COVID-19 Business Relief Analysis

Within weeks, several new laws and programs offering Coronavirus relief have gone into effect. While these measures to protect those hit hardest by the pandemic are important, it can be a somewhat confusing process for individuals and businesses to decide which route is best for their situation, and for what they qualify. Information is updated daily and interpretations are continually changing.

To help our friends and clients, this chart breaks down comparative information about a few of the new laws and programs that have rolled out in response to the COVID-19 pandemic. It describes the Paycheck Protection Program, FFCRA Credits, Employee Retention Credit, Employer Payroll Tax Payment Deferral, and the CARES Act Unemployment Assistance.

Please contact our team if you need guidance, as we have additional tools internally to counsel our clients through this process. We are always here to help.

Click here for a PDF download of the COVID-19 Business Relief Analysis.

 

SBA Paycheck Protection Program Offers Coronavirus Relief

The Paycheck Protection Program (PPP) is part of “The Coronavirus Aid, Relief, and Economic Security Act” (CARES Act) that was recently passed.  The PPP provides short-term cash flow assistance to small businesses to support their employees during this time of economic distress.  The PPP loans are provided by the SBA through their certified lenders guaranteed by the federal government. SBA will be guaranteeing these loans 100%, but due to sheer volume of need at this time, they are allowing banks to write the loans.

We can counsel our clients on two main issues regarding PPP loans:

  1. If you qualify, calculating the maximum borrowing amount
  2. If you qualify for forgiveness of the loans, calculating the forgiveness


Eligibility Period

PPP loans must be made for the period prior to June 30, 2020.


Eligible Businesses

PPP Eligible Businesses Include:

  • Businesses with less than 500 employees (full-time or part-time), operations as of February 15, 2020, and was substantially impacted by COVID-19
  • A business that otherwise meets the SBA’s size standard
  • A 501(c)(3) with fewer than 500 employees (full-time or part-time)
  • Sole Proprietors and independent contractors
  • A self-employed individual who regularly carries on any trade or business
  • A Tribal business concern that meets the SBA size standard
  • A 501(c)(19) Veterans Organization that meets the SBA size standard

Businesses not eligible include:

  • Churches
  • Cannabis companies
  • Casinos
  • Land developers
  • Any business involved in an illegal or prurient activity are not eligible per federal law

Affiliation rules of limiting to one entity are waived for this loan in certain industries.

Special Rules

  • If you are in the accommodation and food services sector (NAICS 72), the 500-employee rule is applied on a per physical location basis
  • If you are operating as a franchise or receive financial assistance from an approved Small Business Investment Company the normal affiliation rules do not apply

 

PPP Loan Funding

  • Loan amounts can be as large as 250% of the business’s average monthly payroll cost over the last 12 months not to exceed $10M
  • As well as salaries over $100,000 (annualized for each employee) not counted in this payroll calculation


Use of PPP Loans

The funds received under the PPP loan requirements must be for the following expenses:

  • Payroll (salaries, wages, vacation, parental, family, medical, or sick leave, severance, retirement benefits, and state or local taxes)
  • PPP funds cannot be used to pay salaries over $100,000
  • Costs for related group health care benefits
  • Employee commissions and tips
  • Interest on mortgage payments (not applicable for principle portion of payments) and on additional debt incurred prior to obtaining the loan
  • Rent and utilities

 

Certifications

An eligible recipient applying for a covered loan shall make a good faith certification:

  1. that the uncertainty of current economic conditions makes necessary the loan request to support the ongoing operations of the eligible recipient;
  2. acknowledging that funds will be used to retain workers and maintain payroll or make mortgage payments, lease payments, and utility payments;
  3. that the eligible recipient does not have an application pending for a loan under this subsection for the same purpose and duplicative of amounts applied for or received under a covered loan; and
  4. during the period beginning on February 15, 2020 and ending on December 31, 2020, that the eligible recipient has not received amounts under this subsection for the same purpose and duplicative of amounts applied for or received under a covered loan.

 

Payment Forgiveness

The goal of PPP loans is to not reduce workforce and improve economic stability in the midst of the Coronavirus pandemic. Therefore, businesses who are continuing to retain and pay their staff during the pandemic will be eligible for certain levels of loan forgiveness.

It’s also important to note that those who qualify for PPP loan forgiveness will not be forced to report those amounts as income. However, the amount of loan forgiveness cannot exceed the principal amount of the loan

Businesses who may be eligible for payment forgiveness include:

  • Businesses who used the PPP loan for payroll costs as described above. Mortgage interest, rent, and utilities as described above must have been in effect as of February 15, 2020. All must be paid during the first 8 weeks from the origination date of the loan.
  • Businesses who keep their employees and pay at least 75% of their prior year compensation

The amount of forgiveness will be reduced by the comparison of current year and prior year Full-Time Equivalent (FTEs). Businesses must submit applicable supporting documentation to request the available loan forgiveness

Reductions in employment or wages that occur during the period beginning on February 15, 2020 and ending 30 days after enactment of the CARES Act, (as compared to February 15, 2020) shall not reduce the amount of loan forgiveness IF by June 30, 2020 the borrower eliminates the reduction in employees or reduction in wages.

Due to likely high subscription, at least 75% of the forgiven amount must have been used for payroll.

 

Payment Deferral

Payments on PPP loans can be deferred for 6 months up to one year.

