As I sit in my home office here in the beginning of April I am humbled by the resolve we are all showing in the face of uncertain times. I know you are probably feeling anxious about the future, but together, we can achieve great things and I have no doubt this crisis will bring us all closer together, not farther apart – well not more than 6 feet closer for now. Our hope is that companies will be back operating at full strength and better than ever in the near future. As you are well aware, the government has stepped in and provided a few resources to make sure this is the case. While it is impossible to cover every resource available, there are a few I would like to point out that have been the most beneficial for our construction clients, and can help make a positive impact on your company moving forward.
FAMILIES FIRST CORONAVIRUS RESPONSE ACT (H.R. 6201)
The Families First Act expanded FMLA requirements to include employees affected by Covid-19. Businesses with fewer than 500 employees are required to provide up to 80 hours of Emergency Paid Sick Leave for employees that are subject to a quarantine order, have been diagnosed with Covid-19, or are caring for someone under the same conditions. Depending on the reason, employers would pay the employees regular rate of pay, up to $511 per day, if it is for their own illness, or $200 per day if caring for another individual. To assist employers the act provides refundable credits to be used against payroll taxes at the capped amounts.
IRS AND IDAHO STATE TAX COMMISSION EXTEND TAX DEADLINES
On March 20th, the IRS released expanded guidance providing relief to taxpayers by extending the due date of tax returns and payments due on April 15, 2020 to July 15, 2020. The Idaho State Tax Commission followed up shortly thereafter extending the due date of returns and payments due on April 15, 2020 to June 15, 2020. You may also still file an automatic filing extension to October 15, 2020.
CORONAVIRUS AID, RELIEF AND ECONOMIC SECURITY ACT (CARES Act)
Delay of Employer Payroll Taxes
The CARES ACT defers the due date for employers and self-employed individuals for payment of the employer share of taxes related to Social Security. The payments may be deferred one-half to December 31, 2021 and the other one-half to December 31, 2022. However, this deferral is not available for businesses that take advantage of the SBA Paycheck Protection Program, whose loans are forgiven.
Employee Retention Credit
There is now an available credit to be used against your payroll taxes. The credit is limited to 50% of the first $10,000 in wages per employee. Businesses must be fully or partially shut down due to a government order, or have had at least a 50% reduction in gross receipts. There are additional limitations for employers with over 100 employees.
SBA Paycheck Protection Loan Program
The SBA now provides a forgivable loan program, in which businesses can secure credit through local banks and credit unions to cover costs including payroll, continuation of health care benefits, mortgage interest obligations, rent or lease payments, utilities, and interest on debt incurred prior to obtaining the loan. The loan amount available is 2.5 times the business average payroll and benefit costs for the prior twelve months. To qualify, businesses must have fewer than 500 employees and be within the SBA’s Small business size threshold. The applicant must certify the loan is due to uncertainty of current economic conditions and is necessary to support the ongoing operations of the business. The applicant must spend the funds on eligible expenses in the immediate 8 week period after getting the loan and then may submit an application for forgiveness.
SBA Economic Injury Disaster Loans
The SBA also has available loans to eligible small businesses up to $2M to provide a stop gap funding at a reduced interest rate and attractive terms. The loan provides an approval grant of $10,000 per applicant. The loan can be used to cover expenses that cannot be paid due to the pandemic. Payments can be deferred for up to 12 months, however interest will still accrue. These loans require collateral if over $25,000 and typically require personal guarantees, however, there is no fee to apply.
Deferral of Net Business Losses
Prior law limited the amount of other income that an individual could offset by losses from passthrough business. Business losses were limited to $500,000 for married couples and any excess would be converted to Net Operating Losses (See below), which could then be only carried forward. This was effective for years beginning after 2017 and before 2026. The CARES Act defers the effective date of this rule for three years. Therefore losses sustained in 2018, 2019 or 2020 will be fully available to offset other income and not limited to $500,000.
Net Operating Losses
Prior law abolished the carryback for Net Operating Losses (NOLs) generated in years beginning after 2017. NOLs were only allowed to be carried forward and were limited to 80% of a taxpayers income in any given year they were carried to. The CARES Act provides that NOLs generated in 2018, 2019 or 2020 will be carried back 5 years. Taxpayers can elect to forego the carryback, however the election is irrevocable once made. For those companies with losses in any of those years, look to carry back the loss and generate current year refunds by offsetting taxable income in the prior five years. The CARES Act also delayed the 80% rule and allows the NOL to offset 100% of your income in those prior years.
Qualified Improvement Property
Prior law required that Qualified Improvement Property (QIP) be depreciated over 39 years. Qualified Improvement Property is an improvement to the interior of nonresidential real property that is not structural in nature. This also includes Qualified Leasehold Improvements made by the lessee, any sublessee, or the lessor under a lease or a commitment to enter into a lease. To qualify, it must not be between related parties and the improvement must be placed in service more than 3 years after the date the building was first placed in service. The effect of this rule resulted in QIP not being eligible for 100% bonus depreciation. This was an error in the drafting of the prior law and caught many of us off guard in 2018. The CARES Act retroactively changes QIP to 15 year property, thereby allowing 100% depreciation in years 2018 and forward. This can provide a real benefit to those companies that had QIP in 2018. You may now go back and amend your tax returns and take the additional deduction, which could generate immediate refunds. Going forward, this will allow greater flexibility to deduct the cost of these improvements.
Alternative Minimum Tax Credit Refunds
Prior law required that Alternative Minimum Tax Credits be refunded over a period of years with the balance due in 2021. The CARES Act allows these tax credits to be fully refundable in 2018 on an amended tax return or on your 2019 tax return.
Charitable Contributions by Corporations
The CARES Act expands the deduction for charitable contributions by corporations from 10% to 25% of taxable income. It also increases the limitation on deduction for contributions of food inventory from 15% to 25%.
YOU ARE NOT IN THIS ALONE
Navigating these resources can be tricky, and time is of the essence. As a CPA, it is our job to stay up to date on the changing regulations, and to help our clients take advantage of opportunities as they present themselves. This summary is meant to be a brief overview, but many stipulations can apply. Consult your tax advisor regarding your specific situation to learn which of these resources may be applicable to your business and can help you weather the storm and come out stronger and more prepared in the end.
About the author: Robert Shappee has over 18 years of experience in public accounting. During the last 13 years at Harris CPAs, Robert has focused his practice primarily on the construction industry, advising companies on process improvement, financial strategies, succession planning and tax strategies. He partners with businesses and owners in understanding the value in well planned and executed financial initiatives and how they can have a positive impact to the bottom line of their companies. He can be reached at firstname.lastname@example.org.
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