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Coronavirus (COVID-19): Tax relief for small businesses

Businesses across the country are being affected by the coronavirus (COVID-19). Fortunately, Congress recently passed a law that provides at least some relief. In a separate development, the IRS has issued guidance allowing taxpayers to defer any amount of federal income tax payments due on April 15, 2020, until July 15, 2020, without penalties or interest. 

New law
On March 18, the Senate passed the House’s coronavirus bill, the Families First Coronavirus Response Act. President Trump signed the bill that day. It includes:

  • Paid leave benefits to employees,
  • Tax credits for employers and self-employed taxpayers, and
  • FICA tax relief for employers.

Tax filing and payment extension

In Notice 2020-18, the IRS provides relief for taxpayers with a federal income tax payment due April 15, 2020. The due date for making federal income tax payments usually due April 15, 2020 is postponed to July 15, 2020.

Important: The IRS announced that the 2019 income tax filing deadline will be moved to July 15, 2020 from April 15, 2020, because of COVID-19.

Treasury Department Secretary Steven Mnuchin announced on Twitter, “we are moving Tax Day from April 15 to July 15. All taxpayers and businesses will have this additional time to file and make payments without interest or penalties.”

Previously, the U.S. Treasury Department and the IRS had announced that taxpayers could defer making income tax payments for 2019 and estimated income tax payments for 2020 due April 15 (up to certain amounts) until July 15, 2020. Later, the federal government stated that you also don’t have to file a return by April 15.

Of course, if you’re due a tax refund, you probably want to file as soon as possible so you can receive the refund money. And you can still get an automatic filing extension, to October 15, by filing IRS Form 4868. Contact us with any questions you have about filing your return.

Any amount can be deferred

In Notice 2020-18, the IRS stated: “There is no limitation on the amount of the payment that may be postponed.” (Previously, the IRS had announced dollar limits on the tax deferrals but then made a new announcement on March 21 that taxpayers can postpone payments “regardless of the amount owed.”)

In Notice 2020-18, the due date is postponed only for federal income tax payments for 2019 normally due on April 15, 2020 and federal estimated income tax payments (including estimated payments on self-employment income) due on April 15, 2020 for the 2020 tax year.

As of this writing, the IRS hasn’t provided a payment extension for the payment or deposit of other types of federal tax (including payroll taxes and excise taxes).

Contact us

This only outlines the basics of the federal tax relief available at the time this was written. New details are coming out daily. Be aware that many states have also announced tax relief related to COVID-19. And Congress is working on more legislation that will provide additional relief, including sending checks to people under a certain income threshold and providing relief to various industries and small businesses.

We’ll keep you updated. In the meantime, contact us with any questions you have about your situation.

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Adjusting your financial statements for COVID-19 tax relief measures

The Coronavirus Aid, Relief, and Economic Security (CARES) Act, signed into law on March 27, 2020, contains several tax-related provisions for businesses hit by the novel coronavirus (COVID-19) crisis. Those provisions will also have an impact on financial reporting.

Companies that issue financial statements under U.S. Generally Accepted Accounting Principles (GAAP) are required to follow Accounting Standards Codification (ASC) Topic 740, Income Taxes. This complicated guidance requires companies to report the effects of new tax laws in the period they’re enacted. As a result, companies — especially those that issue quarterly financial statements or that have fiscal year ends in the coming months — are scrambling to interpret the business tax relief measures under the new law.

Overview of business tax law changes

The CARES Act suspends several revenue-generating provisions of the Tax Cuts and Jobs Act (TCJA). These changes aim to help improve operating cash flow for businesses during the COVID-19 crisis. Specifically, the new law temporarily scales back TCJA deduction limitations on:

  • Net operating losses (NOL),
  • Business tax losses sustained by individuals,
  • Business interest expense, and
  • Charitable contributions for corporations.

The CARES Act also accelerates the recovery of credits for prior-year corporate alternative minimum tax (AMT) liability. And it fixes a TCJA drafting error for real estate qualified improvement property (QIP). The fix retroactively allows a 15-year depreciation period for QIP, making it eligible for first-year bonus depreciation in tax years after the TCJA took effect. The correction allows businesses to choose between first-year bonus depreciation for QIP expenditures and 15-year depreciation.

