As the federal government continues to look for ways to help the country through this unprecedented health and economic crisis, there have been several pieces of legislation that have passed, with more being proposed. Most notable were the Coronavirus Aid, Relief and Economic Security Act (CARES) Act and the Paycheck Protection Program and Health Care Enhancement (PPP & HCE) Act. There are more proposals being considered as well, so let’s focus on what’s passed so far and what tax and accounting professionals can do to advise their individual taxpayer and business clients.
1. Let your clients know about the required minimum distribution (RMD) suspension.
As part of the CARES Act, the requirement for older taxpayers to take required minimum distributions (RMDs) from their retirement plans has been waived for 2020. This is primarily due to the drop in value for most investments as a result of the economic effects of COVID-19.The CARES Act RMD waiver applies to:
- The 2020 RMD for taxpayers who turned 70½ before 2020.
- The 2019 RMD for taxpayers who turned 70½ in 2019 and chose to defer their first distribution to 2020.
- The 2020 RMD for taxpayers who turned 72 in 2020.
- The RMDs for beneficiaries.
Explain to your clients that not taking or minimizing distributions during the suspension can minimize their Social Security benefit taxation and overall taxes for 2020. Remember: Social Security income is tax-free for lower income retirees but becomes taxable as their income increases. For some, there is a potential opportunity to take more than the RMD at a lower or even zero tax rate if their income will be substantially reduced for 2020. Let your clients know that those who took an RMD before the suspension was announced have until July 15 to roll the fund back into the retirement plan (this does not apply to taxpayers that took a distribution in January).
2. State the option of retirement plan distributions and loans (as a last resort).
For those in immediate need of cash, the CARES Act allows qualified taxpayers to make coronavirus-related distributions in calendar year 2020 from qualified retirement plans or IRAs not to exceed $100,000. Coronavirus-related distributions are not subject to the 10% early withdrawal penalty. The taxpayer is permitted to spread the income from a coronavirus-related distribution over a three-year period beginning with the year of distribution, or they can opt out (i.e., report it all in the distribution year). Any amount of the distribution can be re-contributed in one or more re-contributions over the 3-year period beginning on the day after the date of the distribution. Additionally, the maximum amount available for 401(k) plan loans taken between March 27, 2020 and September 23, 2020 by a “qualified participant” was doubled under the CARES Act to the lesser of $100,000 or 100% of the participant’s vested account balance. The amount available for the loan is reduced by any other loans outstanding in the last twelve months. HOWEVER, make sure to emphasize to your clients that tapping into their retirement funds should be a last resort.
3. Help them take advantage of retroactive business benefits.
For your business clients, this is an opportunity to advise them on several key provisions of the COVID-19 relief measures:
- Net Operating Loss (NOL) – NOL carrybacks have been reinstated for 2018 through 2020. For these years, NOLs can be carried back five years, and the loss is not subject to the 80% limitation, giving business owners quick access to cash in the form of tax refunds from prior years.
- Qualified Improvement Property – Leasehold, restaurant and retail improvements are retroactively (to 2018) allowed to use 100% bonus depreciation, thus allowing those improvements to be expensed instead of depreciated over 39 years. This could possibly lead to some big tax refunds.
- Limitation on Losses – The limitation on losses has been retroactively suspended for 2018 through 2020.
- Limitation on Deductible Business Interest – The limitation on business interest has been retroactively suspended for 2018 through 2020.
These updates may seem a bit overwhelming to your clients, but if any of the provisions apply to them, they can be very financially beneficial and should be taken care of immediately.
4. Notify them of payroll assistance provisions.
For your business clients, it’s vital to help them understand the various provisions that allow them to continue to keep their employees on payroll with government assistance.
Employee Retention Credit
This credit is a refundable payroll tax credit for 50% of qualified wages up to a maximum wage of $10,000 per employee. Wages taken into account are those paid starting March 13, 2020 through December 31, 2020 and include a portion of the cost of health care provided by the employer. However, if the employer gets a PPP Loan, that makes the employer ineligible for the credit. Additionally, any wages paid through reimbursement from the FFCRA sick and family leave provisions do not count towards the credit.
Families First Coronavirus Response Act (FFCRA)
The FFCRA allows employers to pay sick leave & family leave and be reimbursed by the government.
Paycheck Protection Program (PPP)
PPP Loans provide employers with a loan amount equal to 2.5 times their average 2019 payroll (limited to $100K per employee). The loan is forgivable to the extent the loan proceeds are used for payroll in the 8 weeks following funding. Self-employed individuals qualify and can add their net profit to payroll to calculate the loan amount, but they are also limited to $100K. However, remind your clients that the PPP Loan makes an employer ineligible for unemployment.
The Paycheck Protection Program has been confusing for businesses and financial professionals alike, with the first round of funds being rapidly depleted (and replenished by the PPP & HCE Act). This means your clients (and other business owners) are going to need help from pros like you to guide them through the process of applying for loan forgiveness. Otherwise, they may end up with additional debt they were unprepared to handle.
Deferral of Payroll Taxes
Taxpayers (including those who are self-employed) will be able to defer paying the employer portion of certain payroll taxes through the end of 2020. The delay provisions apply to all employers regardless of size. The 2020 deferred amounts will be due in two equal installments: 50% by the end of 2021 and the balance by the end of 2022. The relief legislation passed thus far is providing plenty of financial relief to your individual taxpayer and business clients – they just need to know how to use it. Clients and prospects will turn to you to guide them through the maze of choices and ensure they don’t compromise their long-term planning with these short-term decisions. Helping your clients through the COVID-19 crisis is a huge undertaking, but you don’t have to do it alone. You take care of the service, and CountingWorks PRO will take care of the rest.
We’re already providing our CPAs, EAs, and tax professionals with all the content and tools they need to run their practices virtually, keep their clients up to date on the latest news and changes, and even grow their client base during challenging times. Ready to give it a shot? Get in touch here.