Congress Passes Coronavirus Relief Bill

Earlier this week, Congress passed a major new COVID-19 relief bill (Consolidated Appropriations Act, 2021). The bill’s headline provisions include another round of stimulus payments and extended unemployment benefits for individuals, as well as funding for vaccine distribution. There are also major tax and financial provisions to help businesses hit hard by COVID-19.

The new bill is massive and complex, and as of this writing, its enactment into law remains uncertain. But it does contain some good news.

Deductions for PPP-related expenditures

The Paycheck Protection Program was a centerpiece of the original CARES Act. While the loans provided invaluable assistance for business, one problem that arose had to do with the deductibility and timing of expenditures made with PPP funds. Earlier in 2020, the IRS ruled that if a business had a reasonable expectation that its PPP loans would be forgiven, expenditures made with PPP proceeds were non-deductible. This treatment caused problems for some businesses (especially those with a fiscal year-end) because the disallowed deductions and the excluded income (from the PPP loan forgiveness) didn’t happen in the same tax year.

The new legislation overrides the initial guidance from IRS and explicitly states that expenditures funded with PPP proceeds will be deductible. So even though the loan proceeds will not have to be paid back and even though the forgiveness of debt income is not taxable, businesses will still be allowed to take deductions for expenditures they make with the proceeds. This provision is a major win for taxpayers.

The legislation also clarifies that when a PPP loan is forgiven, the non-taxable income will nonetheless increase an owner’s basis in their pass-through entity, which means that losses are more likely to be fully deductible by the owners.

Round Two of the Paycheck Protection Program

While many businesses are still waiting to apply (or waiting for approval of their applications) for forgiveness of their PPP loans from earlier in 2020, the new law provides a second round of PPP loans for some businesses and expands the types of entities that can apply for an initial PPP loan.

The new PPP provisions (as with the original) are complicated, but in general terms, a business that has used or will soon use all of its initial loan can qualify for a second loan. In order to qualify, a business must have 300 or fewer employees and must demonstrate a 25% decline in revenue in any quarter in 2020 when compared to the same quarter in 2019.

As with the first round of PPP loans, the amount of the loan is based on an employer’s past payroll costs. The loan amount is up to 2.5 times an employer’s average monthly payroll costs over a specified period, with a maximum loan of $2 million. (The loan amount for hotels and restaurants is 3.5 times average monthly payroll costs, with the same $2 million limit.) As with the first round of PPP loans, there are special rules allowing separate locations to be treated as separate businesses, as well as special provisions for businesses that weren’t in existence for the entire measurement period.

Some businesses that didn’t qualify or didn’t apply for the first PPP wave can also apply under the new provisions. The expanded eligibility list includes 501(c)(6) organizations and entities that were previously barred because they received other types of assistance from SBA or other government programs.

Once again, the uses of the PPP loan are restricted to certain types of expenditures, with at least 60% of the proceeds required to be used for payroll costs. Borrowers who don’t meet these criteria will face a reduction in the amount of loan forgiveness. Many of the other requirements from the first round of PPP have also been carried over to the second round.

Additionally, the bill includes provisions for streamlined forgiveness application procedures and reduced recordkeeping requirements for smaller businesses. These provisions should help ease the backlog in processing loan forgiveness applications.

New Maryland Pass-through Entity Tax Provides a Year-end Tax Savings Opportunity

By Greg Yoder

In 2020, Maryland enacted an optional tax on pass-through entities that allows them to, in effect, pay some state income taxes on behalf of their resident members. This law – along with a recent notice from the IRS — may give an important federal tax benefit to members of Maryland pass-through entities. There are, however, some important complications to know about, and taxpayers who want to benefit should act before the end of 2020.

Background

As you know, back at the very end of 2017, the Tax Cuts and Jobs Act was rushed into law, and one of its revenue-raising provisions was to limit the itemized deduction for income and property taxes to $10,000 per year. For higher-income taxpayers – particularly those living in states with higher state income tax rates – this change caused a substantial limit on their itemized deductions. Many of our clients pay property taxes in excess of $10,000 per year; consequently, they effectively get no deduction for their state income taxes. Between this limitation and the increase in the standard deduction, many taxpayers who had itemized their deductions for decades suddenly found themselves using the standard deduction.

States whose residents had suddenly lost the ability to deduct their state income taxes have tried various ways to help their residents get around this problem. For example, some states tried to have state income taxes recast as charitable contributions. The IRS has quashed most of these efforts.

