CARES Act & PPPFA: Tactical Moves for SMB Owners and Occupants
Updated: Jul 23, 2020
The arrival of COVID-19 introduced uncertainty and upheaval in all our lives. For individuals, unknown health, safety, and economic impact - check. For the companies that rely on these special people, unpredictable revenue, retention, rehiring, and now recession - check. Unknowns and imperfect data must guide decisions to upfit, retrofit, pivot, or exit. Near-constant updates to legislation and local leadership mandates, personal losses of both loved ones and of predictable finances all consume our daily decisions. And the latest, social upheaval and heated, passionate confrontation over America's core values. What? When? How? If… But…. Or…. Can?
Slow down. Breathe. We are ALL Americans. We can and we will prevail. For now, take the first step.
STEP 1: Assemble your team of advisors.
First and foremost, you should have a commercial banker and/or lender and a strong, responsive CPA. Your next tier of important advisory relationships should include a CFP, attorney, business coach/mentor. Additionally, for specific real estate related concerns of occupancy and ownership, a commercial broker is a vital resource right now.
STEP 2: Dig into the CARES Act and the PPPFA summary (below) and assemble the right questions. You will need them for your pivot strategy.
The summary below is an accumulation of data gleaned from experts in tax and resources in lending. It will update periodically. Start here to grasp the depth and breadth of the complexities of financial management in the context of COVID-19, probably social reconstruction, and reopening. Revisit as you figure out how to adjust because the information is fluid.
BE SURE TO:
Ask your CPA & CFP how to relate current conditions to your long term funding and operational planning.
Understand how to properly track your actions and conditions for maximum benefit and protection.
STEP 3: Be on the lookout for changing conditions and new information.
For now, your world may simply be about survival. At some point, this $6T+ economic emergency bill will come due. Nothing in life is truly free and survival will soon require that we pivot. As you progress in this realization, you don't have to do it alone. For occupants and owners, if Haugh Realty Advisors can earn the opportunity to journey with you as you navigate these new unknowns and fluctuating conditions, reach out to find the ready and, most importantly, willing. In the meantime, a summary follows to assist your understanding of the depth of your toolkit. Again, check back regularly, and stay in touch with your CPA. This information is fluid as guidance trickles down from Fed Gov.
Disclaimer: The information below this point should not be construed as advice. The summary that follows is a compilation of notes taken from webinars and conversations with qualified CPA's, business consultants, strategists, and other 3rd parties deemed credible in their fields of expertise. ALL information should be verified with your own certified, qualified, trusted advisors to confirm that your understanding and application you seek best fits your unique conditions.
Real estate owners, pay particular attention to bold print for specific opportunities.
· Qualified Improvement Property – is any improvement made by a taxpayer to an interior portion of an existing building that is nonresidential real property.
The most common application for QIP is for tenant upfits or leasehold improvements. Not for the first iteration of tenants in a newly constructed building. Applies most basically to the operating building that adds a tenant space or refits an old tenant space. If 51% of the property is fully leased, then you might apply this to the new tenant of a new building that is 49% vacant
QIP doesn't include any structural framework, enlargements to the building envelope or elevators/escalators.
No 3-year holding period exists
The property must be placed in service after the initial building placed in service.
Eligible for Section 132 bonus depreciation.
Interest Expense Limitations Section 163j – implemented under TCJA, was designed to limit currently deductible interest expense for certain taxpayers. Capped deductions at 30% of adjusted taxable income.
Cares increased the deductible interest to 50% of ATI vs 30% of ATI for 2019 and 2020. (For partnerships, only applies to 2020 tax year.)
CRE business owners can elect to be a real property trade or business and remove the 163j limitation with the caveat that we can no longer take makers depreciation. You would have to take alternative depreciation and are DQ'd from bonus depreciation. The irrevocable decision can not be changed for future years.
· Recovery Tax Credit Rebates – eta 3rd week of April, citing via Steve Mnuchin, who is usually very credible.
A 2020 tax credit will come in the form of an advance rebate for earned income, social security, or pension income between $2500 and up to $75K (phased out at $99K AGI) for single filers, $150K (phased out at $198K AGI) for married, filing jointly. (An additional $500/child under 18 is also available.)
