Act Now to Take Advantage of SBA Loans & Payroll Tax Incentives

Apr 03, 2020

In light of the novel coronavirus (COVID-19) global pandemic, many small-to-medium-sized businesses are struggling to manage revenue losses amid prolonged economic uncertainty.  To offset the pandemic’s financial impacts, Congress has passed several stimulus bills, including the Families First Coronavirus Response Act and the Coronavirus Aid, Relief, and Economic Security (CARES) Act, which includes provisions that can provide for increased cash flow as well as tax savings. Businesses should quickly consider how these provisions could help their companies during this uncertain time to ensure they are maximizing available benefits.

SBA Paycheck Protection Program

This $350 billion forgivable loan program, included in the CARES Act, significantly expands which organizations are eligible for Small Business Administration (SBA) loans. For organizations facing financial strain as a result of COVID-19, these loans can help offset a variety of costs.

What can the loan be used for? 
The loan can cover costs including payroll, the continuation of health care benefits, employee compensation (excludes compensation in excess of $100,000 on an annual basis), mortgage interest obligations, rent or lease payments, utilities, and interest on debt incurred before the covered period.

Who is eligible for the program? 
To qualify for the program, businesses must have either fewer than 500 employees (including full time, part-time and “other” employees), meet the SBA’s size standards, or have less than $15 million of tangible net worth and less than $5 million of average net income in the last 2 years. There are some special eligibility rules for businesses in the hospitality and dining industries.

How much can a business borrow?
The maximum amount for these loans is two times the average total monthly payroll costs, or up to $10 million. The interest rate may not exceed 4%. Businesses can also defer payment of the principal, interest, and fees for six months to one year.

Is there loan forgiveness?
Yes, provided your business meets certain conditions. Your business will be eligible to apply for loan forgiveness equal to the amount you spent during an eight-week period after the loan closing date on:​

  • Payroll costs
  • Interest on mortgages
  • Payments of rent
  • Utility payments

Principal payments of mortgage payments will not be eligible for forgiveness.

How do you apply?
Applications and underwriting are handled by SBA-approved banks. While documentation requirements will vary between institutions, we would expect them to include the following:

  • Current personal financial statement
  • Latest available personal tax return
  • Latest available business tax return
  • Latest available internal 2019 YE financials
  • YTD internal 2020 financials
  • A spreadsheet detailing the following:
    • List of all full-time employees with eight weeks salary + payroll taxes
    • Cost of two months of rent with copies of leases
    • Cost of two months of mortgage interest with a copy of loan payments
    • Cost of two months of utility costs with a copy of utility payments

What is required to be eligible?
Borrowers will need to include a Good-Faith Certification that:

  • The loan is needed to continue operations during the COVID-19 emergency.
  • Funds will be used to retain workers and maintain payroll or make mortgage, lease and utility payments.
  • The applicant does not have any other application pending under this program for the same purpose.
  • From February 15, 2020, until December 31, 2020, the applicant has not received duplicative amounts under this program.

Are there any other considerations to be aware of?

  • Given these very limited requirements for borrowers, we may see additional guidance from the SBA on how banks should be underwriting these loans.
  • Additionally, the CARES Act does not appear to have overridden the SBA’s “affiliation” rules. Entities are considered “affiliates” when they are controlled by or under common control of another entity. This classification generally includes private equity owners.  Business cannot exceed the size thresholds for either the primary industry of the business alone or the industry of the business and its affiliates, whichever is greater. For groups of affiliates that operate in different industries—a typical case for private equity portfolio companies—industry code is based on the primary income-producing entity. However, there is some ambiguity in the text of the CARES Act, so additional guidance may be forthcoming.

Employee Retention Credit

The CARES Act provides eligible employers with a refundable credit against payroll tax liability.

How much does the credit cover?
The credit is equal to 50% of the first $10,000 in wages per employee (including the value of health plan benefits).

