The SBA has issued PPP loan forgiveness guidelines for owner employees, home office expenses, subleased space and related party rent expenses
Normally distributions from IRAs that are required minimum distributions aren’t eligible to be rolled over. Required minimum distributions are amounts that are required to be distributed that are based on the life expectancy of the account owner once the account owner reaches age 70 ½ or usually based on the initial beneficiary’s life expectancy for an inherited IRA account.
As a relief measure, the CARES Act suspended required minimum distributions for 2020. The reason was the value of many IRAs had fallen and distributions would deplete the value of the account. The CARES Act was passed on March 27, 2020, so many IRA owners and beneficiaries had already taken distributions.
In addition to the prohibition from rolling over required minimum distributions, there are two other restriction blocking potential rollovers of the distributions. (1) Beneficiaries of inherited IRAs are prohibited from making rollovers and (2) Taxpayers are limited to one IRA rollover for a 12-month period.
The IRS provided additional relief from these requirements in Notice 2020-51. The IRS designates restoration of 2020 IRA required minimum distributions as “repayments.” As repayments, the restoration of the funds to an IRA is not a rollover. Since they are not rollovers, beneficiaries of inherited IRAs are permitted to make restorations and the limitation to one IRA rollover for a 12-month period doesn’t apply.
In order to qualify for this relief, a restoration must be completed by August 31, 2020.
If the deadline is missed, the only way to restore the funds will be as a rollover, subject to the once in a 12-month period limit and not available for inherited IRA accounts.
If you have a question about this matter, consult your tax advisor.
The U.S. Supreme Court has agreed to hear California v. Texas (U.S. Supreme Court Docket 19-840.) This case challenges the constitutionality of the Affordable Care Act, nicknamed Obamacare.
If the Supreme Court rules the Affordable Care Act to be unconstitutional, taxes and penalties enacted as part of the Act could be eliminated and taxpayers could apply for refunds of those taxes. These include an extra 0.9% Medicare tax and the 3.8% net investment income tax.
Consider sending a protective claim to the IRS by July 15, 2020 for the tax year 2016. Spidell Publishing has posted a suggested simple form for a claim. Here is a URL for the form. http://www.mmsend63.com/link.cfm?r=4MGaSk-8do9OSq5rWJozRA~~&pe=MLxUYHWRMJTah2hlVsRhufQV3c6p4SCiez5_l6NGi1-_VLwkya4_xaxcLOOmNGM5Qkg_z_cN4pc5N38k-Y3xTA~~&t=QIJYj7V5qtg-xGkCJ-dZlw~~
You might remember the Supreme Court previously upheld the Affordable Care Act as constitutional during 2012 in National Federation of Independent Businesses v. Sebelius, because the penalties enacted in that Act to enforce the Mandate that everyone have medical insurance were considered to be taxes and Congress has the power to levy taxes under the U.S. Constitution.
One of the provisions of the Tax Cuts and Jobs Act of 2017 was to change the penalty rate to zero.
The Fifth Circuit Court of Appeals ruled on December 18, 2019 that since the “tax” for the Mandate no longer applies, the Mandate is unconstitutional, and so is the Affordable Care Act.
California and other states are contesting the decision of the Fifth Circuit Circuit Court of Appeals.
This is a last-minute development. Personally, I question whether the U.S. Supreme Court would retroactively strike down the Affordable Care Act when they previously upheld it and the penalty “tax” applied before 2019. But I could be wrong. If you don’t file a protective claim and the U.S. Supreme Court rules Obamacare was unconstitutional during 2016, you won’t be able to recover the taxes for that year.
Tax return preparers are probably already occupied with finishing 2019 income tax returns and extensions for the July 15, 2020 deadline.
If you paid these taxes and can get through to your tax advisor, discuss this matter with her or him.
President Trump signed legislation (S.4116) on July 4, 2020 extending the application deadline for Paycheck Protection Program (PPP) loans from June 30, 2020 to August 8, 2020.
Paycheck Protection Program loans were enacted as part of the Coronavirus Aid, Relief, and Economic Security Act (CARES Act.)
Certain businesses can apply for up to $10 million. If certain requirements are met, the loan principal will be forgiven, tax free. At this time, expenses paid using the loan proceeds are not tax deductible.
At this time $130 billion of $660 billion allocated hasn’t been committed for loans, yet.
If you haven’t been approved for a PPP loan and would like to apply, see your banker.
The CARES Act eliminated required minimum distributions for 2020. (Distributions are still required for a defined benefit account, which is basically an employer-provided retirement annuity.)
