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Payroll Tax Credit Eligibility

The CARES Act’s new Employee Retention Credit is an alternative to receiving a loan through the Paycheck Protection Program (PPP). Businesses may choose the credit or PPP loan, if available. Unlike the PPP, the tax credit does not have a limit on the size of your business, making it an option for larger companies that don’t qualify for the PPP.

The Employee Retention Credit helps businesses to retain employees during the current economic crisis. The credit equals 50% of qualified wages and qualified allocable health care expenses paid to staff members between March 12, 2020 and December 31, 2020. The maximum credit per employee is $5,000 per quarter during that period.

In order to be eligible for this credit, however, the IRS states you must meet one of two qualifying factors. The first is if your operations have been suspended in any way because of the government’s restrictions on commerce, travel, or group meetings due to COVID-19. The other eligibility factor is if you experience a “significant decline” in gross receipts for the quarter. The IRS defines a significant decline as gross receipts totaling less than 50% than what they were in the same quarter for 2019. Once gross receipts reach 80% of the previous year’s quarterly numbers eligibility for any credit ends.

The employer is not required to pay qualified wages if they qualify for the program, and can choose to opt out of claiming the Employee Retention Credit.

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Client Profile

At the beginning of the year, Phil, age 40, took out a 401(k) loan to use as a down payment on his new home. When the coronavirus hit, Phil was laid off from his job at a travel tech firm as flights all but came to a standstill.

Along with the bad news of losing his job, Phil also found out that his outstanding 401(k) loan balance of $20,000 will be due in full by April 15, 2021. What options are available to Phil?

Phil must either repay the full loan balance by the deadline or treat the amount as a distribution. In the first scenario, he must save over $2,000 each month in order to pay back the loan by April 2021.

In the second scenario, Phil will have to pay state and federal income tax on the money withdrawn. However, thanks to the Cares Act, the 10% penalty for the withdrawing the funds before age 55 will be waived. Depending on how quickly he returns to work, the distribution may even bump him up into a higher tax bracket.

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

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CARES Act Retirement Plan Changes

The Coronavirus Aid, Relief, and Economic Security (CARES) Act offers relief to individuals with some major changes to retirement plans in the near-term. These temporary new rules apply to both current retirees and those saving for future retirements.

RMDs SUSPENDED FOR 2020

Under normal circumstances, individuals with IRAs or 401(k)s who are over the age of 72 must take required minimum distributions (RMDs) each year.* Your RMD is calculated by the life expectancy factor assigned to your age, then divided by your retirement plan’s account balance from December 31 of the prior year.

The CARES Act, however, has created a provision that lifts RMDs for 2020. Depending on your tax bracket, it may or may not make sense to take out the money.

EARLY WITHDRAWAL PENALTY ELIMINATED

Tapping retirement funds is something we should all try to avoid, but sometimes circumstances leave us no choice. That is why the government has waived penalties when you take out an early distribution from an IRA or 401(k) before retirement age. While income tax is still due, the 10% penalty is removed for any distribution up to $100,000 from January 1, 2020 to December 31, 2020. This is meant to help with cash flow for those who have been financially impacted by the pandemic.

HIGHER 401(k) LOAN LIMITS

If you have been impacted by COVID-19 in some way, you may qualify for a larger 401(k) loan amount. Typically, you can borrow up to $50,000 or half of your balance amount. Between March 27 and December 31, 2020, however, you can borrow up to $100,000 or 100% of your 401(k) account balance, if less, as part of the CARES Act provisions.

Qualifying circumstances include you, your spouse, or dependent being diagnosed with COVID-19 or financial consequences from the pandemic like losing your job. Consult your tax advisor on how to qualify and what type of certification you need.

*Age 70 is a new age limit effective 2020.

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Should You Refinance Your Mortgage?

Refinancing your mortgage could result in a lower monthly payment, especially with interest rates at a near historic low. Here’s what to consider before you decide:

Rule of Thumb

It usually makes sense to refinance if you can save 75 basis points, but consider the whole package, including points paid and closing costs.

Job Stability

With record unemployment numbers in just a matter of weeks, job stability plays a huge role in qualifying for a refinance – even if you have a substantial amount of equity in your home.

Shop Around

Although refinancing is on the minds of many homeowners, check your credit score before you apply. Some lenders are raising their minimum credit score requirements. While its always smart to shop around for the best deal, today’s environment has banks strictly enforcing expanded qualification guidelines.