Who is eligible for the credit?
Eligible employers must have carried on a trade or business during 2020 and satisfy one of two tests:

  • Business operations are fully or partially suspended due to orders from a governmental entity limiting commerce, travel, or group meetings.
  • A year-over-year (comparing calendar quarters) reduction in gross receipts of at least 50% – until gross receipts exceed 80% year-over-year.

For employers of more than 100 employees, only wages for employees who are not currently providing services for the employer due to COVID-19 causes are eligible for the credit. For employers of 100 or fewer employees, qualified wages include those for any, regardless of if the employee is providing services.

Employers receiving a loan under the SBA Paycheck Protection Program are not eligible for this credit.

Delay of Employer Payroll Taxes

The CARES Act postpones the due date for employers and self-employed individuals for payment of the employer share of taxes related to Social Security.

When are the deferred payments due?
The deferred amounts are payable over the next two years – half due December 31, 2021, and half due December 31, 2022.

Who is eligible for the deferral?
All businesses and self-employed individuals are eligible. However, employers who receive a loan under the SBA Paycheck Protection Program and whose indebtedness is forgiven are not eligible for the payroll tax deferral.

How We Can Help

Small to medium-sized businesses have many potential avenues—including the SBA loan program and payroll tax incentives—to help offset costs during this uncertain time. However, navigating the complex loan application process is a daunting task. The payroll tax provisions in the CARES Act interact with the SBA loan provisions, adding to the complexity.

In the immediate term, we can assist in analyzing which approach will be the most beneficial for your employees and your company. Those seeking SBA loans will need to move quickly to get their loans approved and funded. We can help you navigate the required paperwork and help organize the necessary information in an expedited manner—so you can boost your cashflow ASAP.

In addition to maximizing these available options, there are also beneficial income tax provisions to claim on income tax returns, including 2019 returns. We can assist companies in determining possible cash tax refunds through net operating loss (NOL) carrybacks and quick refunds of 2019 taxes already paid. Contact your William Vaughan Company advisor today!

 

 

Categories: Other Resources, Tax Planning

The CARES Act: What You Need to Know

Mar 28, 2020

Late Friday, the President signed a bipartisan relief bill entitled the “Coronavirus Aid, Relief, and Economic Security Act” or the CARES Act. The $2 trillion coronavirus response Act is intended to provide relief across America and to keep businesses and individuals afloat during the unprecedented freeze on most American life.

Key Provisions for Businesses

$10,000 Grant awarded within three days under Expansion of SBA Disaster Loan Program (SBA 7(b))
For eligible applicants, small businesses with 500 or fewer employees, sole proprietors, and independent contractors, the CARES Act makes changes to the SBA Disaster Loan program by waiving: 1) rules related to personal guarantees on loans of up to $200,000, 2) the 1 year in business requirement and 3) the requirement that an applicant is unable to find credit elsewhere; and allows lenders to approve applicants based solely on credit scores or other appropriate methods to determine ability to repay.

Applicants can request an emergency advance of up to $10,000 which does not have to be repaid, even if the loan is later denied. Advances are to be awarded within three days of application.

Forgivable Loans under SBA 7(a) Payroll Protection Program
For small businesses, one of the more important sections of the CARES Act is the Paycheck Protection Program. This program gives the SBA the ability to guarantee $350 billion in loans to small businesses via a network of more than 800 banks. The program provides eight weeks of cash-flow assistance to small businesses with 500 employees or fewer, and administration will be handled by banks. Businesses would be well advised to communicate with their lending institutions soon, and all qualifying businesses are eligible without regard to entity type, including sole proprietors and independent contractors.

