During April of this year, our firm communicated with you regarding the relief available under the CARES Act. The IRS has issued additional guidance and here are some selected updates. These updates are overviews and do not include all details or provisions of the CARES Act. We are here to help you overcome the challenges and want to provide additional detailed resources to you and the businesses that are facing an unprecedented economic hardship at this time.
Employee Retention Credit (ERC)
The Employee Retention Credit (ERC) under the CARES Act is designed to encourage employers to keep employees on their payroll. The businesses not participating in the Paycheck Protection Program (PPP) loans should consider the Employee Retention Credit (ERC).
- The refundable tax credit is 50% of up to $10,000 in wages per employee paid by an eligible employer.
- Eligible employers:
- Have operations that were fully or partially suspended due to the COVID-19, or
- Significant decline (50%) in gross receipts as compared to the same calendar quarter of 2019.
- ERC is available to employers of any size (certain limitation may apply to companies with more than 100 employees).
- Tax-exempt entities qualify.
- To claim the credit, eligible employers will report their qualified wages for each quarter on their quarterly employment tax return form 941.
- Eligible employers can get immediate access to the credit by reducing employment tax deposits they are otherwise required to make.
Retirement Plan Relief
The CARES Act has created the ability for taxpayers to withdraw up to $100,000 from retirement without penalty and potentially income recognition.
- Coronavirus-related distributions from eligible retirement plans are not subject to the 10% penalty on early distributions.
- Taxable distributions from retirement plan are treated as income received ratably over a three year period unless elected otherwise.
- Taxpayers may also avoid income recognition by repaying distribution to the retirement plan within three years of receipt.
- Distributions must be made on or after January 1, 2020 and before December 31, 2020.
- Loans from qualified employer plans up to $100,000 (increased from $50,000) are permitted in the 180 days beginning on the date of enactment (no later than September 22, 2020).
- Minimum Required distribution rules are waived for calendar year 2020 for IRAs and certain defined contribution plans.
Qualified Improvements Property (QIP)
Under the Tax Cuts and Jobs Act (TCJA), Congress intended for building improvements to be eligible for a 100 percent bonus depreciation deduction, however due to a drafting error, the TCJA ultimately did not allow 100 percent bonus depreciation for QIP (QIP = Qualified Improvements Property). The CARES Act retroactively changed this recovery period to 15 years, which made certain improvements done to buildings qualified for 100 percent bonus depreciation.
- QIP recovery period adjusted to 15 years from 39 years applies retroactively to all building improvement assets placed-in-service on or after January 1, 2018.
- Taxpayer must adjust recovery period to 15-years and claim 100% bonus depreciation if eligible.
- Taxpayer may consider amending 2018 or 2019 tax returns to take 100% bonus depreciation if improvement property was classified as 39 years.
- Qualified improvement property generally means any improvement to a building’s interior except:
- The enlargement of the building,
- Any elevator or escalator, or
- The internal structural framework of the building.
Paycheck Protection Program (PPP) Loan update
The Paycheck Protection Program loan was designed to provide a direct incentive for small business to keep their workers on the payroll. The loan amounts will be forgiven as along as:
- The loan proceeds are used to cover payroll costs, most mortgage interest, rent, and utility costs over the 8 week period after the loan is made; and
- Employee and compensation levels are maintained.
- Payroll costs include:
- Salary, wages, commission, or tips (capped at $100,000 per employee on an annualized basis);
- Employee benefits, health insurance premiums, and employer portion of retirement plan contribution;
- State and local taxes assessed on compensation;
- Forgiveness will be reduced if you decrease salaries and wages by more than 25% of any employee that made less than $100,000 annualized in 2019;
- Re-hiring: You have until June 30, 2020 to rehire your full time employee; and
- You must submit a request to your lender for loan forgiveness.
The CARES Act provides that the loan amounts forgiven shall be excluded from the income (tax-exempt income) for the Federal income tax purpose.
In a new twist, the IRS issued a notice on April 30, 2020 (Notice 2020-32), announcing that the above qualified expenditure resulting in loan forgiveness are not tax deductible for the Federal income tax purpose. However, stay tuned because the Senate Finance Committee immediately expressed disappoint with the IRS guidance and indicated they may correct this in future legislation.
Roth IRA Conversion
The stock market distress and the financial fallout from the coronavirus might be an opportunity to do a Roth conversion for the following reasons:
- Affordable tax rate (low current tax rates) against future increases in the tax rate.
- Future gains and distributions are tax-free.
- Decline in the stock market and lower value in retirement account means lower tax cost to convert and potential higher gains in the future will be tax-free.
- Simpler tax planning, reduces the overall lifetime tax liability.
- No required minimum distribution (RMD).
The Roth conversion will trigger extra income and requires the taxpayer to pay taxes in the year of conversion; this may not be a feasible option if you are experiencing significant financial strain. The conversion could be a good move currently, because your retirement account value may be lower than it was due to the decline in the stock market. Looking forward to when the market recovers, all the post-conversion income and gains that accumulated in your Roth account will be tax-free, if you have had at least one Roth account open for more than five years when withdrawing money from the account.
2020 Estimated Tax Payments update
- Second quarter is now due July 15, 2020, extended from June 15, 2020.
Third and fourth quarter are due as usual.
- Second, third and fourth quarter are due as usual.
We’re here to help, if you have any questions, please reach out to your tax professional at McDonald Jacobs. We encourage you to follow McDonald Jacobs on LinkedIn and Twitter to stay up to date on any new information.