Tax Aspects of the CARES Act

Late in the evening on Wednesday, March 25th, Congress agreed on a stimulus package to assist with the COVID-19 pandemic.  The Coronavirus Aid, Relief, and Economic Security (CARES) Act will boost the economy with over $2 trillion in relief.  The tax provisions of the act include the following:

  • Individual stimulus checks
  • Small business loans
  • Loan Forgiveness of Paycheck Protection Loans
  • Emergency Government Disaster Loan
  • Using IRA funds for Coronavirus Costs
  • Required Minimum Distribution Waiver for 2020
  • Changes to charitable contributions
  • Exclusion from Income of Employer Payment of Employee Student Loan Debt
  • Employee Retention Credit
  • Delay of Payment of Employer Payroll Tax and Self-Employment Tax
  • Changes to the Net Operating Loss Rules

We will be posting additional information in regards to these provisions in the coming days.  In the meantime, we recommend reading ‘Congress Reaches Agreement On A Coronavirus Relief Package:  Tax Aspects of the CARES Act‘ by Tony Nitti – Forbes.com

CARES Act: Retirement Funding

On March 25, 2020 the Senate passed the Coronavirus Aid, Relief, and Economic Security (CARES) Act, which will inject roughly $2 trillion of economic stimulus into the economy designed to provide relief from the devastating toll of the COVID-19 pandemic. The final obstacles for the CARES Act are a vote by the House of Representatives, which is expected by Friday March 27, 2020, followed by the President’s signature. Passage of the CARES Act is expected.

Within the variety of different provisions that comprise the CARES Act are special rules for use of retirement funds. Included in these rules is a waiver of the 10% penalty for early withdrawals not to exceed $100,000 from 401k plans, and also a temporary waiver of the required minimum distribution (RMD) rules for 401k plans and IRAs for the calendar year 2020. Qualifying individuals will have up to three years to repay the distributions. During those three years, 401k plan contribution limits will be increased for said individuals in order to assist them in making up for such distributions. Taxpayers electing for such distributions shall include any required amounts in gross income ratably over a three year taxable period, beginning with tax year 2020. However, taxpayers can avoid any income recognition by repaying the distribution to the retirement plan within three years of receiving it.

Section 2202. Special Rules for use of Retirement Funds, defines these withdrawals as a “coronavirus-related distribution”.  These distributions must be made:

  1. on or after January 1, 2020, and before December 31, 2020,
  2. by an individual:
    • who is diagnosed with the virus SARS-CoV-2 or with coronavirus disease 2019 (COVID-19) by a test approved by the Centers for Disease Control and Prevention (CDC)
    • whose spouse or dependent is diagnosed with such virus or disease by such test, or
    • who experiences adverse financial consequences as a result of being quarantined, being furloughed or laid off or having work hours reduced due to such virus or disease, being unable to work due to lack of child care due to such virus or disease, closing or reducing hours of a business owned or operated by the individual due to such virus or disease.

Furthermore, the CARES Act will temporarily increase the limit on loans not treated as distributions from the lesser of $50,000 or 50% of the vested balance to the lesser of $100,000 or 100% of the vested balance. Repayments for such loans that are due between the enactment date of the Act and December 31, 2020 are eligible to be delayed for one year.

A link to Section 2202. Special Rules for use of Retirement Funds can be found Here.

These provisions will provide additional financial resources for individuals struggling during the ongoing pandemic. All employers with eligible plans should discuss these provisions with their corresponding 401k administrator to determine the overall impact and any action needed for employees that may utilize the changes implemented by the CARES Act during 2020.

IRA & HSA Deadlines Extended to July 15th

The following questions and answers were obtained from the IRS ‘Filing and Payment Deadlines Questions and Answers‘.

Does this relief provide me more time to contribute money to my IRA for 2019?

Yes. Contributions can be made to your IRA, for a particular year, at any time during the year or by the due date for filing your return for that year. Because the due date for filing Federal income tax returns has been postponed to July 15, the deadline for making contributions to your IRA for 2019 is also extended to July 15, 2020. For more details on IRA contributions, see Publication 590-A, Contributions to Individual Retirement Arrangements (IRAs).

Does this relief provide me more time to contribute money to my HSA or Archer MSA for 2019?

