As a follow up to our overview of The CARES Act sent last week, the third Federal stimulus bill in response to COVID-19, I wanted to provide you with a quick update on additional guidance recently issued on the two key SBA loan programs available to business owners: the Payroll Protection Program (this is the program that will issue forgivable loans and every business owner should know about) and Economic Injury Disaster Loans.

The Payroll Protection Program (“PPP”)

  • Signed into law on Friday, these are SBA loans administered by banks.  $350 billion of loans will be issued.
  • Businesses with < 500 employees, as well as self-employed individuals, can apply for a loan of up to 2.5x their average monthly payroll costs.  Payroll costs include wages, health insurance, and retirement plan contributions, capped at an annual salary of $100,000 per employee.  For example, if your business average monthly payroll is $50,000 the maximum loan is $125,000.
  • If the loan is used for certain expenses (payroll costs, rent, utilities, etc.) during the 8 weeks following the origination of the loan, and as long as there is not a reduction in the number of employees or a greater than 25% reduction in wages paid, the borrower is eligible for complete loan forgiveness.  This is a tax-free grant.
  • The application was just released yesterday, a copy is attached for your review, and we understand that banks will start processing most loans this Friday (April 3rd) and next Friday (April 10th) for any self-employed individuals or independent contractors.
  • There are two things that we recommend you do at this time:
  1. Calculate your average monthly payroll costs for the 12 months from April 2019 through March 2020 (you will likely need to substantiate this with payroll returns filed over that time period, so you should have those ready as well), and
  2. Contact your CURRENT business bank/banker. As mentioned, these forgivable loans will be administered by banks, and we have heard that bankers intend to take care of their existing customers first.  Many lenders who have not done SBA loans in the past will start processing PPP loans.  Each bank will have its own list of required documents that you will need to provide.

If we can help with the average monthly payroll calculations, or working through the requirements of maintaining your pre-COVID-19 payroll and/or reinstating terminated employees to meet this test, please let us know.

Economic Injury Disaster Loans (“EIDL”)

  • Businesses with < 500 employees, as well as self-employed individuals, can apply for loans of up to $2 million. Interest rates will be low, and terms will be 15 to 30 years.
  • Eligible businesses may receive an advance of up to $10,000 within 3 days of submitting a loan application.
    • Advances made prior to loan approval do not need to be repaid, even if the loan application is denied.
  • Businesses will likely be able to receive a much larger loan under the EIDL compared to the PPP, to be used for a variety of operating expenses over a longer time period, but these loans are not forgivable.

As additional guidance is issued we will continue to keep you updated. 

Tax Extension

Tax Extension

In response to the COVID-19 pandemic, Treasury Secretary Steven Mnuchin announced yesterday that individuals can defer April 15th tax payments up to $1 million, and Corporations can defer up to $10 million of tax payments, for 90 days.  Please note that many details remain unclear with respect to this relief, and no official written policy has been released yet, but we expect additional guidance from the IRS in the coming days and will provide details once available.  For now, here is an overview of what to expect:

  • Tax payments due April 15th can be deferred until July 15th without incurring any interest or penalties.  This extension is available for all individual taxpayers who owe < $1 million for 2019.
  • This 90-day extension of time to pay will likely also apply to 1st and 2nd quarter 2020 estimated tax payments due April 15th and June 15th respectively.
  • Mnuchin’s statement did not extend the tax filing due date, so all taxpayers must still file their tax returns or request extensions (Form 4868 automatically extends the filing deadline to October 15th) by April 15th.
  • For anyone that anticipates a refund for 2019 taxes, as usual we recommend you go ahead and file by April 15th, if not sooner, to have that money refunded.

“We encourage those Americans who can file their taxes to continue to file their taxes by April 15,” Mnuchin said, especially encouraging people who will be getting tax refunds to do so. “Just file your taxes,” he said, and “you will automatically not get charged interest and penalties” on payments made within the 90-day deferral period.

We are following the Families First Coronavirus Response Act (FFCRA) closely, which will address relief in the form of tax credits and/or cash payments to businesses and employees affected by COVID-19 and will send an update once there is an agreement. For our business owners, we are also closely monitoring federal and state incentives (including low interest loans, grants, unemployment for employees, etc.) and will send details and guidelines once available.