 

PPP Loan Terms

  • No collateral or personal guarantee
  • Per SBA’s website on April 1, 2020, maturity of 2 years and an interest rate of .5%

 

How We Can Help

This is a trying and unprecedented time for business owners. Our team is utilizing our nationwide resources to update our clients and friends as these programs are interpreted and regulations are written. The COVID-19 pandemic and the regulatory news surrounding it are constantly evolving. We are closely monitoring these situations and will share timely and important news with you as it is released.

Please reach out to your dedicated Scheffel Boyle team member at any time for assistance. We are always here to help.

President Trump Signs the CARES Act, Sending $2.2 Trillion for Coronavirus Relief

On March 27th, 2020, President Trump signed into law the Coronavirus Aid, Relief and Economic Security (CARES) Act, which provides relief to taxpayers affected by the coronavirus (COVID-19). The CARES Act is the third round of federal government aid related to COVID-19. We have summarized the top provisions in the new legislation below, with more detailed alerts on individual provisions to follow. Click here for a link to the full text of the bill.


Stimulus Refund Payments to Individual Taxpayers

One of the most talked-about portions of The CARES Act provides eligible individuals with a refund check. We’ve summarized the payout amounts and the criteria with each below. If you are unsure of your adjusted gross income (AGI) for the tax year this would be applicable to, it is listed on your 1040 federal tax return on Line 8b.

  • Single Filers: if your AGI is less than $75,000, you will receive a refund of $1,200. The refund begins to phase out if the individual’s AGI exceeds $75,000, and is completely phased out for individuals with no qualifying children if their AGI exceeds $99,000.
  • Joint Filers (Married Filing Joint): if your combined AGI is less than $150,000, you will receive a refund of $2,400. The refund begins to phase out if the filers’ AGI exceeds $150,000, and is completely phased out for joint filers with no qualifying children if their AGI exceeds $198,000.
  • Head of Household (HOH) Filers: if your AGI is less than $112,500, you will receive a refund of $1,200. The refund begins to phase out if the filer’s AGI exceeds $112,500, and is completely phased out for HOH with no qualifying children if their AGI exceeds $136,500.
  • Qualifying Children: in addition to the refunds listed above, taxpayers will receive $500 per qualifying child. Criteria for this is listed below.

A qualifying child is…

  • a child, stepchild, eligible foster child, brother, sister, stepbrother, or stepsister, or a descendent of any of them,
  • 16 years of age or younger,
  • who has not provided more than half of their own support,
  • who has lived with the taxpayer for more than half of the year, and
  • who has not filed a joint return (other than only for a claim for refund) with the individual’s spouse for the taxable year beginning in the calendar year in which the taxable year of the taxpayer begins.

Eligible individuals do not include nonresident aliens, individuals who may be claimed as a dependent on another person’s return, estates, or trusts. Eligible individuals and qualifying children must all have a valid social security number. For married taxpayers who filed jointly with their most recent tax filings (2018 or 2019) but will file separately in 2020, each spouse will be deemed to have received one half of the credit.

The refund is determined based on the taxpayer’s 2020 income tax return but is advanced to taxpayers based on their 2018 or 2019 tax return, as appropriate. If an eligible individual’s 2020 income is higher than the 2018 or 2019 income used to determine the rebate payment, the eligible individual will not be required to pay back any excess rebate. However, if the eligible individual’s 2020 income is lower than the 2018 or 2019 income used to determine the rebate payment such that the individual should have received a larger rebate, the eligible individual will be able to claim an additional credit generally equal to the difference of what was refunded and any additional eligible amount when they file their 2020 income tax return.

Individuals who have not filed a tax return in 2018 or 2019 may still receive an automatic advance based on their social security benefit statements (Form SSA-1099) or social security equivalent benefit statement (Form RRB-1099). Other individuals may be required to file a return to receive any benefits.

So what about college students?

Yes, college students are eligible for the stimulus as long as they are not claimed as a dependent on their parent or guardian’s return.

Sidenote: federal student loan payments have been deferred, waiving penalties, for two months due to the Coronavirus pandemic. Furthermore, federal student loans have also waived interest for six months.

What do I need to do to receive my payment and where will it go?

If you are current with your 2018 or 2019 tax filings, you do not need to apply or take any extra steps to receive your payment.

The payment will be given to you in the format you requested on your most recent tax filing (2018 or 2019). If you had your refund mailed to you, it will be mailed. If you had your refund direct deposited, it will be deposited in the same bank account which your refund was deposited.

Retired, Veteran, Disabled, on Social Security, or Eligible Unemployed?

All will still receive a payment in accordance with the guidelines listed above.

When can I expect to get my stimulus payment?

Lots of information has been circulating on the timeframe for distribution of these payments. However, Treasury Secretary Mnuchin recently said he expects most taxpayers to receive their payments within three weeks.

The Act also outlined a safeguard to those unsure where their payment would end up or if they would receive one. All recipients of the stimulus will receive a paper notice via USPS within a few weeks after your payment was disbursed. The notice will outline when the payment was released and to where (direct deposit account or mailed to a physical address). If you still cannot locate your payment after receiving that letter, we would urge you to contact the IRS with that information.


Charitable Contributions

Above-the-line deductions. Under the CARES Act, an eligible individual may take a qualified charitable contribution deduction of up to $300 against their AGI in 2020. An eligible individual is any individual taxpayer who does not elect to itemize his or her deductions. A qualified charitable contribution is a charitable contribution:

  • made in cash,
  • for which a charitable contribution deduction is otherwise allowed, and
  • that is made to certain publicly supported charities.

This above-the-line charitable deduction may not be used to make contributions to a non-operating private foundation or to a donor advised fund.

