April 2020 Tax Tips

Updated: Aug 11, 2020


This month we cover the following hot topics. Enjoy!

· COVID-19: New SBA Loans for Small Businesses

· COVID-19: Important Tax Breaks from the CARES Act

· COVID-19: Tax Season Delayed until July 15—Wait or File Now?

· Tax Loophole Allows Tax-Free COVID-19 Payments to Employees

· COVID-19: IRS Provides Relief from Enforcement Actions


· COVID-19: CARES Act Allows $100,000 Tax-Free IRA Grab-and-Repay

· COVID-19: Significant Payroll and Self-Employment Tax Relief


COVID-19: New SBA Loans for Small Businesses

The COVID-19 pandemic has upended all aspects of life around the world, including the world of business here in the U.S.

If your business is struggling, you may be able to get some help from the federal Small Business Administration (SBA), which is authorized to provide loans to small businesses on an as-needed basis.

There are two types of relief you can apply for—read on.

Economic Injury Disaster Loans

Traditionally, low-interest SBA Economic Injury Disaster Loans (EIDLs) have been available to small businesses following a disaster declaration; these are authorized by Section 7(a) of the Small Business Act.

EIDLs are commonly granted on a local level following a natural disaster (such as a hurricane or a tornado). But right now they are authorized for small businesses in all U.S. states and territories due to the COVID-19 pandemic.

Currently, each disaster loan provides up to $2 million to pay fixed debts, payroll, accounts payable, and other bills. The interest rate is fixed at 3.75 percent for small businesses and 2.75 percent for non-profits. EIDLs can be repaid over a period of up to 30 years.

Additionally, due to COVID-19, the SBA is providing advances of up to $10,000 on EIDLs for businesses experiencing a temporary loss of revenue. Funds are available within three days after applying, and the loan advance does not have to be repaid.

Small business owners can apply for an EIDL and advance here: https://covid19relief.sba.gov/#/.

New Paycheck Protection Program

The Paycheck Protection Program (PPP) is an expansion of the existing 7(a) loan program, authorized by the recently passed Coronavirus Aid, Relief, and Economic Security Act (CARES Act).

Who’s Eligible?

Employees. According to the SBA, you are eligible if your business was in operation as of February 15, 2020, and you had employees for whom you paid salaries. (The CARES Act includes as eligible payroll your payments to 1099 independent contractors, but the SBA guidance says no—you can’t include the 1099 payments. And since this is an SBA loan, the SBA guidance likely rules for now.)

No employees. You qualify the PPF loan even if the only worker is you. Thus, both the sole proprietor with no employees and the single-member LLC with no employees qualify.

Small businesses that employ 500 or fewer employees are eligible for PPP relief. In this small business category, you find S and C corporations, sole proprietors, partnerships, certain non-profits, veterans’ organizations, and tribal businesses.

How Much Aid Is Available?

Small businesses can borrow 250 percent of their average monthly payroll expenses during the one-year period before the loan is taken, up to $10 million.

For example, if your monthly payroll average is $10,000, you can borrow $25,000 ($10,000 x 250 percent). At $1 million, you can borrow $2.5 million.

The law defines “payroll costs” very broadly as

· employee salaries, wages, commissions, or “similar compensation,” up to a per-worker ceiling of $100,000 per year;

· cash tips or the equivalent;

· payment for vacations and parental, family, medical, or sick leave;

· allowance for dismissal or separation;

· payment for group health benefits, including insurance premiums;

· payment of any retirement benefit; or

· state or local tax assessed on employee compensation.

What’s specifically not included in payroll costs:

· Annual compensation over $100,000 to any individual employee

· Compensation for employees who live outside the U.S.

· Sick leave or family leave wages for which a credit is already provided by the Families First Coronavirus Response Act (P.L. 116-127)

How Much of the Loan Is Forgiven?

Principal amounts used for payroll, mortgage interest, rent, and utility payments during an eight-week period (starting with the loan origination date) will be forgiven.

If the full principal is forgiven, you are not liable for the interest accrued over that eight-week period—and, as an added bonus, the canceled amounts are not considered taxable income.

Warning: Payroll Cuts Affect Loan Forgiveness

Because the whole point of the PPP is to help keep workers employed at their current level of pay, the loan forgiveness amount decreases if you lay folks off or reduce their wages.

If you keep all your workers at their current rates of pay, you are eligible for 100 percent loan forgiveness. If you reduce your workforce, your loan forgiveness will be reduced by the percentage decrease in employees.

Example. Last year, you had 10 workers. This year, you have eight. Your loan forgiveness will be reduced by 20 percent.