Yes. Contributions may be made to your HSA or Archer MSA, for a particular year, at any time during the year or by the due date for filing your return for that year. Because the due date for filing Federal income tax returns is now July 15, 2020, under this relief, you may make contributions to your HSA or Archer MSA for 2019 at any time up to July 15, 2020. For more details on HSA or Archer MSA contributions, see Publication 969, Health Savings Accounts and other Tax-Favored Health Plans.

Families First Coronavirus Response Act

On March 18, 2020, President Trump signed the FFCRA into law. In general the FFCRA requires employers with less than 500 employees to provide a certain amount of paid leave to employees impacted by the coronavirus (COVID 19) and provides a tax credit to employers to mitigate the costs of providing the mandated leave. The Act is intended to ease the economic consequences of the COVID – 19 outbreak. The Act also affects employer sponsored health plans.

The Emergency Family and Medical Leave Expansion Act

The Act includes the Emergency Family and Medical Leave Expansion Act (EFMLEA) (Division C of the Act), which requires employers with fewer than 500 employees and all government entities to provide both paid and unpaid public health emergency leave for as many as 12 weeks of job protected leave to certain employees through December 31, 2020.

This emergency leave generally is available when an employee who has been employed for at least 30 days is unable to work or telework due to a need for leave to care for a son or daughter under age 18 because a school or place of care has been closed, or a childcare provider is unavailable, due to an emergency with respect to COVID-19 that is declared by a federal, state, or local authority. The first 10 days of leave may be unpaid, although a worker could choose to use other accrued leave first and then receive the required paid leave.

Employers would be required to pay employees an amount calculated on an amount not less than two-thirds of an employee’s regular rate of pay and the number of hours the employee would otherwise be normally scheduled to work, not to exceed $200 per day and $10,000 in the aggregate. As with traditional FMLA leave, EFMLA leave is job protected, and an employer must return the employee to the same or equivalent position upon their return to work. The bill outlines an exception for employers with fewer than 25 employees stating that, if the employee’s job no longer exists due to the coronavirus pandemic, employers would be required to make reasonable efforts to restore the employee to an equivalent position over a one year period.

The bill grants the Secretary of Labor the authority to issue regulations exempting: (1) certain healthcare providers and emergency responders from taking leave under the bill; and (2) small businesses with fewer than 50 employees from the requirements of the bill if it would jeopardize the viability of the business.

Emergency Paid Sick Leave Act

Under the Emergency Paid Sick Leave Act (EPSLA) (Division E of the Act), private employers with fewer than 500 employees, and public employers of any size, must provide 80 hours of paid sick time to full-time employees who are unable to work (or telework) for specified virus-related reasons. Part time employees are entitled to sick time based on their average hours worked over a 2 week period. This amount is immediately available regardless of the employee’s length of employment. The maximum amounts payable vary based on the reason for absence.

Employees who are (1) subject to a quarantine or isolation order, (2) advised by a health provider to self-quarantine, or (3) experiencing symptoms and seeking diagnosis, must be compensated at their regular rate, up to a maximum of $511 per day ($5,110 total). Employees caring for an individual described in category (1), (2), or (3), caring for a son or daughter whose school is closed or child care provider is unavailable, or experiencing a “substantially similar condition” specified by the government must receive two-thirds of their regular rate, up to a maximum of $200 per day ($2,000 total).

Employers cannot require employees to find a replacement worker or use other sick leave before this sick time. Employers may exclude health care providers and emergency responders, and the DOL can issue regulations exempting businesses with fewer than 50 employees.

EFMLEA and EPLSA Tax Credits

Any amount paid by an employer under EFMLA is eligible for a 100% refundable tax credit, equal to 100% of the qualified emergency family leave wages required to be paid by the Emergency Family and Medical Leave Expansion Act. The credit is claimed against the tax imposed by section 3111(a) (the employer portion of the Social Security taxes) each calendar quarter through the IRS Form 941. The amount of qualified leave wages taken into account for each employee is capped at $200 per day and $10,000 for all calendar quarters. If the credit exceeds the employer’s total liability for any calendar quarter, the excess credit is refundable to the employer.

The EPSLA credit for each employee is equal to the lesser of the amount of his leave pay or either (1) $511 per day while the employee is receiving paid sick leave to care for themselves, or (2) $200 if the sick leave is to care for a family member or child whose school is closed. An additional limit applies to the number of days taken into account for all preceding calendar quarters.