Modification of limitations on cash contributions. Currently, individuals who make cash contributions to publicly supported charities are permitted a charitable contribution deduction of up to 60% of their AGI. Any such contributions in excess of the 60% AGI limitation may be carried forward as a charitable contribution in each of the five succeeding years.

The CARES Act temporarily suspends the AGI limitation for qualifying cash contributions, instead permitting individual taxpayers to take a charitable contribution deduction for qualifying cash contributions made in 2020. However, such contributions must not exceed the excess of the individual’s contribution base over the amount of all other charitable contributions allowed as a deduction for the contribution year. Any excess is carried forward as a charitable contribution in each of the succeeding five years. Taxpayers wishing to take advantage of this provision must make an affirmative election on their 2020 income tax return.

This provision is useful to taxpayers who elect to itemize their deductions in 2020 and make cash contributions to certain public charities. As with the aforementioned above-the-line deduction, contributions to non-operating private foundations or donor advised funds are not eligible.

For corporations, the CARES Act temporarily increases the limitation on the deductibility of cash charitable contributions during 2020 from 10% to 25% of the taxpayer’s taxable income. The CARES Act also increases the limitation on deductions for contributions of food inventory from 15% to 25%.


Technical Correction to Qualified Improvement Property

The CARES Act contains a technical correction to a drafting error in the Tax Cuts and Jobs Act that required qualified improvement property (QIP) to be depreciated over 39 years, rendering such property ineligible for bonus depreciation. With the technical correction applying retroactively to 2018, QIP is now 15-year property and eligible for 100% bonus depreciation. This will provide immediate current cash flow benefits and relief to taxpayers, especially those in the retail, restaurant, and hospitality industries.

Taxpayers that placed QIP into service in 2019 can claim 100% bonus depreciation prospectively on their 2019 return and should consider whether they can file Form 4464 to quickly recover overpayments of 2019 estimated taxes. Taxpayers that placed QIP in service in 2018 and that filed their 2018 federal income tax return treating the assets as bonus-ineligible 39-year property should consider amending that return to treat such assets as bonus-eligible. For C corporations, in particular, claiming the bonus depreciation on an amended return can potentially generate NOLs that can be carried back five years under the new NOL provisions of the CARES Act to taxable years before 2018 when the tax rates were 35%, even though the carryback losses were generated in years when the tax rate was 21%. With the taxable income limit under Section 172(a) being removed, an NOL can fully offset income to generate the maximum cash refund for taxpayers that need immediate cash. Alternatively, in lieu of amending the 2018 return, taxpayers may file an automatic Form 3115, Application for Change in Accounting Method, with the 2019 return to take advantage of the new favorable treatment and claim the missed depreciation as a favorable Section 481(a) adjustment.


Compensation, Benefits, and Payroll Relief

Unemployment Benefits. The CARES Act temporarily increases the amount of and expands eligibility for unemployment benefits, and provides relief for workers who are self-employed. The law allows for individuals are not currently eligible for federal and state unemployment benefits, but are now unable to work due to the COVID-19 pandemic, a fixed amount of unemployment compensation. Furthermore, individuals who resign from their position surrounding a coronavirus-related incident or effect would be eligible for benefits as well.

For those who were already receiving unemployment benefits, the law enhanced their current benefit with an additional $600 per week in compensation. They will also be granted an additional 13 weeks in benefits.

Eligible individuals include those who are fully or partially unemployed or unable to work because…

  • They had to quit their job as a direct result of COVID-19
  • They have contracted COVID-19 and have been diagnosed by a medical professional, or are experiencing symptoms and are seeking an official diagnosis
  • Someone in their household has been diagnosed by a medical professional
  • They must provide full-time care for a dependent, a family member, or someone in their household who has contracted the virus
  • If they depend on a school or facility for care of a child or someone in their household in order to work, and that school or facility is closed as a direct result of the pandemic
  • If their current employment closed as a result of the quarantine put in place due to the pandemic, or they were scheduled to begin a position and that employer and/or position has ceased as a result of the Coronavirus
  • If the head of household dies in direct result of the Coronavirus, and the applicant is now the breadwinner of the home

Payroll Relief. Several provisions assist certain employers who keep employees on payroll even though the employees are not able or needed to work. The cornerstone of the payroll protection aid is a streamlined application process for SBA loans that can be forgiven if an eligible employer maintains its workforce at certain levels. Additionally, certain employers affected by the pandemic who retain their employees will receive a credit against payroll taxes for 50% of eligible employee wages paid or incurred from March 13 to December 31, 2020. This employee retention credit would be provided for as much as $10,000 of qualifying wages, including health benefits.

In addition, eligible employers may defer remitting employer payroll tax payments that remain due for 2020 (after the credits are deducted), with half being due by December 31, 2021, and the balance due by December 31, 2022. Employers with fewer than 500 employees are also allowed to give terminated employees access to the mandated paid federal sick and child care leave benefits for which the employer is 100% reimbursed by the government through payroll tax credits if the employer rehires the qualifying employees.

Any benefit that is driven off the definition of “employee” raises the issue of partner versus employee. The profits interest member that is receiving a W-2 may not be eligible for inclusion in the various benefit computations.

Retirement Accounts. Eligible individuals can withdraw vested amounts up to $100,000 during 2020 without a 10% early distribution penalty, and income inclusion can be spread over three years. Repayment of distributions during the next three years will be treated as tax-free rollovers of the distribution. The bill also makes it easier to borrow money from 401(k) accounts, raising the limit to $100,000 from $50,000 for the first 180 days after enactment, and the payment dates for any loans due the rest of 2020 would be extended for a year.

