A Message from Method CPA–
The Coronavirus is certainly altering the everyday lives of all Americans. Our hope for our clients and their families is that they remain healthy and minimally affected. Our small business clients are now faced with some hard decisions regarding how to stay viable and ensure the safety and continuity of their workforce. What do we do next? How do we keep all the pieces together in the aftermath of this crisis? While the duration of this disruption is still unknown, we as small business owners ourselves, are trying to figure out how to proceed in this uncertain world. The financial well-being of our clients and our staff is of the utmost importance and we will do our very best to guide our small business clients through the logistical and financial pitfalls that are likely to result from this pandemic.
We are working diligently to stay abreast of all the new information coming from the Federal Government and Virginia Government. Once official guidance and implementation is provided, we will provide more information.
As we are in a constant state of flux with changes in laws and intent of leaders to change the laws, we expect further guidance on all of these items below. The information summarized below is an interpretation from our tax professionals based on the guidance and rulings coming from the Federal and State authorities. We have tried to include links so our clients can see the sources of this information. For non-clients, please consult your tax professional before making any decisions.
SBA Backed Loan Programs for Businesses
The Families First Coronavirus Response Act passed on March 19, 2020 provided for “Economic Injury Disaster Loans (EIDL).” The CARES Act passed on March 27, 2020 provides for an additional loan program, “Paycheck Protection Program Loans (PPPL).”
Paycheck Protection Program Loan
Treasury finally releases Loan Forgiveness Application. While this application is helpful, further guidance is expected to provide more clarification.
Method CPA’s Commentary on H.R. 7010, Paycheck Protection Program Flexibility Act of 2020
- PPP loans originating after the date of enactment of this Act will have a maturity date of 5 years. Banks may renegotiate loans that existed prior to the Paycheck Protection Fexibility Act of 2020 to have this longer maturity.
- Borrower’s will have until 12/31/20 to restore employee levels to avoid reductions to the forgivable amount.
- The “Covered Period” will now begin on the date of funding and end at the earlier of (1) 24 weeks after such date of loan origination OR (2) December 31, 2020.
- The amount of loan forgiveness under this section shall be determined without regard to the reduction in number of full-time equivalent employees if an eligible recipient, in good faith
- Is able to document an inability to rehire individuals who were employees on 2/15/20 and an inability to hire similarly qualified employees for unfilled positions on or before 12/31/20 OR
- Is able to document an inability to return to the same level of business activity as the business was operating at before February 15, 2020 due to compliance with requirements established or guidance issued by the Secretary of Health and Human Services, the Director of the CDC, or OSHA during the period beginning 3/1/20 and ending 12/31/20, related o the maintenance of standards for sanitation, social distancing, or any other worker or customer safety requirement related to COVID-19.
- Recipient MUST use 60% of loan amount for payroll costs, and may use up to 40% for allowable nonpayroll costs.
- Payments on loan amounts not forgiven may be deferred until the date on which the forgiveness application is provided to the lender.
Method CPA’s Commentary of the Loan Forgiveness Application and Interim Rules on Loan Forgiveness (Interim Rules Comments are in Blue)
- The application seems to indicate that applicants who received more than one loan disbursement will have their eight week covered period start with the date of the first loan disbursement.
- If your pay period is biweekly or weekly, you can select an Alternative Payroll Covered Period for calculating payroll costs. This Alternative period allows you to use the pay period that starts on or after the receipt of loan proceeds and continue for eight weeks. This Alternative Payroll Covered Period will keep you from allocating payroll costs from partial periods. The CARES Act stated that eligible costs must be incurred and paid. This provision eases the administrative burden to meet this requirement.
- For Eligible Nonpayroll Costs (rent, utilities, mortgage interest), you can use EITHER costs paid during the Covered Period OR costs incurred during the Covered Period and paid on or before the next regular billing date. We feel that using costs paid during the Covered Period will ease administrative efforts to track these expenses, especially since some items are billed in arrears and some items are billed in advance.
- The dollar amount of forgiveness that is requested cannot exceed eight weeks’ worth of 2019 compensation for any owner-employee, self-employed, or general partner, capped at $15,385 per individual ($15,385 for eight weeks equates to a $100,000 annual salary). For example an S Corporation shareholder who made $52,000 ($1,000 per week) in 2019 is limited to $8,000 during the eight week period ($1,000 per week).
