A Message from Harper & Pearson Company, P.C.
We are fully operational and committed to serving our clients. As the novel coronavirus (COVID-19) continues to spread in the U.S. and across the world, our priority at Harper Pearson is the safety and well-being of our people, clients, families, and community. We are monitoring daily updates and recommendations from the CDC. We have communicated workplace guidelines to our Harper Pearson team members and have implemented strategies in our workplace that align with the recommendations to do our part with the prevention while also minimizing the impact that COVID-19 could have on our services. We understand that in this time of uncertainty you may have growing concerns for the financial health of yourselves and your businesses, employees, and families. We are closely monitoring federal and state updates that impact our clients and their businesses and will continue to update our COVID-19 Resources page with articles and information as these issues rapidly develop and change.
Special Edtion Tax Newsletter - July Newsletter
June 23, 2020 - IRS announces rollover relief for required minimum distributions from retirement accounts that were waived under the CARES Act
WASHINGTON – The Internal Revenue Service today announced that anyone who already took a required minimum distribution (RMD) in 2020 from certain retirement accounts now has the opportunity to roll those funds back into a retirement account following the CARES Act RMD waiver for 2020.
The 60-day rollover period for any RMDs already taken this year has been extended to Aug. 31, 2020, to give taxpayers time to take advantage of this opportunity.
The IRS described this change in Notice 2020-51, released today. The Notice also answers questions regarding the waiver of RMDs for 2020 under the Coronavirus Aid, Relief, and Economic Security Act, known as the CARES Act.
The CARES Act enabled any taxpayer with an RMD due in 2020 from a defined-contribution retirement plan, including a 401(k) or 403(b) plan, or an IRA, to skip those RMDs this year. This includes anyone who turned age 70 1/2 in 2019 and would have had to take the first RMD by April 1, 2020. This waiver does not apply to defined-benefit plans.
In addition to the rollover opportunity, an IRA owner or beneficiary who has already received a distribution from an IRA of an amount that would have been an RMD in 2020 can repay the distribution to the IRA by Aug. 31, 2020. The notice provides that this repayment is not subject to the one rollover per 12-month period limitation and the restriction on rollovers for inherited IRAs.
The notice provides two sample amendments that employers may adopt to give plan participants and beneficiaries whose RMDs are waived a choice as to whether or not to receive the waived RMD.
Balance Due Notice Mailings: Due Dates Extended to Help Taxpayers
Due to the COVID-19 pandemic, the IRS was unable to mail some previously printed balance due notices as a result of office closures. As IRS operations continue to reopen, these notices will be delivered to taxpayers in the next few weeks. Given the time it would take to reprogram IRS systems, and generate updated notices, some of the notices taxpayers will receive have due dates that have already passed. However, each notice will include an insert confirming that the due dates printed on the notices have been extended.
Extended Payment Due Dates: The payment due dates printed on the notices have been extended, as described in the insert. The new payment due date will be either July 10, 2020 or July 15, 2020, depending upon the type of tax return and original due date. Taxpayers should be sure to read the insert included with the notice that explains the delay and provides the correct payment due dates.
New PPP Guidance Helps but Falls Short on Key Loan Forgiveness Rules - June 5, 2020
Almost weekly, Treasury, the IRS, and the SBA release guidance to help businesses understand and comply with the loan programs and tax changes enacted to mitigate economic damage from the COVID-19 pandemic. Recently, two interim final rules were released by the SBA to address some of the finer points of PPP loan forgiveness. The first set of rules covers payroll periods and other expenses during the 8-week measurement period, eligible compensation, interest, employees who refuse to work, and FTE calculations. The second rule explains SBA loan review procedures.
While the new rules pre-date the bill that was signed into law on Friday, June 5th, the clarifications are still useful.
Highlights of New Rules
The first set of Interim Final Rules amplifies guidance included with the forgiveness application (covered in a previous article.) The most important modifications regarding loan forgiveness eligibility are in the following areas:
Payroll Timing. Businesses with bi-weekly or more frequent pay cycles can elect an “alternative payroll covered period”, which is the eight-week period starting the first day of the first payroll cycle that begins after the loan funds are received. Under the original rule, the loan covered period began on the day the loan funds were disbursed, with no exceptions. Payroll costs that are incurred during the alternative period but paid after the end of the covered weeks are still eligible for forgiveness if they are paid no later than the first regular payroll date after the loan coverage period ends.