As a general rule, you have to start taking distributions from a retirement account, like an IRA or a 401(k), when you reach age 72 (as amended by the SECURE Act.) The required minimum distribution is computed based on your life expectancy each year. This rule has been waived by the CARES Act for 2020.
If you don’t need the money for living expenses, it’s best not to take money out of a retirement account, so that it can continue to enjoy tax-deferred growth. (If you do need the money for living expenses, this discussion doesn’t apply to you. There’s no requirement to roll over what would otherwise be a required minimum distribution.)
Without this exception for 2020, distributions that are required minimum distributions wouldn’t be eligible for a rollover to an IRA or other qualified retirement account.
The elimination of required minimum distributions created a problem for some taxpayers. Taxpayers usually can only roll over one distribution in a 12-month period. Many retired persons take their distributions in monthly installments to make it easier for them to budget funding their expenditures.
In addition, rollovers usually must be completed within 60 days. The IRS previously extended the due date to complete a rollover for a distribution made during the period from February 1, 2020 to May 16, 2020 to July 15, 2020 with Notice 2020-23.
Now the IRS has announced more relief for retirement account distributions received during 2020 that would otherwise be required minimum distributions in Notice 2020-51. Here is a URL for the Notice. https://www.irs.gov/pub/irs-drop/n-20-51.pdf
- The due date to complete a rollover of any distribution that would otherwise be a required minimum distribution during 2020 is extended to be not before August 31, 2020.
- Any distribution that would otherwise be a required minimum distribution paid during 2020 is not subject to the one rollover per 12-month period limitation. In other words, if multiple payments have been received that would otherwise be required minimum distributions, the total of all of the payments can be rolled over.
- The IRS clarified that a plan participant with a required beginning date of April 1, 2021 (became age 72 during 2020), is not required to take an initial distribution on that date. Unless there is a later tax law change, the plan participant will still have to receive a required minimum distribution for 2021 during 2021. Any distributions made during 2021 will first be applied as required minimum distributions and will ineligible for a rollover.
- Even though no distribution is required when the required beginning date is April 1, 2020 or April 1, 2021, those dates will still be the required beginning date for every other purpose, such as determining how distributions must be paid after the death of the participant.
IRAs don’t have to be amended in order to receive a rollover contribution of required minimum distributions. Employer-provided defined contribution retirement plans (like 401(k)s) do have to be amended to accept these rollover contributions. Notice 2020-51 includes a sample amendment for a defined contributions plan to accept these contributions.
Notice 2020-51 clarifies that payments that are part of a series of substantially equal periodic payments under the “RMD method” (commenced before age 59 1/2) aren’t considered “required minimum distributions” for the 2020 waiver. If the payments are stopped in 2020 (other than because of death or disability) prior to age 59 1/2 (or prior to 5 years from the date of the first payment), the cessation of the payments is a modification so that ALL of the payments made under the series are subject to an early distribution recapture penalty tax.
If you already received what would normally be required minimum distributions during 2020, consider rolling them over by August 31, 2020.
If you haven’t received what would normally be a required minimum distribution but have one scheduled for later this year, consider notifying the plan administrator to cancel the distribution.
Also consider that Roth conversions aren’t limited to one per year. Considering the stock market has been soft, 2020 may be a good year to make one or more Roth conversions.
If you have questions about these matters or need help with your tax and financial planning, consult with your tax advisor and financial advisor. You can also write to me at firstname.lastname@example.org.
The CARES Act, enacted on March 27, 2020, includes relief measures relating to retirement account distributions, including waiving the penalties for certain early distributions from retirement accounts, recontributions of distributions, deferring income taxation of distributions, and increasing the limits for plan loans.
The IRS has issued details of how the relief measures will work in Notice 2020-50. Here’s a URL for the Notice. https://www.irs.gov/pub/irs-drop/n-20-50.pdf
Here are the requirements for an individual who would otherwise be subject to the early distribution penalty (usually under age 59 1/2) to qualify for the relief:
- Diagnosed with COVID-19 by a test approved by the Centers for Disease Control and Prevention;
- Spouse or dependent diagnosed with COVID-19; OR
- Who experiences adverse financial consequences as a result of: (1) the individual being quarantined, being furloughed or laid off, or having work hours reduced due to COVID-19; (2) the individual being unable to work due to lack of childcare due to COVID-19, or (3) closing or reducing hours of a business owned or operated by the individual due to COVID-19.