Individuals earning above or below the threshold who take the rebate in 2020 should expect the IRS to fully recover this amount. Always, ask your CPA.
IRS will use the 2018 status on your return. FILE electronically immediately if: a.) income drops below $150K AND/OR b.) You added dependents who were under 18 as of 1 Jan 2020, to your household to receive the additional child credit.
If your dependent is above 18, has transitioned to a worker, and makes under $75K, file their return in order for them to be recognized in the system.
Do not file your return if your 2019 earnings are higher than your 2018 return.
If you hired your dependent to work for your Corp, they will file their own return, but they do NOT quality to receive a check (or credit as a tax-paying adult) as long as they are under 18 as of 1 Jan 2020.)
Employees laid off as a result of COVID-19 should immediately apply for unemployment benefits. Through the CARES Act, unemployment benefits were expanded to the self-employed and most contractors, which comprise up to ~30% of the American population. ALL 51 states are now required to extend benefits to W-2 and 1099 workers for up to potentially 39 weeks.
Pandemic Unemployment Assistance (PUA): is Fed Gov assistance of up to $600/week available to those unemployed due to COVID-19 and is over and above state unemployment assistance made available under state law up until and through July 25, 2020.
PUA covers the first week of unemployment, which is typically a waiting period and funds 13 additional weeks of unemployment once state benefits are exhausted.
The expanded scope includes independent contractors, part-time workers, and those with limited work histories that may not qualify for state unemployment benefits.
CONCERNS – Employees may be paid more on unemployment than they were at their job and it is unclear whether unemployment insurance rates will be impacted going forward. Consider the implications of this funding structure to your retention and rehiring plans.
NC has an earning threshold that will adjust unemployment benefits downward if you make over 20% of your benefit.
· Employee Retention Payroll Tax Credits
Some companies that retain employees are eligible for a refundable payroll tax credit; based upon the payroll taxes paid in the immediate quarter.
Ops must be fully or partially suspended due to the government or municipal order limiting commerce, etc. OR suffer >50% reduction in quarterly receipts.
Amounts are limited for each employee. The credit is computed on the first $10K wages and compensation, including health benefits paid by the employer to the employee by 12/31/2020.
Employers with 100+ employees: only amounts paid to employees who are not working due to COVID-19 qualify. For companies under <100 employees, all workers are counted, regardless of work status.
Includes ALL employees, S-Corporation owners paid a salary or wages, and amounts paid by workers who take a reduction in pay but are still on the payroll.
Review the payroll reporting process to understand how to capture these credits. (Consult your CPA.)
Claim the credits on Form 941 or request an advance on Form 7200
*If you take PPP, you can not claim the tax credits.
· Payroll Tax Deferrals:
If you remit payroll taxes and file payroll returns, the EMPLOYER side of payroll taxes is now deferred for a LONG time.
All 2020 Employer side Fed payroll taxes deferred, with 50% due on 12/31/2021 and 50% due on 12/31/2022
Applies to all 2020 SSI Payroll taxes. *SSIM was not noted. May still need to pay the employer side of medicare – awaiting Treasury guidance. For now, plan on 7.65% due.
Employee side is still due for FICA and withholding – these are Trust Fund taxes so do not misstep here.
Payroll companies can not adjust platforms instantly; expect a delay in your software implementation until Q2.
Includes payroll taxes on your own salary.
Ex: Sole proprietor paying myself over $125K, does that apply regardless of the salary? YES. Taxes would be employer side Fed payroll tax ($9600) on yourself that you get to hold onto.
· Net Operating Loss Carrybacks
For losses incurred in 2018, 2019, 2020, now that CARES has passed, the loss carryback is again beneficial b/c tax rates at 35%, in general, were much higher for C-Corporations prior to TCJA. Corporations now are taxed at 21%, making the offset less impactful and *significantly lower tax rates going forward will mean carryback is more advantageous than to carry losses forward.
