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.

Paycheck Protection Program Flexibility Act of 2020

By Greg Yoder

Congress has just passed new legislation significantly liberalizing the loan forgiveness provisions of the Paycheck Protection Program (PPP) established by the CARES Act.

In response to the continuing COVID-19 situation and the concerns of many businesses about the difficulty of navigating the existing forgiveness provisions, the House passed legislation late last week. Last night, the Senate passed the House version without changes, and the President is expected to sign the bill into law later today.

Major provisions of the bill:

  • The “covered period” has been extended from eight to twenty-four weeks from the date of loan origination, or December 31, 2020, whichever is earlier. Current PPP borrowers can either use the new extended covered period or keep their original eight-week period. This means that businesses now have three times as long to incur and/or pay expenses that are eligible for loan forgiveness.
  • The minimum proportion of the loan forgiveness amount that must be used for payroll costs has been reduced from 75% to 60%. However, borrowers who do not have covered period payroll costs totaling at least 60% of the loan amount will not be eligible for any forgiveness.
  • Businesses that receive PPP loans are now eligible for the other payroll tax deferral provisions of CARES. (Previously, once your PPP loan was forgiven you couldn’t defer payment of payroll taxes.)
  • Loan recipients who don’t apply for forgiveness will have ten months from the end of the covered period to begin making payments on the loan.
  • Employers will have until December 31 (rather than June 30) to restore employee salaries and FTEs to prior levels to avoid a reduction in forgiveness.
  • The bill provides additional exceptions for businesses that can’t fully restore staffing levels because of an inability to hire or because of an inability to fully resume operations because of complying with COVID-19 safety orders.

For a lot of businesses, the major takeaway from the new legislation will be that their eligible payroll costs during the covered period will now exceed the loan amount, and the entire loan amount can be forgiven without having to consider other eligible costs. The other practical effect is that employers will have an additional sixteen weeks before they begin the complex loan forgiveness application process.

The current legislation likely isn’t the last Congressional action we’ll see in response to the pandemic. Additionally, there are still a number of areas where we’re awaiting clarification from the SBA on other PPP matters. We’ll be back with more updates.

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

PPP Update – Forgiveness Matters

By Greg Yoder

The SBA has released its loan forgiveness application for the Paycheck Protection Program (PPP). The application is accompanied by instructions that give additional guidance and resolve some (not all) of the questions regarding how to calculate the loan forgiveness amount. There’s a lot of information to digest in the new releases; this article covers some of the highlights.

Alternate Payroll Covered Period. Under CARES, the “Covered Period” was defined as the eight-week period beginning with the date the PPP loan was disbursed. For administrative convenience, employers who use biweekly or weekly payroll may elect to use the “Alternate Payroll Covered Period.” This period is the eight-week period that begins on the first day of the first pay period after the loan disbursement date. It’s important to understand that the alternate period applies only to payroll costs. Non-payroll costs still have to be determined using the Covered Period.1

Paid or incurred. Payroll costs will be counted towards the loan forgiveness amount if they’re paid during the covered period OR if they’re incurred during the covered period and paid on or before the next payroll date. The payroll cost for an employee is incurred when the employee’s pay is earned. Non-payroll costs that are incurred during the covered period can be included as long as they’re paid by the next regular billing date.

The wording in the application also implies that non-wage payroll costs can be included when paid even if they aren’t incurred during the covered period. In other words, there may be an opportunity to increase eligible payroll costs by prepaying costs such as health insurance and retirement plan contributions for employees. It’s not clear whether the SBA actually intended to allow loan forgiveness for amounts that were paid but not incurred during the covered period, and we expect that there may be additional guidance on this issue in the coming months, so we are advising clients to proceed with caution. There is also some indication that health insurance contributions for the owners of some businesses may have to be included in the base compensation amount, which is limited to $15,385 per person in the covered period. This is another area where we’re not certain of SBA’s intent, and we expect additional guidance.