The IRS also extends relief to an individual who experiences adverse financial consequences as a result of:
- the individual having a reduction in pay or self-employment income due to COVID-19 or having a job offer rescinded or start date for a job delayed due to COVID-19;
- the individual’s spouse or a member of the individual’s household (shares the same principal residence) being quarantined, being furloughed or laid off, or having work hours reduced due to COVID-19, being unable to work due to lack of childcare due to COVID-19, or having a job offer rescinded or start date for a job delayed due to COVID-19; or
- closing or reducing hours of a business owned or operated by the individual’s spouse or a member of the individual’s household due to COVID-19.
A coronavirus-related distribution is any distribution from an eligible retirement plan made on or after January 1, 2020 and before December 31, 2020 to a qualified individual. An individual can receive a maximum of $100,000 of coronavirus-related distributions. Any distributions beyond the $100,000 limit won’t qualify for relief.
The distribution can be used for any purpose.
A beneficiary of an inherited retirement account doesn’t qualify for relief, because beneficiaries aren’t subject to the early distribution penalty.
Certification to plan administrator
The Notice includes a sample certification to the plan administrator that a distribution qualifies as a coronavirus-related distribution. The plan administrator can rely on the certification unless the administrator is aware of facts to the contrary, such as more than $100,000 of distributions have been received by the plan participant.
The certification is for the plan administrator. The individual isn’t bound by the certification for income tax reporting.
Employer plans must be amended to make a qualifying distribution
Employer plans can only make these distributions if they are permitted by the plan document. The plan document will probably have to be amended to be able to make them. For most plans, the plan amendment must be made by the last day of the first plan year beginning on or after January 1, 2022. For government plans, the plan amendment must be made by the last day of the first plan year beginning on or after January 1, 2024.
Some plans, such as annuity type retirement plans, don’t qualify to make early distributions. 401(k) plans usually can qualify. See your tax advisor for details.
The payor will report the distribution on Form 1099-R. The distribution must be reported even if the qualified individual recontributes the coronavirus-rleated distribution to the same eligible retirement account in the same year. The payor may use either distribution code 2 (early distribution, exception applies) or distribution code 1 (early distribution, no known exception) in box 7 of Form 1099R.
Accepting recontribution of coronavirus-related distributions
Retirement plans aren’t required to accept recontributions of coronavirus-related distributions. It’s optional. The plan will have to be amended to accept them.
Income inclusion for coronavirus-related distributions
Individuals may elect to report coronavirus distributions (1) for the year of distribution or (2) ratably over three years, starting with the year of distribution. The election can’t be made or changed after the timely filing of the individual’s federal income tax return (including extensions) for the year of distribution. The individual must treat all of the qualifying distributions for the year using the same method.
Reporting recontributions of coronavirus-related distributions
A qualified individual is permitted at any time in the 3-year period beginning the day after the date of a coronavirus-related distribution to recontribute any portion of the distribution, up to the total amount, to an eligible retirement plan. The distribution is not considered a rollover contribution, so multiple distributions during 2020 can qualify.
If a qualified individual elects to report all of the income for 2020, the recontribution will reduce the amount of the coronavirus-related distribution included in gross income for 2020. The recontribution is reported on Form 8915-E. If the recontribution is made after the due date, including extensions, for filing the income tax return for the year for distribution, the income is reduced on an amended income tax return for 2020, which will include Form 8915-E.
If a qualified individual elects to report the income over three years and the individual recontributes any portion of the coronavirus-related distribution to an eligible retirement plan by the due date including extensions, for a tax year in the three-year period, the amount of the recontribution will first be applied to reduce the taxable amount for that year. The individual may elect to carryover or carryback any excess amount.
For example, Mary received a $30,000 coronavirus distribution during 2020. She elected to report the income over three years. Mary files an extension for her 2021 income tax return, extending the due date to August 15, 2022. Mary recontributes $15,000 to an eligible retirement plan on August 5, 2022. Mary’s income from the coronavirus distribution for 2021 is reduced to zero. Mary may elect to reduce her income from the coronavirus distribution for either 2020 or 2022 by the excess $5,000 ($15,000 – $10,000). A reduction for 2020 would be reported on an amended income tax return. The reductions are reported using Form 8915-E.
Special rule for year of death
If an individual dies before the full taxable amount of the coronavirus distribution has been included in gross income, the remainder must be included in gross income for the taxable year that includes the date of the individual’s death.
The CARES Act includes relief for employer retirement plan loans. (California’s income tax rules don’t conform to this change.)
- The allowable loans from an employer retirement account is increased from $50,000 to $100,000, and the rule that limits the aggregate amount of loans to 50% of the employee’s vested accrued benefit is increased to 100% of the employee’s vested accrued benefit. The plan document must be amended to permit this change.
