5 Things You Should Know from the Week Ended April 11, 2020
The tax and financial impacts of COVID-19 continue to unfold rapidly. To help keep you up to date on these rapidly evolving changes, we have put together the 5 most important things you should know from last week.
1. More filing due date changes
On April 9, 2020 the IRS issued Notice 2020-23. This notice basically cleans up the original notice which postponed only selective tax returns and payments due on April 15th until July 15th. This notice expands and simplifies these rules.
The new rules make every federal tax return and payment which is due between April 1, 2020 and July 15, 2020 now due on July 15, 2020. This includes the second quarter individual estimated taxes originally due on June 15th. This change only applies to federal taxes. Each state is adopting their own rules which may be different. We anticipate that most states will conform to the new IRS guidelines. We will continue to monitor this progress.
Strategy & Advise! If you are due a refund, you should go ahead and file your 2019 tax return as soon as possible. Also, keep in mind any impact this might have on the individual “stimulus payments” outlined below. Filing your 2019 tax return may impact the amount of your rebate. Lastly, our general advice during this time of uncertainty, is to suspend all federal estimated payments for 2020. We anticipate at this time that your 2020 tax liability will be less than your 2019 liability. If not, the exposure for underpayment this year will be under 1% of the unpaid tax. Due to the uncertainty of the economy, we believe preserving cash is key, particularly at these rates. However, due to the rate of state penalties, you may want to consider paying the state estimates.
2. Paycheck Protection Program (PPP)
There is a lot of talk and frustration over the PPP loan program, as well as the SBA’s EIDL. We have begun seeing a small number of clients receive PPP approval and funds. PPP was also opened to self-employed individuals last week. It appears as if the PPP will be oversubscribed and many small businesses will not receive funds unless Congress expands funding. Senate Democrats shot down a proposal last week to expand the funding, but talks will resume this week. EIDL appears to be fully funded and combined with an overwhelmed SBA, there has been no movement that we have seen. Due to the challenges of these programs, it is advisable to have plans for both getting and not getting federal assistance.
What to do If you have gotten PPP funds or anticipate getting funds?
We advise that when you get these funds that you develop a 13-week cash flow projection. If you are not in operation (or operating on a very limited basis), we advise that you do not focus on the forgiveness piece of the loan. Instead focus on longer term business recovery. There is some talk about providing relief for the hospitality industry hardest hit by the pandemic. We need to plan for the worst and hope for the best. A comprehensive strategy for the use of funds needs to be developed before spending any proceeds.
What if you do not get PPP funds?
There are two payroll tax programs available that are directly tied to the PPP loan. First, there is the Employee Retention Payroll Tax Credit. This refundable credit is available only if you do not get a PPP loan. The refundable credit is generally 50% of wages paid up to $10,000 per employee. Additionally, there is a Payroll Tax Deferral which postpones the payment of the employer portion of social security tax until December 31, 2021 and December 31, 2022. This deferral is only available if you do not have any funds forgiven from the PPP. We strongly suggest 13-week cash flow projections to manage cash and provide a basis for negotiating with landlords and vendors as needed.
3. Tap Retirement Funds
The CARES Act eased retirement fund rules which give us access to these long-standing protected assets. Under these new rules, we can take up to $100,000 per person from retirement plans, including IRAs, for COVID related impact. The definition for “impacted by COVID” is broad and should be easy to qualify. Under these new rules, the funds are not subject to the 10% penalty, are taxed over a three-year period, and can be rolled back into the plans within the three-year period to avoid the tax. These rules apply for distributions through the end of the year.
Additional rules have been added which increase the amount of funds you can borrow from these plans, defer payments on plan loans due currently, and suspend the minimum required distributions for this year. All of these should be considered during this time to provide necessary funds.
Strategy & Advice! We advise everyone to look at these rules and how they might be used during this time to provide additional cash or tax advantage. For the cash strapped business or individual, this will provide access to funds that will have minimal short-term tax impact. When business recovers, we can consider roll overs to restore much needed retirement benefits. For those less impacted by the pandemic, we should contemplate using this opportunity to convert to Roth IRAs. Specific planning and projections should be developed before implementing these strategies.
The federal enhanced unemployment benefits started last week. This expansion adds $600 per week to each recipient’s unemployment benefits through July 31, 2020. In order to be eligible, you must be receiving at least $1 of state unemployment benefits. The new rules also extend unemployment benefits for up to an additional 13 weeks.
Pandemic Unemployment Assistance (PUA) was also expanded to include these federal benefits to self employed individuals (including independent contractors) not otherwise covered by state unemployment. The state unemployment offices will administer this expanded benefit. The State of Georgia will begin taking these applications on Monday April 13th. Check your specific states department of labor for their implementation date. We expect significant delays in the benefits to self-employed individuals since the state unemployment departments have significant new challenges and manual processes for verifying self-employed income. We expect payment of benefits to be delayed for 3-4 weeks.
Strategy & Advice! We need to fully leverage these available programs to provide for our employees who have been affected to derive the maximum benefit, until we are able to hire them back. We do not advise a business to hire employees until there is adequate work and profit to sustain their jobs. We believe it would be financially disadvantageous for them to re-enter unemployment after PPP funds are used while not operational. In developing your 13-week cash projection plan for your business, we recommend that you estimate the unemployment benefits your employees will receive under these programs in order to find a balance between business and employee needs.
5. Stimulus checks
Stimulus checks began being sent to individuals this weekend (April 11th) and will continue over the next several months. The stimulus payment is $1,200 per person plus $500 per dependent child. These benefits begin to phase out for single individuals once adjusted gross income (AGI) exceeds $75,000 or $150,000 for married couples. The phase out is $5 per $100 over the AGI limit until completely phased out.
The benefits are disbursed based on your 2019 tax return if filed. If your 2019 return is not filed, then they will look at your 2018 tax return. There is no action that needs to be taken to get this payment. However, unfortunately at this time there is no mechanism in place to request payments that have not been received. We expect additional guidance on this program now that funds have started to be dispensed.
In these uncertain times, we are continually evolving to ensure that we do what is in the best interest of our clients, team and community.
We will continue to closely monitor the economic and tax changes and communicate important information to you timely and accurately. We are always available by phone or email to address your questions and concerns.
We strongly encourage you to leverage our expertise during these trying times. We have a deep understanding and broad view of the economic climate, which can add significant value during times of uncertainty. We are committed to assisting you in successfully managing through the rapidly changing economic environment.