The low-interest loans are meant to cover payroll costs, paid sick leave, employee salaries, health-insurance premiums, utilities, and rent or mortgage payments. The maximum loan amount is $10 million, maximum maturity is 10 years, and the interest rate on the loans can’t surpass 4%. There is $17 billion available to cover six months of payments for small businesses already using SBA loans. Requirements and further details:

  • A borrower can get an SBA 7(a) forgivable loan and add the outstanding amount of a loan made under the SBA’s Disaster Loan Program (SBA 7(b)) between January 31, 2020, and the date on which such loan may be refinanced as part of this new program.
  • Increased eligibility is eligible for certain small businesses that employ less than 500 employees per physical location of the business. Generally speaking, this provision applies to accommodation and foodservice businesses.
  • Loans are calculated on a formula of the average monthly payroll costs times 2.5 plus any outstanding amount made under the SBA’s disaster loan program as referenced above.
  • SBA will waive the guarantee fee required for a 7(a) loan.
  • SBA will eliminate the requirement that a small business concern is unable to obtain credit elsewhere.
  • A good faith certification from the eligible recipient will be required, stating that the uncertainty of the economic conditions make the loan request necessary to support the ongoing operations of the recipient, acknowledge that the funds will be used to retain workers and maintain a pre-crisis level of full-time equivalent employees or make mortgage payments, lease payments and utility payments.
  • The new program provides a process to allow borrowers to be eligible for loan forgiveness in the amount equal to their payroll costs, health benefits, the interest portion of mortgage payments, rent and utility costs during the 8-week period that begins on the origination date of the 7(a) loan.
  • The amount of debt forgiveness will be reduced proportionally by the number of employees laid off during this time. Any staffing reductions made after February 15, 2020, that are remedied no later than June 30, 2020, shall not impact the amount forgiven.
  • Any amount forgiven shall be excluded from gross income. For most borrowers, these provisions will convert the loan into a tax-free grant upon certification of the incurred costs.

Employee Retention Credit

  • A 50 percent employee retention payroll tax credit for wages paid to employees during the COVID-19 emergency. The fully refundable credit would be available to any business or non-profit that has a furloughed or reduced workforce as a result of forced closure due to a federal, state or local government directive or as a result of quarantining of employees. The credit would also be available to any business that has seen a 50 percent drop in gross receipts.
  • The credit is equal to 50% of “qualified wages,” which includes both actual wages paid plus qualified health plan expenses allocable to those wages.  However, the credit ceases when qualified wages exceed $10,000 per employee.  The maximum credit per employee then is $5,000.
  • The Treasury Department would provide advance payments to get money to businesses more quickly.
  • A special rule applies to eligible small employers (those with 100 employees or less) that provides a 50 percent credit for all wages paid, regardless of whether employees are furloughed or not.
  • The credit would be available to businesses that do not receive the 7(a) payroll protection Small Business Administration loan described above. Business owners would be able to choose whether that SBA loan or employee retention credit is better suited to their situation. Disaster loans under 7(b) are still able to be received in conjunction with the credit.

Delayed Payment of Employer Payroll Tax and Self-Employment Tax
For those businesses who do not receive a 7(a) payroll protection loan from the SBA, a delay of employer Social Security tax (6.2%) and one-half of the self-employment tax (6.2%) is available. Payments that would have been due from the date of the law’s enactment through December 31, 2020, are delayed and split into two equal payments due December 31, 2021, and December 31, 2022.

Net Operating Losses
Firms may take net operating losses (NOLs) earned in 2018, 2019, or 2020 and carry back those losses five years. The NOL limit of 80 percent of taxable income is also suspended, so firms may use NOLs they have to fully offset their taxable income. The Act also modifies loss limitations for non-corporate taxpayers, including rules governing excess farm losses, and makes a technical correction to the treatment of NOLs for the 2017 and 2018 tax years.

Alternative Minimum Tax (AMT)
Firms with tax credit carryforwards and previous alternative minimum tax (AMT) liability can claim larger refundable tax credits than they otherwise could.

Qualified Improvement Property
The CARES act contains a technical correction to a drafting error within the Tax Cuts and Jobs Act (TCJA). This correction changes the life of Qualified Improvement Property (QIP) from 39 years to 15 years and now eligible for 100% bonus depreciation, or immediate expenses. This retroactive for 2018 tax years. This is a substantial retroactive change for any business that had these additions.