- Owner-employees are allowed to include employer retirement benefits and health care contributions made on their behalf in allowable payroll costs, but these benefits appear to be limited to the 2019 amounts. Sole proprietors are limited to 8/52 of their 2019 net profit. General Partners are limited to 92.35% of their 2019 net earnings from self employment reduced by section 179 expense deduction and unreimbursed partnership expenses. Sole proprietors (Schedule C filers) and General Partners cannot account for their health insurance or retirement contributions.
- The borrower must certify that they understand that if the loan was used for unauthorized purposes, the federal government may pursue recovery of loan amounts and/or civil or criminal fraud charges.
- To calculate Full Time Equivalent employees to determine reductions in the amount forgiven, average the number of hours paid per week for each employee, divide by 40, and round to the nearest tenth. For example, if someone worked and average of 30 hours per week, then they would equal .8 Full Time Equivalent employee (30/40=.75, rounded to .8). OR, you can treate anyone who was paid for an average of 40 hours or more per week as 1 Full Time Equivalent and anyone who was paid less than an average of 40 hours per week as 0.5 Full Time Equivalent.
- Full Time Equivalent Exceptions (FTE): The following circumstances allows the employer to exclude certain employees from the F.T.E. forgiveness reduction calculation. We recommned keeping documentation in your file as evidence.
- Borrower made a good faith, written offer to rehire an employee during the Covered Period or Alternative Payroll Covered Period (if elected), which was rejected by the employee. The borrower must have made a good faith, written offer to rehire such employee during the covered period or alternative payroll period, the offer was for the same pay (and hours if hourly), offer was rejected, and the borrower informed the state unemployment insurance office of such employee’s rejected offer within 30 days of employee’s rejection of the offer.
- Employees fired for cause
- Employees who voluntarily resigned (try to get in writing from employee)
- Employee who voluntarily requested and received a reduction in their hours (request employee to put in writing)
- Full Time Equivalent (FTE) Reduction Safe Harbor: If the employer restores its FTE employee levels by June 30 to the level of FTE on 2/15/20, then the borrower is exempted from the loan forgiveness reduction based on FTE employee levels.
- In addition to reducing the forgiveable amount for reductions in Full Time Equivalent employees, the CARES Act also provided for a reduction in forgiveness due to a Salary/Hourly Wage Reduction for any employee in excess of 25%. This reduction can be eliminated if employees’ salaries and hour wages are restored by June 30. To ensure borrowers are not penalized twice, the salary/wage reduction applies only to the portion of the decline in employee salary and wages that is not attributable to the FTE reduction.
- Documentation: We recommend that you review Page 10 of the Loan Forgiveness Application for details. You will need proof of payment such as cancelled checks, receipts, bank statements, etcetera for amounts included in Loan Forgiveness. Borrowers must retain PPP documentation for 6 years.
- Lenders have 60 days from receipt of a complete loan forgiveness application to review the application before submitting to the SBA.
Congress voted, Thursday, April 23, on the Amendment to the CARES Act. This Amendment included a refresh of the Payroll Protection Program Loan.
- The amount of this loan is determined by taking the average monthly payroll for the year prior to the loan and multiplying that average monthly payroll amount by 2.5. For seasonal businesses, you can use the period from 2/15/19 to 6/30/19 (or elect to use 3/1/19 to 6/30/19) to determine your average monthly wages that will be multiplied by 2.5.
- You can refinance an EIDL into a Paycheck Protection Loan. You can have an EIDL loan in addition to a Paycheck Protection Loan (PPPL) as long as the PPL is not for the same operating costs.
- The loan proceeds can be used for payroll, group health benefits, interest on mortgage loan obligations, rent, and utilities.
- The business had to exist on or before 2/15/20 to be eligible.
- This loan is nonrecourse and does not require a personal guarantee.
- The loan is for a maximum of 10 years at a rate not to exceed 4% interest. Recent guidance indicated a 2 year loan at 0.5% interest. The latest guidance appears to be a 2 year loan at 1%.
- Payments can be deferred for 6 months to 1 year, depending on lender.
- A portion of this loan can be forgiven (principal portion only). The forgiven amount is excludable from income. The forgivable portion is based on the allowabe expenses for an eight week period. However, this amount is reduced for reductions in full-time equivalent employees during the covered period as compared to the period from 2/15/19-6/30/19 (or 1/1/20-2/29/20). The loan forgiveness amount will also be reduced by the amount of any reduction in the salary or wages of any employee during the covered period that is in excess of 25% of the total salary or wages of the employee during the most recent full quarter before the covered period.