You are allowed to compare your average number of full-time equivalent employees employed during the covered period (February 15, 2020, to June 30, 2020) to the number employed during your choice of

· February 15, 2019, to June 30, 2019, or

· January 1, 2020, to February 29, 2020.

If you reduce by more than 25 percent (as compared to the most recent full quarter before the covered period) the pay of a worker making less than $100,000 annually, your loan forgiveness decreases by the amount in excess of 25 percent.

Example. Last quarter, Jim was earning $75,000 on an annual basis. You still have Jim on the payroll but have reduced his salary to $54,750 annually. Jim’s pay has decreased by 27 percent, so the amount of your PPP loan forgiven is reduced by the excess 2 percent.

The good news: If you have already laid workers off or made pay cuts, it’s not too late to set things right. If you hire back laid-off workers by June 30, 2020, or rescind pay cuts by that date, you remain eligible for full loan forgiveness.

When Are Payments Due?

Any non-forgiven amounts are subject to the terms negotiated by you and the lender, but the maximum terms of the loan are capped at 10 years and 4 percent interest.

Also, payments are deferred for at least six months and up to one year from the loan origination date.

What If You Already Applied for an EIDL for Coronavirus-Related Reasons?

No problem—if you took out an EIDL on or after January 30, 2020, you can refinance the EIDL into the PPP for loan forgiveness purposes, but you can’t double-dip and use the loans for the same purposes.

Any remaining EIDL funds used for reasons other than the stated reasons above are a regular (albeit low-interest) loan that needs to be repaid.

How to Apply for a PPP

Unlike EIDLs, which run directly through the SBA, PPP loans go through approved third-party lenders. Talk to your bank or your local SBA office (given the current demands on the SBA, your bank may be a better place to start).

There’s no fee to apply, and your burden for demonstrating need is low. In addition to the appropriate documentation regarding your finances, you need only make a good-faith showing that

· the loan is necessary to support your ongoing business operations in the current economic climate;

· the funds will be used to retain workers and maintain payroll or make mortgage payments, lease payments, and utility payments; and

· you do not have a duplicate loan already pending or completed.

If You’re Going to Apply, Do It Now

The law allocates $349 billion for PPP relief—a huge amount, but one that will presumably be in very high demand given the devastating effects of the COVID-19 pandemic.

There’s no guarantee that more funding will be forthcoming, so act now to claim your share if you are eligible. It may be a while before the processes to grant these loans are actually up and running, but get things rolling on your end ASAP.

If you are in dire straits right now, you may additionally want to go ahead and apply for an EIDL loan and advance, as the machinery is already set up for those.

COVID-19: Important Tax Breaks from the CARES Act

Congress just passed the CARES Act in response to the COVID-19 pandemic.

In it, there are a lot of juicy tax benefits for you and your business. We’ll tell you about a collection of important ones you need to know.

The Check Will Be in the Mail

As you read this, the U.S. Treasury Department could be in the process of writing you a check, and it’s possible you could have that check in your hands within three weeks, according to the Treasury secretary.

The check you receive this year is going to be your minimum amount. You don’t have to repay it or pay taxes on it. And next year, when you file your 2020 tax return—say, on April 15, 2021—you could receive more cash if the 2020 return shows a bigger credit than you receive this year.

Technically, the cash you’re about to receive is an advance payment of a new refundable tax credit for your 2020 Form 1040 tax return. (This is the return you will file in 2021.)

The advance tax credit (think cash) coming in the mail or electronically in the next three weeks or so is based on your 2018 or 2019 (if you filed it already) tax return. If your income qualifies for the full credit, you will receive

· $1,200, or $2,400 if you filed a joint return, plus

· $500 for each dependent age 16 or younger on December 31, 2020.

Your tax credit (the check in the mail) goes down by 5 percent of the amount by which your adjusted gross income (AGI) exceeds

· $150,000 on a joint return,

· $112,500 on a head of household return, or

· $75,000 for all other filing statuses.

The advance credit amount is based on

· 2019 AGI; or

· 2018 AGI, if you have not yet filed your 2019 return; or

· 2020 Social Security benefits statement, if you did not file a 2018 or 2019 tax return.

You’ll “true up” your advance tax credit on your 2020 Form 1040 (which you will file in 2021):

· If the tax credit amount (the cash you are about to receive) is less than the credit you qualify for based on 2020 AGI, then you’ll get the difference as a refundable tax credit in 2021 after you file your 2020 tax return.

· If the cash amount you receive this year is greater than the credit you qualify for based on 2020 AGI, you have a windfall. You don’t have to pay the excess cash back to the IRS.