Any unused NOL (unused as an offset against income) typically carries forward to the next year. Now, NOL’s for 2018, 2019, & 2020 can be carried back for 5 years or you can elect NOL's be carried forward. You can not carry forward and carry back. TBD - can partial losses carryforward and carryback or must the election govern the application of the total losses for that year?
Carrybacks in 2020 may increase the tax due in the prior years as the NOL carryback reduces income and also some tax deductions; credits like charitable deductions are limited based on income. This change could trigger a charitable loss carryforward.
Pro-tip: When you carry back, you take advantage immediately and offset prior year income by filing an amended return for that year. For an even quicker refund, you can file a tentative refund on Form 1045. If you file an amended return, you can create a loss, carryback, and receive refunds. You may also qualify for a stimulus check and reduce estimated taxes for 2020.
Excess Business Losses: subsection 461(l) The CARES Act allows a temporary repeal of excess business loss limitations.
Under the CARES Act, the loss from one business can now fully offset the income of another for 2018, 2019, 2020.
· Paycheck Protection Program Loans
CARES Act changes were adopted through PPPFA on June 8, 2020. PPPFA 1.) allows borrowers up to 24 weeks to use the funds 2.) reduces the threshold that must be used on employee salaries from 75% to 60%. (Companies may decide to lean out and reduce WF and still be eligible for loan forgiveness while maintaining obligations like rent and inventory. (The business lobby is still pursuing an expansion of eligible expenses beyond the current scope.)
7(a) loan amount maximums are computed based upon payroll expenses of sole-proprietors, independent contractors, and other self-employed individuals. Essentially you receive a 2-month forgivable loan at a 4% rate with no payments for 6 to 12 mos and no borrower and lender fees.
The loan amount calculation looks like: Avg monthly (payroll + mortgage + rent, + any other debt obligations incurred during the 1 year period before the date of the loan) multiplied x2.5*. (ETS notes up to 4. Confirm with your CPA.)
You need to be operational and income-producing by March 1, 2020
You may refinance EIDL loans into PPPL loans, even though EIDL loans may not be taken out for the same purpose.
ProTip: Start with EIDL and then refinance them into PPL loans as your runway becomes more clear.
PPPL funds may be used on 1.) payroll support (sick, medical, or family leave & costs to continue group health benefits during those paid leave periods), 2.) employee salaries, 3.) mortgage payments, 4.) rent/lease payments, 5.) utilities, and 6.) debt obligations incurred before the covered period.
While applying, no SBA 7a loan application may be pending.
Useable on expenses incurred between 3/1/2020 and12/31/2020
SBA-eligible banks will administer funds under the assumption that COVID-19 impacts are clear and taking into account the borrower’s good faith certification that the loan is necessary due to uncertainty of current economic conditions caused by COVID-19 AND
Funds must be used to retain workers and maintain payroll, lease, utility payments, vehicle leases and interest, equipment leases and interest (if secured), home office deductions and payments in arrears are allowed during the covered loan period of 3/1/2020-12/31/2020.
To qualify, any business needs to have generated income in 2019. No personal guarantee is required and amortization is suggested to be 10 years, but is likely to be 5 years..
It is important to note that under PPPFA, the calculation of loan balances remains the same as detailed in the original CARES Act. Loans can be forgiven on the amount spent by the business during the 8-week period after the origination date of the loan on 1.) payroll costs (not including individual wages >$100K and employer owners and contractors remain capped at $15,385. 2.) interest on any mortgage, 3.) rent on any lease (in effect prior to 2/15/2020) and 4.) utility payments (in service prior to 2/15/2020). *No cap on non-cash compensation in payroll costs. Includes payroll/FICA costs, so be sure to include those amounts.
Loan amount forgiveness is available for employers who maintain at least 60% of the average payroll of the 12 mos prior but is reduced by the reduction in employees or salary. If a RIF occurs, businesses must rehire to 2/15/2020 levels, and, as per PPPFA, do so by the end of 2020 to avoid a reduction in the amount of loan that will be forgiven. Loans must be fully utilized by the end of 2020 to be eligible for forgiveness. Businesses may still apply for forgiveness before they expend the funds.