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Make Sure Your Loan is Forgiven – Update

Updated on June 8th – On June 5th, President Trump signed into law the Paycheck Protection Program Flexibility Act of 2020, which amends the Small Business and CARES Act. This action provides more time for borrowers to qualify for loan forgiveness and eases the restrictions on how much of the forgivable portion of the loan proceeds must be used for payroll costs. Below are the noteworthy changes that affected the original article: 
 

  • Loan Maturity Date Extended. Borrowers now have five years, up from two, after the forgiveness period to repay any portion of loans that were not forgiven. Also, the deferment period is extended from six months to the date the borrower’s forgiveness amount is determined.
  • Eligibility Restrictions on Forgivable Expenses Eased. Borrowers now have 24 weeks from the loan origination date or until December 31, 2020 to qualify for loan forgiveness, which is extended from eight weeks. Loan application deadline remains June 30, 2020.
  • Deadline Extended for Measuring FTE and Salaries. The deadline to fully return Full Time Equivalent “FTE” headcount and salaries to February 15, 2020 levels, has been extended to December 31, 2020. This deadline must be met in order to eliminate the reductions for loan forgiveness. There is are two exceptions: The first is when the borrower is able to document an inability to rehire individuals or inability to hire similarly qualified employees for unfilled positions. The second exception is when the borrower cannot fully operate due to inability to meet safety standards for employees and customers.
  • Payroll Cost Allocation Reduced. For loan forgiveness, 60% of the loan must be used for payroll costs, which is down from 70%. The legislation also clarified that borrowers can defer 50% of the employer’s share of payroll taxes until 2021 and the remaining 50% until 2022.

Make Sure Your Loan is Forgiven

The Coronavirus Aid, Relief, and Economic Security (CARES) Act provided for small businesses to receive low-interest loans under the Paycheck Protection Program (PPP). At this writing, Congress is considering additional billions in funding to replenish the depleted program. Meanwhile, here is an overview of the program.

WHO CAN APPLY

Loans may be available to businesses with fewer than 500 employees that were in operation on February 15. This includes not-for-profits, veterans’ organizations, Tribal concerns, self-employed individuals, sole proprietorships, and independent contractors. According to the SBA and Treasury, some businesses with more than 500 employees in certain industries also can apply for loans.

Specific loan amounts are calculated as two months of a company’s pre-coronavirus average monthly payroll costs plus an extra 25%. The PPP loans have a 1% interest rate and a five-year repayment term, which is deferred for the first six months.

LOAN FORGIVENESS

The loan may be fully, or partially forgiven provided the company appropriates at least 60 percent of the loan to cover payroll, including benefits costs, within eight weeks. Additionally, not more than 40 percent of the loan may be attributable to nonpayroll costs, including mortgage interest, rent and some utilities.

If you reduce your staff or their wages, the rate of forgiveness on your loan lowers – meaning you will be on the hook to repay ineligible funds. Business owners must rehire any laid off employees by December 31 and must keep at least 90% of their original staff on the payroll through at least September 30.

Before applying for the Paycheck Protection Program, consult with your tax advisor to make sure you can feasibly meet all of the requirements within your current business outlook and that you fully understand the rules. Keep in mind that if you are unable to meet every requirement perfectly, your loan may not be forgiven and you will be responsible to pay it back within five years.

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Tax Deadline Extension

As part of the federal government’s response to the economic impact of the coronavirus, Tax Day has been moved from April 15, 2020 to July 15, 2020 – a three-month extension. Both individuals and businesses have until this new deadline to both file their taxes and make a payment on anything owed. Quarterly estimated tax payments that were set to be due on June 15 have also been pushed back to July 15. Additionally, no penalties or interest will accrue during the extension period.

Also remember that state tax filing deadlines don’t necessarily match up to the federal changes.

Your tax advisor can confirm any changes to the state process and help you determine the best overall course of action for filing. If you’re likely to receive a refund, for example, it’s smart to file sooner rather than later.

Given so many sweeping changes in the tax landscape, working with your tax advisor is more important than ever to make sure you don’t miss out on any potential benefits from the IRS. While you may be accustomed to in-person meetings to go over your tax documents, help is still available via remote meetings.

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Question and Answer

Question

My company is facing a retirement plan audit. How do I best prepare?