Individuals do not have to take their 2020 required minimum distributions from their retirement funds. This avoids lost earnings power on the taxes due on distributions and maximizes the potential gain as the market recovers.

Added Benefit. Two long-awaited provisions allow employers to assist employees with college loan debt through tax free payments up to $5,250 and restores over-the-counter medical supplies as permissible expenses that can be reimbursed through health care flexible spending accounts and health care savings accounts.


Deferral of Net Business Losses for Three Years

Section 461(l) limits non-corporate taxpayers in their use of net business losses to offset other sources of income. As enacted in 2017, this limitation was effective for taxable years beginning after 2017 and before 2026, and applied after the basis, at-risk, and passive activity loss limitations. The amount of deductible net business losses is limited to $500,000 for married taxpayers filing a joint return and $250,000 for all other taxpayers. These amounts are indexed for inflation after 2018 (to $518,000 and $259,000, respectively, in 2020). Excess business losses are carried forward to the next succeeding taxable year and treated as a net operating loss in that year.

The CARES Act defers the effective date of Section 461(l) for three years, but also makes important technical corrections that will become effective when the limitation on excess business losses once again becomes applicable. Accordingly, net business losses from 2018, 2019, or 2020 may offset other sources of income, provided they are not otherwise limited by other provisions that remain in the Code. Beginning in 2021, the application of this limitation is clarified with respect to the treatment of wages and related deductions from employment, coordination with deductions under Section 172 (for net operating losses) or Section 199A (relating to qualified business income), and the treatment of business capital gains and losses.


Net Operating Losses Carryback Allowed for Taxable Years Beginning in 2018 and Before 2021

The Act provides for an elective five-year carryback of net operating losses (NOLs) generated in taxable years beginning after December 31, 2017, and before January 1, 2021. Taxpayers may elect to relinquish the entire five-year carryback period with respect to a particular year’s NOL, with the election being irrevocable once made. In addition, the 80% limitation on NOL deductions arising in taxable years beginning after December 31, 2017, has temporarily been pushed to taxable years beginning after December 31, 2020. Several ambiguities in the application of Section 172 arising as a result of drafting errors in the Tax Cuts and Jobs Act have also been corrected.

As certain benefits (i.e., charitable contributions, Section 250 “GILTI” deductions, etc.) may be impacted by an adjustment to taxable income, and therefore reduce the effective value of any NOL deduction, taxpayers will have to determine whether to elect to forego the carryback. Moreover, the bill provides for two special rules for NOL carrybacks to years in which the taxpayer included income from its foreign subsidiaries under Section 965. Please consider the impact of this interaction with your international tax advisors. However, given the potential offset to income taxed under a 35% federal rate, and the uncertainty regarding the long-term impact of the COVID-19 crisis on future earnings, it seems likely that most companies will take advantage of the revisions.


Alternative Minimum Tax Credit Refunds

The CARES Act allows the refundable alternative minimum tax credit to be completely refunded for taxable years beginning after December 31, 2018, or by election, taxable years beginning after December 31, 2017. Under the Tax Cuts and Jobs Act, the credit was refundable over a series of years with the remainder recoverable in 2021.


Effects of the CARES Act at the State and Local Levels

As with the Tax Cuts and Jobs Act, the tax implications of the CARES Act at the state level first depends on whether a state is a “rolling” Internal Revenue Code (IRC) conformity state or follows “fixed-date” conformity. For example, with respect to the modifications to Section 163(j), rolling states will automatically conform, unless they specifically decouple (but separate state ATI calculations will still be necessary). However, fixed-date conformity states will have to update their conformity dates to conform to the Section 163(j) modifications. A number of states have already updated during their current legislative sessions (e.g., Idaho, Indiana, Maine, Virginia, and West Virginia). Nonetheless, even if a state has updated, the effective date of the update may not apply to changes to the IRC enacted after January 1, 2020 (e.g., Arizona).

A number of other states have either expressly decoupled from Section 163(j) or conform to an earlier version and will not follow the CARES Act changes (e.g., California, Connecticut, Georgia, Missouri, South Carolina, Tennessee (starting in 2020), Wisconsin). Similar considerations will apply to the NOL modifications for states that adopted the 80% limitation, and most states do not allow carrybacks. Likewise, in fixed-dated conformity states that do not update, the Section 461(l) limitation will still apply resulting in a separate state NOL for those states. These conformity questions add another layer of complexity to applying the tax provisions of the CARES Act at the state level. Further, once the COVID-19 crisis is past, rolling IRC conformity states must be monitored, as these states could decouple from these CARES Act provisions for purposes of state revenue.

 

How We Can Help

We are always here. Our team is closely monitoring new regulations as they roll out and doing all we can to disseminate that information to our clients and friends. If you have a specific question on your situation, please contact your trusted Scheffel Boyle team member. We remain dedicated to helping our clients navigate these uncertain times and will use every resource available to us to best serve you.

 

State of Illinois Extends Income Tax Filing & Payment Deadline

Governor Pritzker announced today, March 25th, that the State of Illinois income tax filing and balance due payment deadline has been extended for 2019 returns to July 15th, 2020.

However, for Illinois, 1st quarter estimates are still due on April 15th, 2020, and 2nd quarter estimates are still due on June 15th, 2020. This decision does not mirror Federal, Missouri, and a number of other states, as Federal and Missouri 1st quarter estimates are not due until July 15th, 2020.