A more recent attempt to accomplish the same goal, however, has met with success. Midway through 2020, Maryland passed a law that allowed pass-through entities (S corporations, partnerships, and LLCs) to elect to pay tax on the income allocable to resident owners. The owners will then get a credit on their Maryland individual returns for their share of taxes paid at the entity level. Last month, Treasury released a notice effectively giving its blessing to this treatment. The notice (Notice 2020-75) says that if a state imposes an entity level tax on a pass-through entity, subject to certain restrictions, the entity may take the tax as a deduction in calculating its ordinary income.

The effect of the new state laws and the IRS notice is that taxes that previously were “wasted” as a disallowed itemized deduction will now reduce ordinary income from a pass-through entity. Put another way, taxes that were non-deductible have now effectively become an above-the-line deduction. Notice 2020-75 applies to taxes paid to other states as well as MD. Certain taxes paid to DC will qualify for the same treatment, and other states have enacted similar measures.

There are a couple of intricacies that you need to be aware of. First, there may be some problems for pass-through entities that have both resident and non-resident owners. Second, there was a drafting error in the Maryland law that makes its efficacy questionable; however, it appears that there will be a retroactive technical amendment early next year to fix this problem. Additionally, the tax will only be deductible at the entity level in the year it’s paid, so pass-through entity owners who want to take advantage of the new law in 2020 have to make sure the entity pays the taxes before the end of the year.

The IRS notice tells us what Treasury intends to put in regulations, but the regulations themselves have not been issued. Because we don’t have final regulations and because we don’t have the Maryland technical corrections yet, we can’t say with certainty that all pass-through entity owners can benefit. What we can say:

  1. Pass-through entities that have only Maryland resident owners can get a benefit. In some cases, this benefit will be quite large, and the entities should begin planning immediately so that they can make deductible payments by the end of the year.
  2. Pass-through entities that have both resident and non-resident owners may get a similar benefit, but they may have to take additional steps to do so. Partnerships and LLCs may have to make changes to their operating agreements. S corporations with both resident and non-resident shareholders may not have certainty before the end of the year, but there may also be a work-around for some S corporations.

As is the case with all new tax developments, we haven’t included all of the details, and there are a number of them. Pass-through entities (and their owners) who might benefit from the new legislation should contact us so that we can help them get the largest tax benefit possible.

Steve Braunstein – CEO You Should Know by M&T Bank

iHeartMedia Washington DC’s “CEO’s You Should Know” weekly program presented by M&T Bank features the most influential CEOs who lead businesses that drive our regional economy. This week, the #CEOYouShouldKnow is Snyder Cohn’s Steve Braunstein.

Learn more about Steve and hear his interview.

Retirement Account Withdrawals Under the CARES Act

By Camille Smith

With 2020 coming to a close, it is the time for year-end tax planning. Meanwhile, many regions are experiencing a spike in coronavirus cases. To those ends, below is a refresher on some of the retirement related provisions of the CARES Act, passed in March of this year.

Required Minimum Distributions:

If you must generally take a required minimum distribution (RMD), for 2020 you can skip the distribution. This includes both RMD’s for over 70 ½ (72 if born after June 30, 1949) and inherited IRA’s. The distribution waiver applies to defined-contribution retirement plans like 401(k)’s, IRA’s, 403(b)’s. It does not apply to defined-benefit plans (i.e. pension plans). Keep in mind, it may make sense to take your RMD in 2020 or even convert your Traditional IRAs to Roth IRAs.  This should be considered as a part of your 2020 year-end planning.

Coronavirus-related Withdrawal:

If like many people, you have been impacted by the pandemic and need some financial relief, you may be able to use your retirement funds. A qualified individual may withdraw up to $100,000 from his/her eligible retirement plan and receive special tax treatment for the withdrawal.

To be considered a qualified individual, you (or your spouse) must have been diagnosed with the coronavirus or you experienced any of the following financial hardships due to the coronavirus.

  • Quarantine
  • Lay-off or furlough
  • Reduced work hours or reduced pay (including self-employment income)
  • Unable to work due to lack of child-care
  • Job offer rescinded or delayed
  • Your (or your spouse’s) business closed or had reduced hours

If you must take a distribution from your retirement account(s) due to Covid-19, the distribution is still subject to income taxes, but you can pay the taxes over three years (⅓ each year). You can also elect to pay the related income taxes in the first year. The distribution is not subject to the usual mandatory tax withholding. This withdrawal must be taken by 12/31/20.