Qualified Opportunity Zones in Virginia

Qualified Opportunity Zones in Virginia

Tax-Deferral Opportunity on the Sale of Low-Basis Assets:

Are you considering selling stock, real estate, or a business that has substantially appreciated in value? Are you concerned with the capital gains tax that will accompany those sales?

The December 2017 Tax Cuts and Jobs Act (TCJA) provides a new tax incentive and potential solution for investors to defer, if not eliminate, capital gains tax on the sales of assets in exchange for investments back into Qualified Opportunity Zones (“QOZs”) across the Commonwealth.  Click here for more details

December 2017 – Tax Cuts and Jobs Act

December 2017 – Tax Cuts and Jobs Act

We are increasingly expectant that major tax legislation will become law as Republican leaders have indicated that after the latest round of quick negotiations, they have arrived at an agreement – the Tax Cuts and Jobs Act.  We have been following the plans closely for the past year, particularly over the past three months, and continue to believe that the final version contains a host of changes that have both positive and negative impacts to middle and high-income taxpayers. We also believe that the legislation carries significantly more complexity than current rules, and look forward to discussing your situation in greater detail in the coming weeks.

In the meantime, please see below a short list of actionable items before year-end as well as a handful of key provisions that may impact you as we head into 2018.

Considerations Before Year-End 2017

  • Deferring Income and Accelerating Deductions: In anticipation of lower tax brackets in 2018 and more favorable corporate tax rates for many of our business-owner clients, the common strategy of deferring income into 2018 and accelerating deductions before year-end still applies (if you are in the green income brackets in the chart below). Consideration should always be given to managing tax liabilities over multiple years to avoid spikes in income and deductions that could cause you to pay tax at significantly higher rates.
  • State and Local Taxes: The Act will prevent many of our clients from deducting their state income taxes paid beginning in 2018 as it imposes a $10,000 cap on the combined total of property and state income taxes. As such, risking the permanent loss of this deduction going forward, we recommend all clients consider paying their entire 2017 state tax liability before December 31st, as well as real estate and personal property taxes due in early 2018.
  • Charitable Donations: The deduction for charitable donations will remain under the Act, however the standard deduction is scheduled to increase beginning in 2018 – from $12,700 for a married couple filing a joint return to $24,000. It is anticipated that this increased standard deduction, combined with the disallowance of deducting more than $10,000 of state and local taxes, will dramatically decrease the number of taxpayers who itemize their deductions. If you do not expect to clear the new standard deduction going forward, consider grouping two or more years of charitable contributions into a single year, then minimizing the deduction in the future.  We believe that this only makes sense with existing charitable commitments, or through a Donor Advised Fund, as to not change your overall philanthropic plan.

Key Provisions of the Act

  • New Brackets: The top tax bracket will be reduced to 37%, down from 39.6%, and will begin at taxable income of $600,000 for a married couple filing a joint return. See comparison at right of current and proposed rates, which are generally favorable to everyone.
  • Expanded Standard Deduction and Repeal of Personal Exemptions: The Act consolidates and expands the Standard Deduction and Personal Exemptions into a single, larger standard deduction of $24,000 for married couples (an increase from $12,700). With the repeal of Personal Exemptions, the larger standard deduction is only slightly better than the current benefit of both Personal Exemptions and the Standard Deduction, and less favorable for some.
  • Business Income Tax: The most controversial of the provisions relates to the lower tax rate for some pass-through business entities, particularly when compared to the new, top corporate tax rate.
    • The Act calls for a reduction in the top corporate tax rate, C-corporations, from 35% to 21% and elimination of the corporate AMT.
    • Many pass-through businesses will receive a 20% deduction against their business income, or, in practice, their owners will be taxed on only 80% of business income. There are a number of restrictions in place intended to limit income eligible for the lower pass-through rate and “service” businesses are excluded if owner income is greater than $315,000.
    • For many of our clients, we see this as one of the greatest planning opportunities in the Act.

Once the Act becomes law, we plan to send a more comprehensive update outlining more provisions and planning ideas – stay tuned!