Although the IRS, Illinois, Missouri, and others have extended SOME filing due dates, it’s important to note that you can still file your return, process payment, and/or receive your refund now, if you so wish.

If you have Illinois estimates due April 15th, 2020, we need to either prepare your 2019 return or estimate your 2020 taxable income. Penalties for underpayment of Illinois taxes can be substantial in relation to the tax due. We suggest that you still get your tax information to us as soon as possible.

Our team will continue to monitor this situation and communicate with our clients as regulatory updates are announced. Please reach out to us with any questions you may have. We are always here to help.

To read the official release from the Illinois Department of Revenue, click here.

Illinois Has Not Announced Any Extended Due Dates; Federal, Missouri and Other States Have Extended Tax Deadlines

State Updates

In a press release dated March 21st, 2020, Missouri Governor Parson announced the extended payment and filing deadlines for Missouri state income tax. The decision mirrors that of the Internal Revenue Service. The City of St. Louis earnings tax has also been extended for both filing and payment. It’s important to note that, as of today March 24th, Illinois has yet to announce any extension of filing or payment deadlines. Our team will keep you updated if Illinois follows Missouri’s lead on this issue.

Additionally, the following states have announced business and individual income tax return filing extensions and/or late filing/payment penalty relief:  California, Connecticut, Indiana, Iowa, Maryland, New York City, North Carolina, Oregon, South Carolina, Virginia, and Washington. Further, San Francisco and Seattle have announced filing extensions for local business taxes, while a number of other states have indicated they will adhere to federal extension guidance on tax payments once formalized by the Internal Revenue Service.

 

Federal Updates

On March 20, 2020, the Internal Revenue Service released Notice 2020-18, its second round of formal guidance – this time expanding its earlier guidance (Notice 2020-17) by including relief to taxpayers for both federal income tax returns and federal income tax payments which would be due April 15, 2020. Notice 2020-18 is available here. Notice 2020-17 is superseded by Notice 2020-18.

Under the expanded guidance, the President’s March 13, 2020, Emergency Declaration instructs the Treasury Secretary to provide relief to taxpayers affected by the coronavirus (COVID-19). The notice provides that any person with a federal income tax return or federal income tax payment due April 15, 2020, is an “Affected Taxpayer.”  Any such person includes an individual, trust, estate, partnership, association, company, or corporation.  For Affected Taxpayers, the relief provides that federal income tax returns or federal income tax payments that would ordinarily be due April 15, 2020, are postponed until July 15, 2020.

The notice provides that there is no limitation on the amount of the payment that may be postponed to July 15, 2020.  The relief is provided for income tax payments in respect of an Affected Taxpayer’s 2019 tax year or federal estimated tax payments due April 15, 2020, for an Affected Taxpayer’s 2020 tax year.

The extension provided in the notice applies only to federal income tax returns and federal income tax payments normally due April 15, 2020.  Any interest, penalty, or addition to tax for failure to pay will not begin to accrue until July 16, 2020. The notice expressly states: “No extension is provided in this notice for the payment or deposit of any other type of Federal tax, or for the filing of any Federal information return.”

 

The situation surrounding COVID-19 is constantly evolving. Our team is working to keep our clients updated as new regulations are announced. Please contact our team for questions on this issue.

How to Provide COVID-19 Tax-Free Disaster Payments to Your Employees

Employers are scrambling to find ways to help their employees who are impacted by the coronavirus (COVID-19) pandemic. It would surprise some to know that help already exists in a little-known provision of our tax law. Now that the COVID-19 has been declared a national emergency, Internal Revenue Code Section 139 can be used to allow employers to make tax-free payments or reimbursements to employees as “qualified disaster payments.” Enacted in 2002 largely stemming from the September 11th attacks of 2001, the provision has, thankfully, not been used often. However, it may prove its value during unprecedented times such as these.

The rules of our tax code are relatively simple: an employer cannot “gift” financially to an employee. Therefore, any payment from an employer to an employee is taxable as compensation, regardless of the intent or purpose behind it. That’s when Code Section 139 becomes so important. In times of national disaster, an employer can make a tax-free payment to an employee.

Below are some frequently asked questions about how employers can use Section 139 immediately to help their employees cope with COVID-19. Our team is available for consultation regarding your specific situation as the coronavirus situation continues to evolve.

Q1: What is a “qualified disaster payment”?
A1: Qualified disaster payments are payments that are not otherwise reimbursed by insurance made by an employer to an employee that are reasonably expected by the employer to:

  • Reimburse or pay reasonable and necessary personal, family, living, or funeral expenses incurred as a result of a qualified disaster; and
  • Reimburse or pay reasonable and necessary expenses incurred for the repair or rehabilitation of a personal residence or repair or replacement of its contents to the extent that the need for such repair, rehabilitation, or replacement is attributable to a qualified disaster.

The payments should not include non-essential, luxury, or decorative items or services.

Insight

Wage replacement (such as paid sick or other leave) would not be covered by Section 139, so such payments would still be taxable wages and would remain subject to income and payroll tax withholding and reporting.

Q2: What expenses might be considered to be eligible as a qualified disaster payment with respect to COVID-19?
A2: With respect to COVID-19 circumstances, it appears that employers can pay for, reimburse, or provide in-kind benefits reasonably believed by the employer to result from the COVID-19 national emergency that are not covered by insurance. For example, it appears that employers could pay for, reimburse or provide employees with tax-free payments for over-the-counter medications, hand sanitizers, home disinfectant supplies, child care or tutoring due to school closings, work-from-home expenses (like setting up a home office, increased utilities expense, higher internet costs, printer, cell phone, etc.), increased costs from unreimbursed health-related expenses and increased transportation costs due to work relocation (such as taking a taxi or ride-sharing service from home instead of using public mass transit).