FTE determination. In order to avoid a reduction in loan forgiveness, an employer generally has to maintain the same number of full-time equivalent (FTE) employees during the covered period as they had during a prior reference period. Under the instructions in the application, total FTEs are determined by calculating an FTE for each individual employee and then adding the individual amounts up. For an individual employee, the FTE is calculated by determining the employee’s average hours worked per week and dividing by 40. The result is calculated to one decimal place, and it’s capped at 1.0 for any individual employee: overtime doesn’t count.

The instructions also provide for a simplified method where any employee who works less than 40 hours/week is counted as 0.5 FTE. Whichever method is used for calculating FTEs during the covered period must also be used for calculating FTEs during the employer’s chosen reference period. The application includes a “Schedule A Worksheet” that’s used to calculate both FTEs and employee compensation during the covered period.

Certain former employees may continue to be counted as FTEs even if they are no longer employed or fully employed. These include employees who voluntarily resigned, were fired for cause, or voluntarily requested a reduction in hours. In addition, if the employer attempted to rehire an employee (a “good-faith, written offer”), and the employee refused the offer, that employee can be counted towards the total FTEs, provided they haven’t already been replaced.

FTE Reduction Safe Harbor. As a general rule, employers calculate a ratio of FTEs during the covered period to FTEs during their chosen reference period. If this ratio is less than one, the loan forgiveness amount is reduced. However, if they meet the FTE Reduction Safe Harbor, they aren’t subject to this particular reduction. The safe harbor is also addressed on the Schedule A Worksheet.

To meet the safe harbor, employers have to do three separate calculations of FTEs:

      (A) Their average FTEs for the period from February 15, 2020 through April 26, 2020;
      (B) Their FTEs during the pay period that includes February 15, 2020; and
      (C) The FTEs as of June 30, 2020.

Each calculation must use the same method. In order for the safe harbor to apply, two requirements must be met. First, (A) has to be less than (B). In other words, there must have been a reduction in workforce after February 15. Second, (C) must be greater than or equal to (B); i.e., the workforce level must have rebounded by June 30.

Keep in mind that a reduction in staffing levels is only one way that the loan forgiveness amount gets reduced. In order to get the full forgiveness amount, employers also have to avoid having a reduction in compensation. If any individual employee’s compensation during the covered period is less than 75% of that same employee’s compensation during the reference period, there may be a reduction. Also, the loan forgiveness amount can’t be more than the qualifying payroll costs divided by 75%. In effect, this limitation means that any time payroll costs aren’t at least 75% of the PPP loan amount, the amount forgiven will be less than the full amount of the loan.

Additional Non-Payroll Costs. The application expands “covered mortgage obligations” to include any debt-secured business property, not just real property. This means that the interest (not the principal) paid during the covered property on a loan secured by business personal property can also be included in covered non-payroll costs. Similarly, the instructions include business property in “covered rent obligations,” which appears to mean that lease payments on business equipment are also covered costs.

There’s a lot more to the application and instructions than we’ve covered here, and we expect additional guidance on some of the issues that remain open. The application and instructions themselves are at https://www.sba.gov/document/sba-form–paycheck-protection-program-loan-forgiveness-application. In addition, the SBA regularly updates and expands its PPP FAQ, and you can find that information at https://www.sba.gov/document/support–faq-lenders-borrowers. We look forward to assisting clients with maximizing their loan forgiveness under the PPP, and we welcome all of your questions.

1 Throughout this article, “covered period” refers to either the Covered Period or the Alternate Payroll Covered Period for payroll costs and the Covered Period for non-payroll costs.

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

PPP Forgiveness Guidance is Here!

Since the CARES Act passed March 27, 2020, we have been advising clients how to apply for and how to obtain forgiveness from their PPP (Paycheck Protection Program) loans. The uncertainty, particularly surrounding forgiveness rules, has been challenging. This past weekend, the SBA published the application and instructions for the forgiveness, and although lengthy, they provide many answers. As we continue to advise you, we expect to provide updates, but for now, please click here for the PPP Forgiveness Application and instructions. Of course, please don’t hesitate to contact your Snyder Cohn partner with any questions.

PPP Update

By Greg Yoder

UPDATE: The SBA has extended the repayment date under the Safe Harbor to May 18, 2020, to give borrowers an opportunity to review SBA’s new guidance.