Net Interest Deduction
Currently, this limits businesses’ ability to deduct interest paid on their tax returns to 30 percent of earnings before interest, tax, depreciation, and amortization (EBITDA). The Act expands it to 50 percent of EBITDA for 2019 and 2020. This will help businesses increase liquidity if they have debt or must take on more debt during the crisis.

Key Provisions for Individuals

Recovery Rebate Checks
Most single individuals earning less than $75,000 can expect a one-time cash payment of $1,200, with “earning” defined as adjusted gross income. Married couples would each receive a check for $1,200 ($2,400 in total) and families would get $500 per child. That means a family of four earning less than $150,000 can expect a total payment of $3,400. The checks start to “phase down” in amount and disappear completely for single individuals with no children making more than $99,000 and couples without children making more than $198,000. A married couple with two children wouldn’t lose all of their payment until their adjusted gross income exceeded $218,000. The cash payments are based on either your 2018 or 2019 tax filings. People who receive Social Security benefits but don’t file a tax return are still eligible, too.

Extended Unemployment Program
Major changes have been made to unemployment assistance, increasing the benefits and broadening who is eligible. States will continue to pay unemployment to people who qualify. That amount varies state by state. So does the amount of time people can claim it. The Act adds $600 per week from the federal government on top of whatever base amount a worker receives from the state, without a cap based on what the worker actually earned prior to unemployment (meaning an unemployed individual could receive more on unemployment than they earned while working). That boosted payment will last for 4 months. In addition, a new, temporary Pandemic Unemployment Assistance program has been created through the end of this year to help people who lose work as a direct result of the public health emergency. This is designed to aid contractors and freelancers who typically are unable to apply for unemployment.

Retirement Relief
There are several provisions to help individuals who experience financial hardships and disruptions due to COVID-19 to access their own money without penalty. Taxpayers can now take a “coronavirus-related distribution” of up to $100,000 in the year 2020, free from penalty, from their retirement account. Amounts distributed may be repaid at any time over the 3-year period commencing on the date of the distribution. To the extent that amounts are not repaid, the income inclusion can be made ratably over three taxable years beginning with the year of the distribution. Plan participants should very carefully consider whether the use of this provision is in their best interest, particularly considering that a distribution would occur while retirement plan assets are likely at low market valuations. Plan sponsors will need to review plan documents to ensure that their hardship provisions are up-to-date and will allow for emergency withdrawals by individual participants.

In addition, there is a temporary elimination of required minimum distributions. By waiving the required minimum distributions from retirement accounts for individuals who are 72 and older, the CARES Act provides the opportunity for individuals who do not need their money now to hopefully recoup some of what they’ve lost when the markets recover.

Charitable Contributions
The CARES Act encourages individuals to contribute to churches and charitable organizations in 2020 by allowing a deduction of up to $300 of cash contributions regardless of whether they itemize deductions or not.

Student Loans
The Act allows student-loan borrowers to take a 6-month break from making payments on their federally backed student loans. Until Sept. 30, borrowers will not be penalized for late payments. If your employer pays student loans as an employee benefit, they can now provide up to $5,250 in tax-free student loan repayment benefits. That means an employer could contribute to loan payments and workers wouldn’t have to include that money as income. Finally, the Act also stops the involuntary collection of student loan debt during this period, including the garnishment of wages, tax refunds, and Social Security benefits.

Health Savings Accounts
Users of health savings accounts or flexible spending accounts will be able to use funds to cover over-the-counter medical products.

Delayed Tax Filings
Individuals have three additional months to file their taxes, with the April 15 deadline pushed back to July 15. No payments are required until July 15, 2020. Individuals who expect refunds would be wise to file quickly, without regard to the July 15 deadline.

