Published on May 14, 2020
All of us are adapting to a new way of life as the world struggles to deal with the COVID-19 crisis. To mitigate the consequences of stay-at-home orders, federal and state agencies have created various programs to assist small businesses dealing with losses of revenues and to sustain employees who have lost their jobs in industries where shelter-in-place orders exist.
Following are a few tax planning opportunities that stem from the Coronavirus Aid, Relief, and Economic Security (CARES) Act and other recent legislative acts to consider.
The Paycheck Protection Program (PPP) has made a lot of headlines and is, by far, the program that businesses are trying to take advantage of the most. As part of the CARES Act, Congress initially authorized nearly $350 billion for this program, which was an attempt to incentivize businesses to keep employee compensation at pre-pandemic levels. A later round of funding added another $310 billion.
The biggest advantage to the PPP is that if the business continues to pay employees at rates consistent with 2019, the Small Business Administration (SBA) will forgive all or a portion of the loan. Additionally, the amount forgiven would not be included in the business’s taxable income in the year of forgiveness. Recent guidance suggests that an amount of expenses equal to any amount of PPP loan forgiven would not be deductible for federal tax purposes; states will need to review this guidance and decide whether to decouple any of the federal provisions in calculating state tax liabilities. Any amount that is not forgiven has terms that are generally attractive compared to other alternatives.
Learn how to get your PPP loan forgiven here.
Congress acted quickly to get these funds to businesses and the SBA is issuing guidance after the fact on the details about how to apply for loan forgiveness.
Before the pandemic, the stock market was at an all-time high. Businesses were profitable and corporate tax rates were historically low. Many corporations paid federal income taxes over the past several years and now have an opportunity to recoup some of those funds.
Previously, businesses that had taxable losses could only carry those losses forward to offset future taxable income. Losses generated in years beginning after December 31, 2017 may now be carried back up to five years. There is no doubt that many businesses will report losses this year because of COVID-19, and this provision is another way Congress is injecting liquidity into the business community.
Previously, anyone who is over 72 years old (increased from 70 ½ by the SECURE Act) who had a retirement account generally was required to withdraw funds from that account on an annual basis based on a prescribed formula. There were penalties associated with taking out less than the minimum.
The CARES Act suspends this requirement for 2020 with no need to make up any distributions in the future. This allows retirees to maintain funds in tax-advantaged accounts and manage their use of available sources of funds more easily.
There are two significant options for people who have retirement accounts.
Generally, participants in a qualified plan or individual retirement account holders who were younger than 59 ½ were penalized if they withdrew funds from the plan without rolling them over to another qualified plan. With the passage of the CARES Act, individuals affected by the virus may withdraw up to $100,000 without incurring the 10% early withdraw penalty for 2020. The recipient would still need to pay income taxes on the amount withdrawn. In addition, the recipient may avoid taxation of the amount if they repay it into the plan over a three-year period.
Secondly, if an employer-sponsored plan allows for participant loans, the maximum amount eligible for withdraw was increased from $50,000 to $100,000 for loans made between March 27 and September 23, 2020. This loan may also be paid back over a maximum six-year period, which is longer than the five-year period previously mandated.
Generally, a company may only deduct a maximum of 30% of adjusted taxable income as interest expense. The CARES Act increased this maximum to 50% for 2019 and 2020, which could increase the loss available for net operating loss carryback discussed earlier.
There is no doubt that the economy is reeling from the consequences of COVID-19. Congress has done a lot in a short period of time to sustain individuals and businesses until we return to business as usual. The programs we discussed above are federal programs. Each state has additional programs to help businesses.
Individuals and business owners should consider all the programs and incentives available to them because many are offered for a short period of time.
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Published on May 14, 2020