The Paycheck Protection Program (PPP) and the loans it provides continue to be the most important financial assistance programs for many small and mid-sized businesses during the current pandemic. As you likely already know, Congress created the PPP as part of the CARES Act in response to COVID-19. When businesses quickly borrowed all of the funds provided in the initial law, Congress passed additional legislation, primarily to further fund the PPP loan provisions.

Many businesses, including many of our clients, have applied for and received paycheck protection loans. Provided that businesses follow the CARES provisions, these loans do not have to be repaid, and the debt forgiveness is not considered taxable income, making the loans a major tax benefit, as well as a vital economic one.

Following the CARES provisions, however, has been complicated for many taxpayers, and the Small Business Administration (SBA), which administers the program, has been giving additional guidance at frequent intervals. This has mostly taken the form of a FAQ. For those who are interested, the most current version of SBA’s PPP FAQ (it’s all TLAs all the time these days) can be found at https://www.sba.gov/document/support–faq-lenders-borrowers.

We wanted to highlight two important updates affecting PPP loans.

Safe Harbor for Loans under $2 Million

One of the certifications that borrowers have to make when applying for a PPP loan is that they really need the loan to succeed in the face of COVID-related economic troubles. Or, in the language of the SBA, that “current economic uncertainty makes this loan request necessary to support the ongoing operations of the Applicant.”

In guidance issued May 13, SBA says that for loans of less than $2 million, if the borrower makes such a certification, the borrower “will be deemed to have made the required certification concerning the necessity of the loan request in good faith.” This safe harbor is important because it means that when banks and other lenders receive a loan application with this certification, they don’t have to do any additional procedures or request additional documentation to ensure that they’re complying with SBA requirements on this issue. This in turn means that they’re eligible for the loan guarantees provided under CARES and should be able to loan money more quickly and with more confidence. Borrowers — who are already having to provide substantial amounts of information to document payroll costs and other items — are relieved from the burden of having to provide yet more information to qualify for loans. It’s one less hoop for businesses that are already jumping through a lot of them while trying to stay afloat.

Non-deductibility of Costs Funded by PPP Loans

CARES specifies that (if all requirements are met) PPP loans can be forgiven and that the loan forgiveness does not have to be treated as taxable income by the taxpayer. This is a substantial tax benefit since under general tax provisions, loan forgiveness is treated as taxable income. In order to meet the loan forgiveness requirements, businesses have to use the funds to pay expenses that would normally be deductible as ordinary and necessary business expenses. Since the legislation didn’t specifically say that the expenses paid with the excludable loan proceeds would be non-deductible, some financial experts speculated (hoped, really) that taxpayers would get a double tax benefit. In other words, there had been some hopes that a business could take out a PPP loan, use it to pay salaries (for example), not repay the loan, not include the loan forgiveness as income, and still deduct the salaries as expenses on their 2020 tax returns.

Most of us thought that level of generosity was unlikely (and unintended), and the IRS agreed. In Notice 2020-32, IRS says that amounts paid with excludable PPP funds are not deductible for income tax purposes. The reasoning that IRS used to reach this result was arguable (trust me when I tell you that you don’t want to know the details), but the result itself makes sense under tax law.

As always, we continue to monitor these and other developments, and we will continue to update you as the situation evolves, which it certainly will.

Paycheck Protection Program — Legal and Regulatory Considerations

UPDATE: The SBA has extended the repayment date under the Safe Harbor to May 18, 2020, to give borrowers an opportunity to review SBA’s new guidance. For more information on the new guidance, click here.

On April 24th, President Trump signed the Paycheck Protection Program and Health Care Enhancement Act (“Enhancement Act”). This legislation infuses $310 billion into the Paycheck Protection Program (“PPP”) with more than $250 billion in unrestricted funds for the program and an additional $60 billion allocated specifically for smaller lending institutions.

