Updates on IRS Responses to COVID-19
March 30th Post:
We are starting to understand the contours of the CARES Act that was passed on Friday. This is a long post, but hopefully it will provide a general understanding.
Who gets one and how much do they receive? Single taxpayers (or those filing Married Filing Separately) will receive a $1,200 if their Adjusted Gross Income (AGI) is less than $75,000. Head of Household filers receive $1,200 if their AGI is less than $112,500. Married taxpayers filing jointly will receive $2,400 if their AGI is below $150,000. There is a phaseout provision that if your income slightly exceeds the above amounts, you will still receive some money. For every $100 you make over the threshold, your check will decrease by $5.
Is the check amount increased if I have kids? Yes, you will get an additional $500 for each qualifying child. The stimulus check rules are following the eligibility rules for the Child Tax Credit meaning that the child must be under 17 years of age to receive the additional $500. The child must also have a Social Security Number.
How will the IRS know what to send me? If you have filed your 2019 return, the Service will base your check on that information. If you have not, they will base it on your 2018 return.
If I have not filed my 2019 return yet, should I hurry up and file it if it would lead to a bigger stimulus check? It is hard to say. Would the newly filed return “post” to the IRS system in time? I do not know.
If I have not filed my 2019 return yet, what if I am entitled to a bigger stimulus check than I receive? The best information we have is that you will get the additional funds when you file your 2020 return. We will keep you posted on new information.
If I have not filed my 2019 return yet, what if I get a bigger check than I was eligible? As of now, there is no indication that you will have to pay it back as part of your 2020 return. But that determination has not been made yet.
Retirement Account Items
Early distributions from a retirement account will not be subject to the 10% penalty for early distribution (up to $100K of distribution), but they will be taxable ratably over three years. This means that if you take $X amount out, you will report a portion of that income in each of the next three years. However, you will have three years to re-contribute those distributions back into the retirement account – at which time you will get a deduction for the repayment to the extent you have paid taxes on the distribution.
Required Minimum Distributions have been suspended for 2020. You do not need to take an RMD this year. If you have already taken yours for 2020 and it has been less than sixty days since that distribution, please discuss with your financial planner whether putting that money back into the retirement account is appropriate for your situation.
The maximum loan from a 401(k) have been increased from $50,000 to $100,000.
Expansion to Unemployment Eligibility
Historically, filing for unemployment benefits was reserved for employees who lost their job for no fault of their own – were not fired for cause. The new bill expands access to federal unemployment benefits to those that are self-employed, independent contractors or with limited work history who are unable to work as a direct result of the coronavirus. Benefits are also available for individuals who are unemployed, partially unemployed or unable to work. The seven-day waiting period generally applicable to unemployment benefits has been waived. These benefits are administered by the Texas Workforce Commission and your employer. Please direct questions related to unemployment to those folks. They will likely have the answers for your situation.
Mortgage & Renter Relief
- Borrowers with federally backed mortgage loans—loans under Fannie Mae and Freddie Mac—who are experiencing financial hardship due to COVID-19 can request forbearance on their payments for up to six months. Borrowers must submit a request to their servicer and affirm that they’re experiencing a financial hardship during the crisis. Additionally, no foreclosures or evictions from properties with federally backed mortgages can occur during this period.
- During the mortgage forbearance period, interest will still accrue. However, additional fees, penalties or extra interest cannot be added to mortgages.
- Renters have some eviction protection, but only if they live in a multifamily building or single-family home that has a federally backed mortgage. Landlords cannot evict tenants of these buildings or charge any late fees, penalties or other charges for late rent payments.
Student Loan Relief
- Interest will not accrue on federal student loans from April through September 30 and no payments are required.
- Even though payments are suspended during this time period, the Department of Education will treat it as if the borrower made a payment toward public service loan forgiveness or other forgiveness programs.
- Borrowers who are in loan rehabilitation programs will also have the suspension period count toward rehabilitation. These programs are for borrowers working to pull their loans out of default.
- Credit reports and scores will not be impacted during the suspension of payments period for student loans.
- Wage garnishment and tax refund seizures will be halted during the forbearance period for student loans.
