In a recent ruling Notice 2020-32 the IRS stated the business owner will not be able to deduct the payroll costs, certain employee benefits such as healthcare and other benefits, as well as interest on mortgage obligations, rent, and utilities.
The recent ruling Notice 2020-32 provides guidance regarding the deductibility for Federal income tax purposes of certain otherwise deductible expenses incurred in a taxpayer’s trade or business when the taxpayer receives a loan pursuant to the Paycheck Projection Program.
Specifically, this notice clarifies that no deduction is allowed under the Internal Revenue Code for an expense that is otherwise deductible if the payment of the expenses results in forgiveness of a covered loan pursuant to section 1106(b) of the CARES Act.
On Friday March 27th, 2020 Congress passed a $2 trillion stimulus bill to address the economic crisis caused by the coronavirus pandemic.
The first part of this Act is direct stimulus payments to many taxpayers. Individuals are eligible for up to $1,200 and couples would receive up to $2,400. In additional you will receive $500 per child.
But not everyone will receive these stimulus payments. There are phase-out based on Adjusted Gross Income:
Single taxpayer phase out starts at $75,000 of adjusted gross income and reduced by $5 for every additional $100 of adjusted gross income. Those making more than $99,000 will not receive anything.
Married taxpayers phase out starts at $150,000 of adjusted gross income and reduced by $5 for every additional $100 of adjusted gross income. Those couple making more than $198,000 will not receive anything.
Below are the charts giving in $5,000-$10,000 increments. There are also several websites that have an actual calculator.
|Stimulus Checks (Single)|
|Stimulus Checks (Married)|
If you have already filed your 2019 income tax returns, the IRS will base the adjusted gross income off of 2019. If not, do not worry; they will base off your 2018 tax return adjusted gross income.
The payments will be made between now and December 31, 2020. If you have provided direct deposit information on your return, it will be direct deposited.
As you prepare your 2020 tax return, you will have to recalculate the amount you were actually owed based on 2020 tax data. If the advanced payment was less than what you are owed in 2020 the excess will be treated as a credit on 2020 tax return. In reverse if your 2020 adjusted gross income is greater than 2018 or 2019, you will have to add the amount to your 2020 tax liability.
The CARE Act included $350 billion in loans for companies with 500 employees or fewer. This includes non-profit, self-employed people as well as hotel and restaurant chains with up to 500 workers per location.
These are loans to cover payroll, rent, and other expenses. That can be a forgivable loan if you meet the criteria.
The covered period is February 15, 2020 through June 30, 2020. These “paycheck protection loans” are limited to the LESSER of:
Sum of the average monthly “payroll costs” for 1 year period ending on the date the loan was made or 10 million. “Payroll costs” include:
Payroll costs DO NOT include:
These loans will have a maximum maturity of 10 years and the rate of interest will not exceed 4%. Proceeds may be used to cover payroll, mortgage payments, rent, utilities, and other debt service requirements. The standard fees imposed under Section 7 of the Small Business Act are waived. There is NO personal guarantee required by the business owner.
In a separate section of the CARES Act, a portion of the “paycheck protection loans” are to be forgiven on a tax-free basis if you meet the criteria.
The amount to be forgiven is the sum of the following payments made by the borrower during the 8-week period beginning on the date of the loan:
There may be a reduction in the amount that is forgiven due to reducing the workforce during the 8-week period when compared to either 2019 or 2020; or reduction in salary or wages paid to an employee who has earned less than $100k in annual salary by more than 25% during that covered period.
The small business can avoid this reduction if they rehire or increase the employee’s pay within the allotted time period.
The Act expanded access to Economic Injury Disaster Loans under Section 7(b)(2) of the Small Business Act. This program provides small businesses with working capital of up to $2 million to help overcome the temporary loss of revenue they are experiencing. This is administered through the S.B.A. (U.S. Small Business Administration).
This loan does not include payroll costs.
The operation of the business was fully or partially suspended during any quarter during 2020 due to order from an appropriate government authority resulting from COVID-19, or
The business remained open, but during any quarter in 2020, gross receipts for that quarter were less than 50% of what they were for the same quarter in 2019. The business will be entitled to a credit for each quarter, until the business has a quarter where it’s recovered. The receipts exceed 80% of what there were for the same quarter in the prior year.
The refundable credit is applicable for all wages paid between March 12th, 2020 and before January 1, 2021. The credit will be computed on a quarterly basis and equals 50% of qualified wages including health benefits, up to $10,000 paid to each employee ($5,000 in actual credit).
NOTE: If the employer takes out a “payroll projection loan” no employee retention credit will be available.
For the period March 27, 2020 and ending before January 1, 2021, an employer may elect to defer the payment of the employer portion of Social Security-6.2%.
Similarly, a self-employed taxpayer can defer paying 50% of their social security as well.
The amount deferred is to be paid back as follows:
NOTE: Employers and self-employed individuals cannot use this delay of payment if they have taken out a “payroll protection loan”.
A taxpayer is allowed to take a “coronavirus related distribution” of up to $100,000 in the year 2020 and there will be no penalty.
The definition of “coronavirus related distribution”:
The income tax due on this distribution can be spread over a 3-year period beginning with 2020. The taxpayer can also choose to pay back the distribution over the 3 year period and avoid any tax consequences.
The CARES Act allows an individual to make a cash contribution of up to $300 and deduct the contribution “above the line” in computing their adjusted gross income. Thus, if a taxpayer does not itemize, they are able to deduct up to $300 above the line.
The CARES Act has many components to assist business owners. Please contact our office if you are needing to determine which fits your business the best. My staff and I are here to help!
On a personal note it is wonderful to see your posts on Facebook and Instagram. Parents and children spending quality time together. Sometimes we get lost in all the hustle and bustle. This pandemic has provided a time to step back and appreciate what we have.
We will get through this together!
Earlier today, IRS rolled out additional information on its operations, entitled the People First Initiative. While the document is fairly dense, here is what we see as the most salient features for enrolled agents: