10 Questions: A practical tax perspective on the CARES Act, FFCRA, and other COVID-19 relief
The CohnReznick National Tax team, along with other key partners within the firm, recently presented a webinar to address federal and state legislative and policy changes related to the COVID-19 pandemic that impact nearly every taxpayer and business in the country.
- The Families First Coronavirus Response Act (FFCRA)
- General tax provisions in the Coronavirus Aid, Relief, and Economic Security (CARES) Act
- Tax credits available under these programs, including the CARES Act’s Employee Retention Credit (ERC)
- The Paycheck Protection Program (PPP)
Because this particular webinar received so many questions, we decided to go beyond our typical “10 Questions” roundup. Read on for answers. (Some questions have been edited for length or clarity.)
Note: With information on these relief programs and measures changing daily, watch our Coronavirus Resource Center for the latest updates, or reach out to your CohnReznick contact with any questions.
Q: Are the affiliation rules under the FFCRA similar to the affiliation rules under the PPP? Meaning many venture capital (VC) and private equity (PE) portfolio companies are not eligible?
A: The rules are different. For purposes of the FFCRA, the U.S. Department of Labor’s “integrated employer” test applies. Unlike other affiliate aggregation requirements under federal law, this test is not based solely upon certain specified levels of ownership. Rather, it is facts and circumstances-based. VC and PE portfolio companies may well be eligible under the FFCRA, depending upon the degree of control exercised by the VC or PE over the particular portfolio company. (The PPP, meanwhile, applies the affiliation rules that appear in 13 CFR 121.301(f) for portfolio companies of private equity funds, though the rules are waived “if the borrower receives financial assistance from an SBA-licensed Small Business Investment Company (SBIC) in any amount”; learn more in our PPP FAQ.)
Q: Are you eligible to qualify for credits for employee wages and healthcare expenses under the FFCRA Leave act if you are applying for a PPP loan?
A: Yes. Although there are exclusions for PPP loan recipients for purposes of certain CARES Act payroll-related provisions, there are no similar exclusions for purposes of FFCRA applicability.
Q: As it relates to the ERC, can you explain how this works with a company that has many entities and consolidation? If all returns are filed separately, can they each file separately for the credit as they'd each have separate 941s? Similarly, if a consolidated group, do they have to file on a consolidated basis?
A: The employee retention credit is available for companies of all sizes, but there are different guidelines for businesses depending on whether on average they had 100 or fewer full-time employees for 2019, or more than 100. The “more than 100 full-time employees for 2019” qualified wages threshold generally requires aggregation of employees of 50% and greater affiliates, as well as of employees of affiliates that are members of the same affiliated service group.
Q: Can a small business defer withholding payroll tax?
A: Yes. The CARES Act’s deferral of the deposit requirement for the employer portion of the Social Security tax for the period March 27 – Dec. 31, 2020, is available to employers of all sizes.
Q: How do we inform the IRS we are deferring employer FICA pay or taking FFCRA credits?
A: As part of the regular quarterly IRS Form 941 filing. Regarding deferrals, the IRS has said that Form 941 will be revised for the second calendar quarter of 2020, and that information will be provided on how to reflect the deferred deposits and payments otherwise due on or after March 27 for the first quarter (January – March 2020). “In no case will employers be required to make a special election to be able to defer deposits and payments of these employment taxes,” the IRS wrote.
Q: Can an employer take the FICA deferral and get the PPP loan forgiveness?
A: No. An employer that has any portion of a PPP loan forgiven is not eligible for the deferral of the deposit requirement for the employer portion of the Social Security tax for the period March 27 – Dec. 31, 2020. However, the IRS recently announced that where a PPP loan is forgiven, the deferral will be available for the period from March 27 up to and until the employer receives notice of the forgiveness from its lender. Thus, an employer can defer its payments while waiting to find out if it receives a PPP loan and subsequently qualifies for forgiveness, but if any portion is forgiven, the deferral will not be available for the period following the receipt of the forgiveness notice.
Q: Can you receive the employee retention credit if you have a PPP loan that is forgiven?
A: No. An employer that receives a PPP loan is not eligible for an employee retention credit, even if no portion of the loan is forgiven. (However, an employer that applied for a PPP loan, received payment, then repays the loan by May 14, 2020, will be eligible for the ERC.)
Q: Can you defer Social Security payment and take advantage of the ERC?
A: Yes. An employer can both avail itself of the deferral of the employer portion of the Social Security tax for the period March 27 – Dec. 31, 2020, and utilize the employee retention credit.
Q: Do self-employment wages qualify for the ERC?
A: No. The employee retention credit is not available for self-employed individuals.
Q: Does an individual have to take waived 2020 required minimum distributions (RMD) from certain retirement plans and accounts in 2021?