These changes are subject to numerous rules and restrictions. So, it’s not always clear whether a business will benefit from a particular change. In some cases, businesses may need to file amended federal income tax returns to take advantage of retroactive changes in the law. In addition, a company’s tax obligations may be impacted by relief measures provided in the states and countries where it operates.

Impact on financial reporting

Under ASC 740, companies must adjust deferred tax assets and liabilities for the effect of a change in tax laws or tax rates. On the income statement side, the adjustment is included in income from continuing operations.

If your business follows U.S. GAAP, you’ll need to account for the effect of the CARES Act on deferred tax assets and liabilities for interim and annual reporting periods that include March 27, 2020 (the date the law was signed by President Trump). Also, certain provisions, such as the modified NOL and business interest deduction rules, may impact a company’s current taxes payable. Unfortunately, some companies may have difficulty accurately forecasting income or loss in the current period due to the economic disruptions caused by COVID-19.

Stay tuned

In the coming months, the Financial Accounting Standards Board (FASB) plans to focus on supporting businesses as they navigate the impact of the COVID-19 crisis and providing guidance to clarify financial reporting issues as they arise. We are atop the latest developments and can help guide you through your tax and financial reporting challenges.

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Relief from not making employment tax deposits due to COVID-19 tax credits

The IRS has issued guidance providing relief from failure to make employment tax deposits for employers that are entitled to the refundable tax credits provided under two laws passed in response to the coronavirus (COVID-19) pandemic. The two laws are the Families First Coronavirus Response Act, which was signed on March 18, 2020, and the Coronavirus Aid, Relief, and Economic Security Act (CARES) Act, which was signed on March 27, 2020.

Employment tax penalty basics

The tax code imposes a penalty for any failure to deposit amounts as required on the date prescribed, unless such failure is due to reasonable cause rather than willful neglect.

An employer’s failure to deposit certain federal employment taxes, including deposits of withheld income taxes and taxes under the Federal Insurance Contributions Act (FICA) is generally subject to a penalty.

COVID-19 relief credits

Employers paying qualified sick leave wages and qualified family leave wages required by the Families First Act, as well as qualified health plan expenses allocable to qualified leave wages, are eligible for refundable tax credits under the Families First Act.

Specifically, provisions of the Families First Act provide a refundable tax credit against an employer’s share of the Social Security portion of FICA tax for each calendar quarter, in an amount equal to 100% of qualified leave wages paid by the employer (plus qualified health plan expenses with respect to that calendar quarter).

Additionally, under the CARES Act, certain employers are also allowed a refundable tax credit under the CARES Act of up to 50% of the qualified wages, including allocable qualified health expenses if they are experiencing:

  • A full or partial business suspension due to orders from governmental authorities due to COVID-19, or
  • A specified decline in business.

This credit is limited to $10,000 per employee over all calendar quarters combined.

An employer paying qualified leave wages or qualified retention wages can seek an advance payment of the related tax credits by filing Form 7200, Advance Payment of Employer Credits Due to COVID-19.

Available relief

The Families First Act and the CARES Act waive the penalty for failure to deposit the employer share of Social Security tax in anticipation of the allowance of the refundable tax credits allowed under the two laws.

IRS Notice 2020-22 provides that an employer won’t be subject to a penalty for failing to deposit employment taxes related to qualified leave wages or qualified retention wages in a calendar quarter if certain requirements are met. Contact us for more information about whether you can take advantage of this relief.

More breaking newsBe aware the IRS also just extended more federal tax deadlines. The extension, detailed in Notice 2020-23, involves a variety of tax form filings and payment obligations due between April 1 and July 15. It includes estimated tax payments due June 15 and the deadline to claim refunds from 2016. The extended deadlines cover individuals, estates, corporations and others. In addition, the guidance suspends associated interest, additions to tax, and penalties for late filing or late payments until July 15, 2020. Previously, the IRS postponed the due dates for certain federal income tax payments. The new guidance expands on the filing and payment relief. Contact us if you have questions.