- WHILE THE FORGIVEN PORTION IS EXCLUDED FROM INCOME, YOU CANNOT DEDUCT THE EXPENSES PAID WITH THE PORTION THAT IS FORGIVEN. DISALLOWING EXPENSES RELATED TO TAX EXEMPT INCOME IS CONSISTENT WITH INTERNAL REVENUE CODE SECTION 265(a)(1) AND TREASURY REGULATION SECTION 1.265-1. See IRS Notice 2020-32.
The Small Business Administration has released and continues to release guidance related to the Paycheck Protection Program Loan. Following are some of the links to the guidance.
Treasury finally releases Loan Forgiveness Application. While this application is helpful, further guidance is expected to provide more clarification.
- Frequently Asked Questions – (constantly being updated)
- 4/2/20 Interim Final Rule 1
- 4/3/20 Interim Final Rule on Applicable Affiliation Rules
- 4/14/20 Interim Final Rule – Additional Eligibility Criteria and Requirements for Certain Pledges of Loans (as of 4-15-20)
- 4/24/20 Interim Final Rule on Requirements for Promissory Notes, Authorizations, Affiliation and Eligibility
- 4/27/20 Interim Final Rule on Seasonal Employers (optional payroll period to calculate loan)
- 4/28/20 Interim Final Rule on Disbursements
- 5/5/20 Interim Final Rule on Nondiscrimination and Additional Eligibility Criteria.
- 5/8/20 Interim Final Rule on Extension of Limited Safe Harbor with Respect to Certification Concerning Need for PPP Loan Request
- 5/13/20 Interim Final Rule on Loan Increases
- 5/22/20 Interim Final Rule on Loan Forgiveness
- 5/22/20 Interim Final Rule of SBA Loan Review Procedures and Related Borrower and Lender Responsibilities
April 16, 2020: The American Institute of Certified Public Accountants has compiled a FAQ related to the PPP. We find this organization continually provides valuable insight regarding the PPP Loans.
March 27, 2020: Congress has passed the CARES Act (Coronavirus Aid, Relief, and Economic Security Act). This Act provides for the following.
The US. Senate Committee on Small Business & Entrepreneurship has put together a great guide on the CARES Act. Small Business Owner’s Guide to the CARES Act
- Payroll Tax Credit Refunds: The bill provides for advance refunding of payroll tax credits related to required paid sick leave and required paid family leave. The I.R.S. will be issuing forms and instructions. Form 7200, Advance Payment of Employer Credits Due to COVID-19. Form 7200 Instructions.
- Employee Retention Credit: Eligible employers are allowed a credit against employment taxes equal to 50% of qualified wages (up to $10,000 in wages) for each employee. Eligible employers are employers whose business operation is fully or partially suspended due to orders from an appropriate governmental authority related to the COVID-19 outbreak. Eligible employers also include businesses whose gross receipts are less than 50% of their gross receipts for the same quarter in the prior year until their gross receipts exceed 80% of their gross receipts for the same calendar quarter in the prior year. The Department of the Treasury has issued some additional guidance and that can be found here. This credit is not available to employers receiving assistance through the Paycheck Protection Program.
- This credit for wages from March 13 through June 30 will be reported on the second quarter Form 941.
- Click here to see the FAQs issued by the IRS regarding this credit.
- Payroll Tax Delay: The bill delays payment of 50% of 2020 employer taxes (employer portion of Social Security and Medicare) until December 31, 2021 and the remaining 50% until December 31, 2022. This delay in payments also applies to one-half of self-employment taxes.
- Net Operating Losses: The bill temporarily suspends the 80% income limitation for net operating losses for years beginning before 2021. For losses arising in 2018, 2019, and 2020, taxpayers are now allowed a 5 year carryback. Rev. Proc. 2020-24
Families First Coronavirus Response Act
March 19, 2020: The Families First Coronavirus Response Act was passed by the Senate and signed into law by President Trump.
The IRS has compiled a very informative summary of this bill and they provide some examples. We highly recommend referring to this link: IR 2020-57.
Additionally, we have highlighted some of the more important points below:
Emergency Family and Medical Leave Expansion Act:
FMLA has been temporarily broadened to include employers with less than 500 employees through December 31, 2020 in relation to a public health emergency. Eligible employees include those that have been on payroll for at least 30 days. The first two weeks can be unpaid, then the employer is required to offer FMLA paid leave for 10 weeks. This leave can be utilized for an employee’s COVID-19 quarantine or treatment, care of an at-risk family member, or care of a child due to school closings.
The U.S. Secretary of Labor has the authority to exempt a small business with fewer than 50 employees from this section when the imposition of these requirements would jeopardize the viability of the business.