Paid Family Leave
- The new law expands the family leave provided in the Families First Coronavirus Response Act that President Trump signed into law on March 18. That bill covers workers in businesses with fewer than 500 employees. Those covered by the act can get up to 12 weeks of family leave (with the first two weeks unpaid) if they must stay home with children whose schools and day care centers have closed because of the pandemic.
- The expansion allows individuals who were laid off on or after March 1, but then rehired before the end of 2020, access to this family leave. (To be eligible for this leave, they need to have worked in that job 30-60 days before the initial layoff).
- The benefit paid to individuals eligible for this family leave is two-thirds of pay, with a maximum of $200 per day, or an aggregate $10,000 per worker. In other words, it can be a maximum of $1,000 per week. (Employers cut the family leave checks and then get reimbursed by the federal government through the IRS.)
Paid Sick Leave
- Employees (both part-time and full time) will get 80 hours of paid sick leave at full pay, capped at $511 per day, or an aggregate $5,110 per worker, with part-timers receiving a proportionate number of hours. Individuals who are unable to work or telework because they are under medical quarantine or treatment for COVID-19, suspect they have the illness or are ordered to quarantine at home are eligible for the pay.
For my clients that are employers, I strongly urge that you address questions related to Family Leave, Paid Sick Leave, Payroll Credits and related to your payroll company. If you do not have a payroll company, I urge you to consider employing one. They are best suited for providing detailed guidance on how these provisions will impact you – both to the timing of your cashflow, the proper filings, your duties to your employees and compliance with government dictates.
Employee Retention Credit for Employers Subject to Closure Due to Coronavirus
All eligible employers are permitted to claim a 50 percent credit against wages paid. The credit is provided for first $10,000 of compensation, including health benefits, paid to an eligible employee. The credit offsets employment taxes (Medicare, Social Security, etc.) otherwise paid during a calendar quarter with any excess refundable by the federal government.
The employer is eligible if its operations are fully or partially suspended during a calendar quarter due to a government order or gross receipts for a calendar quarter are less than 50 percent of gross receipts from the same quarter in the prior year. The credit is based on qualified wages paid to the employee.
For employers with 100 or fewer full-time employees, all employee wages qualify for the credit, whether the employer is open for business or subject to a shut-down order. The credit applies to tax-exempt organizations as well.
Employer Payroll Taxes
Entities may postpone most employer payroll taxes during this time. Self Employed folks may postpone 50% of social security taxes. (This would impact your Estimate Payments). 50% of the deferred taxes are due by December 31, 2021; the remainder is due by December 31, 2022.
Net Operating Losses
The “Trump tax changes” that began in 2018 eliminated a person’s ability to carry back Net Operating Losses (NOLs). Beginning in 2018, taxpayers could only carry those losses forward to offset future income. In addition, the law limited the NOLs benefit in those future years. The new legislation allows for the carryback of NOLs to the prior five years and eases the abovementioned limitations. If you ran an NOL in 2018 or 2019, you should consider revisiting whether to carry back those losses now that that is available.
Paid Sick Leave for Workers
- For COVID-19 related reasons, employees receive up to 80 hours of paid sick leave and expanded paid childcare leave when employees’ children’s schools are closed or childcare providers are unavailable.
- Employers receive 100% reimbursement for paid leave pursuant to the act.
- An immediate dollar-for-dollar tax offset against payroll taxes will be provided.
- Where a refund is owed, the IRS will send the refund as quickly as possible.
- Small Business Protection. Employers with fewer than 50 employees are eligible for an exemption from the requirements to provide leave to care for a child whose school is closed or childcare is unavailable in cases where the viability of the business is threatened.
Lending Programs for Small Businesses
There are currently two kinds of loans for small business loans:
- EIDL – Economic Injury Disaster Loan
- PPP – Paycheck Protection Program
These are two very different loans and I am receiving the most questions about them. Please do additional research to confirm you are eligible for these loans.
1. Economic Injury Disaster Loan – EIDL:
This is a loan written directly from the SBA and is designed to cover the expenses you would have been able to pay but for the Coronavirus. In addition, the EIDL also provides for a $10K grant. To apply for it, go to the SBA website (https://www.sba.gov). Warning: the website is moving very, very slowly for obvious reasons. Here are some important FAQs:
How much can I borrow? It appears that the SBA will use the financials you submit to determine the amount for which you are eligible, but not to exceed $2M.