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Beware: Coronavirus may affect financial reporting

The coronavirus (COVID-19) outbreak — officially a pandemic as of March 11 — has prompted global health concerns. But you also may be worried about how it will affect your business and its financial statements for 2019 and beyond.

Close up on financial reporting

The duration and full effects of the COVID-19 outbreak are yet unknown, but the financial impacts are already widespread. When preparing financial statements, consider whether this outbreak will have a material effect on your company’s:

  • Supply chain, including potential effects on inventory and inventory valuation,
  • Revenue recognition, in particular if your contracts include variable consideration,
  • Fair value measurements in a time of high market volatility,
  • Financial assets, potential impairments and hedging strategies,
  • Measurement of goodwill and other intangible assets (including those held by subsidiaries) in areas affected severely by COVID-19,
  • Measurement and funded status of pension and other postretirement plans,
  • Tax strategies and consideration of valuation allowances on deferred tax assets, and
  • Liquidity and cash flow risks.

Also monitor your customers’ credit standing. A decline may affect a customer’s ability to pay its outstanding balance, and, in turn, require you to reevaluate the adequacy of your allowance for bad debts.

Additionally, risks related to the COVID-19 may be reported as critical audit matters (CAMs) in the auditor’s report. If your company has an audit committee, this is an excellent time to engage in a dialog with them.

Disclosure requirements and best practices

How should your company report the effects of the COVID-19 outbreak on its financial statements? Under U.S. Generally Accepted Accounting Principles (GAAP), companies must differentiate between two types of subsequent events:

1. Recognized subsequent events. These events provide additional evidence about conditions, such as bankruptcy or pending litigation, that existed at the balance sheet date. The effects of these events generally need to be recorded directly in the financial statements.

2. Nonrecognized subsequent events. These provide evidence about conditions, such as a natural disaster, that didn’t exist at the balance sheet. Rather, they arose after that date but before the financial statements are issued (or available to be issued). Such events should be disclosed in the footnotes to prevent the financial statements from being misleading. Disclosures should include the nature of the event and an estimate of its financial effect (or disclosure that such an estimate can’t be made).

The World Health Organization didn’t declare the COVID-19 outbreak a public health emergency until January 30, 2020. However, events that caused the outbreak had occurred before the end of 2019. So, the COVID-19 risk was present in China on December 31, 2019. Accordingly, calendar-year entities may need to recognize the effects in their financial statements for 2019 and, if applicable, the first quarter of 2020.

Need help?

There are many unknowns about the spread and severity of the COVID-19 outbreak. We can help navigate this potential crisis and evaluate its effects on your financial statements. Contact us for the latest developments.

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The new COVID-19 law provides businesses with more relief

On March 27, President Trump signed into law another coronavirus (COVID-19) law, which provides extensive relief for businesses and employers. Here are some of the tax-related provisions in the Coronavirus Aid, Relief, and Economic Security Act (CARES Act). 

Employee retention credit

The new law provides a refundable payroll tax credit for 50% of wages paid by eligible employers to certain employees during the COVID-19 crisis.

Employer eligibility. The credit is available to employers with operations that have been fully or partially suspended as a result of a government order limiting commerce, travel or group meetings. The credit is also provided to employers that have experienced a greater than 50% reduction in quarterly receipts, measured on a year-over-year basis.

The credit isn’t available to employers receiving Small Business Interruption Loans under the new law.

Wage eligibility. For employers with an average of 100 or fewer full-time employees in 2019, all employee wages are eligible, regardless of whether an employee is furloughed. For employers with more than 100 full-time employees last year, only the wages of furloughed employees or those with reduced hours as a result of closure or reduced gross receipts are eligible for the credit.

No credit is available with respect to an employee for whom the employer claims a Work Opportunity Tax Credit.

The term “wages” includes health benefits and is capped at the first $10,000 paid by an employer to an eligible employee. The credit applies to wages paid after March 12, 2020 and before January 1, 2021.

The IRS has authority to advance payments to eligible employers and to waive penalties for employers who don’t deposit applicable payroll taxes in anticipation of receiving the credit.

