Now that we are past the initial shock of COVID-19 and the first wave of relief we wanted to circle back and follow-up with you on some items that might require action on your behalf.
On June 5, 2020 the Paycheck Protection Program Flexibility Act (PPPF) was signed into law, which will provide more loan flexibility for participants. The PPPF Act modifies provisions related to the forgiveness of loans made to small businesses under the PPP. One important thing to consider is that in IRS Notice 2020-32 it was stated that “no deduction is allowed under the Internal Revenue Code for an expense that is otherwise deductible if the payment of the expense results in the forgiveness of a covered loan pursuant to” the CARES Act. Legislation has been introduced in congress to rectify this issue, but as of now no major action has occurred.
Paycheck Protection Program Flexibility Act
Delay of Payment of Employer Payroll Taxes
Allows employers (and self-employed individuals) to defer payment of the employer’s share of the Federal Social Security tax (6.2%) on employee’s wages paid between March 27, 2020 and December 31, 2020. The deferred employment tax will be paid over the following two years. 50% of the amount will need to be paid by December 31, 2021 and the remaining by December 31, 2022.
Extended PPP Loan Time Period
The PPPF increases the period of time to use loan proceeds from eight weeks to 24 weeks. It also lowers the percentage that loan proceeds must be used on payroll costs from 75% to 60%. This increased the percentage that is allowed to be used for nonpayroll costs such as rent, mortgage interest, and utilities from 25% to 40%. The time that employers have to restore full-time employment and salary levels has been extended to December 31, 2020 from June 30, 2020 for loan forgiveness eligibility. It also amends the loan deferral from six months to “until the date on which the amount of forgiveness determined under Section 1106 of the CARES Act is remitted to the lender.
The PPPF Act increases the loan maturity from two years to five years for loans made on or after June 5, 2020. Loans that were made prior to June 5, 2020 still have a two-year maturity, however they may be extended to five years under a mutual agreement between the borrower and the lender.
Employee Retention Credit
Creates an employee retention credit equal to 50% of qualified wages up to $10,000 (including properly allocable qualified health plan expenses) paid per employee during the COVID-19 crisis by eligible employers. Eligible employers are those employers whose (1) operations were fully or partially suspended, due to shut-down orders related to COVID-19, or (2) gross receipts declined by more than 50 percent when compared to the same quarter in the prior year.
Qualified wages paid by eligible employers with 100 or fewer full-time employees are the wages paid to all employees, whether the employee is providing services or not, for the period that the employer qualifies as an eligible employer, as defined above. Qualified wages paid by eligible employers with greater than 100 full-time employees are wages paid to employees when they are not providing services for the period that the employer qualifies as an eligible employer, as defined above.
The credit is not available to employers receiving Small Business Interruption Loans (payroll protection loans) or to self-employed individuals.
This credit applies to wages paid after March 12, 2020 and before Jan. 1, 2021.
Special Rules for Use of Retirement Funds
For Employees – No 10% penalty tax for COVID19-related early retirement plan distributions before age 59 1/2. A COVID19-related distribution may be made between January 1 and December 31, 2020, by an individual who is (or whose family) is infected with the COVID19 or who is economically harmed by the COVID19 as a result of being quarantined, being furloughed or laid off, working reduced hours due to virus, being unable to work due to lack of child care due to virus, or closing or reduced hours of a business owned or operated by the individual due to virus. Distributions are limited to $100,000, and may be re-contributed to the plan or IRA at any time during the 3-year period beginning on the day after the date on which the distribution was received. Additionally, employee may be able to borrow up to $100,000 against their vested employer plan up from $50,000.
For Employers – Employers are permitted to amend defined contribution plans to provide for these distributions and loan provisions.
Modification of Limitations on Charitable Contributions
Individuals – The limitation on charitable deductions is increased from 60% to 100% of modified income for cash contributions generally to public charities in 2020.
Corporations – This provision increases the limitation on charitable contribution deductions. For corporations, the “10-percent of taxable income” limitation is increased to “25-percent of taxable income” for the 2020 tax year. Additionally, the limitation on deductions for contributions of food inventory is increased, from a 15-percent limitation to a 25-percent limitation.
Exclusion for Certain Employer Payments of Student Loans
Under current law, an employee may exclude $5,250 from income under a Section 127 employer sponsored educational assistance program. The CARES Act adds to the types of education payments that are excluded from employee gross income to now include eligible student loan repayments made before January 1, 2021. Eligible student loan repayments are payments by the employer, whether paid to the employee or a lender, of principle or interest on any qualified higher education loan for the education of the employee (but not of a spouse or dependent). To prevent double benefit, student loan repayments for which the exclusion is allowable cannot be deducted on individual return. In order to qualify under Section 127 a program must:
- Be in writing
- Provide educational assistance exclusively to employees
- Not provide eligible employees with a choice between educational assistance and taxable renumeration
- Provide reasonable notice of the availability and terms of the program to eligible employees
- Not discriminate in favor of highly compensated employees or their dependents
- Not pay more than 5% of the program benefits to more-than-5% shareholders or owners or their spouses or dependents (which means that these plans are not recommended for businesses with only more-than-5% owners as employees).
Ashley Choate, CPA – Financial Manager, [email protected], Extension 4
Any tax advice included in this written or electronic communication was not intended or written to be used, and it cannot be used by the taxpayer, for the purpose of avoiding any penalties that may be imposed on the taxpayer by any governmental taxing authority or agency.
Email Link: https://conta.cc/2CtnlqH