Example based on an 8 week loan period: A borrower has a bi-weekly payroll schedule. The borrower’s regular covered period begins on June 1 and ends on July 26. The borrower’s first payroll cycle that starts in the covered period begins on June 7. The borrower may elect an alternative payroll covered period that starts on June 7 and ends 8-weeks later, on August 1. Payroll costs paid during this alternative payroll period are eligible for forgiveness, as are payroll costs incurred during this period but paid no later than the first regular payroll date occurring after August 1.
Note that payroll both paid and accrued during the covered period is eligible for forgiveness, and a business may have a greater chance of getting an additional payroll run included in the covered period if the alternative payroll period is not used. For example, if a business receives funds on May 1st, and the next payroll period starts on May 5th, the previous payroll would likely be paid sometime between May 1st and 5th. The funds paid for that payroll period would count towards forgiveness, as well as the payroll for wages earned during the 8 weeks beginning May 1st.
The interim rule also clarifies that payroll costs are considered paid on the day that paychecks are distributed or the borrower originates an ACH credit transaction. Payroll costs are considered incurred on the day the employee’s pay is earned (the day the employee worked). For employees who are not performing work but are still on the borrower’s payroll, payroll costs are incurred based on the work schedule established by the borrower.
Interest Payments. Interest payments on any business mortgage obligation on real or personal property that was incurred before February 15, 2020, qualifies toward loan forgiveness. Presumably, this means that the debt had to be in place before February 15, 2020. The final rules make clear that prepayments of interest and payments of principal do not qualify as costs eligible for loan forgiveness.
The interim rule is silent on payments between related parties. There does not appear to be any prohibition against adjusting the interest rate payable on debt that existed before February 15, 2020, to a fair market value interest rate. (Please note there are other tax implications to consider when visiting interest rate adjustments).
Non-Payroll Expenses. The interim rule explains when non-payroll costs must be paid or incurred to qualify for loan forgiveness. These costs either must be paid during the loan coverage period or incurred during the period and paid by the next billing cycle that occurs after the loan coverage period.
Example-Based on an Eight Week Coverage Period: A borrower’s covered period begins on June 1 and ends on July 26. The borrower pays its May and June electricity bill during the covered period and pays its July electricity bill on August 10, which is the next regular billing date. The borrower may seek loan forgiveness for its May and June electricity bills because they were paid during the covered period. The borrower also may get loan forgiveness for the portion of its July bill from July 1-July 26 because it was incurred during the covered period and paid on the next regular billing date.
The final rules do not specifically address prepaying rent for future months or paying rent in arrears during the covered period, but rather points to the overall limitation of non-payroll costs. This suggests that as long as rent is PAID during the covered period, and is not in excess of ceiling percentage of the forgiveness amount (when combined with all non-payroll costs), rent paid would be eligible for forgiveness. Similar to interest expense guidance, there is no mention of related party limitations, so adjustments of rent expense paid to related parties to fair market value may beneficial.
Bonuses, Hazard Pay, and Furloughed Employees. The interim rule clarifies that bonuses, hazard pay, and compensation of furloughed employees are eligible for loan forgiveness. However, the employee’s total compensation including bonuses and hazard pay may not exceed $100,000 as prorated for the covered period.
Payments to Owner-Employees and the Self-Employed. The interim final rule provides a limitation on the amount of compensation paid to owner-employees and self-employed individuals that can be forgiven. The amount forgiven per individual cannot exceed the lesser of:
8/52 of 2019 compensation
For owner-employees, 2019 compensation includes retirement and health insurance contributions. No additional forgiveness is provided for retirement or health insurance contributions for self-employed individuals, including Schedule C filers and general partners. Schedule C filers are capped by the amount of their owner compensation replacement, calculated based on their 2019 net profit. General partners are capped by the amount of 2019 net earnings from self-employment (with certain reductions) multiplied by 92.35%.
The rule states that the limitation applies across all businesses of the individual, so an individual must aggregate compensation from all businesses owned when applying the cap. The effect of this rule is that only $15,385 of owner compensation can be forgiven from ALL businesses owned.
This new rule clarification may have a negative impact on businesses taxed as S Corps, C Corps, or partnerships where the owners may not have taken a full year of compensation or had limited earnings in 2019.
No Double Penalty for Reducing Hours. If an employer reduces its employees’ salaries or wages in excess of 25%, the law requires a reduction in the loan forgiveness amount. For purposes of determining the limitation on loan forgiveness, the rule clarifies that a reduction in compensation related to a reduction in hours will not be counted as a reduction in compensation, eliminating the potential to be penalized twice on both the FTE calculation and the reduced salary calculation.