Categories: Other Resources, Tax Compliance, Tax Planning

Employers Can Provide Tax-Free Qualified Disaster Payments To Employees

Mar 24, 2020

Employers are scrambling to find ways to help their employees who are impacted by the novel coronavirus (COVID-19). Help is available. Now that the COVID-19 has been declared a national emergency,[1] Internal Revenue Code Section 139 can be used to allow employers to make tax-free payments or reimbursements to employees as “qualified disaster payments.” Below are some frequently asked questions about how employers can use Section 139 immediately to help employees cope with COVID-19.

Q1: What is a “qualified disaster payment”?
A1: Qualified disaster payments are payments that are not otherwise reimbursed by insurance made by an employer to an employee that are reasonably expected by the employer to:

  • Reimburse or pay reasonable and necessary personal, family, living, or funeral expenses incurred as a result of a qualified disaster; and
  • Reimburse or pay reasonable and necessary expenses incurred for the repair or rehabilitation of a personal residence or repair or replacement of its contents to the extent that the need for such repair, rehabilitation, or replacement is attributable to a qualified disaster.

The payments should not include non-essential, luxury, or decorative items or services.

Insight

Wage replacement (such as paid sick or other leave) would not be covered by Section 139, so such payments would still be taxable wages and would remain subject to income and payroll tax withholding and reporting.

Q2: What expenses might be considered to be eligible as a qualified disaster payment with respect to COVID-19?
A2: With respect to COVID-19 circumstances, it appears that employers can pay for, reimburse, or provide in-kind benefits reasonably believed by the employer to result from the COVID-19 national emergency that are not covered by insurance. For example, it appears that employers could pay for, reimburse or provide employees with tax-free payments for over-the-counter medications, hand sanitizers, home disinfectant supplies, child care or tutoring due to school closings, work-from-home expenses (like setting up a home office, increased utilities expense, higher internet costs, printer, cell phone, etc.), increased costs from unreimbursed health-related expenses and increased transportation costs due to work relocation (such as taking a taxi or ride-sharing service from home instead of using public mass transit).

Q3: What is the federal tax treatment of qualified disaster payments?
A3: Qualified disaster payments are federal tax-free to employees and are fully deductible to the employer. Such payments are not considered “gifts.” There is no federal reporting or disclosure, so such payments are not reported on Form W-2 or 1099 and are not subject to federal income or payroll tax withholding.

Q4: What is the state tax treatment of qualified disaster payments?
A4: Generally, state treatment for income tax withholding purposes will mirror the federal treatment of qualified disaster relief payments. That is, states generally exclude qualified disaster relief payments from the definition of wages for state income tax withholding purposes, either expressly or by applying the federal definition of “wages” for state income tax withholding purposes. However, qualified disaster relief payments may still be considered “wages” for purposes of state unemployment insurance tax. Employers should determine on a state-by-state basis whether certain income tax withholding and/or unemployment insurance tax contribution obligations may arise in connection with such payments.

Q5: Is there a cap on how much an employer can provide to an employee as a qualified disaster payment?
A5: No. Section 139 does not impose any limit on the amount or frequency of qualified disaster payments that an employer can make to any individual employee or to all employees in the aggregate.

Q6: Must employers have a written plan to make qualified disaster payments to employees?
A6: No. Employers are not required to have a written program for qualified disaster payments. But having such a program is recommended, so employers can inform employees about the parameters of the employer’s program in the COVID-19 context. Such a program might include a description of who is eligible, what expenses will be reimbursed (perhaps up to a “per employee” maximum), how and when payments will be made, etc.

Q7: Are employees required to substantiate their expenses to prove that they are eligible for qualified disaster payment treatment?
A7: No. Employees are not required to provide receipts or other proof supporting their expenses. However, employers could require such proof as part of its written program, perhaps using rules similar to the long-standing IRS “accountable plan” rules.