What is the interest rate? 3.75%
What is the term of the loan? Up to 30 years.
When is the first loan payable? One year after the loan origination, but interest accrues from the origination date.
What can I use the loan proceeds for? Financial obligations and operating expenses that could have been met had the disaster not occurred.
What collateral is required? The SBA will place a UCC lien against the assets of your business.
Is a personal guarantee required? Yes, but no liens will be taken against real estate owned by the guarantor.
Can this loan be forgiven? No.
Do I need to have filed my 2019 tax returns? No.
How long with the loan application take? 2-3 weeks for processing plus up to five days for funding
When can I apply and how? Go to the SBA website (https://www.sba.gov) and fill out the online application now.
Can I roll this loan into my PPP loan if I chose to get one? Yes, but the details are not clear. You should discuss this with your banker at the time you apply for your PPP loan.
2. Paycheck Protection Program – PPP
This loan is designed to help you meet your payroll and payroll related expenses. The lender will be a bank that already writes loans that are underwritten by the SBA. Your first step should be to talk to your banker about applying for the loan. Warning, these loans are not ready to go yet (March 29th). Now that the CARES Act has become law, the SBA will give their guidelines to the banks. The banks will then prepare their loan application process. It is expected to take two weeks (mid April).
Unlike the EIDL, this loan can qualify to be forgiven.
Here are some important FAQs:
How much can I borrow? Although the maximum is $10M, the calculation on what you can borrow is 2.5X the average monthly payroll costs, measured over the previous 12 months. There are some exceptions for seasonal businesses. Payroll includes salaries, commissions, tips, certain employee benefits (including health insurance and retirement benefits), state and local taxes and certain types of compensation to sole proprietors or independent contractors. (As of March 29th, there is no guidance on which sole proprietors or independent contractor’s payments are eligible). Note, payroll costs exclude compensation of an individual employee in excess of $100,000.
What is the interest rate? Not to exceed 4%.
What is the term of the loan? 10 Years.
When is the first loan payment due? At least six months after the loan origination date. But interest accrues from the origination date.
What can the loan be used for? Payroll costs (see above), group health benefits, insurance premiums, and interest (but not principal) on mortgages incurred prior to Feb. 15th, 2020, rent on any lease in force on Feb. 15th, 2020 and utility payments.
Is collateral required? No.
Is a personal guarantee required? No.
Can this loan be forgiven? Yes. We are going to get a little in the “weeds” here. The amount that can be forgiven is calculated as the amount spent by the borrower during an 8 week period after the origination date of the loan on: payroll costs, interest payments on any mortgage incurred prior to Feb 15th, 2020, payment on any lease in force prior to Feb. 15th, 2020, and payment on any utility in service before Feb 15th, 2020.
However, in general, that amount eligible to be forgiven will be reduced by amounts that you cut your payroll. Remember, the primary purpose of this loan is to keep people employed. To be more specific, the following will reduce the amount of loan eligible to be forgiven:
The amount forgiven is reduced based on failure to maintain the average number of full-time equivalent employees versus the period from either February 15, 2019, through June 30, 2019, or January 1, 2020, through February 29, 2020, as selected by the borrower. The amount forgiven is also reduced to the extent that compensation for any individual making less than $100,000 per year is reduced by more than 25% measured against the most recent full quarter. Reductions in the number of employees or compensation occurring between February 15, 2020, and 30 days after enactment of the CARES Act will generally be ignored to the extent that reductions are reversed by June 30, 2020.
Will any amounts of the loan forgiven be considered “Discharge of indebtedness Income”? No.
Do I need to have filed my 2019 returns? It will depend on your bank’s requirements.
I hope this has been helpful. We will continue to update as more information becomes available.
March 25th Post
The IRS announced today relief on a variety of issues for taxpayers that have back taxes or related issues.
If you are in an existing installment agreement with the IRS, payments due between April 1st and July 15th have been suspended. The IRS will not default any agreements for lack of payment during this time.