Payroll and self-employment tax payment delay

Employers must withhold Social Security taxes from wages paid to employees. Self-employed individuals are subject to self-employment tax.

The CARES Act allows eligible taxpayers to defer paying the employer portion of Social Security taxes through December 31, 2020. Instead, employers can pay 50% of the amounts by December 31, 2021 and the remaining 50% by December 31, 2022.

Self-employed people receive similar relief under the law.

Temporary repeal of taxable income limit for NOLs

Currently, the net operating loss (NOL) deduction is equal to the lesser of 1) the aggregate of the NOL carryovers and NOL carrybacks, or 2) 80% of taxable income computed without regard to the deduction allowed. In other words, NOLs are generally subject to a taxable-income limit and can’t fully offset income.

The CARES Act temporarily removes the taxable income limit to allow an NOL to fully offset income. The new law also modifies the rules related to NOL carrybacks.

Interest expense deduction temporarily increased

The Tax Cuts and Jobs Act (TCJA) generally limited the amount of business interest allowed as a deduction to 30% of adjusted taxable income.

The CARES Act temporarily and retroactively increases the limit on the deductibility of interest expense from 30% to 50% for tax years beginning in 2019 and 2020. There are special rules for partnerships.

Bonus depreciation for qualified improvement property

The TCJA amended the tax code to allow 100% additional first-year bonus depreciation deductions for certain qualified property. The TCJA eliminated definitions for 1) qualified leasehold improvement property, 2) qualified restaurant property, and 3) qualified retail improvement property. It replaced them with one category called qualified improvement property (QIP). A general 15-year recovery period was intended to have been provided for QIP. However, that period failed to be reflected in the language of the TCJA. Therefore, under the TCJA, QIP falls into the 39-year recovery period for nonresidential rental property, making it ineligible for 100% bonus depreciation.

The CARES Act provides a technical correction to the TCJA, and specifically designates QIP as 15-year property for depreciation purposes. This makes QIP eligible for 100% bonus depreciation. The provision is effective for property placed in service after December 31, 2017.

Careful planning required

This article only explains some of the relief available to businesses. Additional relief is provided to individuals. Be aware that other rules and limits may apply to the tax breaks described here. Contact us if you have questions about your situation.

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CARES Act provides option to delay CECL reporting

Updated accounting rules

The Financial Accounting Standards Board (FASB) issued Accounting Standards Update No. 2016-13, Financial Instruments — Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, in response to the financial crisis of 2007–2008. The updated CECL standard relies on estimates of probable future losses. By contrast, existing guidance relies on an incurred-loss model to recognize losses.

In general, the updated standard will require entities to recognize losses on bad loans earlier than under current U.S. Generally Accepted Accounting Principles (GAAP). It’s scheduled to go into effect for most public companies in 2020. In October 2019, the deadline for smaller reporting companies was extended from 2021 to 2023, and, for private entities and nonprofits, it was extended from 2022 to 2023.

Option to delay

Under the CARES Act, large public insured depository institutions (including credit unions), bank holding companies, and their affiliates have the option of postponing implementation of the CECL standard until the earlier of:

  • The end of the national emergency declaration related to the COVID-19 crisis, or
  • December 31, 2020.

Many public banks have made significant investments in systems and processes to comply with the CECL standard, and they’ve communicated with investors about the changes. So, some may decide to stay the course. But many large banks are expected to take advantage of the option to delay implementation.

Congress decided to provide a temporary reprieve from implementing the changes for a variety of reasons. Notably, the COVID-19 pandemic has created a volatile, uncertain lending environment that may result in significant credit losses for some banks.

To measure those losses, banks must forecast into the foreseeable future to predict losses over the life of a loan and immediately book those losses. But making estimates could prove challenging in today’s unprecedented market conditions. And, once a credit loss has been recognized, it generally can’t be recouped on the financial statements. Plus, there’s some concern that the CECL model would cause banks to needlessly hold more capital and curb lending when borrowers need it most.

Stay tuned

So far, the FASB hasn’t delayed the CECL standard. But the COVID-19 crisis has front-loaded concerns about the CECL standard, prompting critics in both the House and Senate to step up their efforts to block the standard. Contact us for the latest developments on this issue.