[1] COVID-19, was designated as an emergency under the Stafford Act on March 13, 2020. Although there is some debate over the legal technicalities of that declaration, it appears that Section 139 relief has been triggered. Specifically, Rev. Rul. 2003-29 says that for Section 165(i) (which is cross-referenced in Section 139), an “emergency” is treated as a “disaster.” In addition, an IRS Chief Counsel Memorandum dated June 28, 2019, states “A Federally declared disaster includes a major disaster declaration under section 401 of the Stafford Act and an emergency declaration under section 501 of the Stafford Act.”

Categories: Other Resources

Small Business Loans & Grants Available To Overcome COVID-19 Impact

Mar 23, 2020

Monday, March 23, 2020

The Federal Reserve announced today an unlimited expansion of bond purchasing programs to help the U.S. economy due to the near-total shutdown to fight the coronavirus.

Treasury Secretary Steven Mnuchin said is he working closely with the Fed to ensure small businesses get the money they need quickly to survive. The bill in Congress would enable small businesses with 500 or fewer employees to get an SBA-backed grant to cover approximately two months’ payroll and some overhead expenses. Methods to distribute the money quickly are being debated, including an option to route the funds through payroll companies. About 40% of all U.S. businesses use a payroll service to process their employees’ payroll.

Businesses in all U.S. states and territories are currently eligible to apply.

The SBA’s Economic Injury Disaster Loan program (in addition to the potential grant) provides small businesses with working capital loans of up to $2 million to provide economic support to small businesses to help overcome the temporary loss of revenue they are experiencing.

The Fed also announced Monday it will buy certain corporate bonds and said it will “soon” announce a Main Street Business Lending Program. These programs are meant to provide ample availability of loans to small and large businesses on top of any efforts Congress does.

Many businesses have business interruption insurance although there is debate on whether a pandemic would be considered since it is not an act of God. Now is the time to contact your insurance agent to review your policy to understand precisely what you are and are not covered for in the event of an extended incident.

Categories: Other Resources

Federal Aid Package Helps Individuals Affected By Coronavirus

Mar 19, 2020

Provided by BDO Alliance, USA

The Families First Coronavirus Response Act (H.R. 6201),  became law on March 18, 2020. The Act guarantees free testing for the novel coronavirus (COVID-19), establishes emergency paid sick leave, expands family and medical leave, enhances unemployment insurance, expands food security initiatives, and increases federal Medicaid funding.

The Act includes up to 80 hours of emergency paid sick leave for workers who are unable to work while they are sick or complying with COVID-19 restrictions or caring for school-age children due to the closure of schools or child care facilities, as well as paid family and medical leave that employees will be able to use to care for family members (not for personal illness) for up to 12 weeks. The first 10 days of an emergency family and medical leave may be unpaid unless employees opt to use accrued paid time off for those days.

The mandatory paid leave provisions apply to employers with fewer than 500 employees and government employers, with exceptions for health care workers and first responders. Self-employed individuals would be eligible for the new benefits provided under the Act. It is not clear if individuals who have self-employment income from their partnership or limited liability company would be eligible for the new self-employed benefits, as the Act does not specifically address those situations. Employers with 500 or more employees would not be subject to those rules.  Employers who are required to provide paid time off would need to initially bear the costs of paying their employees, but the federal government would provide payroll tax credits to help cover those costs.

Background. Currently, the federal Family Medical Leave Act of 1993 (FMLA) provides eligible employees up to 12 workweeks of unpaid leave a year and requires group health benefits to be maintained during the leave as if employees continued to work instead of taking leave. Employees are also entitled to return to their same or an equivalent job at the end of their FMLA leave. Special rules apply to military personnel.

To be eligible for FMLA, an employee is required to have been employed by their employer for a year, worked for 1,250 hours, and worked in a location where there are 50 other employees within a 75-mile radius. The FMLA applies to all private-sector employers who employ 50 or more employees for at least 20 workweeks in the current or preceding calendar year (including joint employers and successors of covered employers). Many states have enacted laws that are similar to federal FMLA, which apply to smaller employers who may be exempt from federal FMLA. The FMLA also applies to federal, state and local employers. These current provisions remain available for qualifying employees.