Answer

First, understand that besides talking to your tax professional, there are few similarities between an overall company audit (see accompanying article) and a retirement plan audit. You may want to consult a plan consultant to gather necessary documents and begin a series of tests. This includes doing compliance testing to ensure your highly compensated employees don’t contribute more than allowed to your company plan. You’ll also want to check that all eligible employees know they can contribute, you follow IRS and other government rules when offering automatic plan tools, and the plan is fulfilling other fiduciary responsibilities.

Question

I’m a self-employed delivery driver who volunteers to deliver meals to seniors and the disadvantaged. Can I deduct the cost of my time?

Answer

No, you can’t deduct your time, but you can deduct your mileage. In 2020, the IRS allows taxpayers to deduct the standard mileage rate of 14 cents per each mile their vehicles were used for eligible charitable work. Incidentally, the business standard mileage rate is 57.5 cents and the mileage rate for driving to and from medical care is 17 cents in 2020. Talk to your tax professional for more information, including whether you’ll need to itemize on your return to get these tax breaks.

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Short Bits

Employer Costs

Compensation costs for private industry workers increased 2.7% in 2019 compared to an increase of 3% the year before, according to the Department of Labor. Wages and salaries increased 3% in 2019, a tick under the 3.1% rise in 2018. Benefit costs rose 1.9%, with health insurance benefits rising 2.2%. That was also lower than 2018, when benefit costs increased 2.6%.

Boomers Unprepared

The Insured Retirement Institute (IRI) reports that about 45% of Baby Boomers have saved nothing for retirement. So it’s not surprising one-third of baby boomers plan to retire at age 70 or older or not at all, and another third of employed boomers ages 67 to 72 postponed retirement, according to IRI.

Job Happy

Looking for your first job or to advance your career? Follow the jobs. According to the Bureau of Labor Statistics, Texas, California and Florida created more than 800,000 new jobs from December 2018 to December 2019. Texas registered the highest number of new jobs at 342,800, but 25 other states also saw an increase in jobs. Utah, Idaho and Arizona led the way in percentage increases.

Income Up

The median weekly income of fulltime workers rose a healthy 4.0% in 2019, increasing from $900 in 2018 to $936 last year. Women saw their weekly median earnings rise to $843, which was 82.5% of the $1,022 median for men. While men saw their income rise 2.9%, women had a 6.2% increase last year, making up a little lost ground. Inflation, as measured by the Consumer Price Index for All Urban Consumers (CPI-U) over the same period, rose just 2.0%.

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How to Correct Tax Filing Mistakes

The last thing most taxpayers want to think about so soon after the tax-filing deadline is filing another tax return. Yet, that’s something you’ll have to do if you made an error and a task you’ll want to perform if you shorted yourself. Here’s what you need to know if you have to file an amended return due to a mistake on your tax return.

What to Do

First, contact your tax preparer if you had that person’s help to prepare and file forms. Next, whether the error was in the IRS’s favor or yours, file Form 1040-X, Amended U.S. Individual Income Tax Return to report the error. Include copies of forms and schedules with the errors or forms that you didn’t include with your original return.

Generally, for a credit or refund, you must file Form 1040-X within three years of the date you filed your original return or two years after the date you paid the tax, whichever is later. Don’t forget to include a check for any amount underpaid, plus potential penalties and interest.

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Steps to a Successful Company Audit

While few companies will experience tax audits, all public and some closely held companies should undergo periodic company audits to stay on top of their businesses. This is an exercise that can fray nerves without preparation. But there are steps you can take to ensure audit success.

GROUNDWORK

Start by selecting your auditor. If your tax professional doesn’t offer this service, ask for a referral experienced with your business type and size. Next, pick your company liaison. This person could be an owner of a small, closely held business or a controller in a larger company.

Talk to your auditor to learn which documents, papers and files you’ll need for the review, and then compare any previous audit’s findings with actions taken. Learn where efficiencies increased and where they didn’t. Remember, an audit is only as good as the actions you undertake to correct identifiable deficiencies.

COMMUNICATION

An audit needs accurate information, so take your emotions out of the auditor relationship and be open and honest about your business. Communicate with your auditor each week to ensure deadlines are met, and expect a written report when the audit is completed.

You have a right to disagree with the audit in writing if you run a public company, and the freedom to take it or leave it if you own a privately held business. Ultimately, a properly conducted audit should help you limit risk, create efficiencies and even increase profits.