Numerous recent headlines have shown the spotlight on the distribution of the first round of PPP funds to prominent public and private companies. Many have questioned the propriety of the eligibility requirements and impugned the integrity and ethics of many organizations that have applied for funding. The decision by Shake Shack to return the $10 million it received from the PPP, as well other prominent companies to do likewise, has drawn attention to the perceived inequitable distribution of PPP proceeds.

As you may remember, the Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”) provided a $2.2 trillion stimulus package that allocated funding to small businesses through new and enhanced loan programs administered by the Small Business Administration (“SBA”). The PPP was one such program designed specifically to provide eligible small businesses immediate relief if they believe that “current economic uncertainty” of the COVID-19 pandemic makes such a loan for their business “necessary to support their ongoing operations,” and were willing to certify to the lender to that affect.

Offering funds covering up to eight weeks of payroll, the program’s purpose is to reduce the growth of unemployment, help small businesses retain employees, and enable them to rebound quickly once the pandemic is under control. Unfortunately, the initial guidance promulgated by the SBA did not provide any definition or specifics regarding the nature or extent of the required impact to operations or the “current economic uncertainty” that would make the loan request “necessary to support ongoing operations.” In addition, since the PPP loan has a forgiveness component if a business meets certain conditions, the program has been touted by many as “free money.” Consequently, demand for PPP loans has been unprecedented, exceeded loan availability, and resulted in the SBA having to stop accepting PPP loan applications on April 16.

On April 23rd, the SBA updated its Frequently Asked Questions Document to add FAQ 31. The new FAQ provides much-needed clarity regarding program qualifications specific to businesses with access to other sources of liquidity to support their ongoing operations. Although the CARES Act suspends the SBA requirement that borrowers must be unable to access credit elsewhere, borrowers must certify in good faith that the loan proceeds are necessary. The FAQ specifically states that borrowers must make the certification taking into account their ability to access other sources of liquidity. It is unclear if the intent of this FAQ was to combat the recent reports of numerous public and large private companies receiving large PPP loans or if this extends further.

Any business that received a PPP loan prior to the issuance of this new guidance and who now believes that they do NOT demonstrate the necessity for the loan, can repay the loan in full by May 7, 2020. Any business that does so, will be deemed by the SBA to have made the required good faith certification on their PPP loan application.

We certainly understand that there has been a justifiable rush for eligible small businesses to expedite processing of these loans and you may be primed to submit your PPP application, but we do want to caution you as to the potential risks of receiving these funds as these loans will be subject to regulatory and public scrutiny. Loan recipients will not remain anonymous as EINs will be made public. We anticipate heightened government scrutiny will be forthcoming to investigate potential fraud and abuse. In fact, Secretary Mnuchin has already indicated that PPP loans in excess of $2 million will automatically be reviewed. Businesses who have received PPP loans and are later found to have not qualified under the eligibility rules and/or businesses who do not use the funding in accordance with the terms of the program, could be subject to significant legal or regulatory consequences. Further, businesses may experience reputational damage for having pursued these loans.

Given the revised guidance issued by the SBA and the pending May 7, 2020 deadline for returning loan proceeds, we strongly encourage you, your organization’s management, and board of directors to carefully and immediately review your company’s financial situation and reconsider the relief you may have already received with a PPP loan. Specifically, consider whether your circumstances fall within the spirit and intent of this economic relief program. If you do receive and keep PPP funding, it is critical that you maintain complete and accurate documentation to support your eligibility for such funding, the specific use of these funds, as well as your qualifications for forgiveness under the terms of the program. This documentation will be crucial were your business to be audited and/or investigated. This defensive documentation will greatly minimize your potential exposure to fraud and abuse allegations related to your participation in this loan program.

Many of the factors influencing whether you qualify or should apply for these loans are organization specific. We encourage you to consult with legal counsel if you have questions regarding your organization’s eligibility to receive funds.

We recognize that these are difficult times and we remain committed to supporting you. If you would like our assistance with evaluating whether the PPP or other small business loan programs and/or economic relief measures are appropriate for you, please contact us.

Paycheck Protection Loan and CARES Act Updates

By Greg Yoder

In addition to a scary and challenging public health situation, the COVID-19 pandemic has created equally challenging and frightening business and economic concerns. Both we and our clients have been spending much time and effort trying to navigate a rapidly changing and unstable environment.

