COVID-19 Legislation: What Employers Should Know

COVID-19 Legislation: What Employers Should KnowJ UNE 3 , 2 0 2 0

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DANIEL P. MEHANPresident & CEO,Missouri Chamber of Commerce and Industry

DANIEL P. MEHANPresident & CEO,Missouri Chamber of Commerce and Industry

1 Return to Work Guide: mochamber.com/returntowork

Uniting for Recovery: A COVID-19 Economic Response Agenda: mochamber.com/recovery

Coronavirus resources for businesses: mochamber.com/coronavirus

#BuyMO to support local businesses: mochamber.com/buymo

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RESOURCES

5 Upcoming virtual events: mochamber.com/events

RESOURCES

INTRODUCTIONS

Jesse Palmer, CPAPartner & Director of Tax Quality [email protected]

Yelena BosovikSenior Associate [email protected]

1 Payroll Tax Credits & Tax Deferral Options

Retroactive TCJA Changes: NOLs, 163(j) Changes, Retail Glitch Fix

COVID-19 Lending Programs

Legislative Updates

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AGENDA

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PAYROLL TAX CREDITS: PAID SICK LEAVE & EXPANDED FMLA

• Families First Coronavirus Response Act (FFCRA) requires private employers with 500 or fewer employees & public employers to provide paid leave of up to 12 weeks for eligible employees who are unable to work or telework due to COVID-19 related reasons

• Paid sick leave – six qualifying reasons Full time: 80 hours for full-time employees Part time: average number of hours worked over two-week period

• Expanded FMLA – employee’s minor child’s school or day care is unavailable due to COVID-19 Employed for at least 30 calendar days Up to 10 weeks paid leave; first 10 days unpaid

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PAYROLL TAX CREDITS: PAID SICK LEAVE & EXPANDED FMLA

• Eligible employers are entitled to refundable payroll tax credits for qualified sick leave wages & qualified family leave wages paid Note: public employers are NOT eligible for FFCRA tax credits

• Credit is increased by qualified health plan expenses & employer’s portion of Medicare tax allocable to qualified leave

• Qualifying wages exempt from employer portion of Social Security tax• Credit applies to employer’s portion of Social Security tax & tier 1 of railroad

retirement tax; excess refundable• Applies to leave taken between April 1, 2020, & December 31, 2020

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PAYROLL TAX CREDITS: PAID SICK LEAVE & EXPANDED FMLA

Reason for Leave Emergency Paid Sick Leave FMLA Expansion

Employee seeking medical diagnosis or ordered to isolate or quarantine

• 10 days paid leave at 100 percent of regular rate

• Up to $511/day or aggregate $5,110

N/A

Employee caring for someone seeking diagnosis, or ordered to isolate or quarantine

• 10 days paid leave at 2/3 of regular rate

• Up to $200/day or aggregate $2,000

N/A

Child care due to closures • 10 days paid leave at 2/3 of regular rate

• Up to $200/day or aggregate $2,000

• 10 weeks at 2/3 of regular rate

• Up to $200/day or aggregate $10,000

I have fewer than 50 employees. Am I exempt from providing this paid leave? • Employers with fewer than 50 employees may be exempt if

1. Paid sick leave due to school or place of care closures or child care provider unavailability for COVID-19 related reasons &

2. Expanded family & medical leave due to school or place of care closures or child care provider unavailability for COVID-19 related reasons when doing so would jeopardize the viability of the small business as a going concern

• A small business claiming this exemption isn’t entitled to tax credits for qualified leave wages they’re exempt from providing

• DOL FAQ #58 lists scenarios that qualify for a small business hardship exemption

FREQUENTLY ASKED QUESTIONS

If we pay an employee full pay versus the two-thirds pay required in certain circumstances under the FFCRA, is our credit capped at the two-thirds rate, or are we precluded from credit because we paid higher than the FFCRA rate?

You may pay your employees in excess of the FFCRA requirements, but you can’t claim, & won’t receive a tax credit for, amounts in excess of the FFCRA’s statutory limits

FREQUENTLY ASKED QUESTIONS

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PAYROLL TAX CREDITS:EMPLOYEE RETENTION CREDIT

• Coronavirus Aid, Relief, and Economic Security (CARES Act)

• Encourages businesses to keep employees on their payroll

• Refundable tax credit

• 50 percent of up to $10,000 in qualified wages paid by an eligible employer whose business has been financially impacted by COVID-19

• Qualified wages definition varies based on number of employees 100 or fewer FTEs = credit applies to all wages, whether an employee is providing services

or not More than 100 FTEs = credit applies to wages paid to employees who are not providing

services to employer due to COVID-19

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PAYROLL TAX CREDITS:EMPLOYEE RETENTION CREDIT

• To qualify, an employer must carry on a trade or business during calendar-year 2020, & the operation of that trade or business is either1. Fully or partially suspended due to orders from an appropriate governmental

authority limiting commerce, travel or group meetings due to COVID-19; or2. Receiving gross receipts, for at least one calendar quarter, that are less than 50

percent of gross receipts received during the same calendar quarter(s) in prior year

Do essential businesses qualify for the Employee Retention Credit?• According to IRS FAQ 30, an essential business isn’t

considered to have a full or partial suspension of operations if the governmental order allows the employer to remain open, even though the governmental order requiring nonessential businesses to close may have an effect on the essential business’s operations

• However, an employer with an essential business may be considered to have a full or partial suspension of operations if the business’s suppliers are unable to make deliveries of critical goods or materials due to a governmental order that causes the supplier to suspend its operations

FREQUENTLY ASKED QUESTIONS

Does an eligible employer receiving an Employee Retention Credit for qualified wages need to include any portion of the credit in income?• No. An employer receiving a tax credit for qualified

wages, including allocable qualified health plan expenses, doesn’t include the credit in gross income for federal income tax purposes

• However, a deduction is disallowed for the portion of wages paid equal to the sum of certain credits determined for the taxable year, such that an employer's aggregate deductions would be reduced by the amount of the credit as result of this disallowance rule

FREQUENTLY ASKED QUESTIONS

May an employer treat its health plan expenses as qualified wages if it continues the employees' health care coverage but doesn’t pay the employees' wages for the time for which the employees aren’t providing services?• More than 100 full-time employees = treat health plan expenses

paid or incurred, after March 12, 2020, & before January 1, 2021, allocable to the time that employees are not providing services as qualified wages

However, may not treat health plan expenses allocable to the time for which employees are receiving wages for providing services as qualified wages

• 100 or fewer full-time employees = health plan expenses may be treated as allocable to the applicable periods as qualified wages even if employees are not working & employer does not pay employees any wages for the time they are not working

FREQUENTLY ASKED QUESTIONS

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CLAIMING COVID-19 PAYROLL TAX CREDITS

• Apply for credits on quarterly payroll filings – draft revised Form 941 released on April 29, 2020 Qualified sick leave wages (line 5a(i)); Qualified family leave wages (line 5a(ii)); Nonrefundable portion of tax credits as calculated in Worksheet 1 (lines 11b &

11c); Deferred amount of the employer share of Social Security tax (line 13b); Refundable portion of tax credits as calculated in Worksheet 1 (lines 13c & line

13d); & Advances received from filing Form 7200 for the quarter (line 13f)

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CLAIMING COVID-19 PAYROLL TAX CREDITS

• Eligible employers may retain withheld federal income taxes, the employee share of SS & Medicare taxes & employer share of SS & Medicare taxes with respect to all employees to help pay required leave under the FFCRA or qualified wages under the CARES Act

• Form 7200 – request an advance on COVID-19 payroll tax credits if tax withholding is insufficient to cover mandated paid leave or qualified wages IRS intends to process these requests in two weeks or less

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TAX DEFERRAL OPTIONS

• Tax filing & payment due date postponement Notice 2020-23 postponed to July 15, 2020; most filings & payments due

on or after April 1, 2020, & before July 15, 2020

• Employers may defer employer’s portion of SS taxes due in 2020 50 percent due December 31, 2021, & remaining 50 percent due

December 31, 2022

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NET OPERATING LOSSES (NOLS)

• TCJA Two-year NOL carryback provision removed NOLs may be carried forward indefinitely until the loss is fully recovered Limited to 80 percent of taxable income any single tax period

• CARES Act Suspends 80 percent limitation for tax years beginning after December 31, 2017,

& before January 1, 2021, i.e., 2018 through 2020 NOLs generated during 2018 through 2020 may be carried back up to five tax

years

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NET OPERATING LOSSES (NOLS):TAX PLANNING OPPORTUNITIES

• Amending past tax returns or filing a tentative refund claim to take advantage of the temporary rules under the CARES Act, potentially resulting in cash tax refunds

• NOLs carried back to pre-2018 tax years may offset income taxed at higher pre-TCJA rates, making such NOLs even more valuable from a cash tax perspective

• Notice 2020-26 extends the deadline for filing a tentative refund claim for 2018 NOLs by six months, to June 30, 2020 (for 2018 calendar-year taxpayers)