Your current tax debts will not interfere with the cash amount you are about to receive. There are no offsets for outstanding tax debts. But there is an offset for past-due child support that is reported to the IRS by a state. In this case, the IRS will take the child support money from the advance tax credit before remitting any money to the taxpayer.

Planning tip. If you didn’t file your 2019 tax return yet, calculate if your advance credit is higher with your 2018 AGI. If it is, wait to file your 2019 return until after you get the advance credit paid to you.

Example. You filed a 2018 Form 1040 with AGI of $70,000 and no dependents. Your 2019 Form 1040, which you did not file yet, has an AGI of $105,000 and no dependents.

If you file your 2019 return now, you will get no cash from the advance credit because your AGI would have phased out your entire credit. But if you don’t file your 2019 return now, you receive $1,200.

Fast-forward to your 2020 tax return—say your 2020 Form 1040 has AGI of $110,000. It’s over the threshold. No problem. Under the rules, you keep the $1,200.

Charitable Contributions

For the tax year 2020 only, the CARES Act increases the limits on charitable contributions as follows:

· For individuals, there is no AGI limit for contributions normally subject to the 50 percent and 60 percent limitations. The 2020 no-limit rule does not apply to contributions to donor-advised funds.

· For corporations, the 10 percent limitation goes up to 25 percent of taxable income.

· The limitation on deductions for contributions of food inventory goes from 15 percent to 25 percent.

If you are a non-itemizer, you may now deduct up to $300 of cash charitable contributions above the line. This above-the-line deduction is a permanent change starting with the tax year 2020.

Net Operating Losses

The CARES Act temporarily suspends some of the Tax Cuts and Jobs Act (TCJA) limitations on net operating losses (NOLs):

· For NOLs that arise in tax years 2018, 2019, and 2020, you can now carry them back five years to obtain refunds of taxes previously paid.

· Under the TCJA, an NOL deduction in a tax year usually cannot exceed 80 percent of taxable income, but the CARES Act suspends that limitation and allows a 100 percent deduction for tax years 2018, 2019, and 2020.

These new, temporary changes allow you to fully utilize your NOLs and potentially amend prior-year tax returns to get refunds.

461(l) Limitation

The TCJA created a new loss limitation rule (a ceiling) that limited your ability to use business losses. The CARES Act retroactively eliminates the Section 461(l) limitation rule for tax years 2018, 2019, and 2020 and moves the start to tax year 2021. Once again, this change allows you to possibly amend prior-year tax returns to get refunds now.

Qualified Improvement Property

Finally! Congress fixed the TCJA error. Qualified improvement property (QIP) is now 15-year property, and not 39-year property, for depreciation purposes.

This means QIP is now eligible for bonus depreciation, where previously you could use only Section 179 expensing. This change is retroactive as if Congress originally included it in the TCJA, so you can amend prior-year returns to fully expense the property and potentially secure refunds.

COVID-19: Tax Season Delayed until July 15—Wait or File Now?

As you know, the COVID-19 pandemic has shut down much activity in the United States. The IRS decided to use its authority in a national emergency to postpone certain tax return filings and payments. This change affects every one of you, and the rules are tricky—after all, this is tax law.

We’ll explain who gets relief; what the IRS postponed; and perhaps more important, what wasn’t postponed. We’ll also tell you whether you should file regardless of the postponement.

Who Qualifies?

First, to qualify for postponement, you must have a tax return that is due on April 15, 2020. In general, the returns due on April 15 include the following:

· An individual filing a Form 1040 series return

· A trust or estate filing Form 1041

· A partnership filing Form 1065

· A corporation filing a Form 1120 series return

In its FAQ, the IRS did not include the Form 1065 for partnerships or the Form 1120S for S corporations when it listed the forms available for relief.

That’s because most partnerships and S corporations have calendar-year returns, making the 2019 tax return due March 15, 2020. But if you have a fiscal-year partnership or S corporation with a due date of April 15, 2020, it should qualify for relief under the official guidance.

Second, you must have one of the following due on April 15, 2020:

· Tax year 2019 federal income tax return

· Tax year 2019 federal income tax payment

· Tax year 2020 federal estimated income tax payment

This grant of relief does not apply to

· federal payroll taxes, including federal tax deposits, and

· federal information returns.

Federal Tax Return Filing Deadline

If you qualify for relief, your 2019 federal income tax return is now due July 15, 2020. You do not have to file an extension on Form 4868 or Form 7004 or contact the IRS to get the automatic postponement to July 15, 2020.

If you need additional time beyond July 15, 2020, to file your tax return, you can file Form 4868 or Form 7004 on or before July 15, 2020, and get an automatic extension to your normal extension due date:

· September 30 for Form 1041

· October 15 for Forms 1040 and 1120