Pro Tip: Run the numbers on rent adjustments and deferrals with a CPA to clarify the "paper treatment" and impact to required distribution thresholds on potential loan forgiveness.
Pro Tip: RIF's are special circumstances and are now allowable under PPPFA. Employers can still receive forgiveness if they are unable to rehire an individual who was an employee prior to 2/15/2020, can demonstrate an inability to hire similarly qualified employees on or before 12/31/2020, or is able to demonstrate an inability to return to the same level of business activity at which the business was operating prior to 2/15/2020. The definition of "demonstrate" is still TBD. Ask your CPA!
The forgiven loan is not counted as cancellation of debt income for the business, meaning you shouldn't have an income tax bill on that debt cancellation. Seek clarity through your CPA.
The loan is actually considered non-taxable income and is funded through your local banking organization. If the loan is forgiven entirely, you can not double-dip to deduct the interest and the funds do then become taxable.
NC must pass legislation to make PPP funds non-taxable and unless that happens, NC holds static conformity.
Under CARES Act, loan repayment terms are 2 years at 1% for portions that are not forgiven. PPPFA extends the term to 5 years and the first payment will be deferred for 6 months after the SBA makes a determination on forgiveness. Also, under PPPFA, you could have up until May 2021 to secure forgiveness. The CARES Act lays out that the bank must make a determination in 60 days and SBA has another 90 days. Expect up to 6 mos before receiving confirmation of forgiveness.
PPP monies are booked as a liability (loan) on the balance sheet. Then, with forgiveness, it flows down to the equity section of the balance sheet or you remove it by paying it back. It should not become taxable income on the income statement at all. Typically, with debt forgiveness, you earn what is called debt forgiveness income. PPP money does not become debt forgiveness income and is therefore not an income recognition matter; rather it is a tax matter.
For businesses that may be selling:
Pro Tip: Pay attention to the impacts of recasting the income statement. If looking at the operational side of the business, if it was clear that ample dollars were moving through to keep people paid, but the business still qualified for the loan, the challenge will be determining whether to remove the expenses or include the income that came in on that loan to keep the recasting advantageously displayed. Avoid: If the business has no way of keeping people employed and covering expenses without the PPP loan, is it appropriate to recast if you aren't going to have the income but you used the loan to pay expenses? On the recast, you should show a one-time add back event on the expenses. There should be no income showing up for this loan.
Pro Tip: When PPP monies are involved in the sale of a business, what should the buyer do? The loan doc used to issue the loan may not mention asset changes. Look at the issues. If there is no personal guaranty, no lean on the equipment, no intent to misrepresent to the lender, follow the lender paperwork in the equity piece. Directly dialogue with the lender. Ex. Seller owes $80K of PPP, and that amount is held in the escrow account so they can close the transaction. If forgiven, the $80K goes to the seller. If not, it goes to the buyer to pay off the PPP. The seller and buyer can negotiate this. This is not always a lender requirement, so diligently negotiate it into the deal. Sellers should also understand their complete or partial release from the promissory note of the loan.
Pro Tip: Diligence musts: Understand the need for lender consent to the sale, review the promissory note, and track the SBA's application window for loan forgiveness so that you can clearly understand implications to operations and any pending transactions. *Currently, forgiveness applications are not open. Note - SBA does not create the promissory note but relies upon the lender to execute that step. In some cases, the bank drops the ball and fails to create one. Buyers need to ask sellers for a copy of the promissory note to be able to take those docs to the buyer's attorney and/or the closing attorney so steps for closing can be solidified and a full accounting analysis can be perfected. In some instances, if you don't confirm consent for the sale of the business from the bank, the loans can become due immediately. You don't want to put the seller in that position. Same for the default on the forgiveness provision. Applies to both asset and stock sales.
CAVEATS of Forgiveness:
If you received an EIDL grant ($1000/employee up to $10K), the grant received reduces your amount of loan forgiveness. Additionally, any amount received for which you hold no eligibility, will not be forgiven and must be repaid.
If you don't apply for forgiveness within 10 mos from the last day of your covered period. So, from the date of disbursement + either 8 or 24 weeks + 10 mos, your loan will harden and the payments will be triggered with interest applied to potentially the date of disbursement.