FTE Calculations and Special Rules
Borrowers seeking forgiveness must document their average number of employees during the covered period and a reference period to determine if they have maintained payroll at the required level. The interim rule defines full-time equivalent (FTE) as 40 hours of work and includes two methods for calculating FTEs for employees who do not work full time. For method one, the borrower may calculate the average number of hours a part-time employee was paid per week during the covered period. For example, if an employee was paid for 30 hours per week on average, the employee could be considered an FTE employee of 0.75. Under the second method, borrowers may elect to use a full-time equivalency of 0.5 for each part-time employee.
Employees Who Refuse to be Rehired: Employers can exclude from loan forgiveness calculations employees who refuse to be rehired if the following requirements are met:
• the borrower made a good faith, written offer to rehire the employee or to restore reduced hours during the covered period or the alternative payroll covered period;
• the offer was for the same salary or wages and the same number of hours earned by the employee in the last pay period prior to the separation or reduction in hours;
• the offer was rejected by the employee;
• the borrower maintains records documenting the offer and its rejection; and
• the borrower informs the state unemployment insurance office of the employee’s rejected offer of reemployment within 30 days of the rejection.
In addition, a borrower will not be penalized with FTE reductions for employees who are fired for cause, voluntarily resign, or voluntarily take a reduction in hours.
Rehiring. Employers can restore loan forgiveness and avoid a reduction in FTEs if a borrower rehires employees and restores salary and wage levels. The deadline for rehiring was extended to December 31 as part of the Bill approved by congress on June 3rd, 2020. This rule offers borrowers an important opportunity to cure reductions in employees that occurred earlier and regain loan forgiveness.
Loan Review Procedures
The second interim final rule establishes loan review procedures and borrower-lender responsibilities. Some key points are these:
• The SBA says it will review any PPP loan, in its discretion. Borrowers should take this as a warning that all loans are subject to review, not just loans over $2 million.
• Lenders must issue a decision to SBA on loan forgiveness not later than 60 days after receipt of a complete loan forgiveness application from the borrower.
• The borrower must retain PPP documentation for six years after the loan is forgiven or paid in full.
• If the SBA determines the borrower is ineligible for the PPP loan, the lender must deny the loan forgiveness application and may seek repayment of the outstanding PPP loan balance. The borrower may appeal this determination. The SBA intends to issue a separate rule addressing the appeals process.
Treasury characterized its final interim rule on PPP loan forgiveness in this way. “By providing a high degree of certainty to PPP borrowers through this interim final rule, PPP borrowers will be able to take immediate steps to maximize their loan forgiveness amounts, for example, by either rehiring employees or not laying off employees during the covered period.” Given the many time limitations, borrowers need to understand their options regarding loan forgiveness.
As part of the FFRCA, and CARES Act, Congress has provided for various payroll tax credits and has revised Form 941.
Please see below for a copy of the draft form along with instructions for filling out the new form. Please note, an employer may NOT claim the employee retention credit, if the employer receives a Small Business Interruption Loan under the Paycheck Protection Program (PPP) that is authorized under the Coronavirus Aid, Relief, and Economic Security (CARES) Act (“Paycheck Protection Loan”). An employer that receives a Paycheck Protection Loan should not claim an employee retention credit.
Instructions for Form 941: https://www.irs.gov/pub/irs-df...
Revised Form 941: https://www.irs.gov/pub/irs-df...
Changes to Section 125 cafeteria plans -
The IRS released guidance on May 12, 2020, to address unanticipated changes in expenses as a result of COVID-19. The guidance allows temporary changes to section 125 cafeteria plans to extend the claims period for health flexibility spending arrangements (FSAs) and dependent care assistance programs and allows taxpayers to make mid-year changes. An employer, in its discretion, may amend one or more of its cafeteria plans to allow the changes noted below.
Notice 2020-29 provides greater flexibility by -
Notice 2020-33 increases the amount of funds that can carry over without penalty at the end of the year for FSAs from $500 to a maximum of $550, as adjusted annually for inflation.
Texas Franchise Tax Extended Due Date
The COVID-19 pandemic is disrupting life for people and businesses nationwide. To provide Texas franchise taxpayers some relief, the Texas Comptroller of Public Accounts is automatically extending the due date for 2020 Texas franchise tax reports to July 15, 2020, to be consistent with the Internal Revenue Service (IRS).
The due date extension applies to all franchise taxpayers. The extension is automatic, and franchise taxpayers do not need to file any additional forms.