If you are under the age of 59 ½, the additional 10% excise tax on early withdrawals is waived for coronavirus-related distributions.

Lastly, you may be able to repay the distribution back to your retirement account within three years and it would be treated as a rollover. In this case, you could claim a refund for any taxes you already paid on the withdrawal.

While taking a distribution from your retirement account may provide much needed relief, keep in mind that you will lose the tax deferred investment growth on any funds withdrawn.

For an in-depth review of the rules and requirements, see IRS Notice 2020-50 or the IRS Q&A. As with most things tax related, the rules are complex and we recommend that you consult your tax advisor.

Paycheck Protection Program Loan Forgiveness Updates – November 2020

By Billy Litz, CPA

The Small Business Administration (SBA) and the U.S. Treasury Department recently released a simplified two-page loan forgiveness application and issued an Interim Final Rule (IFR) for recipients of Paycheck Protection Program (PPP) loans of $50,000 or less. The IFR provides new guidance concerning forgiveness and loan review processes. Below are some highlights of this issuance:

    • You are no longer required to reduce forgiveness if you reduce the wages of employees during the loan cover period compared to the reference period.
    • Your paycheck protection loan forgiveness will not be reduced if you reduce the number of full-time equivalent employees.
    • Borrowers that use the new form aren’t required to show the calculations used to determine their loan forgiveness amount.
    • The new form requires less documentation – borrowers that use the new forms are advised to keep all documentation relating to their PPP loan but are not required to submit all of the materials with their application.

( IFR link – https://home.treasury.gov/system/files/136/PPP–IFR–Additional-Revisions-Loan-Forgiveness-Loan-Review-Procedures-Interim-Final-Rules.pdf )

Which Forgiveness application should you use?

There are now three different PPP forgiveness application forms, each with its own set of instructions. They are:

    • Form 3508S – Designed for borrowers with $50,000 or less in loans- So long as the total loan amount is under $2 million in aggregate with affiliates.

Form 3508S Application

Form 3508S Instructions

    • Form 3508 – All borrowers can use this form:

Form 3508 Application

Form 3508 Instructions

    • Form 3508 EZ – Borrowers must satisfy one of the following criteria to use the EZ form:
      • Self Employed Individuals, Independent contractors, or self-proprietors who had no employees at the time of the PPP loan application OR
      • Did not reduce annual salary or hourly wages of any employee by more than 25% during the covered period or alternative payroll covered period and did not reduce the number of employees between January 1st, 2020, and the end of the covered period OR
      • Did not reduce annual salary or hourly wages of any employee by more than 25% during the covered period or the alternative covered period AND was unable to operate during the covered period at the same level of business activity as before February 15, 2020, to compliance with Covid-19 requirements or guidance.

Application for Form 3508 EZ

Instructions for Form 3508 EZ

When are the applications due?

All three PPP Loan forgiveness applications displayed an expiration date of 10/31/2020, which caused some confusion. Based on the FAQ (click here to read), the borrowers may submit the application any time before the maturity date of the loan. However, if a borrower does not apply for forgiveness within 10 months after the end of their covered period, the borrower must begin making payments on their loan.

Loan Necessity Questionnaire

Additionally, the SBA (via lenders) has begun to issue a PPP Loan Necessity Questionnaire to businesses that received PPP loans over $2 million. The questionnaire will be used by SBA loan reviewers to evaluate the good-faith certification that these businesses made on their applications regarding the necessity of the loan due to economic uncertainty. For those businesses that receive this questionnaire, it is due (along with supporting documentation) within 10 business days from receipt from the lender.

As always, if you have any questions about the Paycheck Protection Program Loan, or your loan forgiveness calculation, please do not hesitate to reach out.

Disclaimer: Please note this article is based on the information that is currently available and is subject to change.

Saving for Health Related Items in a Health Savings Account (HSA)

By Alexandre Ptaszynski

A Health Savings Account (HSA), is an account that can be established to pay for certain current or future healthcare expenses, provided you are currently enrolled in a High Deductible Health Plan (HDHP). An HDHP that combines traditional health insurance coverage with an HSA provides a tax free way of saving for healthcare expenses. Compared to a traditional HMO, an HDHP/HSA combination will have lower monthly premiums, but a higher yearly deductible. Essentially, this means that HDHP members will pay less in monthly premiums, but will pay more when they need to access healthcare.

