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Following enactment of the Families First Coronavirus Response Act and the CARES Act, Buckingham’s team of tax attorneys have been helping clients survive these difficult and unprecedented times in America. Below are some of the most important tax aspects that businesses, their owners, and nonprofit organizations should be aware of.
Refundable Tax Credits for Compensation Paid to Employees and Self-Employed Individuals
1: Emergency Paid Sick Leave Credit: Commencing April 1, 2020, businesses with less than 500 employees must provide employees with 10 days (80 hours if full-time or an average for part-time) paid sick leave for various qualifying reasons related to COVID-19. Employers are entitled to a refundable tax credit against payroll taxes for the amount paid for this sick leave, including the employer’s associated health insurance cost. The maximum credit for employees using leave because they cannot work or telework is $511 per day or $5,110 total. The maximum is available if the employee is unable to work due to a government order, is advised to self-quarantine, or has COVID-19 symptoms. If the employee takes sick leave to care for others (e.g., children or family members), the credit is equal to 2/3rds of the employee’s pay up to $200 per day or $2,000 total.
2: Tax Credit for FMLA: In addition to the above, small business employers may also claim a credit for wages paid to employees who are unable to work or telework to care for their child if the child’s school or place of care is closed due to COVID-19. The credit is available for up to 10 weeks up to $200 per day and $10,000 total. If the employee chooses to use the paid sick leave first, this effectively allows up to 12 weeks of compensation while on FMLA to be recovered in tax credits – two weeks for paid sick leave and ten weeks for FMLA.
3: Employee Retention Credit: A payroll tax credit of up to 50% of certain compensation paid from March 13, 2020 to December 31, 2020 is also available. To qualify, the business must either: (1) be fully or partially suspended due to a COVID-19 related shutdown order; or (2) have a 50% or greater decline in gross receipts from the same quarter in the previous year. The credit is determined differently based upon whether the business has more than 100 employees or not. Additionally, the maximum credit is $5,000 per employee. Significantly, this credit is not available if the business takes advantage of an SBA Paycheck Protection Program loan.
Although multiple credits cannot be claimed for the same time period, the three credits above can be combined to maximize the length of time employers may be reimbursed for compensation paid to employees.
Self-Employed Tax Credit: Complementary to Emergency Paid Sick Leave Credit, self-employed individuals are entitled to a credit against their income taxes if unable to work related to COVID-19. As with the Emergency Paid Sick Leave Credit, the maximum credit is $511 per day for up to 10 days if the individual cannot work due to a government order, is advised to self-quarantine, or has COVID-19 symptoms. The maximum decreases to $200 per day if caring for a child or family member.
Business Tax Implications: The CARES Act modified the following limitations which were enacted as part of the Tax Cuts and Jobs Act of 2017 (TJCA):
1: Net Operating Loss Carrybacks Allowed: NOLs from 2018, 2019, and 2020 can now be carried back up to five years. This could allow businesses to take advantage of NOLs, which could no longer be carried back under the TJCA, in a tax year with a higher tax rate. Further, the CARES Act eliminated the 80% maximum for NOLs.
2: Interest Limitation Increased: Business interest was limited generally to 30% of adjusted taxable income. The CARES Act increased the limitation to 50% for 2019 and 2020. Businesses may elect to compute the 2020 limit by using its 2019 adjusted taxable income, which will provide an increased deduction if income declines in 2020.
3: Business Loss Limit Suspended: After the TJCA, individuals were limited to $250,000 ($500,000 married filing jointly) of business losses to offset non-business income. The CARES Act eliminated this limitation for years before 2021. Individuals who were limited by this rule in 2018 or 2019 can file amended returns to obtain a refund.
Benefits for Individuals: In addition to the highly publicized up to $1,200 per person rebate checks, the CARES Act includes some significant changes for individuals
1: IRA Early Withdrawal Penalty Waived: Individuals may withdraw up to $100,000 from their retirement accounts without incurring the 10% early withdraw penalty. Although tax may still be owed on the withdraw, individuals have up to three years to restore the amount without tax.
2: Other IRA Modifications: The amount an individual may obtain as a loan from his/her IRA is increased to $100,000. Additionally, required minimum distributions are waived for 2020.
3: Charitable Contributions: Individuals who do not itemize may now claim up to $300 of cash contributions to public charities. Additionally, for those taxpayers who do itemize, the percentage limitation on charitable deductions is eliminated for 2020.
Ohio Tax Relief: Like many states, Ohio extended the filing and payment deadlines for individual income taxes, pass-through entities, municipal income tax, and municipal net profit tax. However, it is important to realize that deadlines have not been extended for commercial activity tax, sales / use tax, or employer withholding tax. This is especially significant for sales tax and employer withholding tax which carry personal liability for responsible parties, such as business owners, officers, and employees that have fiscal control over the business.
If you have questions about how to maximize your benefits from the ever-changing tax landscape, please do not hesitate to reach out to one of Buckingham’s tax professionals: Rich Fry, Steve Dimengo, Rob Malone or Jon Stefanik.
Our attorneys will provide a collaborative, thoughtful approach to your legal needs. We look forward to connecting with you.