Texas Franchise Tax Extended Due Date - https://comptroller.texas.gov/taxes/franchise/filing-extensions.php
Tax Update on the Response to the COVID-19 Outbreak:
In Notice 2020-23 issued on April 9th, the IRS has extended more tax deadlines for individuals, trusts, estates, corporations, nonprofit organizations, and other non-corporate tax filers. This broad relief includes a variety of tax filings and payment obligations that are due between April 1, 2020, and July 15, 2020, and the relief is automatic, so taxpayers do not have to file extensions or submit other documentation to the IRS to obtain relief. The notice also suspends interest, additions to tax, and penalties for late filing or late payment until July 15th.
Taxpayers who need additional time beyond July 15, 2020, have until July 15th to request an extension, but the extension date may not go beyond the original extension date (for calendar-year filers, this would be September 15th for partnerships and S corporations; October 15th for individuals and C corporations; and November 15th for Form 990 series filers).
The relief includes not only the filing of the specified forms, but also all schedules, returns, and other forms that are filed as attachments to these forms or are required to be filed by the due date of the specified forms (for example, Schedule H and Schedule SE, as well as Forms 3520, 5471, 5472, 8621, 8858, 8865, and 8938). Elections that are made or required to be made on a timely filed specified form will be timely made if filed on the specified form or attachment on or before July 15, 2020 (unless an extension is filed).
The relief also applies to time-sensitive acts listed in Regs. Secs. 301.7508A-1(c)(1)(iv) through (vi) and Rev. Proc. 2018-58.
Some common filings and payment obligations now added to the list of filings granted relief by this notice include:
Estimated tax payments due June 15, 2020 (including Forms 1040-ES, 1041-ES; 1120-W; and 990-W)
Form 706, United States Estate (and Generation-Skipping Transfer) Tax Return
Form 990, Return of Organization Exempt from Income Tax
Form 990-T, Exempt Organization Business Income Tax Return
Form 990-PF, Return of Private Foundation
Form 5500, Annual Return/Report of Employee Benefit Plan
Form 1120 (and other filings) for certain fiscal year taxpayers
Deadline for filing a 2016 return to claim a refund
Installment payments under IRC Section 965(h)
New CARES Act Provides Tax Relief
Key tax breaks in COVID-19 law
In response to the COVID-19 outbreak, Congress passed the Coronavirus Aid, Relief, and Economic Security (CARES) Act, signed into law on March 27. This new federal legislation includes relief for both individuals and businesses of all shapes and sizes. Following is a brief roundup of several key tax-related provisions affecting individuals and small business owners.
Individual Tax Relief:
Stimulus checks: The most publicized provision in the new law provides $1,200 cash payments to single filers and $2,400 to joint filers. Plus, you will receive $500 for each “child” as defined by the Child Tax Credit (CTC). Generally, the CTC is available for dependent children under age 17 living in your household.
But the checks phase out for higher-income taxpayers. The phase-out begins at $75,000 of adjusted gross income (AGI) for single filers and $150,000 of AGI for joint filers. The phase-out is complete for single filers with an AGI of $99,000 or more and $198,000 for joint filers.
The payments are technically advances of refundable credits. These amounts are generally based on your 2019 tax return, if you have already filed it, or your 2018 return. Nonresident aliens, individuals who can be claimed as a dependent by another taxpayer, estates, and trusts are not eligible.
Required minimum distributions: Most qualified plan and IRA owners must begin taking “required minimum distributions” (RMDs) after attaining age 72 (recently increased from age 70½). But the CARES Act suspends all RMDs, from a defined contribution plan under Section 403(a) or 403(b), eligible governmental deferred compensation plans, and individual retirement accounts (IRAs), including inherited accounts, for 2020.
Charitable contributions: Due to changes in the Tax Cuts and Jobs Act (TCJA), many taxpayers who previously itemized now claim the standard deduction. Thus, they receive no current tax benefit from their charitable donations. The CARES Act allows you to deduct up to $300 in donations to qualified charities even if you do not itemize on your tax return and regardless of your AGI. In addition, the Act removes the adjusted gross income (AGI) limit for charitable contributions by individuals in 2020 for gifts to qualifying charities. For both provisions under the Act, only cash gifts qualify and gifts to donor-advised funds and 509(a)(3) supporting organizations are not eligible.
Early plan withdrawals: Generally, if you make a withdrawal from a qualified retirement plan or IRA before age 59½, you must pay a 10% penalty tax in addition to regular income tax. But the tax code includes a list of exceptions to the penalty. The new law adds another exception for coronavirus-related distributions of up to $100,000 in 2020. The withdrawal is still subject to income tax but may be spread over a three year period beginning with 2020. Taxpayers may also recontribute the withdrawn amount within three years in which case it is not taxable. In addition, the new law enhances the rules for loans from qualified plans.