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NET OPERATING LOSSES (NOLS):TAX PLANNING OPPORTUNITIES

• Review 2018 & 2019 tax returns, & 2020 tax projections to look for ways to generate or increase NOLs Accounting method changes – accrued bonuses, prepaid expenses,

accounting methods related to inventory Cost segregation studies Research & development (R&D) studies Section 179D deduction Refundable AMT credits More NOL tax planning solutions here

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SECTION 163(j)

• TCJA Limited business interest expense to 30 percent of Adjusted Taxable Income (ATI), i.e.,

taxable income before interest expense, depreciation, amortization & depletion After 2021, the limit is modified to 30 percent of taxable income before interest expense

only

• CARES Act Business interest expense limitation raised to 50 percent of ATI for 2019 & 2020 tax years

(2020 for partnerships) Businesses may elect to use 2019 ATI to calculate 50 percent limitation for 2020 Corporations deducting more interest expense in 2019 due to the increased ATI limitation

may increase or generate a NOL NOL may result in a cash refund if fully used in 2019 or carried back

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RETAIL GLITCH FIX

• CARES Act fixed TCJA retail glitch – qualified improvement property (QIP) is now considered 15-year property & eligible for bonus depreciation

• Leaving 2018 & 2019 QIP unchanged as 39-year property is considered an impermissible tax accounting method

• IRS has indicated that a taxpayer that already filed a 2019 tax return may amend that tax return with an accounting method change, rather than wait for a 2020 tax return or amend two tax returns

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SBA PAYCHECK PROTECTION PROGRAM (PPP)

• CARES Act authorized $349 billion toward SBA loans to help with job retention & certain other expenses Paycheck Protection Program and Health Care Enactment Act (PPPHEA)

allocated an additional $310 billion to the SBA PPP

• Small businesses & specific nonprofit organizations, veterans’ organizations & tribal businesses, as well as individuals who are self-employed or are independent contractors, are eligible if they also meet program size standards

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SBA PAYCHECK PROTECTION PROGRAM (PPP)

• Borrower certifications Funds were used to pay costs that are eligible for forgiveness Any FTE or salary/wage reductions were reflected Nonpayroll costs are limited to 25 percent of the amount requested Owner-employee or self-employed compensation limited to lesser of

$15,385 or 2019 equivalent (prevents artificial increases) General certifications related to fraud, accuracy, false statements, required

documentation, cooperation with SBA & lender

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SBA PAYCHECK PROTECTION PROGRAM (PPP)

• Loan amount in excess of $2 million? Any borrower that, together with its affiliates, received PPP loans with an original

principal amount of less than $2 million will be deemed to have made the required certification concerning necessity of the loan in good faith

Borrowers with loans greater than $2 million that do not satisfy this safe harbor may still have an adequate basis for making the required good-faith certification, based on their individual circumstances in light of the language of the certification & SBA guidance

Loans in excess of $2 million will be reviewed by SBA. If borrower repays loan after receiving notification from SBA, SBA will not pursue administrative enforcement or referrals to other agencies based on its determination with respect to the certification concerning necessity of the loan request

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SBA PAYCHECK PROTECTION PROGRAM (PPP)

• Interaction with Employee Retention Credit Section 2301(j) of the CARES Act specifies that if a business receives a PPP

loan, such business shall not be eligible for the Employee Retention Credit

SBA FAQ: PPP loan recipients who repay their SBA loans in full by May 18, 2020, are eligible for Employee Retention Credit

• Interaction with Payroll Tax Deferral SBA PPP loan recipients may take advantage of the CARES Act deferral

provisions up to the date the lender issues a decision to forgive any of the PPP loan

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SBA PAYCHECK PROTECTION PROGRAM (PPP)

• SBA PPP Loan Forgiveness Form 3508: PPP Loan Forgiveness Application CARES Act excludes PPP loan forgiveness from gross income subject to tax; however, recent

IRS guidance provides that expenses covered by a PPP loan that are forgiven cannot be deductible by the borrower

Loan disbursement starts an eight-week (or 56-day) covered period (CP) for purposes of measuring payroll & nonpayroll costs eligible for loan forgiveness

• Example: Loan proceeds were received on Monday, April 20. The CP runs from Monday, April 20, to Sunday, June 14

Forgiveness application also provides an Alternative Payroll Covered Period 75/25 Rule – SBA adopted by administrative authority

• Not more than 25 percent of the loan forgiveness can be on non-payroll costs items • Congress may modify to 40 percent, but nothing is finalized

To determine borrower eligibility under the 500-employee or other applicable threshold, must a borrower count all employees or only full-time equivalent employees?• CARES Act defines the term employee to include “individuals

employed on a full-time, part-time, or other basis”