- If a qualified individual had an outstanding loan from a qualified employer plan on or after March 27, 2020, any repayment for the loan due during the period from March 27, 2020 through December 31, 2020 is delayed for one year. The term of the loan may be extended by up to one year. Any subsequent repayments are adjusted to reflect the delay and the period of delay is disregarded in determining the 5-year period and term of the loan. Unpaid interest is added to the loan. This rule isn’t mandatory. The employer is permitted to choose to allow this delay in loan payments.
The administrator of a qualified employer plan may rely on an individual’s certification that the individual satisfies the conditions as a qualified individual.
Nonqualified deferred compensation plans
The IRS stated that the coronavirus crisis qualifies as an unforeseen emergency, qualifying for a cancellation of a service-provider’s deferral election relating to a nonqualified deferred compensation plan. The deferral election must be cancelled, not merely postponed or otherwise delayed.
See your tax advisor
There are many special tax rules that have been enacted for 2020. This is one year that you can really benefit from meeting with a tax advisor for tax planning.
The SBA has issued new forms and updated its Paycheck Protection Program loan “final rules” for the Paycheck Protection Program Flexibility Act of 2020, enacted on June 5, 2020.
One of the forms is a new one, simplified Form 3805EZ.
Here are URLs for the final rules and forms.
Under the Act, the “covered period” was extended from the eight-week period beginning on the date of the origination of a covered loan to 24 weeks. Borrowers that received PPP loans before June 5, 2020 may elect to use the original eight-week period.
The forgiveness requirement to use at least 75% of loan proceeds for payroll costs was reduced to 60%.
The forms reflect that a pro-rated forgiveness can apply if there is a reduction of the employee count by the end of the covered period.
The maximum payroll costs, including salary, wages and tips, eligible for the forgiveness for an employee is $46,154 with the 24-week covered period and $15,385 with the eight-week covered period.
The owner compensation replacement is calculated based on 2019 net profit. The amounts are 2.5/12 of 2019 net profit, up to $20,833, for a 24-week covered period and 8/52 of 2019 net profit, up to $15,385, for an eight-week covered period. Amounts for which a credit is claimed for qualified sick leave equivalent amount and qualified family leave equivalent amount aren’t eligible for forgiveness.
Remember up to 25% of loan proceeds used to pay otherwise tax deductible interest on mortgage obligations or personal property incurred before February 15, 2020, otherwise tax deductible rent payments on lease agreements in force before February 15, 2020 and otherwise tax deductible utility payments under service agreements dated before February 15, 2020 is eligible for forgiveness under the eight-week covered period scenario. Up to 40% of loan proceeds used to pay the same expenses is eligible for forgiveness under the 24-week covered period scenario.
Many more borrowers should be able to qualify for exclusion of their PPP loans under the new rules.
The California legislature has passed budget legislation, AB 85, and sent it to Governor Newsom, who is expected to approve it.
Notably, there were no provisions conforming California tax law to the CARES Act relief measures adopted by the federal government earlier this year.
Net operating loss deductions won’t be allowed on California income (including corporate franchise) tax returns for 2020-2022 tax years for businesses with business income, or modified adjusted gross income of $1 million or more. The term for which net operating losses that could have been deducted in those years is extended by one year for losses incurred in taxable years years beginning on or after January 1, 2021 and before January 1, 2022, by two years for losses incurred in taxable years beginning on or after January 1, 2020 and before January 1, 2021, and by three years for losses incurred in taxable years beginning before January 1, 2020.
The $800 “privilege tax” for corporations, limited partnerships and limited liability companies “doing business” in California is waived for new companies organized (registered with the California Secretary of State) on or after January 1, 20121 and before January 1, 2024.
Business credits will be limited to $5 million for the 2020 – 2022 tax years. The carryover period for the credits is extended to compensate for the years the limitation applies.
The exemption for sales tax for baby diapers and for menstrual hygiene products, which was scheduled to expire on January 1, 2022 is extended to June 30, 2023.
New sales tax collection and reporting rules will apply for auto dealers, other than new car dealers, effective January 1, 2021. The details are beyond the scope of this summary. See your tax advisor for details.
The maximum monthly penalty for not having mandated health insurance for a responsible person with an applicable household size of five or more individuals is capped at the penalty for five individuals.
The Senate passed the Paycheck Protection Program Flexibility Act of 2020 (H.R. 7010), which was previously passed by the House of Representatives on June 3, 2020. President Trump is expected to sign the legislation.
Here is a URL for the text of H.R. 7010. https://www.congress.gov/bill/116th-congress/house-bill/7010/text
The legislation relaxes the requirements to qualify for forgiveness of Paycheck Protection Program (PPP) loans.