Q3: What is the federal tax treatment of qualified disaster payments?
A3: Qualified disaster payments are federal tax-free to employees and are fully deductible to the employer. Such payments are not considered “gifts.” 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.

Q4: What is the state tax treatment of qualified disaster payments?
A4: Generally, state treatment for income tax withholding purposes will mirror the federal treatment of qualified disaster relief payments. That is, states generally exclude qualified disaster relief payments from the definition of wages for state income tax withholding purposes, either expressly or by applying the federal definition of “wages” for state income tax withholding purposes. However, qualified disaster relief payments may still be considered “wages” for purposes of state unemployment insurance tax. Employers should determine on a state-by-state basis whether certain income tax withholding and/or unemployment insurance tax contribution obligations may arise in connection with such payments.

Q5: Is there a cap on how much an employer can provide to an employee as a qualified disaster payment?
A5: No. 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.

Q6: Must employers have a written plan to make qualified disaster payments to employees?
A6: No. Employers are not required to have a written program for qualified disaster payments. But having such a program is recommended, so employers can inform employees about the parameters of the employer’s program in the COVID-19 context. Such a program might include a description of who is eligible, what expenses will be reimbursed (perhaps up to a “per employee” maximum), how and when payments will be made, etc.

Q7: Are employees required to substantiate their expenses to prove that they are eligible for qualified disaster payment treatment?
A7: No. Employees are not required to provide receipts or other proof supporting their expenses. However, employers could require such proof as part of its written program, perhaps using rules similar to the long-standing IRS “accountable plan” rules.

COVID-19, was designated as an emergency under the Stafford Act on March 13, 2020. Although there is some debate over the legal technicalities of that declaration, it appears that Section 139 relief has been triggered. Specifically, Rev. Rul. 2003-29 says that for Section 165 (which is cross-referenced in Section 139), an “emergency” is treated as a “disaster.” In addition, an IRS Chief Counsel Memorandum dated June 28, 2019, states “A Federally declared disaster includes a major disaster declaration under section 401 of the Stafford Act and an emergency declaration under section 501 of the Stafford Act.”

Please contact our team with questions regarding Code Section 139. We are here to help.

Families First Coronavirus Response Act

The Families First Coronavirus Response Act, (H.R. 6201), became law on March 18, 2020. It is the first coronavirus relief bill, with likely more to come as the situation evolves. The law requires employers with 500 employees or less to provide paid leave to their employees who are affected by the pandemic. A number of factors go into this new and mandatory employer-provided benefit, which we explain in detail below. In addition, to help employers in this growing financial burden, new tax credits and payroll tax relief have been put in place by the Act, which are also described in the following.

Other provisions of the Act expand FMLA, guarantee free testing for COVID-19, enhance unemployment insurance, expand food security initiatives, and increase federal Medicaid funding. The coronavirus issue is ever-changing and our team is doing our best to provide details as they emerge. Please let us know if you have questions on the following. We are here to help.


Emergency Paid Sick Leave

One of the most talked-about provisions of the Act is that it includes up to 80 hours of emergency paid sick leave for workers who are…

  1. unable to work while they are sick or complying with COVID-19 restrictions; or
  2. subject to a federal, state, or local quarantine or isolation due to COVID-19; or
  3. caring for school age children due to the closure of schools or child care facilities

It also includes paid family and medical leave that employees will be able to use to care for family members (not for personal illness) for up to 12 weeks. The first 10 days of emergency family and medical leave may be unpaid, unless employees opt to use accrued paid time off for those days.

The mandatory paid leave provisions apply to employers with fewer than 500 employees and government employers, with exceptions for health care workers and first responders. Self-employed individuals would be eligible for the new benefits provided under the Act. It is not clear if individuals who have self-employment income from their partnership or limited liability company would be eligible for the new self-employed benefits, as the Act does not specifically address those situations. Employers with 500 or more employees would not be subject to those rules.  Employers who are required to provide paid time off would need to initially bear the costs of paying their employees, but the federal government would provide payroll tax credits to help cover those costs.


Employer Mandates

Emergency Paid Sick Leave. Through December 31, 2020, the Act requires employers with fewer than 500 employees and government employers to provide all employees (including union employees and regardless of how long the individual worked for the employer, but excluding health care workers and first responders) with 80 hours of emergency paid sick leave for full-time workers. Paid sick leave will be pro-rated for part-time employees or employees with varying work schedules.

Generally, employers would pay employees at their regular rate of pay for emergency sick leave, capped at $511 per day ($5,110 in the aggregate) if the employee is unable to work or telework because the employee:

  • Is subject to a federal, state, or local COVID-19 quarantine or isolation order;
  • Has been advised by a health care provider to self-quarantine because of COVID-19;
  • Is experiencing COVID-19 symptoms and is seeking a medical diagnosis;

Employers would pay employees two-thirds of their regular rate of pay for emergency sick leave, capped at $200 per day ($2,000 in the aggregate) if the leave is taken to care for others or due to school closures. For example, if the employee:

  • Is caring for an individual subject to or advised to quarantine or isolation;
  • Is caring for a son or daughter whose school or place of care is closed, or child care provider is unavailable, due to COVID-19 precautions; or
  • Is experiencing substantially similar conditions as specified by the Secretary of Health and Human Services, in consultation with the Secretaries of Labor and Treasury.