The most common questions we’ve been receiving have centered around the recent CARES Act in general, and the Paycheck Protection Program (PPP) loans and loan forgiveness provisions in particular.

Although the SBA has already run through all of the funds originally earmarked for PPP loans in the CARES Act, another $310 billion of PPP loan funding has just been passed by Congress and signed into law. Businesses who missed out on the first tranche will have another bite at the apple. And for businesses that have already secured PPP loans, the work is just beginning. The CARES Act was definitely welcome and provided much needed relief, but the legislation itself raised nearly as many questions as it answered, and additional guidance has been coming out on a weekly or even more frequent basis.

With the understanding that what we think Treasury or the SBA means today might be “clarified” by what they say tomorrow, here’s a sampling of some of the most important items that we know now.

PPP Matters

With respect to PPP loans, most businesses have two main concerns: a) maximizing the amount they can borrow under the program, and b) maximizing the amount of the loan that can be forgiven. Fortunately, the actions you can take to optimize the first will also help to maximize the second. Key things to keep in mind:

  • Understand the requirements. The requirements for PPP expenses are complex — and substantially more stringent than general requirements for deductibility under tax law. In order to make sure you get the most forgiveness possible, you will have to consider:
      • Allowable expenditures. Payroll will make up the bulk of your PPP expenditures (non-payroll costs cannot be more than 25% of total expenditures). But payroll costs themselves are limited and what is and isn’t included is not always immediately obvious. For example, gross wages are included, but they’re limited for more highly compensated employees. The employer portion of federal payroll taxes are not considered payroll costs. Some benefits (e.g., health insurance) are included in allowable payroll costs; others aren’t. When you move to non-payroll costs (mortgage interest, utilities, rent), there are further restrictions to consider.
      • Timing of expenditures. Typically, loan forgiveness will be limited to the amount of allowable expenditures made during the eight weeks beginning with the date the business receives the loan proceeds. You’ll need to plan to make sure that you incur and pay sufficient expenditures within that time frame. In some cases, this may mean pre-paying allowable items (such as the employer portion of retirement plan contributions, which under normal circumstances would not be paid until the following year). Unfortunately, we don’t yet know whether pre-payment of many expenses will be allowed; we’re awaiting additional guidance on this issue.
      • Staffing levels and compensation. While some businesses may feel it advisable to reduce the number and/or compensation of staff in order to survive the economic downturn, it’s important to keep in mind that such reductions may reduce the amount of loan forgiveness. Here again, the rules are complicated, and there are exceptions. For example, employees who make more than the $100K/year allowed under the PPP can generally have their compensation cut (but not below the $100K limit) without reducing loan forgiveness; reducing the compensation of employees who make less than $100K/year generally will reduce loan forgiveness, however. Temporary reductions in either staffing levels or staff compensation typically will not reduce loan forgiveness if the reductions are restored by June 30, 2020.
    • Keep scrupulous records. Although the specific documentation and forms SBA will require for loan forgiveness are not yet known or available, it’s clear from what we’ve seen in the loan application process that you’ll need to be able to demonstrate that amounts were expended on allowable and forgivable expenses within the permitted time frame in order to maximize loan forgiveness.
    • Open a separate account for PPP proceeds and expenditures. One way to avoid having some of your loan forgiveness disallowed is to put PPP loan proceeds into a separate account and then pay only amounts that are clearly allowed under the program from that account. For example, many businesses have employees who earn more than the $100K per year that’s permitted to be funded and will want to continue to pay those employees their full salary. In these cases, employers may want to pay the forgivable portion from their PPP account and the rest from another account. Maintaining a separate PPP account avoids the possibility of commingling funds and reduces the possibility that some expenditures won’t qualify for loan forgiveness when the forgiveness application is eventually submitted.

