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KEY PROVISIONS OF THE CARES ACT AIMED AT INDIVIDUALS

The Coronavirus Aid, Relief, and Economic Security (CARES) Act introduced a variety of assistance to businesses, industries and individuals. Perhaps the most talked about assistance was the establishment of the Paycheck Protection Program and the Payroll Protection Loans offered through that program.

Here we will focus on provisions of the CARES Act aimed at providing assistance to individuals.

Provisions Providing More Flexibility in the Use of Retirement Account Funds

The CARES Act expanded the ability to take in‐service distributions from employer retirement plans by allowing for up to $100,000 in distributions without being subject to the 10% premature distribution penalties for qualified individuals. Furthermore, participants may elect to have the distribution taxed over a 3 year period, if desired, and the distribution can be recontributed to another eligible retirement plan within 3 years as a rollover. Individuals must be able to provide that COVID‐19 affected them personally. The employer provided retirement plan must allow for in‐service distributions and must be amended to specifically allow for the CARES Act distribution.

The CARES Act also provides for qualified individuals to take up to a $100,000 loan from their employer provided retirement plan. Participants do not have to start paying the loan back until January 1, 2021. These loans must be taken between March 27, 2020 and September 23, 2020 and individuals must be able to prove that COVID‐19 effected them personally. The employer provided retirement plan must allow for participant loans and must be amended to specifically allow for the expanded loans.

Early distribution and loan provisions under the CARES Act is restricted to individuals with a COVID‐19 related reason for early access to the retirement funds. These include:

  • Being diagnosed with COVID‐19
  • Having a spouse or dependent diagnosed with COVID‐19
  • Experiencing a layoff, furlough, reduction in hours, or inability to work due to COVID‐19
  • Lack of childcare because of COVID‐19
  • Having a job offer rescinded or a job start date delayed due to COVID‐19
  • Experiencing adverse financial consequences due to an individual or the individual’s spouse’s finances being affected due to COVID‐19
  • Closing or reducing hours of a business owned or operated by an individual or their spouse due to COVID‐19

Additional considerations for taking an early distribution or loan:

  • COVID‐19 distributions do not require any federal taxes to be withheld but are subject to tax at an individual’s effective tax rate. Make sure, if you do not have any taxes withheld, to budget for tax owed when you file your form 1040.
  • If you decide to redeposit the distribution within 3 years to a retirement plan account, you will need to amend any prior year filings that you reported the distribution as taxable. If you tax the distribution over 3 years, it could mean amending 3 years of returns including federal and state returns.
  • If you have access to bank loans, it may be cheaper take a loan rather than tap your retirement plan account as you will miss out on stock market gains, especially if you experienced serious losses in the COVID‐19 crash. After the COVID‐19 crash, most indexes rebounded and gains have wiped out most of the losses.

The CARES Act also waived Required Minimum Distributions (RMD) for 2020. This impacts anyone born prior to July 1, 1949 and most non‐spousal heirs who inherited tax‐deferred accounts. If you already took an RMD for 2020, you have until August 31, 2020 to put the RMD funds back into your account.

Provisions Aimed at All Individuals

The CARES Act provides for an above the line deduction for cash contributions of up to $300 for individuals who do not itemize deductions, but rather take the standard deduction. It should be noted that there is no expiration date associated with this provision, which means it stands a good chance of being applicable for future years.

The CARES Act allows an employer to pay up to $5,250 annually towards an employee’s student loans with the payment being excluded from the employee’s income. The provision applies to any payments made on behalf of an employee after the date the CARE Act was enacted through December 31, 2020.

The CARES Act provides for payments of $1,200 to individuals with Adjusted Gross Income (AGI) up to $75,000 and joint filers up to $150,000 of AGI and who are not dependents of another taxpayer. Additionally, eligible individuals can receive $500 for each child that qualifies as a dependent. Individuals in higher tax brackets receive a reduced rebate that is phased out at AGI’s exceeding $99,000 for individuals, $146,000 for head of household filers and $198,000 for joint filers. These payments are not taxable to the taxpayer. If eligible to receive the payment and you do not receive it before yearend, you will receive it as a credit on your 2020 form 1040 filing.

Final Thoughts

As you can see, there are several provisions, which may be a help to individuals depending on their circumstances. Not sure where to turn? Whether you just have a question, need clarification or advice, or need your taxes prepared, feel free to drop me a line. I am available via email at Briand@hobe.com or via info@hobe.com. I am also available by phone at (216) 524‐8900 extension 230.

PPP Loan Update: Payroll Protection Program Flexibility Act

On June 82020, President Trump signed The Payroll Protection Program Flexibility Act into law, which allows the following changes to the PPP loan program. The SBA, in consultation with Treasury, will issue rules and guidance, a modified borrower application form, and a modified loan forgiveness application implementing the amendments to the PPP made in the new law. In addition confirms that June 30, 2020, remains the last date on which a PPP loan application can be approved, the new rules will implement the following changes:

Extended Covered Period

The covered period may be extended from 8 weeks to 24 weeks: businesses with existing PPP loans may elect to keep the 8 week covered period, or may extend the covered period to 24 weeks. New borrowers who are approved after June 3, 2020 will automatically have 24 weeks to use the loan proceeds.