Student loans: Employers may provide up to $5,250 this year in student loan repayment benefits on a tax-free basis. In other words, employers could assist with loan payments and employees would not be responsible for tax on those amounts, up to the stated limit. Borrowers can defer payments on qualified student loans without any penalty until September 30.
Business Tax Relief:
Employee retention credit: The new law authorizes a credit for 2020 only against an employer’s 6.2% share of Social Security payroll taxes. This refundable credit is available to businesses that suspend or close operations due to COVID-19, or certain companies with reduced gross receipts, as long as they continue to pay their employees. For each eligible quarter, the credit is equal to 50% of the first $10,000 of qualified wages per employee, through the quarter ending on December 31, 2020.
Payroll tax delay: A qualified employer will be able to defer its share of the 6.2% Social Security tax that would otherwise be due through December 31, 2020. The new law permits 50% to be paid by the end of 2021 and 50% by the end of 2022. Similarly, a self-employed taxpayer may defer payment of 50% of self-employment tax, with 25% due at the end of 2021 and 25% due at the end of 2022.
Net operating losses: The TCJA changed the rules for net operating losses (NOLs). Briefly stated, it disallowed carrybacks relating to NOLs after 2017 and provided an indefinite carryforward period with a limit of 80% of taxable income. The CARES Act repeals these NOL changes and also temporarily eliminates a cap for net losses based on $250,000 of income for single filers and $500,000 for joint filers.
Business interest limit: Under the TCJA, business interest expense deductions were limited to the sum of business interest income and 30% of “adjusted taxable income” (ATI). A provision in the CARES Act temporarily increases the ATI limit to 50% for 2019 and 2020.
Qualified improvement property: Initially, Congress had intended for qualified improvement property placed in service after 2017 to have a 15-year depreciation recovery period, which would make it eligible for special “bonus depreciation.” However, due to a drafting error in the TCJA, the 15-year recovery period for this type of property wasn’t reflected in the statute. Now the CARES Act fixes this problem retroactive to January 1, 2018.
• Eases the excess business loss rules under IRC Section 461(l) for 2018, 2019 and 2020
• Accelerates the ability of corporations to receive refunds of AMT credits to 2019, or 2018 if elected
• Increases the net income limitation for charitable contribution deductions for corporations from 10% to 25% for 2020
Finally, the CARES Act includes numerous provisions signed to help small businesses weather the storm, including hundreds of billions of dollars in emergency funds to cover immediate operating costs and loans through the Small Business Administration (SBA). Extensive improvements to unemployment benefits for individuals were also approved.
The CARES Act also provides significant federal funding for a range of non-tax measures to assist individuals and businesses impacted by the economic effects of COVID-19. While not the focus of this update on the tax relief included in the CARES Act, some of the key programs include:
We’ve attached a helpful reference sheet on the CARES Act related to tax relief associated with the recent stimulus package. You can download the reference sheet here.
Harper Pearson has taken measures to achieve our first priority of protecting the health and safety of our employees, clients, and the community at large. Our office will remain open for business, but access to our office will be modified as follows:
1. We encourage clients to send information electronically or via a delivery service.
2. Please contact us at firstname.lastname@example.org or call our office directly at 713.622.2310 if you need assistance.
3. There will be someone at our office from 8:00 am to 5:00 pm to meet with you if necessary.
4. On June 1st, we will begin a phased return of employees to our offices. While we encourage our clients to continue communicating by telephone, email, or delivery service, we will have the ability to meet clients in our office as needed. We are requiring all employees, vendors, and clients to acknowledge a statement regarding COVID-19 and to wear a mask to gain access to our offices. Once in our conference room, the mask may be removed with the practice of social distancing.
For those Harper Pearson clients practicing social distancing, or you do not feel comfortable coming to our office in person, these options are available to you:
• Email remains the most effective option for electronic communication.
• Electronic document sharing may be arranged using Harper Pearson’s secure portal. If you would like to be set up on the firm’s portal, please contact Shannon Allison at email@example.com or your Harper Pearson contact. An electronic signature of tax returns is available using RightSignature.
Your Harper Pearson contact can also set-up a virtual meeting, conference call, and video conferencing with you as an alternative to in-person meetings. You can also send documents via FedEx, UPS, USPS, or any courier service. Please coordinate this with your Harper Pearson contact. For more information, please contact us at firstname.lastname@example.org or call our office directly at 713.622.2310.