    There are still a number of unresolved issues associated with the PPP. Because the early focus has been on getting loan applications approved, a number of items associated with the mechanics and processes for loan forgiveness remain open. One of the biggest open issues is whether expenses paid with PPP funds will be non-deductible to the extent the loan is forgiven. Other questions that we continue to monitor include state taxation of loan forgiveness, treatment of amounts paid to related parties, and certain issues regarding payroll costs for owners of pass-through entities. Stay tuned.

    Other CARES Act and COVID-19 issues

    IRA distributions

    Under normal law, taxpayers who are at least 72 years old as of the beginning of the year are required to take at least a certain amount of distribution from their IRAs (the RMD: required minimum distribution). CARES waived the RMD for IRAs for 2020. Taxpayers who have already taken a 2020 distribution can discuss the potential for undoing the distribution with their IRA custodians. Financially, it may make sense for taxpayers to take a distribution even though it’s not required this year. Additionally, depending on your individual tax situation, you may want to consider taking advantage of a Roth conversion or a qualified charitable distribution (QCD) from your IRA.

    Due dates

    Taxing authorities are continuing to update due dates for returns and estimated tax payments. The IRS has deferred the due dates for 2019 returns and 1st and 2nd quarter estimated tax payments to July 15. Maryland has conformed its due dates to follow the federal deferral, but some states have not. At least yet: as with everything else COVID-related, every week brings many new developments, and we are monitoring the situation closely to keep abreast of what is due when.

    We’re sure that you have other questions and concerns, and we want to hear them. Snyder Cohn is here to assist you with all your financial and tax needs. Assisting businesses in transition is what we do, and that’s especially true in times like these, when everyone is going through more transition than they ever wanted or expected.

CARES Act – Tax Provisions

By Greg Yoder

Congress has passed the CARES Act, the giant stimulus bill meant to ameliorate the effects of the COVID-19 virus on individuals and businesses. (The House passed the bill earlier this afternoon and the President recently signed it, making the bill a law. See also: https://www.youtube.com/watch?v=FFroMQlKiag.)

Some of these changes will affect only 2020, but others will continue to have effects in future years and/or will affect past years and may impact 2019 returns as well as creating the opportunity to amend earlier year returns. The details are, as usual, complicated, and the situation is highly fluid, but here’s a summary of what we know so far.

Provisions primarily for individuals

Many individuals will be receiving rebate checks. The amounts are $1,200 for an unmarried individual and $2,400 for a married couple. In addition, there is an additional $500 for each dependent child under the age of 17. As rebates, these amounts are generally not taxable, but they are subject to phase out at relatively modest income levels. Phaseouts begin at an AGI of $75K (single) or $150K (MFJ) and are fully phased out at AGIs of $99K/$198K. The payments in most cases will be made automatically, and taxpayers who provided direct deposit information on a recent tax return may receive a direct deposit into the same account. Since in many cases, the payments will be based on information from 2018 returns, some taxpayers may receive either more or less than they’re entitled to under the new law, and may have modest adjustments to make when they file their 2020 tax returns next year.

Individuals will be eligible to take early retirement plan distributions for “coronavirus-related purposes.” These distributions will not be subject to the normal 10% early withdrawal penalty, and the regular tax associated with the distributions will be payable over three years, rather than all in the year of distributions. A “coronavirus-related distribution” is available where an individual a) is diagnosed with COVID-19, b) has a spouse or dependent diagnosed with COVID-19, OR c) “experiences adverse financial consequences as a result of being quarantined, furloughed, laid off, having work hours reduced, being unable to work due to lack of child care due to COVID-19, closing or reducing hours of a business owned or operated by the individual due to COVID-19, or other factors determined by the Treasury Secretary.” In addition, taxpayers who take a coronavirus-related distribution will have up to three years to recontribute that amount to an eligible plan, regardless of that year’s contributions cap.

The required minimum distribution (RMD) rules for 2020 are being waived for certain IRAs and defined contribution plans. Normally taxpayers who have reached a certain age (currently 72, previously 70 1/2) are required to take a distribution every year. That requirement’s being suspended for 2020 only.

Taxpayers who do not itemize their deductions (a much more common occurrence after the changes in the tax law under TCJA, the major tax legislation from the end of 2017) will be allowed to deduct up to $300 of charitable contributions above the line on their 2020 returns, regardless of whether they itemize.