As mentioned previously, being enrolled in an HDHP is a prerequisite to opening an HSA. Depending on your age and health, being eligible to open an HSA could be a major incentive for switching from a traditional HMO to an HDHP. Here are some of the advantages of using an HSA to save for health related items:

  • HSAs can provide significant tax savings to the account owner. Some of which are:
    • HSA contributions are made on a pre-tax basis.
    • Money contributed to an HSA can be invested and the earnings are tax free.
    • HSA distributions used to pay for qualified medical expenses are non-taxable.
  • Once the account owner reaches the age of 65, they can use the HSA funds for non-medical expenses and not pay any withdrawal penalties (although income tax may be assessed on earnings).
  • Unlike a flexible spending account, unused funds roll forward year after year. There is no minimum spending requirement or penalty for letting your savings accumulate.
  • Since HSA contributions made through payroll are not subject to FICA, many employers offer yearly contribution matches or incentives to account owners who open HSAs. During your next open enrollment period, check with your employer to see if they offer an HSA contribution match.

Single coverage HSA owners are allowed to contribute a maximum of $3,550 in 2020 and $3,600 in 2021. Family coverage HSA owners are allowed to contribute a maximum of $7,100 in 2020 and $7,200 in 2021. Additionally, individuals over the age of 55 may make extra “catch-up” contributions of up to $1,000 per year.

This example should display the savings that an HSA provides. Let’s say you are a single and relatively healthy taxpayer in a 24% tax bracket who spends an average of $600 per year on healthcare expenses.

HDHP with HSA Traditional HMO
Yearly Premiums $1,200 $2,700
Amount towards Annual Deductible/Co Pays $   600 $   150
Employee Contributions to H.S.A. used to pay for deductible/co pays $1,650 $   –
Total cost of premiums & H.S.A. contribution/ Premium & Co Pays for HMO $2,850 $2,850
Benefits
Tax Savings on Premiums $   380 $   855
Tax Savings on HSA Contribution $   522 $   –
Employer Contribution to HSA $   300 $   –
Total Benefits $1,202 $   855
Total cost net of tax $1,648 $1,995
HSA Balance
Individual Contribution $1,650 $   –
Employer Contribution $   300 $   –
Less Health Expenditures $ (600) $   –
Ending HSA Balance $1,350 $   –

As you can see, the HDHP with HSA premiums not only costs less, but if you contribute roughly half the maximum amount to your HSA you will still have $1,350 of tax free money in your account at the end of the year. That money can be invested through your HSA provider with tax free growth or used on medical expenses the following year. Remember, there are no spending minimums and your savings will continue to roll over year after year with no penalties.

If you have any questions regarding how to set up or fund an HSA, as well as any questions or concerns regarding HDHPs and HSAs in general, please contact your tax professional.

Section 139 Payments – Another Way to Help Employees During the Pandemic

By Mandy Lam

Not only has COVID-19 had a profound impact on public health, but also on the economy – locally, nationally and globally. With no end in sight, employers can look to Section 139 of the Internal Revenue Code as a way to provide tax-free supplemental assistance to employees.

On March 13, 2020, President Trump officially declared the US outbreak of COVID-19 to be a national emergency thereby allowing employers to make tax exempt “qualified disaster relief payments” to employees under Section 139. Qualified disaster relief payments include amounts paid to (or for the benefit of) an individual to reimburse or pay personal, family, living, or funeral expenses that are incurred as a result of a qualified disaster. Note that qualified disaster relief payments, however, do not include: (i) payments for expenses that are otherwise paid for by insurance or other reimbursements; or (ii) income replacement payments, such as the payment of lost wages, lost business income, or unemployment compensation.

Section 139 does not impose any limit on the amount or frequency of qualified disaster payments that an employer can make to any individual employee or to all employees in the aggregate. In addition, the payments remain fully deductible for employers despite not being taxable to the recipients. There is no federal reporting or disclosure, so such payments are not reported on Form W-2 or 1099 and are not subject to federal income or payroll tax withholding.

Many of the requirements that exist for other types of benefits aren’t explicitly mandated for Section 139 payments. Section 139 doesn’t require a written plan, and it doesn’t have specific documentation or anti-discrimination requirements. Nonetheless, we encourage employers to maintain documentation to support reasonable payments.

