Economic Impact Payments Received by Deceased or Ineligible Recipients

May 18, 2020

The CARES Act stimulus package passed by Congress in late March provided Economic Impact Payments to eligible recipients which been remitted throughout the last month. According to the Act, eligible individuals include U.S. citizens and qualifying resident aliens who are not a dependent of another taxpayer and have a work-eligible Social Security number with adjusted gross income (AGI) up to the following:

  • $75,000 for individuals filing single or married filing separately
  • $112,500 for the head of household filers
  • $150,000 for married couples filing jointly

These eligible recipients have received or will receive payments of $1,200 to individuals and $2,400 to married couples, plus $500 per dependent child. Taxpayers will receive a reduced payment if their AGI is between:

  • $75,000 and $99,000 for individuals filing single or married filing separately
  • $112,500 and $136,500 for the head of household filers
  • $150,000 and $198,000 for married couples filing jointly

As with any new program, glitches have been identified. Eligibility was determined using 2018 or 2019 tax returns. Discrepancies between information on these previously filed returns and current status have led to deceased taxpayers, trusts, and other ineligible individuals mistakenly receive funds. Those ineligible to receive Economic Impact Payments include:

  • Individuals who were deceased before the date of payment
  • Individuals or married taxpayers filing separately with AGI greater than $99,000
  • Taxpayers filing head of household with AGI greater than $136,500
  • Married taxpayers filing jointly with AGI greater than $198,000
  • Individuals who can be claimed as a dependent on another person’s return (For example, a child or student claimed on a parent’s return
  • Individuals who do not have a valid Social Security number
  • Nonresident aliens
  • Individuals who filed Form 1040-NR, 1040NR-EZ, 1040-PR, or 1040-SS for 2019
  • Individuals who are currently incarcerated

How do I determine if I received misappropriated funds?
The IRS has set up an Economic Impact Payment Information Center that includes information about which taxpayers are eligible and how to return payments received by those disqualified by the factors above.

In many instances, the family or beneficiaries of a deceased individual or trust have received payment on behalf of the deceased. This is particularly common in situations where the individual had passed away in late 2019 or 2020, and a 2019 tax return had not yet been filed on their behalf. By definition, these payments to trusts or family of a deceased individual are considered payments to an ineligible recipient.

What should I do if I received funds for a deceased or an ineligible recipient?
Economic Impact Payments given to deceased or otherwise ineligible recipients previously listed must be returned to the IRS. For payments received by joint filers where only one spouse is deceased or ineligible, only the portion of the payment made for the ineligible spouse must be returned ($1,200 unless the AGI exceeds $150,000). Ineligible recipients of the payments, or those who received payment on behalf of an ineligible or deceased recipient, should follow the IRS repayment instructions to return the payments.

If the payment was a paper check:
1. Write “Void” on the endorsement section on the back of the check.
2. Mail the voided Treasury check immediately to the appropriate IRS location.
3. Do not staple, bend, or paper clip the check.
4. Include a note stating the reason for returning the check.

If the payment was a paper check and you have cashed it, or if the payment was a direct deposit:
1. Submit a personal check, money order, etc., immediately to the appropriate IRS location.
2. Write on the check/money order made payable to “U.S. Treasury” and write “2020EIP,” and the taxpayer identification number (Social Security number, or individual taxpayer identification number) of the recipient of the check.
3. Include a brief explanation of the reason for returning the payment.

Appropriate IRS mailing addresses can be found in the IRS repayment instructions located on the Economic Impact Payment Information Center.

If you feel you have received funds for an ineligible individual but are unsure how to proceed, contact your William Vaughan Company advisor and they can guide you through the appropriate process for your given circumstance.

Categories: Other Resources

IRS Denies Tax Deductions for Expenses Related to Payroll Protection Program Loan Forgiveness

May 11, 2020

What happened?
On April 30, 2020, the IRS released Notice 2020-32 (the Notice) answering a major tax question involving the Paycheck Protection Program (PPP). It ruled that any deductible expenses that result in forgiveness of a PPP loan will not be deductible in computing the taxpayer’s income. This conclusion contradicts the language in the CARES Act (the Act) under Section 1106(i) which states the cancellation of indebtedness of a PPP loan, under the provisions of Section 1106(b), “shall be excluded from gross income” in computing the taxpayer’s taxable income.

The IRS points out in the Notice that while the Act provides that PPP loan forgiveness is not taxable income, no provisions of the Act address the ability to deduct eligible expenses paid from such loan proceeds.

What’s Next?
Stay tuned! It is unlikely the end of this controversy. First, it is possible a taxpayer may decide to challenge this position in court. Whether they would or would not prevail is open to question, and the other big problem is being able to afford the litigation. The more likely scenario is that Congress would reverse the notice by simply enacting an amendment in the next Coronavirus bill (if there is one) to make clear expenses used to justify PPP loan forgiveness are deductible, regardless of any provision by the IRS.

Visit the WVC COVID-19 Resource Center for more insights by clicking here.

Categories: Other Resources, Tax Compliance, Tax Planning

Making the Most of Your PPP Loan

Apr 10, 2020

You have applied for your Paycheck Protection Program (PPP) loan through one of the 1,800 participating SBA approved 7(a) lenders and you are awaiting the exciting news of your approval. In the meantime, have you considered how you will make the most of the funds? Here are a few recommendations as you consider how to best utilize the cash for your business.

Track Your Business Impact
For purposes of not only following the PPP loan certification guidelines but also to help you prioritize your immediate needs, we recommend keeping track of the pandemic’s impact on your business. A hard or electronic log noting the daily/weekly effects on your employees, vendors, and business cash flow will ultimately help you plan ahead and maximize your benefit. Furthermore, at the end of the eight weeks following your loan approval date, this will also help maximize your loan forgiveness.

Develop A Plan
If your operations are currently on hold or reduced, begin to outline varying scenarios of how operations may resume. To obtain full loan forgiveness, at least 75% of the proceeds will need to be used for payroll and you must have at least the same number of employees as of June 30, 2020, as you did as of February 15, 2020. Think about those employees currently on furlough, and when you will bring them back. Calculate various scenarios of operational levels, payroll amounts, and resulting loan forgiveness to guide your decision-making.

Maintain Detailed Records
The covered period of the PPP loan is eight weeks from the date you receive your proceeds. When you receive the proceeds, make note of the receipt date and determine your covered period. We also recommend that you deposit them into a separate account to allow for easier tracking of their use on eligible expenses. Additionally, if your bank activity is requested as part of the loan forgiveness considerations, you will only need to provide activity from this account rather than all operating activity.

Start a tally of your eligible expenses. As a reminder, these include payroll, benefits, retirement, rent, utilities, and mortgage interest payments. Your bank may ask you for a preliminary loan forgiveness calculation around the seven weeks into your eight-week covered period.

  • For payroll, keep records of wages, healthcare costs, and retirement plan employer contributions.
  • Keep separate records for rent, utilities and any mortgage interest paid
  • Keep documentation of the number of employees you have as of June 30, 2020
  • Pay particular attention to any payments made to employees under the Families First Coronavirus Response Act for Emergency Sick Pay or Emergency FMLA. Maintain records for any such payments, as they will reduce the PPP loan forgiveness amount to avoid “double-dipping”.

Note that PPP loan recipients cannot participate in the following CARES act benefits: Employee Retention Credit (provides for a tax credit equal to 50% of payroll taxes) or Delay of Employer Tax Payments (allows for the deferral of payment of employer payroll taxes until 50% due December 31, 2021, and 50% due December 31, 2022).

Categories: Other Resources, Tax Compliance, 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