CARES Act: Tactical Moves for SMB Owners and Occupants
Updated: May 17
The arrival of COVID-19 brought yet another uncertainty and upheaval. Unknown health and safety - check. Unpredictable revenue, retention, rehiring, recession - check. Unknowns and imperfect data 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 consume our daily decisions. What? When? How? If… But…. Or…. Can?
Slow down. Breathe. 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 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 and revisit as you figure out how to adjust.
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 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 $2T+ 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. 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 and 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 best fits your unique conditions.
· Recovery Tax Credit Rebates – eta 3rd week of April, 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 above 18, transitioned to a worker and makes under $75K 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/month available to those unemployed due to COVID-19 and is over and above state unemployment assistance made available under state law.
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.)
· 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.
NOL’s: Any unused NOL (not used for offset against income) typically carries forward to the next year. Now, NOL’s for 2018-2019 can be carried back for 5 years. Congress estimated 80% NOL limitation for 2018-2019 and removed the excess business loss limitation. The opportunities are now:
Adjustments to the 2018/2019 NOL carrybacks limitations should result in a refund. File an amended return to find out.
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.
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 under the assumption that COVID-19 impacts are clear and 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, utilities payments during the covered loan period of 3/1/2020-12/31/2020.
No personal guarantee is required and amortization is suggested to be 10 years.
Loan balances 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) 2.) interest on any mortgage, 3.) rent on any lease (in effect prior to 2/15/2020) and 4.) utilities 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 75% 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 by 6/30/2020 to avoid a reduction in the amount of loan forgiven. Must be fully utilized by June 30 to be eligible for forgiveness.
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.
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.
Terms are 2 years at 1% for portions that are not forgiven.
No prepayment penalties, application, origination, or maintenance fees.
Pro Tip: Clarify the portion of PPPL that must be used for employee salaries and that which can be used for other debts and obligations.
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
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 attributed 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 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.
Excess Business Losses: subsection 461(l)
Interest Expense Limitations under 163(j)
Disaster Relief Payments IRC subsection 139
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/
· Kevin Bassett, Bassett & Associates, PA https://bassettcpas.com/
· Massimo Group, Rod Santomassimo https://massimo-group.com/