TBD: Are we creating havoc in recasting when we have no income and all the expenses? For tax purposes, we are hearing the IRS will deny the double-benefit and will not allow deductions for expenses related to this income stream. A 1v1 battle with IRS will be challenging. Congress will need to pass legislation to allow the deduction. IRS has already ruled that whatever PPP forgiveness is, you will have to take that amount of forgiveness off your expense line.
You can apply for forgiveness, at any time and before the end of the covered period
The alternate payroll period has nothing to do with 24 weeks of the covered period.
For S-Corp owners (flow-through entity - Form 1120S)
For C-Corp (Form 1120)
No prepayment penalties, application, origination, or maintenance fees.
Pro Tip: PPPFA also allows borrowers to take advantage of the CARES Act provision allowing deferment of the employer's payroll taxes for Social Security.
Pro Tip: SBA may still audit loans to determine whether the loan amount was calculated correctly, or whether access to credit elsewhere would invalidate the loan forgiveness, in total or a portion. All borrowers, esp. those with loans above $2M should prepare to explain why funds were financially necessary at the date of the application. Liquidity will be tested and if borrowers had enough funds to stay afloat or lines of credit they could have tapped, they may be determined to be ineligible or a portion of the loan may be required to be repaid in full. Criminal charges would be unlikely, excepting outright fraud.
Pro Tip: Detailed tracking of expenditures and documentation of financial health at the time of the loan will prevent issues during an audit. Ultimately, responsibility for calculations of the loan amount and repayment fall on the borrower.
Pro Tip: Many businesses keep inadequately detailed records. Loan forgiveness will likely flow more smoothly when transmitted from the CPA of SMBs to the lenders before flowing to the SBA. You must submit proper documentation which relies on the complete documentation and details.
Pro Tip: Safe Harbor rules may become available to loans under $250K given that 4.3M PPP loans are outstanding. Loans of $2M are likely to be audited.
· Economic Injury Disaster Loans
Now covering sole proprietors and independent contractors operating during the covered period of 1/31/2020 – 12/31/2020.
Qualification is limited to the business’s credit score vs the onerous ability to pay
Max loan amount is $200K, no personal guarantee required for businesses in business for the prior year
Emergency $10K available, or max $1000/employee, within 3 days as an advance on the loan, even if the loan is not approved. The advance can be used to pay for sick leave to employees, payroll, increased costs of materials, rent, mortgage, and repaying unmeetable obligations due to revenue losses.
*The advance supposedly does not have to be repaid, even if the loan is not approved and is considered in forgiving a PPPL. Many will be refinanced into a PPPL that is forgivable.
Best practice recommendation by ETS: apply for the EIDL, request the advance, then refinance into a PPPL that can be forgiven if you meet the guidelines.
30-year amortization available
· Disaster Relief Payments, IRC Subsection 139:
Tax benefits are achievable through certain Disaster Relief Payments, generally from Businesses to business owners, employees, etc, to allow dollars to flow to individuals immediately. These are deductible but are not subject to income tax or self-employment tax for the recipient.
The payment must be a reasonable reimbursement or payable for expenses attributable to a qualified disaster:
necessary personal, family, living, or funeral expenses
necessary repair/rehabilitation/replacement of a personal residence or its contents
Insurance or another payment may not compensate for these expenses. So, business owners should consider paying expenses incurred by key employees with available cash. Ex. Personal expenses that will not be covered by unemployment are plausible. These deductions could add to the NOL. Best practice to follow is to obtain an affidavit from the key employee or recipient that the requirements of the Code have been met.
Think Strategically: What expenses can you incur now to position you for future growth and offset losses? Consult your CPA.
· Retirement Distributions & Loans
Retirement loans and account distributions may be necessary if other funds are not available. You can borrow from your:
Traditional IRA up to $100K without incurring the 10% penalty, (before age 59.5) but instead of the usual 60 days to replace the money, you now have up to 3 years. You can recognize the revenue over a 3-year period, and you can return the money within a 3-year timeframe. Taxes are still due on that withdrawal.