Here is a summary of key points:
- The time in which businesses that receive a PPP loan may count their expenses that qualify for loan forgiveness is extended from 8 to 24 weeks, and the period ends no later than December 31, 2020.
- Businesses that received a PPP loan before the date of enactment may elect to keep an eight-week period to count expenses that qualify for loan forgiveness. (A borrower might want to make this election because it paid the required expenses and can apply for forgiveness sooner.)
- The portion of the loan proceeds used to pay payroll costs is decreased from 75% to 60%. Under the language in the Act, if the business doesn’t use at least 60% of the loan funds for payroll costs, the loan doesn’t qualify for forgiveness. Congress is expected to pass a technical correction later to permit a sliding scale forgiveness if the 60% threshold isn’t met. This means up to 40% of loan proceeds may be used to pay rent expenses, qualified mortgage interest and utilities and still qualify for full loan forgiveness.
- Borrowers may use the earlier of the date 24-weeks after receiving the loan or December 31, 2020 to meet the requirement to restore their workforce and wages to pre-pandemic levels required for full forgiveness.
- Two new exceptions allowing borrowers to achieve full PPP loan forgiveness even if they don’t fully restore their workforce were included in the legislation. (1) The borrower was unable to find qualified employees. (2) The borrower was unable to restore business operations to February 15, 2020 levels due to COVID-19 related operating restrictions.
- New borrowers have five years to repay the unforgiven portion of the loan instead of two. Those who received loans before the date of enactment may extend the repayment term of the unforgiven portion of their loans from two to five years, if the lender and borrower agree. The interest rate remains 1%.
- Under the CARES Act, businesses that received a PPP loan didn’t qualify for delayed payment of employer taxes. That prohibition is repealed under the Paycheck Protection Program Flexibility Act.
This legislation should enable many more PPP loan borrowers to qualify for loan forgiveness. The Small Business Administration will have to update the forms that it just issued to apply for loan forgiveness.
If your business is one of the fortunate ones that received a PPP (Paycheck Protection Program) loan, now you need to deal with the next challenge: qualifying for forgiveness of the loan.
The SBA (Small Business Administration) has issued Form 3508, Paycheck Protection Program Loan Forgiveness Application, and Schedule A, Worksheet.
Here is a URL to download the application. https://www.sba.gov/document/sba-form–paycheck-protection-program-loan-forgiveness-application
The purpose of the form is to report the expenses actually incurred that qualify for loan forgiveness.
The form is submitted to the lender where you got the loan, NOT the SBA.
There is no due date listed to submit the form. Since the rules relating to PPP loans may be amended based on developments for “opening up” the U.S. economy relating to the COVID-19 pandemic, I suggest not hurrying to submit the form.
For example, a Salary/Hourly Wage Reduction is computed on Schedule A for a reduction in full-time equivalent employees that isn’t restored by June 30, 2020. I think there is a good chance the June 30, 2020 date will be extended if the reopening is slower than Congress initially expected.
An item that isn’t explained very well is self-employment income. Self-employment income isn’t a normal “payroll” type item. That information might not be available until the 2020 income tax return is prepared for the business or the business owner.
The “Covered Period” for covered expenses is the eight-week (56-day) period beginning on the PPP Loan Disbursement Date. For example, if the borrower received its PPP loan proceeds on Monday, April 20, the Covered Period begins on April 20 and ends on June 14.
Generally, covered expenses are incurred and paid during the Covered Period.
Payroll costs must be paid during the covered period (or Alternative Payroll Covered Period) or paid on or before the next regular payroll date. The Alternative Payroll Covered Period for borrowers with a biweekly (or more frequent) payroll schedule is the eight-week (56-day) period that begins on the first day for their first pay period following their loan disbursement date.
Remember payroll costs include wages, bonuses, tips, employer-paid health insurance, and employer-paid qualified retirement plan expenses. (https://www.govinfo.gov/content/pkg/FR-2020-04-15/pdf/2020-07672.pdf)
An eligible nonpayroll cost must be paid during the Covered Period or incurred during the Covered Period and paid on or before the next regular billing date, even if the the billing date is after the Covered Period. Eligible nonpayroll costs include (1) covered mortgage obligations (interest payments on business mortgage obligations on real or personal property incurred before February 15, 2020); (2) business rent or lease payments pursuant to lease agreements for real or personal property in force before February 15, 2020; and (3) business payments for distribution of electricity, gas, water, transportation, telephone, or internet access for which service began before February 15, 2020.
The forgiveness for nonpayroll costs is limited to 25% of the total forgiven amount.
Consider having your CPA help you complete this form.