Employer Mandates

Emergency Paid Sick Leave. Through December 31, 2020, the Act requires employers with fewer than 500 employees and government employers to provide all employees (including union employees and regardless of how long the individual worked for the employer but excluding health care workers and first responders) with 80 hours (e.g, 10 business days) of emergency paid sick leave for full-time workers (pro-rated for part-time employees or employees with varying work schedules) for employees who are unable to work or telework because the employee:

  • Is subject to a federal, state, or local COVID-19 quarantine or isolation order;
  • Has been advised by a health care provider to self-quarantine because of COVID-19;
  • Is experiencing COVID-19 symptoms and is seeking a medical diagnosis;
  • Is caring for an individual subject to or advised to quarantine or isolation;
  • Is caring for a son or daughter whose school or place of care is closed, or child care provider is unavailable, due to COVID-19 precautions; or
  • Is experiencing substantially similar conditions as specified by the Secretary of Health and Human Services, in consultation with the Secretaries of Labor and Treasury.

Generally, employers would pay employees at their regular rate of pay for emergency sick leave, capped at $511 per day ($5,110 in the aggregate) if the leave is taken for an employee’s own illness or quarantine (i.e., for the first three bullets above). Employers would pay employees two-thirds of their regular rate of pay for emergency sick leave, capped at $200 per day ($2,000 in the aggregate) if the leave is taken to care for others or due to school closures (i.e., for the last three bullets above).

An employer cannot require an employee to use other paid leave before using this paid leave. Employers would not be able to require employees to find replacement workers to cover their shifts if employees use emergency paid sick leave. The federal government is supposed to provide a model notice within seven days after enactment, which employers would be required to post at their workplace, informing employees of their right to emergency paid sick leave. The U.S. Department of Labor is directed, within 15 days after enactment, to issue guidelines on how to calculate the amount of emergency paid sick leave. The Department of Labor also has the authority to issue regulations to exempt small businesses with fewer than 50 employees from having to provide emergency paid sick leave to employees who need to care for a son or daughter whose school or place of care is closed, or child care provider is unavailable, due to COVID-19 precautions if the imposition of such requirements would jeopardize the viability of the business as a going concern.

Employers would face penalties for failing to comply with the new emergency paid sick leave rules and are prohibited from discriminating against employees who take emergency paid sick leave. Eligible employees could use emergency paid sick leave before using new, emergency paid family and medical leave created by the Act.

FMLA Amendments. The Act would add provisions to the FMLA to provide employees (including union employees) who have been employed for at least 30 days by employers with fewer than 500 employees or government employers, with the right take up to 12 weeks of job-protected leave through December 31, 2020, if the employee is unable to work or telework due to having to care for a child under age 18 if the child’s school or place of child care has been closed (or the child care provider is unavailable), due to the COVID-19 public health emergency.  Employers may elect to exclude health care workers and first responders from taking this public health emergency FMLA.

The first 10 days of FMLA under these new provisions may be unpaid. Employees can use other paid time off such as vacation, sick days, sabbatical, or emergency paid sick leave to cover that gap, but employers cannot require employees to use their accrued paid time off before using these 12 weeks of extended FMLA leave. Employers would pay employees two-thirds of their regular rate of pay for this emergency FMLA leave, capped at $200 per day ($10,000 in the aggregate per employee). Adjustments would be made to the amount of paid time off for employees with varying schedules.

The Act gives the U.S. Department of Labor authority to issue regulations that would exclude certain health care providers and emergency responders from being able to take emergency family and medical leave. The Department of Labor also has the authority to issue regulations to exempt small businesses with fewer than 50 employees from the emergency family and medical leave requirements if the imposition of such requirements would jeopardize the viability of the business as a going concern. The Act would also exempt employers with fewer than 50 employees in a 75-mile radius from civil damages in an FMLA lawsuit.