For 2020 only, the 60% of AGI limitation on charitable contributions is being eliminated for individuals. For corporations, the usual 10% of taxable income limitation is being increased to 25% of taxable income. This will greatly increase the amount of contributions that many taxpayers can deduct and will create some planning opportunities around the timing of contributions.

For 2020 only, employers may make payments towards employees’ student loan balances on a tax-free basis. Under normal rules, an employer’s payment of employee student loans would be considered taxable income to the employee. The excludable amount is limited to $5,250, and any amount paid towards student loans reduces the excludable amount an employer can provide in other educational assistance.

Paycheck Protection Program (PPP)

While not technically a tax provision, the PPP can be an important benefit for many small businesses, including sole proprietorships and nonprofit organizations. Be warned that these provisions are complex, and there are additional requirements: this is an overview.

The PPP provides businesses with fewer than 500 employees with “paycheck protection loans” (PPLs) during the “covered period” which begins February 15, 2020 and continues to June 30, 2020.

Loans are fully guaranteed by the federal government through the end of this year. After that, loans in excess of $150K will be 85% guaranteed.

Loan amounts are limited to the lower of $10 Million OR the SUM of a) 2.5 times the average monthly payroll costs for the year ending on the date of the loan AND b) any disaster loan taken after January 31, 2020 that’s been refinanced into a PPL.

The definition of “payroll costs” is further complicated. In general, what’s included is fairly expansive and includes many benefits; however, once an employee’s compensation exceeds $100K none of their additional compensation is included. Also excluded is any sick or family medical leave for which an employer receives a credit under an earlier coronavirus relief act.

Interest rates on PPLs are limited to 4%, and there is a maximum maturity of 10 years. Loan proceeds may be used for payroll, rent, utilities, mortgage payments, and other debt service requirements. No personal guarantee by the business owner is required, and some of the standard fees required by the Small Business Act will be waived.

The CARES Act also provides for partial forgiveness of PPL amounts. The amount that’s available for forgiveness is the amount of payroll costs, mortgage interest, rent, and utility payments that are made in the eight weeks beginning with the loan date. While debt forgiveness is generally considered taxable income under the tax code, any PPL amounts forgiven under this program are excluded from a business owner’s taxable income.

There are substantial documentation requirements associated with the loan forgiveness, and the amount available to be forgiven may be reduced if an employer either reduces the wages of employees or reduces the number of employees during the eight-week period. (Wages of employees making more than $100K/year may be reduced without penalty.)

Tax provisions primarily for businesses

Employers whose operations were affected by a COVID-19-related shutdown order are eligible for a refundable payroll tax credit for 50% of wages paid to employees during the crisis. This provision also applies to an employer whose gross receipts fell by more than 50% when compared to the same quarter in 2019. For large employers (greater than 100 full-time employees), the credit applies to wages paid when the employees are not working due to COVID-19-related events. For employers with 100 or fewer full-time employees, all employee wages qualify, regardless of whether the employer is open for business. The credit is limited to the first $10,000 of compensation paid to an eligible employee between March 13, and December 31, 2020. “Compensation” for these purposes includes health benefits paid on employees’ behalf.

Employers may defer payment of the employer share of Social Security taxes paid on behalf of their employees. This tax is generally 6.2% of eligible wages. The deferred taxes must be paid within the following two years: half by the end of 2021, and the remainder by the end of 2022. This provision also applies to part of the self-employment tax paid by self-employed individuals.

Net operating loss carrybacks are being reinstated and the limitations are being relaxed. TCJA only allowed NOLs to be carried forward, not back, in most cases, but under the CARES Act, NOLs arising in 2018 through 2020 tax years are eligible for a five-year carryback. These same NOLs will not be subject to the normal taxable income limitation so that they may fully offset income. This provision will also apply to individuals who have an NOL due to losses from pass-through entities and/or from a sole proprietorship.