As an employer, please be advised of these two important regulations in the Act:

  1. An employer cannot require an employee to use other paid leave before using this paid leave.
  2. Employers would not be able to require employees to find replacement workers to cover their shifts if employees use emergency paid sick leave.

The federal government is supposed to provide a model notice within seven days after enactment, which employers would be required to post at their workplace, informing employees of their right to emergency paid sick leave. The U.S. Department of Labor has been directed to issue guidelines on how to calculate the amount of emergency paid sick leave and also has the authority to issue regulations to exempt small businesses with fewer than 50 employees from these regulations.

Qualifying employers would face penalties for failing to comply with the new emergency paid sick leave rules and are prohibited from discriminating against employees who take emergency paid sick leave.

 

FMLA and The Act

First, a little background. Currently, the federal Family Medical Leave Act of 1993 (FMLA) provides eligible employees up to 12 work weeks of unpaid leave a year and requires group health benefits to be maintained during the leave as if employees continued to work instead of taking leave. Employees are also entitled to return to their same or an equivalent job at the end of their FMLA leave. Special rules apply to military personnel.

To be eligible for FMLA, an employee is required to have been employed by their employer for a year, worked for 1,250 hours, and worked in a location where there are 50 other employees within a 75-mile radius. The FMLA applies to all private sector employers who employ 50 or more employees for at least 20 workweeks in the current or preceding calendar year (including joint employers and successors of covered employers). Many states have enacted laws that are similar to federal FMLA, which apply to smaller employers who may be exempt from federal FMLA. The FMLA also applies to federal, state and local employers. These current provisions remain available for qualifying employees.

So, what’s new? FMLA Amendments. The Act would add provisions to the FMLA to provide up to 12 weeks of job-protected leave through December 31, 2020 to employees (including union employees) who:

  • have been employed for at least 30 days by employers with fewer than 500 employees or government employers, or
  • are the unable to work or telework due to having to care for a child under age 18 if the child’s school or place of child care has been closed (or the child care provider is unavailable), due to the COVID-19 public health emergency.

Employers may elect to exclude health care workers and first responders from taking this public health emergency FMLA.

The first 10 days of FMLA under these new provisions may be unpaid. Employees can use other paid time off such as vacation, sick days, sabbatical, or emergency paid sick leave to cover that gap, but employers cannot require employees to use their accrued paid time off before using these 12 weeks of extended FMLA leave. Employers would pay employees two-thirds of their regular rate of pay for this emergency FMLA leave, capped at $200 per day ($10,000 in the aggregate per employee). Adjustments would be made to the amount of paid time off for employees with varying schedules.

The Act gives the U.S. Department of Labor authority to issue regulations that would exclude certain health care providers and emergency responders from being able to take emergency family and medical leave. The DOL also has the authority to issue regulations to exempt small businesses with fewer than 50 employees from the emergency family and medical leave requirements if the requirements would jeopardize the viability of the business as a going concern. The Act would also exempt employers with fewer than 50 employees in a 75-mile radius from civil damages in an FMLA lawsuit.

Under the Act, employers with less than 500 employees are required to hold an employee’s job open for them until the end of the leave period. However, an exception applies to employers with fewer than 25 employees. If the employer made reasonable efforts to restore the employee’s job, but those efforts failed, the employer will agree to reinstate the employee if an equivalent position becomes available within a year. In those exceptions, if the employee’s position no longer exists due to economic conditions or changes which occurred in the employer’s operations caused by the COVID-19 crisis, the employer will not be subject to penalties under the Act.


Payroll Tax Credits

To assist employers who are required to provide emergency paid sick leave or FMLA leave under the programs described above, the Act provides for a refundable tax credit applicable against the employer’s portion of Social Security or Railroad Retirement Tax Act (RRTA) tax for amounts paid under those programs. The credit is equal to 100% of the compensation paid in each calendar quarter to employees who are not working for the reasons described above, subject to the following limitations:

  • For payments to an employee who needs time off for self-isolation, diagnosis, or care of a COVID-19 diagnosis, or compliance with a health care provider’s recommendation or order, the credit is capped at $511 of eligible wages per employee per day.
  • For payments to an employee who needs time off to care for a family member who has been exposed to or diagnosed with the COVID-19, or a child under age 18 whose school or place of care has been closed, the credit is capped at $200 of eligible wages per employee per day.
  • The credit for emergency paid sick leave wages is only available for a maximum of 10 days per employee over the duration of the program.
  • For expanded FMLA, the credit is capped at $200 of eligible wages per employee per day and $10,000 for all calendar quarters.

Both of the credits are increased by any amounts paid or incurred by the employer to maintain a group health plan, to the extent those expenses are (1) excluded from the employee’s gross income under the tax code and (2) “properly allocable” to the respective qualified sick or FMLA wages required to be paid under the Act. The exact method of allocation will be provided by regulation at a later date, but the Act provides that the allocation will be treated as properly made if done “on the basis of being pro rata among covered employees and pro rata on the basis of periods of coverage.”

If the credit exceeds the employer’s total liability for Social Security or RRTA tax for all employees for any calendar quarter, the excess is refundable to the employer. The employer may choose not to apply the credit. Further, to prevent a double benefit, the employer cannot obtain a deduction for the amount of the credit. In addition, employers may not receive the credit in connection with wages for which a credit is allowed under Section 45S (credit for paid family and medical leave).