If you are currently in collections with the IRS – meaning you have not arranged a payment agreement – IRS is suspending liens and levies and will not initiate additional liens or levies between April 1st and July 15th.
We will keep you posted.
March 24th Post – Updated 2:30 P.M. CST:
Our office is open for business.
Like everyone else, we are conducting business in compliance with the health directives coming from the Federal, State and Local authorities as well as using common sense – some of our staff is working remotely and we are trying to limit our in-person interaction as much as possible. But aside from that, we are still in tax season. Below, please find some thoughts on how we hope you will proceed (we know it runs a little long):
Please do not delay turning in your material to us. This is especially true if you are expecting a refund. But even if you owe, please do not delay. Considering the tenuous employment situation for so many folks, the sooner we know the balance owed, the sooner we can start planning how we will handle it. The closer we get to the deadline, the harder it will be for us to arrange payment agreements, deferrals, etc. After all, if you’re stuck in the house, what better way to pass the time than getting your tax package together? I did try to write that with a straight face.
If you can scan and email your material to us, that will be best. Please include any questions that you have. We will contact you once we have gotten your information inputted into our system. If you prefer dropping off your material, our doors will be open during regular business hours – 8:30 to 5:00. All electronic tax return information should be emailed to Kathy – email@example.com.
For our clients, we are still following tax and relief provisions as they are being released by the relevant government offices. But as of now, there has been no guidance on most issues. Like so much else with the pandemic, it is a fluid situation. However, if you have employees, I strongly urge you to keep your eye on the Texas Workforce Commission’s website as well as staying up to date on IRS announcements regarding your employees and tax breaks designed to help you keep your employees employed. If you utilize a payroll company, they should be your first resource on all things related to payroll breaks.
For those who do not know it, our office is shared by another CPA. We share the same phone lines. She has opted to close her office and work entirely remotely. As such, if our phone message indicates that “we are closed” or there is a sign on our door stating “we are closed” or similar, do not be confused. We are open.
March 20th Post – Updated 12:00 PM CST
Today, the Treasury Secretary announced that July 15th will replace April 15th as filing deadline for all personal tax returns. Likewise, your 2019 tax payment (if you owe) is also not due until July 15th. As you can imagine, we have very few details. But here are some obvious takeaways in the form of FAQs:
When is my personal tax return filing due? July 15th.
I have already completed my return and I owe the IRS for 2019. When is my payment due to avoid any penalties and interest? July 15th.
I make estimated payments throughout the year to the IRS. When are those payments due? Many clients pay the IRS quarterly. The due dates for those payments are traditionally April 15th, June 15th, September 15th and January 15th (following year). Though we are waiting on some more guidance, it appears that the first and second quarter payment will be moved at least July 15th. We will provide more details as they become available.
I run a business through an LLC or S-corp. When are those returns due? Our office has already filed extensions for those entities. Their extended due date remains September 15th.
I owe tax for prior years and am making payments on an installment agreement. Is there any relief for me? As of now, there has been nothing related to past year balances, installment agreements or similar released by Treasury. We do not anticipate any changes to IRS policy. But we are keeping our eyes open.
March 18th Post – Updated 3:00 Pm CST
On March 17th, Treasury Secretary Steven Munchin announced the Trump administration was “giving individuals and some businesses 90 extra days. Individuals can defer up to $1 Million. All you have to do is file your taxes. You’ll automatically not get charged interest and penalties”.
My friends, this is not yet formal and exactly what the above quote means is not entirely clear. As we await formal guidance, I think it safe to make some sweeping generalizations. First, it appears that the filing date for your 2019 personal return will not change. As of now, April 15th is still the filing due date. Second, it appears that the April 15th payment date has been replaced with July 15th. Treasury appears to be extending the equivalent of a “bridge loan” to Americans by letting them delay their tax payment. In addition, the Treasury Secretary is encouraging you to file ASAP so your money is in your pocket.
It also appears the individuals’ 2020 first quarter estimated payments will also be moved back to July 15th. Of course, this ironically moves your 1st payment due date to a month after the June 15th deadline for the second quarter estimated payment. How this due date change might impact other tax responsibilities is still a mystery. I will be updating the website post as more information becomes available.