The amount of the EPSLA and EFMLEA credits are increased by the portion of the employer’s “qualified health plan expenses” that are properly allocable to qualified sick leave wages or qualified family and medical leave wages. Qualified health plan expenses means amounts paid or incurred by the employer to provide and maintain a group health plan (as defined in Code Sec. 5000(b)(1), but only to the extent that such amounts are excluded from the gross income of employees by reason of Code Sec. 106(a).

In addition, the credits allowed to employers for wages paid under the EPSLA and EFMLEA are increased by the amount of the tax imposed by Code Sec. 3111(b) (the 1.45% hospital insurance portion of FICA) on qualified sick leave wages, or qualified family leave wages for which credit is allowed under Act Sec. 7001 or Act Sec. 7003.  The credits are refundable to the extent they exceed the employer’s payroll tax.

Employers don’t receive the credit if they’re also receiving the credit for paid family and medical leave established by the 2017 Tax overhaul (P.L. 115-97).

Wages paid under the EPSLA and EFMLEA are not considered wages under Code Sec. 3111(a) (employer tax-old age, survivors and disability insurance portion of FICA; 6.2%) or under Code Sec. 3221 (a) (employer’s railroad retirement tax).

Special Considerations for Self-Employed Individuals

Self-employed individuals may only take into account those days they are unable to work for qualified reasons under the Emergency Family and Medical Leave Credit or the Emergency Paid Sick Leave Credit. They must maintain documentation to be prescribed by the Treasury to establish their eligibility for the credit.

The Act also provide for similar refundable credits against the self-employment tax. It covers 100% of a self-employed individual’s sick leave equivalent amount, or 67% of the individual’s sick-leave equivalent amount if they are taking care of a sick family member, or taking care of a child following the child’s school closing for up to 10 days. The sick-leave equivalent amount is the lesser of average daily self-employment income or either (1) $511/day to care for the self-employed individual or (2) $200/day to care for a sick family member or child following a school closing, paid user the EPSLA.

Self-employed individuals can also receive a credit for as many as 50 days multiplied by the lesser of $200 or 67% of their average self-employment income paid under the EFMLEA.

Applicability Period

These rules apply only to days occurring during the period beginning on a date selected by the Secretary of the Treasury, which is during the 15-day period beginning on the date of the enactment of this Act (March 18, 2020), and ending on December 31, 2020.

Tax-Free Employee Assistance

We are living in the midst of an unprecedented health and financial crisis as the country tries to navigate unchartered waters along with the uncertainty for what lies ahead.  Fortunately, there is a little known and little used Internal Revenue Code section that was enacted in 2002 in response to the September 11th attacks of 2001 which allows employers to provide tax-free assistance to employees.  Under Section 139, “qualified disaster relief payments” are not only tax-free to the employee, but also tax deductible to the employer.

COVID-19 and Section 139

On March 13th, President Trump declared a national emergency under the Stafford Act in response to the COVID-19 pandemic sweeping across the nation.  Additionally, Notice 2020-17 published on March 18th, cited the Federally declared disaster to give the Secretary of the Treasury authority to postpone the timely payment of taxes due on April 15th  to July 15th.

Qualified Disaster Relief Payments

Qualified disaster relief payments are payments from employers to reimburse or pay employees for reasonable and necessary personal, family, living or funeral expenses incurred as a result of a qualified disaster which, in this case, is COVID-19.  In response to the pandemic, employees are being asked to work from home due to government mandates or employer policies and they may not be adequately equipped without coming out of pocket to purchase computers, scanners, additional monitors or other office supplies.

Paid time off including vacation, sick pay or family medical leave are not covered, nor is lost pay or expenses that are otherwise compensated for by insurance.

Written Plans and Record Keeping

Section 139 does not require employers to have written policies nor does it require formal record keeping typically required for reimbursed expenses.  Revenue Ruling 2003-12 recognizes that given the “extraordinary circumstances surrounding a qualified disaster, it is anticipated that individuals will not be required to account for actual expenses in order to qualify the Section 139 exclusion, provided that the amount of the payments can be reasonably expected to be commensurate with the expenses incurred.”  Despite the informality, it is always good practice for employers to develop a written plan to document who is covered, amounts paid, de minimis amounts not requiring a receipt or proof or expense, a general listing of expenses the employer will reimburse and any maximum amount allowed per employee.