Similar rules apply to a self-employed individual that allow a refundable tax credit against the individual’s self-employment tax. The credit is capped at the lesser of the amounts that apply to eligible wages per employee or the individual’s lost self-employment income. The House-passed version of the Act provides guidance on how to determine the individual’s lost income due to the coronavirus.

Notably, required payments for emergency paid sick leave or FMLA under the Act will not be considered wages for purposes of calculating the employer’s portion of the Social Security or RRTA tax. In addition, the tax credits available to an employer are increased by the amount of the employer’s liability for Medicare tax on wages paid under the Act, effectively exempting the emergency sick leave and FMLA payments from that tax as well. In this way, the Act provides employers with two tax benefits:

  1. Refundable credits against the employer’s portion of Social Security or RRTA tax
  2. An exemption from, or credit against, the employer’s portion of Social Security or RRTA and Medicare taxes on the wages required to be paid under the Act

However, the law does not exempt these payments from the definition of wages for the purpose of other taxes (including the employee’s portion of Social Security, RRTA and Medicare taxes).

The Act ensures there is no negative impact to the Social Security program caused by the tax credit or the exemption of sick pay and family leave pay from Social Security tax by authorizing a transfer of funds from the General Fund to the Social Security and disability insurance trust funds to replace the lost employer contributions. The tax provisions discussed herein will apply beginning on a date to be determined by the Secretary of the Treasury after the enactment of the Act and ending on December 31, 2020.

 

Free Testing

An important piece of the legislation is that it guarantees free testing for the coronavirus, and that is without having to use deductibles or copayments through your personal insurance plan. Included in the act are waivers directing testing costs to be covered by either insurance or government-funded programs. Furthermore, it also allows for a temporary 6.2% increase in federal payments to Medicaid for states.

In addition, the Children’s Health Insurance Program, Department for Veterans Affairs, Indian Health Service, and the National Disaster Medical System will also receive additional government funding and support through the Act.

We are continually evaluating the new regulatory standards due to the coronavirus pandemic. Our team will do our best to keep you informed. Please reach out to us for consultation regarding your specific situation.

An Update From Our Team

Dear Clients and Friends,

We wanted to provide you with this update. As the COVID-19 (Coronavirus) issue continues to evolve, our policies may also evolve to lessen the potential effects of this pandemic. The health and well-being of our communities, clients, and team is our highest priority. As per Governor Pritzker’s order announced last night, March 20th, accounting firms are considered “essential” in nature. As such, our offices remain open, with continued remote work arrangements.

We began remote work arrangements on March 19th, 2020, and will continue monitoring until which time it is determined no longer necessary.

Scheffel Boyle has secure technology in place that enables our team to work safely and seamlessly from remote locations. Your emails and phone calls will be answered in a timely fashion. We have taken several steps to make sure we can continue to deliver the level of quality and excellence you are accustomed to from Scheffel Boyle.

For your safety and ours, we are currently handling tax consultations over the phone. Once returns are finalized, we are mailing the return to you. If you have any questions, please call.

For tax clients who have not yet provided their information to us, possibly send it electronically through our secure upload system, ShareFile, or mail it to our office. If you are not familiar with ShareFile, it is an online, secure upload system sent to you through an email link. The office will be available to assist you in using this secure portal. If you prefer to drop off your documents, you can do that as well.

On behalf of the entire Scheffel Boyle team, thank you for your continued support and loyal business as we all navigate these unique circumstances. Please feel free to reach out to us with any questions or concerns. As always, we are here and ready to help. Thank you for your continued trust in us and stay well.

 

Sincerely,

The Scheffel Boyle Team

Tax Filing Deadline Extended to July 15th

Treasury Secretary Steve Mnuchin announced today that the U.S. income tax filing deadline will be extended to July 15th due to the Coronavirus pandemic.

“All taxpayers and businesses will have this additional time to file and make payments without interest or penalties,” Mnuchin said on Twitter.

We will continue to monitor the updates regarding this issue and do our best to keep you informed.

Treasury Secretary Announces 90-Day Delay in Tax Payment Deadline

Treasury Secretary Steven Mnuchin announced this week that taxpayers may get a bit of relief due to the Coronavirus issue affecting the Nation. Mnuchin declared a 90-day deferral of taxes owed with no interest or penalties . While this provides for some relief due to the COVID-19 issue, it’s important to keep in mind that the filing deadline for individual and C corporation returns is still April 15th.  The deferral is only for the payment of taxes for 90 days (July 15th), not a filing delay. While other states have followed the IRS’ lead, Illinois has not announced its position on this payment relief as of March 19th. If not changed, an individual’s and corporation’s Illinois tax will still need to paid by April 15th. We’ll keep you updated on this Illinois situation.

The IRS and Treasury Department released Notice 2020-17 on March 19th to better explain what payments can be deferred. We have highlighted a few key components of this information:

  • Individuals can defer up to $1 million in income tax payments due on April 15th
  • C corporations and consolidated C corp groups may defer up to $10 million in tax payments due on April 15th
  • Only income taxes and self employment taxes on self employment income can be deferred
  • The extensions also apply to first quarter estimated payments for individuals and C Corporations due April 15th
  • The extensions do not apply to payroll deposits
  • The extensions do not apply to the second quarter estimates as they are due on June 15th

The IRS and Treasury Department will provide more guidance as needed. Our team will keep you advised as more information comes in. Please contact us if you have any questions or concerns.

Click here to read Notice 2020-17.