5 Things You Should Know from the Week Ended April 18, 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. You received a PPP Loan. Now what?
It was a crazy week with much of our attention focused on the Paycheck Protection Program (PPP). As most everyone knows, the PPP met its limit on funding and no new applications will be accepted. Congress is discussing expanding the program, but for now there is no expansion available.
If you were fortunate enough to receive a PPP loan, you must now rapidly focus your attention on the next eight-weeks and what portions are available for loan forgiveness. We have put together an overview of how the forgiveness process will work and what we believe is eligible for forgiveness.
There are many unanswered questions currently regarding forgiveness and exactly how it will work. We are closely monitoring these developments. Once we receive additional guidance, we will distribute more information. If you have any questions about your specific situation or the forgiveness process, please do not hesitate to contact us.
Strategy & Advice! We believe that prudent economic standards should take precedent over loan forgiveness. In other words, first do what is right for your business before considering the loan forgiveness rules. It is critically important to develop a detailed rolling 13-week cash projection to help you navigate these uncertain times. Since there are significant unanswered questions, we suggest you maintain good detailed records, talk with your banker on their process and keep your eye out for new guidance. We will publish additional information as it becomes available. Lastly, you can still utilize the payroll tax deferral provisions outlined below until you receive notice of loan forgiveness.
2. What to do if you did NOT get a PPP Loan?
We understand your frustration. You did everything right – had your paperwork in order and timely submitted, but issues outside of your control caused you to not get much needed capital for your business. As we write this update on Sunday night (April 19th), it appears as if Congress is close to approving additional funding for this program. Fingers crossed, but if they do not come to an agreement, we need to consider Plan B. Here is what you need to do:
First, update your rolling 13-week cash projection to reflect the lack of PPP funds. Open candid discussions with your landlord, lenders and vendors on the state of your business and how you plan to move forward. Ask for favorable terms, deferments and renegotiate where possible. As businesses begin to reopen and we start to fully understand the new economy, we will continue to revise our projections. See last week’s update for additional strategies and how to leverage unemployment benefits.
There are still some incentives out there. The biggest one available is the Employee Retention Credit. The IRS published Frequently Asked Questions (FAQs) and we developed an overview which are helpful resources for understanding who is eligible.
Basically, businesses partially or completely suspended due to COVID-19 can receive a refundable credit of 50% of wages paid to employees starting March 13, 2020, up to $5,000 per employee. This benefit is available only if you do not get a PPP loan. This credit is in addition to any credits for sick and family leave under the Families First Coronavirus Response Act.
How do you get the money for this credit?
Last week, the IRS revised Form 7200 and its instructions. This is a very simple form which allows you to claim the credit not only for the first quarter 2020 but to obtain advance credits for second quarter benefits. You do not have to wait until you file your quarterly payroll tax reports. However, the advance payments will need to be reconciled on your quarterly payroll tax returns. This form is faxed to the IRS which will expedite payment of the advanced credit.
3. Payroll Tax Deferral
Last week, the IRS issued Frequently Asked Questions (FAQs) which answers many questions about the deferral of employment tax deposits and payments through the end of the year.
The CARES Act provides that employers may defer the deposit and payment of the employer’s portion of Social Security taxes and certain railroad retirement taxes starting March 27, 2020 through the end of the year. This amounts to 6.2% of wages, up to the social security wage limit ($137,700) per employee. The amount deferred through the end of the year is due at 50% on December 31, 2021, and the remaining 50% on December 31, 2022.
This deferral is not available to anyone receiving loan forgiveness under a PPP loan. FAQ 4 specifies that employers who have received a PPP loan may defer deposit and payment of the employer’s share of Social Security tax that otherwise would be required to be made beginning on March 27, 2020, through the date the lender issues a decision to forgive the loan. Once an employer receives a decision from its lender that its PPP loan is forgiven, the employer is no longer eligible to defer deposit and payment of the employer’s share of Social Security tax due after that date. However, the amount of the deposit and payment of the employer’s share of Social Security tax that was deferred through the date that the PPP loan is forgiven and continues to be deferred until the “applicable” due dates.
Strategy & Advice! These provisions will be implemented through your payroll systems and providers. It is important to coordinate with your payroll vendor to insure these amounts are properly deferred and remitted when due.
4. Net Operating Loss Carryback
The CARES Act modified the rules for net operating losses for tax years beginning after December 31, 2017 and ending before January 1, 2021. This new rule allows businesses (and individuals) to carryback these losses 5 years. Please see our detailed overview of changes to the NOL rules published in late March.
Last week the IRS issued Rev Proc 2020-24 and Notice 2020-26 to provide guidance on how to carryback these losses and time frames for making such elections. In these pronouncements, the IRS outlined expedited filing rules by filing either Form 1139 or Form 1045 for any affected years. Under these expedited rules (with certain limitations), the IRS will have 90 days to examine the refund request and apply necessary refunds or credits.
Strategy & Advice! Since we anticipate significant losses for the 2020 tax year, the planning for these losses will become a big part of our 2020 tax planning strategies. We will generally address these strategies once we are past the shelter-in-place orders and as we approach year end. However, if you incurred a net operating loss in either 2018 and/or 2019, it is important to take actions currently to take advantage of the new expedited refund rules. Please contact us if you incurred losses in those years or want to discuss your specific situation.
5. Stimulus checks
Stimulus checks (economic impact payments) are being sent to individuals 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.
The IRS launched a website last week to allow people to see if they qualify, check the status of their payment, and update direct deposit information. Unfortunately, the website has not functioned properly. It generally provides an incorrect error message. This message does not affect your payment. The IRS is working through these problems and has rectified many of these issues. The IRS website is being updated daily and we recommend using it to track your payment progress. Unfortunately, there is no other mechanism in place for tracking, requesting or inquiring about these payments.
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.
Thank you for your continued support and stay safe!