A: No. The waiver of the 2020 RMD requirements is permanent.
Q: For a salaried employee, if the sick leave allowed under the FFCRA pays less than their full salary, must the employer make up the difference?
A: No. The FFCRA paid sick leave is only required to be paid at the following applicable daily rate (based on the greater of their normal wage or the applicable state or federal minimum wage):
a) 100% for those who must self-quarantine or otherwise care for their own coronavirus-related issues; $511 per day maximum
b) 67% for those caring for family members who have been diagnosed or are in quarantine, and for those caring for children under age 18 whose school has closed because of the virus; $200 per day maximum
Q: For emergency paid sick leave, is there a requirement to prove that the employee cannot work remotely? How subjective is this assessment, and what is the proof of evidence?
A: There is no such specific requirement; however, it would be a best practice for the employer to obtain the facts, including the number of children and their ages, as well as why the employee’s child or children being home and the employee’s particular job responsibilities preclude the employee from teleworking from home. The employer should retain these records for four years.
Q: How will the IRS be able to handle all the amended returns given the steep reduction in staff?
A: You are correct that the processing of these forms could be slowed based on the current environment, so all we can tell you is that they will be processed on a first-come, first-serve basis. However, we will say that the IRS has been issuing a lot of guidance via Revenue Procedures, Notices, and FAQs pretty quickly, so we would suspect that the process of amended returns (where the goal is to free up cash) will be processed quickly.
Q: How will the expensing of leasehold improvements be different under the CARES Act?
A: The correction is retroactive. The relief applies to returns already filed in 2018 and 2019. Qualified Improvement Property (QIP) is now 15-year depreciable property (20-year ADS) and eligible for 100% bonus, whereas under the old law, it was treated as 39-year property and not eligible for bonus depreciation. It depends on your situation on whether you file an amended return or file an automatic method change to claim these benefits. (Learn more in our article about how to make these adjustments.)
Q: If there is a net operating loss (NOL) from 2018 that can now be carried back five years to 2013, what about the statute of limitations that has closed that year?
A: The statute of limitations for an NOL carryback claim is based off the year the NOL is created. Therefore an NOL carryback from 2018 must generally be filed by April 15 of 2022. Note that the loss is carried all the way back to 2013 first, and then if there is loss remaining it is carried forward to 2014 and onwards.
Q: If you had a 461(l) excess business loss limitation last year, do you have to amend your return?
A: Yes, you will need to amend your 2018 return to remove the loss limitation that had previously been required for that year. If your 2019 return has already been filed with the loss being limited, then it should be amended as well. If these amendments create an NOL for you, then you will also need to file Form 1045 or amend your prior year(s) returns to carry back that NOL.
Q: When you carry back an NOL, do you get the reduction of tax at the rate that was in effect in that year or at the current rate?
A: When you carry back an NOL to a previous year, you reduce the taxable income and therefore the tax liability at the rate that was in effect at that time. Due to the reduction in tax rates starting in 2018, this will generally result in a favorable tax answer as you may be carrying back a loss from 2018 that would otherwise have offset income taxed at a lower rate and using it to offset income taxed at a higher rate.
Q: When are second-quarter estimated tax payments due?
A: Second-quarter payments are now brought in line with first-quarter payments. Both Q1 and Q2 are due on July 15, 2020.
Q: When filing a PPP application for an LLC that files Form 1065, how do you report self-employment earnings for members/owners for purposes of calculating the average monthly payroll?
A: There is no clear guidance on this. Some banks will accept a general ledger reflecting the payments that were made. Others are asking for a draft K-1 that shows the guaranteed payments made to the members. Providing whatever is available to substantiate the payments should at least get the application in process.
For additional insights and details, check out the webinar recording:
Patrick Duffany, Managing Partner, Tax
Brian Newman, Partner, Practice Leader, Federal Tax Services
Corey Rosenthal, JD, Principal, Practice Leader, State and Local Tax (SALT)
Dana Fried, JD, LLM, Managing Director, National Tax Services
Any advice contained in this communication, including attachments and enclosures, is not intended as a thorough, in-depth analysis of specific issues. Nor is it sufficient to avoid tax-related penalties. This has been prepared for information purposes and general guidance only and does not constitute legal or professional advice. You should not act upon the information contained in this publication without obtaining specific professional advice specific to, among other things, your individual facts, circumstances and jurisdiction. No representation or warranty (express or implied) is made as to the accuracy or completeness of the information contained in this publication, and CohnReznick LLP, its partners, employees and agents accept no liability, and disclaim all responsibility, for the consequences of you or anyone else acting, or refraining to act, in reliance on the information contained in this publication or for any decision based on it.
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