Payroll Percentage

The percentage of the loan that is used to determine forgiveness that must go toward payroll costs was decreased from 75% to 60%. Prior to H.R. 7010, the requirement was only that 75% of the loan that was used had to be on payroll costs. This is an important point to note, but with the generous extension of the covered period, most businesses should easily reach 60% on payroll costs.

Full Time Equivalents and Restoring Wage Levels

You now have until December 31, 2020 to restore the level of FTEs and restore their wages. This was extended from the original date of June 30, 2020.

Additionally, there is an exemption added to the FTE reduction calculation if the borrower can document the inability to hire employees who were employed as of February 15, 2020 and the inability to hire other employees with similar qualifications as of December 31, 2020. If you are unable to hire other employees by December 31, 2020 due to compliance requirements with the CDC, OSHA, or the Secretary of Health and Human Services, you will also be allowed an exemption for these employees.

Loan Terms

All PPP loans issued after June 3, 2020 will have a loan term with of a minimum of 5 years. Borrowers that have a 2 year term with their PPP loan may renegotiate the terms to follow the terms for new loans if the lender and borrower mutually agree.

H.R. 7010 also allows the deferral of payment until the date the lender receives the forgiveness amount from the SBA, which will likely be longer than the initial deferral period of 6 months.

Deferral of Payroll Taxes

Employers can now defer all of its 2020 Social Security (50% to 2021 and 50% to 2022), even if the loan is forgiven before December 31, 2020. The original Act only allowed deferral until the loan was forgiven.

Taxability of PPP Loan

There is still a major issue with the taxability of the PPP loans.  Although the PPP states that the forgivable loan amount is not taxable, the IRS has taken the position that employers cannot deduct expenses like payroll and rent that are paid with PPP funds.  The IRS claims not allowing the deductions will prevent employers from receiving a “double tax benefit.”  Members of Congress have already spoken out that it was their intent to have the forgiven loan amount be tax free while still allowing the deductions.  Without a legislative fix to this issue, employers should plan for the additional tax ramifications from the PPP loan.

Still unclear? If you have any questions, please feel free to contact us and we’ll sit down and discuss!

Paycheck Protection Program – Loan Forgiveness Summary

Clients are beginning to receive funding from their Paycheck Protection Program loans and there are things you need to know to ensure forgiveness of these loans. Once the Paycheck Protection Program proceeds are received, the eight week period begins and a business must document how the proceeds were used and provide a computation of the number of equivalent full time employees (FTE’s) to determine the amount of loan forgiveness. 

Step 1 – Document Costs Incurred

During 8 week period:

Cost 1:

  • Document payroll/wage costs incurred- (Source documents such as payroll journals or payroll company summaries will be useful).
  • Document health insurance employer provided costs- During this time period, if health insurance invoices are paid, copy any source documents to substantiate the costs incurred.
  • Document any Company paid profit sharing payments that have been made during this time period. Please note this is only employer paid contributions, so employee 401K contributions are not eligible.
  • Employer paid state taxes. Document any state unemployment payments the Company incurs during this time period.
  • Please note that compensation on an annual basis per employee cannot exceed $100,000 ($8333.33 per month)

Additionally, in determining the eight week period costs incurred, up to 25% of the following costs can be included:

Cost 2:

Rent obligations – This is the lease of real property such as office space. As these obligations are paid during the eight week period, copy any supporting documentation to substantiate the cost incurred.

Cost 3:

Utilities – This includes:

  1. Electricity,
  2. Gas,
  3. Water,
  4. Telephone,
  5. Internet
  6. Transportation

As the above costs are incurred, please copy any supporting documentation to substantiate the costs incurred.

Cost 4:

Interest – This includes mortgage obligations that are secured by a mortgage on real or personal property. This would include debt on real property that is secured by a traditional mortgage lien, or other business indebtedness where a UCC-1 is filed.

Notes:

  1. Only on debt incurred before 2/20/2020,
  2. Key item- has to be secured debt as illustrated above with the normal real estate mortgage lien or a UCC-1 filing.

Step 2 – Compare above costs computed during 8 week period with 75% of prior complete quarter:

There will be further clarification coming shortly. 

Step 3 – Computation of Full Time Equivalents:

The following full time equivalent computation periods will be required.  Please note the current guidance suggests that one FTE is an employee that works 30 hours a week. 

1. 8 Week covered period beginning with receipt of loan proceeds

2. 2/15-6/30/2019 or 1/1-2/29/2020

Choose lower of above two dates, and

3. 2/15-4/27/2020 and

4. 2/15/2020 and

5. Presumably from now until 6/30/2020

If your FTE’s in period 1 are less than period 2, you will have a reduction in forgiveness unless in period 5 you restore any reduction in employees that occurred during period 3 relative to date 4.

There will be further clarification coming shortly.

Overall, it is important to accumulate the four allowable costs during the 8 week period from the date the loan is received and have sufficient back up to support the accumulated costs.