Emergency Paid Sick Leave Act:
This Act provides that an employer with less than 500 employees is required to provide two weeks of paid sick leave to an employee who has COVID-19, has been advised by a healthcare professional to self-quarantine due to concerns over COVID-19, is experiencing COVID-19 symptoms, is caring for an individual who has COVID-19 or is self-quarantined, or is caring for a son or daughter who’s school has closed. This paid leave is for two weeks (80 hours) if full time and two-week hourly average if part-time at the regular rate of pay not to exceed $511 per day. If leave is to take care of a family member or child, leave is paid at two-thirds the normal rate, up to $200 per day.
Employers will receive a 100% tax credit for all wages that are paid, capped at the maximum allowable amounts per eligible employee ($511 per day / $5,110 OR $200 per day / $2,000).
In regards to paid sick time related to taking care of a child who’s school is closed, the U.S. Secretary of Labor has the authority to exempt the employer from this requirement if such sick paid leave would jeopardize the viability of the business as a going concern.
Penalty relief for employment tax deposits in relation to Employee Retention Credit, Qualified Sick Leave Wages, and Qualified Family Leave Wages.
State of Virginia Updates:
March 23, 2020: Please read Executive Order 53, effective midnight March 24, 2020 through April 23, 2020 regarding non-essential businesses.
Virginia Unemployment Updates:
We continue to monitor the guidance put forth from the Virginia Unemployment Commission and will provide appropriate links below.
Based on the Governor’s Announcement, employers who reduce or cease operations will not be financially penalized for an increase in workers requesting unemployment benefits. We would presume this statement to mean that the employer’s VA Unemployment rate will not be increased due to Unemployment Benefits paid. We expect to see this Announcement made into law. See the Governor’s Announcement in the link below.
If your employees have been totally or partially separated from their job due to COVID-19, they cannot file a claim for unemployment insurance until an actual lay off from employment has occurred, or until there has been an actual reduction in hours worked.
Employees can refer to the link below for additional information related to COVID-19.
Restaurants – Virginia ABC
April 8, 2020: Virginia ABC has added a temporary privilege for those businesses with mixed beverage service. Effective April 10, those restaurants can provider delivery and take-out services for mixed drinks. There are some restrictions and they can be found on the link below.
March 25, 2020: Virginia ABC has adjusted the regulations to support Licensed Establishments during the COVID-19 Pandemic. The rules have been relaxed to help support restaurants that are now limited to curbside pickup and delivery.
U.S. Department of Labor :
March 25, 2020: The U.S. Department of Labor has provided many resources related to helping employers deal with COVID-19. This is a good website to answer some common issues for employers.
Economic Injury Disaster Loan
We expect Congress to vote, Thurday April 23, on the Amendment to the CARES Act. This Amendment will include $10 Billion to the grant portion of the Economic Injury Disaster Loan. You can view the Amendment (H.R. 266) up the PPP Loan section.
- U.S. Small Business Administration website
- March 20, 2020: The small business loan application is now available on their website, Disaster Loan Assistance. The application can be completed online.
- March 26, 2020: The Disaster Loan Assistance website continues to be down and is very slow during normal business hours due to the high volume. Traditionally, an applicant will create an account with a username/password & complete the various pages online and upload those documents that need signatures. This is the only method that allows you to track the status of your loan application. We have been in contact with the SBA and they have recommended utilizing this site from 7pm – 7am when there is less volume.
- Other options we would recommend to remit your loan application:
- Mail the completed application and other required forms.
- Fax the completed application and other required forms to 202-481-1505.
The CARES Act also added the Emergency EIDL Grant. This grant of up to $10,000 is based solely on credit score and can be provided within 3 days of the Administrator receives the application. The funds may be used for providing paid sick leave, maintaining payroll, rent, mortgage payments, and repaying other obligations that cannot be met due to decreased revenue. The loan forgiveness amount above will be reduced by the amount of this grant received.
Other Resources regarding SBA Loans:
March 18, 2020: The Small Business Administration (SBA) provides low-interest, long-term loans to businesses for physical and economic damage caused by a declared disaster. Governor Ralph Northam declared a State of Emergency for the Commonwealth of Virginia in response to the pandemic. SBA’s Economic Injury Disaster Loans offer up to $2 million in assistance for each affected business. These loans may be used to pay fixed debts, payroll, accounts payable and other bills that cannot be paid because of the disasters impact. The interest for small business will be 3.75%. Refer to their website for details.
