26, 2020).

Jason Watson, CPA is the Managing Partner of WCG Inc., a business consultation and tax preparation CPA firm located in Colorado Springs, and is the author of Taxpayer’s Comprehensive Guide on LLC’s and S Corps which is available online and from average retailers.