One of the more difficult to implement provisions of TCJA was the cap on the deductibility of business interest for large businesses (and many smaller businesses with losses). CARES does not eliminate this provision, but it temporarily raises the limit on deductibility from 30% of adjusted taxable income to 50% of adjusted taxable income. This change is effective for tax years beginning in 2019 and 2020. Additionally, businesses may elect to use their 2019 income in determining their 2020 limitation. This provision will keep an ordinarily profitable business from losing its interest expense deduction due to a bad year.

Another unpopular feature of TCJA was a technical drafting error which limited depreciation on qualified improvement property (QIP). CARES fixes that error so that QIP will now be subject to immediate expensing under the bonus depreciation rules rather than having to be depreciated on a straight-line basis over 39 years. This change is retroactive to January 1, 2018, which may give some businesses the opportunity to file amended returns and claim refunds.

As with all large legislative packages, there are a number of other provisions that apply only to specified industries, and many of the above provisions have exceptions and limitations that are too detailed to discuss in an overview. We are continuing to monitor the situation and will update advice as appropriate. In the meanwhile, if you have questions about specific provisions of the CARES Act, please get in touch with us.

Additional Resources:

To read about previously enacted provisions related to COVID-19, click here.

To learn about the financial resources for businesses affected by COVID–19 in the Washington Metropolitan area, click here.

To get the most recent developments on state tax filings related to COVID-19, click here.

Coronavirus-related paid leave for workers and tax credits for businesses

On March 18, 2020, President Trump signed the Families First Coronavirus Response Act (FFCRA) – a set of legislation that provides relief for individuals who have been exposed to the COVID-19 virus. There are two critical aspects to the FFCRA regarding leave for employees and paid benefits: the Emergency Family and Medical Leave Expansion Act (EFMLE) and the Emergency Paid Sick Leave Act (EPSLA).

Emergency Family and Medical Leave Expansion Act

EFMLE is a temporary amendment to the Family and Medical Leave Act of 1993 that allows for an employee that is unable to work (or telework) due to a need to care for a family member to take up to 12 weeks of leave.

Employers can offset the cost of the mandated pay under this act through quarterly payroll tax credits. The legislation provides separate credits for the two types of pay mandated under the acts. If the amount of the quarterly credits exceeds the payroll taxes against which the credits may be applied for the quarter, the excess credit amount is treated as an overpayment of tax that is refundable to the employer.

For an employee who is caring for a child because of unavailable child care due to the coronavirus, eligible employers may claim a tax credit for two-thirds of the employee’s regular rate of pay, up to $200 per day and $2,000 in the aggregate, for up to 10 days.

Emergency Paid Sick Leave Act

The EPSLA act permits full-time employees to take up to 80 hours of paid sick time if they are unable to work (remotely or otherwise) for any of the qualifying uses below.

  • The employee is subject to a federal, state or local quarantine or isolation order related to COVID-19;
  • A healthcare provider has advised the employee to self-quarantine due to concerns related to COVID-19;
  • The employee is experiencing symptoms of COVID-19 and seeking a medical diagnosis;
  • The employee is caring for a family member who is subject to a federal, state or local quarantine or isolation order, or advised by a healthcare provider to self-quarantine, due to COVID-19;
  • The employee is caring for their child due to a COVID-19-related school/childcare provider closure; or
  • The employee is “experiencing any other substantially similar condition” specified by the Secretaries of the Department of Health and Human Services, Treasury Department and Department of Labor.

Eligible employers may receive a tax credit up to $511 per day and $5,110 in the aggregate, for a total of 10 days for an instance where an employee is unable to work because of Coronavirus quarantine, self-quarantine, or is experiencing Coronavirus symptoms and is seeking a medical diagnosis.

Eligible employers are entitled to an additional tax credit that determined based on costs of maintaining health insurance coverage for eligible employees during the leave period.

Businesses with less than 50 employees will be eligible for an exemption from the leave requirements relating to school closings or child care unavailability, provided that the employer can show that compliance would jeopardize the ability of the business to continue. The Department of Labor will be providing emergency guidance establishing simple and clear criteria defining the circumstances that will meet the criteria of jeopardy to the viability of an employer’s business as a going concern.