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Short Bits

COMP BREAKDOWN

In September 2019 compensation costs for private industry workers averaged $34.77 per hour worked. Wages and salaries averaged $24.38 per hour worked while benefit costs comprised the rest. The cost of benefits was nearly 30% of total compensation, with health insurance comprising 7.5% and paid leave 7.2% of total comp. The average cost for life and disability insurance, though, was less than one-half of 1%.

BONUS TIME

If you are a private industry worker who received a bonus, you’re among the minority. About one of every 10 employees surveyed had access to end-of-year bonuses (generally performance-based) in 2019, while 6% had access to holiday bonuses (typically equal for all staff). Workers in natural resources, construction and maintenance fared better with year-end and holiday bonuses coming in at 15% and 12%, respectively. Service workers fared the worst.

EMPLOYERS SQUEEZED

Some employers are still finding rough going trying to fill job openings. According to the Bureau of Labor statistics, there were 7.3 million job openings on the last business day of October 2019 and about 5.9 million unemployed people during October, a ratio of 0.8 unemployed people to job openings. Since January 2018, that ratio has ranged between 0.8 and 1.0.

UNPAID CARE

Some 40 million Americans age 15 and over provide unpaid eldercare, and 58% of these providers are women. About one in four of the caregivers were between ages 55 to 64, 21% were ages 45 to 54 and nearly 18% were age 65 and older. More than 8 million eldercare providers also had children living at home.

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Question and Answer

Question:

My company has problems keeping employees, a problem that has escalated this year. What can I do?

Answer:

Record low unemployment has made this a job seeker’s market, but a history of problems retaining employees might suggest that you take a new look at your company’s practices. Start by comparing your salaries, benefits and advancement opportunities to what your competitors offer. Poll your employees anonymously to ask how they view their work environment and work-life balance. Look at your benefits to find gaps you may be able to fill. Throughout the process and after, communicate frequently and effectively.

Question:

I hired a person to do my housekeeping. Do I have to pay or deduct employment and other taxes for this person?

Answer:

This will depend on a number of factors. According to the IRS, housekeepers and other household workers like babysitters and gardeners are your employees if you control their work and how they do it. If you have a household worker you expect to pay more than $2,200 in 2020, you’ll typically have to pay 7.65% of cash wages for Medicare and Social Security taxes, and withhold the same amount (plus income taxes if they ask you to) from the employee’s pay. Talk to your tax professional to learn more.

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Client Profile

Rosa has a large estate that greatly benefitted from the federal tax changes at the end of 2017, but she worries about the tax breaks expiring and estate and gift tax exemptions reverting to 2017 levels. What should she do?

First, Rosa can worry less about the tax expiring because the IRS recently announced that taking advantage of the increased gift and estate tax basic exclusion amounts in effect since 2018 won’t result in a clawback if the exclusion amount drops back to pre-2018 levels in 2026, as scheduled.

A special rule will allow estates to compute their estate tax credit using the higher of the basic exclusion amount applicable to gifts made during life or the exclusion applicable on the date of death. This should calm Rosa’s worries.

Even with this increased certainty, Rosa might still take advantage of the annual gift tax exclusion, which in 2020 is $15,000 per donor per recipient to as many people as she would like until reaching the lifetime limit. And she should also consult a person experienced with estate planning issues.

Client Profile is based on a hypothetical situation. The solutions we discuss may or may not be appropriate for you.

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SECURE for Business

The SECURE Act also creates big changes for companies offering qualified retirement plans. Here are a few of them:

Easier Access

More small businesses are eligible to start a qualified retirement plan for employees, as the new law allows two or more unrelated employers to join a pooled employer plan. More parttime workers are eligible to make elective deferrals, depending on their length of tenure, and plan sponsors have a new safe harbor when offering annuities.

New Credits

Employers will also see higher tax credits for plan startup costs and up to a $500 credit for startup plans that include automatic enrollment in 401(k) plans and SIMPLE IRAs. The safe harbor for the automatic enrollment escalation cap rises from 10% to 15% of pay, while certain penalties for failing to file plan returns increase.

Talk to your tax and plan professionals to learn more.