Under the Act, covered employers (those with less than 500 employees) are required to hold an employee’s job open for them until the end of the leave period. However, an exception applies to employers with fewer than 25 employees if the employee’s position no longer exists due to economic conditions or other changes in the employer’s operations that affect employment and are caused by the COVID-19 crisis, and the employer made reasonable efforts to restore the employee’s job. And, if those efforts failed, the employer agrees to reinstate the employee if an equivalent position becomes available within a year.

The Act creates new, refundable payroll tax credits for employers to help cover the costs of this new paid sick and family leave.

Payroll Tax Credits

To assist employers who are required to provide emergency paid sick leave or FMLA leave under the programs described above, the Act provides for a refundable tax credit applied against the employer’s portion of Social Security or Railroad Retirement Tax Act (RRTA) tax for amounts paid under those programs. The credit is equal to 100% of the compensation paid in each calendar quarter to employees who are not working for the reasons enumerated above, subject to the following limitations:

For payments to an employee who needs time off for self-isolation, diagnosis, or care of a COVID-19 diagnosis, or compliance with a health care provider’s recommendation or order, the credit is capped at $511 of eligible wages per employee per day. For payments to an employee who needs time off to care for a family member who has been exposed to or diagnosed with the COVID-19, or a child under age 18 whose school or place of care has been closed, the credit is capped at $200 of eligible wages per employee per day. The credit for emergency paid sick leave wages is only available for a maximum of 10 days per employee over the duration of the program. For expanded FMLA, the credit is capped at $200 of eligible wages per employee per day and $10,000 for all calendar quarters.

Both of the credits are increased by any amounts paid or incurred by the employer to maintain a group health plan, to the extent those expenses are (1) excluded from the employee’s gross income under the tax code and (2) “properly allocable” to the respective qualified sick or FMLA wages required to be paid under the Act. The exact method of allocation will be provided by regulation at a later date, but the Act provides that the allocation will be treated as properly made if done “on the basis of being pro-rata among covered employees and pro-rata on the basis of periods of coverage.”

If the credit exceeds the employer’s total liability for Social Security or RRTA tax for all employees for any calendar quarter, the excess is refundable to the employer. The employer may choose not to apply for the credit. Further, to prevent a double benefit, the employer cannot obtain a deduction for the amount of the credit. In addition, employers may not receive the credit in connection with wages for which a credit is allowed under Section 45S (credit for paid family and medical leave).

Similar rules apply to a self-employed individual that allows a refundable tax credit against the individual’s self-employment tax. The credit is capped at the lesser of the amounts that apply to eligible wages per employee or the individual’s lost self-employment income. The House-passed version of the Act provides guidance on how to determine the individual’s lost income due to the coronavirus.

Notably, required payments for emergency paid sick leave or FMLA under the Act will not be considered wages for purposes of calculating the employer’s portion of the Social Security or RRTA tax. In addition, the tax credits available to an employer are increased by the amount of the employer’s liability for Medicare tax on wages paid under the Act, effectively exempting the emergency sick leave and FMLA payments from that tax as well. In this way, the Act provides employers with two tax benefits: (1) refundable credits against the employer’s portion of Social Security or RRTA tax; and (2) an exemption from, or credit against, the employer’s portion of Social Security or RRTA and Medicare taxes on the wages required to be paid under the Act.

However, the law does not exempt these payments from the definition of wages for the purpose of other taxes (including the employee’s portion of Social Security, RRTA and Medicare taxes).

The Act ensures there is no negative impact to the Social Security program caused by the tax credit or the exemption of sick pay and family leave pay from Social Security tax by authorizing a transfer of funds from the General Fund to the Social Security and disability insurance trust funds to replace the lost employer contributions. The tax provisions discussed herein will apply beginning on a date to be determined by the Secretary of the Treasury after the enactment of the Act and ending on December 31, 2020.

 

Categories: Other Resources, Tax Compliance, Tax Planning

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