Employers may consider the following in their disaster relief payment program:

  • Which employees are eligible to receive qualified disaster relief payments (i.e.: full time employees, number of years of service, etc.)
  • The type of expenses that are reimbursable (i.e.: expenses incurred to allow the employee to work from home, medical expenses not covered by insurance, etc.)
  • A dollar limit the employer imposes on Section 139 payments
  • The duration of the qualified disaster relief payments

Section 139 benefits won’t be practical for all employers, but it can be a useful part of your company’s response to COVID-19. If you’d like to discuss this or other financial strategies related to the pandemic, please feel free to contact us.

Frequently Asked Questions on PPP Loan Forgiveness

For answers to frequently asked questions on PPP Loan Forgiveness, click here.

How to Manage Your Paycheck Protection Program (PPP) Loan

Snyder Cohn’s Barbara Murphy Kromer joined other leaders to discuss how businesses can manage their Paycheck Protection Program (PPP) loan during these turbulent times.

Thank you, Small Business Network and Kelly Leonard for organizing the monthly morning sessions and addressing topics of interest to small business owners in Montgomery County, MD.

Click on the link below to watch the video of their discussion.

https://www.youtube.com/watch?v=f4hEYKYLkv8

PPP Loan Forgiveness Gets EZ (Relatively Speaking)

By Greg Yoder

Note: Unless there’s further Congressional action, the loan portion of the Paycheck Protection Program is about to close. The deadline for applications is June 30th.

The SBA — in an effort to ease the PPP-related administrative burden — has released a new PPP loan forgiveness application: Form 3508EZ. This two-page application has many fewer calculations and requires less documentation from borrowers than the original Form 3508.

In order to use the EZ, borrowers must meet one of the following three criteria (taken from the SBA instructions):

  • 1. The Borrower is a self-employed individual, independent contractor, or sole proprietor who had no employees at the time of the PPP loan application and did not include any employee salaries in the computation of average monthly payroll in the Borrower Application Form (SBA Form 2483).
  • 2. The Borrower did not reduce annual salary or hourly wages of any employee making less than $100,000 per year by more than 25 percent during the Covered Period compared to the period between January 1, 2020 and March 31, 2020; AND
    The Borrower did not reduce the number of employees or the average paid hours of employees between January 1, 2020 and the end of the Covered Period.
  • 3. The Borrower did not reduce annual salary or hourly wages of any employee making less than $100,000 per year by more than 25 percent during the Covered Period compared to the period between January 1, 2020 and March 31, 2020; AND
    The Borrower was unable to operate during the Covered Period at the same level of business activity as before February 15, 2020, due to compliance with guidance issued by [various government agences] related to COVID-19.

“Covered Period” in the above criteria means either the original 8-week period or the recently expanded 24-week period, in either case beginning with the date the loan proceeds were disbursed.

The 60% rule (payroll cost must make up at least 60% of the forgivable costs) is still included in the application, but in a simplified form. There had previously been some concern that businesses that did not have qualifying payroll costs equaling at least 60% of their loan amount would not get any forgiveness. The SBA has clarified that this is not the case: businesses that don’t meet the 60% threshold will have their forgiveness reduced, but not eliminated.

Because of the extension of the covered period from 8 to 24 weeks, the maximum amount of compensation for an individual employee that qualifies for loan forgiveness has also increased. For non-owner employees, the maximum is now $46,154, the 24-week equivalent of a $100K annual salary. For owners, however, the maximum amount of compensation is 2.5 months’ worth of $100K of compensation, or $20,833. For non-owner employees, the costs of health insurance and some other benefits are also forgivable and are not subject to the same dollar limitations. The $20,833 for owners is inclusive of all costs, so that an owner making more than $100K per year will not get any additional forgiveness for their benefits costs.

Note that if a business chooses to stick with the original 8-week covered period, it will still have to use the original, lower compensation limit of no more than $15,385 per employee.

Links for the 3508EZ:

Application: https://www.sba.gov/document/sba-form-paycheck-protection-program-ez-loan-forgiveness-application-6-16-2020

Instructions: https://www.sba.gov/document/sba-form-paycheck-protection-program-ez-loan-forgiveness-application-instructions-borrowers-6-16-2020

Disclaimer: Please note this article is based on the information that is currently available and is subject to change.