• Borrower must calculate the total number of employees, including part-time employees, when determining employee headcount for purposes of the eligibility threshold Example: Borrower has 200 full-time employees & 50 part-time

employees each working 10 hours per week, then borrower has a total of 250 employees

• For purposes of loan forgiveness, the CARES Act uses the standard of “full-time equivalent employees” to determine the extent to which the loan forgiveness amount will be reduced in the event of workforce reductions

FREQUENTLY ASKED QUESTIONS

Will a borrower’s PPP loan forgiveness amount be reduced if the borrower laid off an employee, offered to rehire the same employee, but the employee declined the offer?• No. SBA issued an interim final rule excluding laid-off

employees whom the borrower offered to rehire (for the same salary/wages & same number of hours) from the CARES Act’s loan forgiveness reduction calculation

• To qualify for this exception, borrower must have made a good faith, written offer of rehire, the employee’s rejection of that offer must be documented by the borrower and the borrower notifies state unemployment office of such employee’s rejection

FREQUENTLY ASKED QUESTIONS

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SBA ECONOMIC INJURY DISASTER LOAN (EIDL)

• Loans up to $2 million for alleviating economic injury caused by a disaster• Includes emergency grants up to $10,000 that are not required to be paid back even if

not approved for EIDL (due to high demand, currently EIDL grants are limited to $1,000 per employee, up to $10,000) NOTE: Currently, SBA is only accepting new EIDL & EIDL Advance applications on a

limited basis to provide relief to U.S. agricultural businesses

• Businesses can receive an EIDL & a PPP loan as long as they are used for different costs. For example, a business can receive an EIDL for working capital & a PPP loan for payroll assistance

• https://www.sba.gov/funding-programs/loans/coronavirus-relief-options/economic-injury-disaster-loan-emergency-advance

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MAIN STREET LENDING PROGRAMSMain Street New Loan Facility (MSNLF) Main Street Expanded Loan Facility

(MSELF)Main Street Priority Loan Facility (MSPLF)

Secured or unsecured Secured or unsecured Secured or unsecured

Four-year maturity Four-year maturity Four-year maturity

Originated on or after April 24, 2020 Existing loans originated before April 24, 2020, with a remaining maturity of at least 18 months

Originated on or after April 24, 2020

Principal & interest payments deferred for one year. Unpaid interest will be capitalized

Principal & interest payments deferred for one year. Unpaid interest will be capitalized

Principal & interest payments deferred for one year. Unpaid interest will be capitalized

Repayment years two to four, 33.33 percent each year

Repayment years two to four, 15 percent, 15 percent, 70 percent

Repayment years two to four, 15 percent, 15 percent, 15 percent, 70 percent

LIBOR (one or three month) + 3 percent LIBOR (one or three month) + 3 percent LIBOR (one or three month) + 3 percent

Minimum loan size – $500,000 Minimum loan size – $10 million Minimum loan size – $500,000

Maximum loan size of $25 million capped at 4x borrower’s adjusted 2019 EBITDA

Lesser of $200 million, 35 percent of outstanding & undrawn available debt or 6x borrower’s 2019 adjusted EBITDA maximum loan size of $200 million

Maximum loan size of $25 million capped at 6x borrower’s adjusted 2019 EBITDA

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LEGISLATIVE UPDATES

• General expectation of Congress is to have a final version of a phase 4 stimulus bill done by early to mid-June

• House passed HEROES Act on May 15, 2020, but highly unlikely to make it through Senate in its current form Proposes changes to existing payroll tax credits made available under previous phases of

COVID-19 relief New tax credits to help businesses & self-employed individuals with business interruption & loss

of revenue during the COVID-19 pandemic Amend the provisions of CARES Act that provide for NOL carrybacks by limiting carrybacks to

taxable years beginning on or after January 1, 2018 Repeal of the state & local tax deduction for 2020 & 2021 Funding for state & local governments

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LEGISLATIVE UPDATES

• Widespread interest in making changes to the PPP

• HR 7010: Paycheck Protection Program Flexibility Act of 2020 Extends covered period to shorter of 24 weeks after loan issuance or

December 31, 2020 Would ease requirement that at least 75 percent of the loans be used for

payroll (reduce to 60 percent) Businesses would also get more than two years to pay back the loans &

would be able to receive a payroll tax deferment, even after forgiveness date

Questions?

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Thank You!The information contained in these slides is presented by professionals for your information only & is not to be considered as legal advice. Applying specific information to your situation requires careful consideration of facts & circumstances. Consult your BKD advisor or legal counsel before acting on any matters covered