SBA Release Number 20-26: SBA Updates Criteria on States for Requesting Disaster Assistance Loans for Small Businesses Impacted by Coronavirus (COVID-19)
Governor Northam’s Declaration: Governor’s letter to SBA to provide for Economic Injury Disaster Loans for Virginia businesses.
Federal Income Tax
March 27, 2020: Congress has passed the CARES Act (Coronavirus Aid, Relief, and Economic Security Act). This Act provides for payments to taxpayers labeled “recovery rebates.” Payments to be received are as follows.
- Individuals: $1,200 plus $500 for each qualifying child
- Joint Filers: $2,400 plus $500 for each qualifying child
These payments (credits) will be phased out for taxpayers with adjusted gross income above $150,000 for joint filers, $112,500 for head of household filers, and $75,000 for single filers. The payment will be reduced by 5% of the amount your adjusted gross income exceeds the thresholds listed in the prior sentence for your filing status.
Other provisions of the CARES Act include:
- Taxpayers can take up to $100,000 in coronavirus-related distributions from retirement plans by December 31, 2020 without being subject to the 10% penalty for early distributions. These distributions can be recognized as income over a 3 year period or they may be recontributed within 3 years to avoid tax. Eligible taxpayers include those who have COVID-19, those whose spouse or dependent has the virus, those who cannot work due to lack of child care, and those who have experienced a reduction in work hours. Consult your financial advisor for further details before taking any distribution to make sure you qualify and to understand the full details of this provision.
- The bill suspends the required minimum distribution requirements for certain retirement accounts for 2020. Consult with your financial advisor for further details.
- The bill allows for a charitable deduction up to $300 for those who do NOT itemize.
Filing March 23, 2020: The IRS and Treasury Department has announced that the federal income tax filing due date has been extended from April 15 to July 15, 2020. Taxpayers can also defer federal income tax payments, without penalties and interest, to July 15, 2020. Taxpayers do not need to file any additional forms or call the IRS for this extension. IRS Notice 2020-23 also moves the 6/15/20 estimated tax payment date to 7/15/20.
IRS Notice 2020-17 (Payments)
IRS Notice 2020-18 (Filing due dates)
IRS Notice 2020-20 Update to IRS Notice 2020-18 (Filing due dates)
IRS Notice 2020-23 (Filing due dates and estimated tax payments)
Easing Payment Guidelines & Postponing Compliance Actions
March 25, 2020: To assist taxpayers facing challenges related to COVID-19, the IRS has unveiled a new People First Initiative. From easing payment guidelines to postponing compliance actions, this inititative will encompass a variety of new provisions to ease the tax burden during these troubling times.
Virginia Income Tax
Filing & Payment Due Dates
April 6, 2020: The State has issued a summary as it relates to Virginia Tax Penalties and Interest.
March 19, 2020: Virginia Income Tax Filing – The Governor has requested that the Department of Taxation to extend the due date of payment of Virginia individual and corporate income taxes. The deadline remains the same, but the due date for tax payments will now be June 1, 2020. It is important to note that interest will still accrue during this time. Per Tax Bulletin 20-5, as long as tax is paid by June 1, intererst will not start accruing until after June 1.
States Other Than Virginia :
March 23, 2020: The American Institute of Certified Public Accountants has developed several resources to help keep professionals up-to-date during these troubling times. If you are required to file taxes in a state other than Virginia, we wanted to share this link to assist with determining what is due and when is it due.
West Virginia Filing and Payment Due Dates Extended
Employees can refer to the link below for additional information related to COVID-19.
Pandemic Unemployment Assistance Program
This program supplements state unemployment and provides for a wider qualification of unemployment benefits. This program provides up to $600 of unemployment benefits in addition to state unemployment benefits.
To access the Pandemic Unemployment Assistance benefit, individuals can follow the guidance found on their website and apply Online.
Mortgage Information for Homeowners :
March 20, 2020: Homeowners who have lost income or their jobs because of the Coronavirus outbreak might be getting some relief. Federal regulators, through the mortgage giants Fannie Mae and Freddie Mac, are ordering lenders to offer homeowners flexibility. We recommend that you call your loan processor to see if any payments are allowed to be deferred or if any other help is available.
March 17, 2020: Governor Northam directs utility companies to suspend service disconnects for 60 days for residential and business customers.
STUDENT AID RELIEF
The US Department of Education has announced relief for student loan borrowers in light of the COVID-19 pandemic. The Education Department will halt collection actions and wage garnishments as well as reduced the interest rate to 0% for federal student loans and allow borrowers to suspend their payments for a 60-day period starting March 13, 2020.