Additional Questions?

ARM CPA’s tax professionals are here to help during the quickly evolving environment challenging nearly every business and its employees to quickly adapt.   Let us worry about the taxes while you are focused on leading your company to more stable ground.  Contact us a 614-486-3600 to initiate a conversation.

SBA Disaster Assistance

The U.S. Small Business Administration is offering small businesses and private, non-profit organizations loan assistance to help alleviate the economic injury caused by COVID-19.  In accordance with the Coronavirus Preparedness and Response Supplemental Appropriations Act that was recently signed by the President, an Economic Injury Disaster Loan can be applied for through the SBA.

Economic Injury Disaster Loan highlights:

  • Up to $2 million in assistance.
  • These loans may be used to pay fixed debts, payroll, accounts payable and other bills that can’t be paid because of the disaster’s impact.
  • The interest rate is 3.75% for small businesses and 2.75% for non-profits.
  • Long-term repayments are available to keep the payments affordable – up to a maximum of 30 years. Terms are determined on a case-by-case basis, based upon each borrower’s ability to repay.

What will my small business or private non-profit organization need in order to apply for a loan?

  • Most recent Federal tax returns for the business or organization
  • Most recent financial statements including a balance sheet and profit and loss statement for the previous 2 years
  • Personal financial statement (if sole proprietorship) and each principal owning 20% or more of the business
  • Schedule of liabilities listing all debts

Helpful Links:

 

Accounting Services Deemed ‘Essential’

Ohio Department of Health Director Amy Acton has signed a “stay at home” order for all Ohioans starting Monday evening, however several key businesses and services, including accounting services may continue as an essential business function.  We are striving to provide superior service to our clients during this unprecedented time.

High Deductible Health Plans Can Cover Coronavirus Costs

The IRS has announced that a health plan will not fail to be a High Deductible Health Plan (HDHP) under IRC Sec. 223(c)(2)(A) merely because it provides health benefits associated with testing for, and treatment of, the COVID-19/Coronavirus without a deductible, or with a deductible below the minimum deductible (self only or family) for an HDHP. Therefore, an individual with an HDHP that covers these costs may continue to contribute to a Health Savings Account (HSA). Also, as in the past, any vaccination costs continue to count as preventive care and can be paid for by the HDHP. According to the IRS, such relief is needed to avoid administrative delays or financial disincentives that might otherwise impede treatment of the coronavirus for participants in HDHPs. The relief, however, does not modify previous guidance on other HDHP requirements. Notice 2020-15 and News Release IR 2020-54.

IRS Tax Payment/Filing Relief

Treasury Secretary Steven Mnuchin just announced that the IRS will move the Federal income tax filing deadline to July 15th. The extension will give all taxpayers and businesses additional time to file returns and make payments without interest or penalties. To obtain this extension, there is no action required by April 15th. If you have already filed your return and have not sent in the balance due, there is no need to send payment until July 15th. In addition, first quarter 2020 estimated tax payments have also been extended to July 15th.

Secretary Mnuchin also encouraged those with refunds to file as soon as possible in order to receive the refund check. We understand that these refunds are important to our clients and we are committed to servicing you during this unprecedented time. While returns have been extended for 90 days, we are still striving to complete our client’s returns. In the event that a return is not completed by the normal due date of April 15th, we will work to finalize the return in a timely manner.

To our clients that routinely file an extension, we still encourage you to provide us with your information now. While there is no need to make extension payments due April 15th, we will continue working to calculate your projected tax liability as soon as possible.

At this time, our office remains open and we can still receive mail, however our office is closed to clients and outside visitors. Clients wishing to drop off information can still do so, but the documents should be dropped off at the front desk. If possible, we strongly encourage you to securely upload your tax information to us. To upload information, please go to our website at ARMCPA.com and click on the green ‘Upload’ button on the top right corner. You can also send information via email to your ARM contact. Our team is currently working both remotely and in the office to service your needs. Rest assured knowing that we have the capabilities to work in a full remote environment.

We do expect that the states and cities will also extend the filing and payment deadlines, but this has not been officially announced. We will follow up with you in the event that the states and cities do not extend their deadlines as well.