401K borrowing limit was raised from $50K to $100K without penalty. If you execute a 401K withdrawal (as a business loan), you can replace the money without paying tax on the replacement monies within 3 years. Seek clarity with your CPA. I’ve heard opposing statements.
Roth IRA withdrawals are already tax-free. Consider the down market. When your taxable income is down, you can do a Roth conversion at a zero or low tax. (Search Backdoor Roth)
If you hold a long-term investment horizon, the upside gains on depressed stocks, bonds, and other investments are in focus. You may benefit from a tax-deductible contribution into a SEP IRA in 2020 prior to the filing deadline for 2019, which could otherwise impact your needs analysis for loans and other tax benefits related to COVID-19. Enlist the guidance of a CPA to ask about this one.
Deadlines to contribute have been extended – seek clarity from your CPA.
Think strategically about your current and future income and navigate from your base case, but identify a trigger point and backstop against the worst case and for the optimistic scenario.
Congress authorized employers to amend retirement plans to allow for loans up to $100K, which may be preferred to taking distributions as they are not currently taxable to the recipient.
· IRS Filing and Payment Extensions:
A 90-day extension of time to FILE and PAY - until July 15 applies to 1040s, IRAs, HSAs
Currently, this doesn’t apply to payroll taxes.
No word yet on C-Corps or 1031x requirements to identify and/or purchase. Assume April 15 and regular deadlines for these scenarios.
Cash-Balance Plan for S-Corp filing: If you extended past March 15, you now have until September as always. As a single-member LLC with your 1040, you’ve moved until July 15.
Sep IRA payments moved to July 15. S Corps due back on March 15.
C-Corps still due April 15.
Partial hours and Family leave – no guidance; likely either on leave or not.
IRS will choose either your 2018 tax return or if you filed your 2019 return already, they will use that.
NEW PPPFA Tax DEADLINES:
90-day extension of time to file and pay – now 7/15
SS taxes may be deferred for up to 2 years
Includes individuals – ($1M max)
Includes C-Corps ($10M max)
1031X & Opportunity Funds extended to 7/15
HSAs, IRAs deadline extended to 7/15
Q1 and Q2 tax payments due 7/15 instead – one big estimated tax payment on profit. Figure out the real number for 2020 - don’t use last year’s numbers.
Includes individuals – ($1M max)
Includes C-Corps ($10M max)
1031X & Opportunity Funds extended to 7/15
HSAs, IRAs deadline extended to 7/15
Q1 and Q2 tax payments due 7/15 instead – one big estimated tax payment on profit. Figure out the real number for 2020 -don’t use last year’s numbers.
· What should you implement now?
Consider a ROTH conversion ASAP from 401K or Traditional IRA. Anytime income decreases and the market is down, it’s a good time to look at this because you are likely to fall into a lower income bracket. When the market is getting uninflated:
Deduct 100% of charity for 2020 and wipe out all income for 2020.
Depreciation, customer deposits
Adjust inventory W/D, Def Rev, Accruals
Worthless stock deductions
File your 1040 ASAP for a refund.
2. Avoid overpaying quarterly taxes if 2020 revenues are expected to be lower.
You can reduce 2020 quarterly estimated tax payments:
If you already filed S-corp or C-corp, go through superseded tax return, not amended return which will trigger higher audit likelihood.
If you generate a loss, carryback, and lower payments for tax in 2020. Then put that money to work to keep it out of the government’s hand.
Much appreciation to the excellent resources of:
· Engineered Tax Services – Michael Donofrio; https://engineeredtaxservices.com/the-path-forward-planning-and-action-items-via-the-care-act/
· CLA – John Werlhof; https://www.claconnect.com/resources/articles/2020/tax-savings-opportunities-from-the-cares-act
· Kevin Bassett, Bassett & Associates, PA https://bassettcpas.com/
· Massimo Group, Rod Santomassimo https://massimo-group.com/
· Thomas Judy Tucker, Wilson Hicks & TCAR http://www.tcar.com/
· NAR - https://narfocus.com/billdatabase/clientfiles/172/26/3594.pdf
· Forbes, All Business, Neil Hare