At its meeting on April 8, 2020, the Financial Accounting Standards Board (FASB) decided to propose the following effective date deferrals due to the coronavirus pandemic:

Individual, Trusts, Estates, Corporations, and Others

Yesterday’s notice expands this relief to additional returns, tax payments and other actions. As a result, the extensions generally now apply to all taxpayers that have a filing or payment deadline falling on or after April 1, 2020, and before July 15, 2020. Individuals, trusts, estates, corporations and other non-corporate tax filers qualify for the extra time. This means that anyone, including Americans who live and work abroad, can now wait until July 15 to file their 2019 federal income tax return and pay any tax due.

Estimated Tax Payments

The Federal Reserve made history on Thursday by moving aggressively to provide up to $2.3 trillion in liquidity commitments to support the economy. This policy intends to bolster households, small and medium-sized firms, and the ability of state and local governments to float debt to ensure critical services during the pandemic.

Like the Paycheck Protection Program, we anticipate that the Main Street program will experience greater-than-expected demand and will very likely be oversubscribed. Eligibility is based on firms with revenues of less than $2.5 billion in 2019, or firms with up to 10,000 employees. Each firm must be a business that is created or organized in the United States with significant operations and a majority of its employees in the U.S.

Loan terms are a four-year maturity at an adjustable rate of SOFR plus 250-400 basis points with the minimum size of $1 million. Amortization of principal and interest will be deferred for one year. The maximum size will be the lesser of $25 million or an amount that, when added to the borrower’s existing and committed but undrawn debt, does not exceed four times the borrower’s 2019 EBITDA. Prepayment will be permitted without penalty.

The facility does contain some loose conditionality around efforts to maintain payroll and retain its employees during the term of the loan, as well as not cancel or reduce any existing lines of credit to the eligible lender or any other lender. In addition, loans obtained through the facility will not be used to repay or refinance pre-existing loan balances.

Here’s a picture of how it is intended to work

For additional information about the Main Street Lending Progrom, refer to the RSM article, Fed introduces Main Street Lending Program.

Please contact your HSC advisor, or Scott Touro, MBA at stouro@hsccpa.com with any questions you may have.

The current market situation is an example of why financial planning (with a keen eye toward tax outcomes) is the cornerstone of investment decisions, retirement planning, business transitions, insurance choices, etc.  A drop in the market provides plenty of planning opportunities to consider.

1. Roth conversions – Convert Traditional IRA accounts to Roth IRAs to maximize future tax-free growth and income distributions as the market recovers.
2. Increase plan contributions – Increase current 401k/403b contributions to “buy low” when the market is down and increase tax-deferred growth potential.
3. 529 Plans – For the same reasons above, consider “max funding” or taking advantage of the 5 year “bunching” rule for gifts to 529 Plans.
4. RMD’s – Stop or delay – Delay taking required minimum distributions until later in the year to allow accounts to recover (or don’t take them at all for 2020 if you don’t need to).
5. Roth deferrals – Consider switching traditional 401k/403b deferrals to Roth deferrals if household income this year will be lower this year.
6. Tax loss harvesting – Tax loss harvest to generate capital losses that can be used to offset capital gains now and in the future.
7. Estate and asset protection planning – Consider several strategies for asset protection and estate tax planning.
   • Consider gifts to irrevocable trusts using assets that have reduced in value. Consider creating a Spousal Lifetime Access Trust (SLAT) that allows your spouse to control and receive income from the assets in the trust.
   • In addition to, or alternatively, sell depressed assets to the trust in return for a promissory note using current low applicable federal rates.
   • If you have grantor trusts in place (e.g. Intentionally Defective Grantor Trusts), consider swapping assets that have a currently depressed value for assets inside the trust that may be holding their values. This allows currently depressed assets to recover in value outside of your estate.
   • Create and fund Grantor Retained Annuity Trusts (GRATs).  These trusts rely on the appreciation on the assets beating the growth based on current applicable federal rates GRATs work best as estate planning vehicles when interest rates are low and with assets that are likely to appreciate significantly over time.
8. Invest some excess cash – Begin dollar cost averaging cash that is earmarked for long-term investment.
9. Re-balancing – Now and going forward, awareness to portfolio re-balancing frequency to maintain appropriate allocations.
10. Refinance – Consider refinancing your mortgage and intra-family loans – interest rates are fluctuating quickly, but may be worth looking into.

The ideas above may or may not be applicable to your personal situation and should be discussed with your advisors prior to implementation. Please contact your HSC advisor, HKFS financial planning consultant, Kathy Ettensohn, CPA kettensohn@hsccpa.com, or Scott Olinger, CPA, CGMA  solinger@hsccpa.com with any questions you may have.

U.S. Small Business Administration (SBA) issued an interim final rule with additional guidance regarding the application of certain affiliate rules applicable to SBA’s implementation of the “size rules” of the Act and requests public comment.  The new guidance effectively reiterates the “control” standards previously communicated including, but not limited to:

• A holder of more than 50% of an applicant’s voting securities de facto “controls” the applicant;
• A minority holder (a holder of less than 50% of an applicant’s voting securities, but in any amount), will be deemed an affiliate if that minority holder can “control” the applicant (by charter, bylaws or stockholder agreement) by preventing a quorum or otherwise blocking actions by the board or stockholders:

If “control” is found between an applicant and another company, all of the applicant’s employees – and employees of all the applicant’s affiliates (including portfolio companies of private equity holders) will be aggregated with the applicant’s employee count in determining eligibility.

More information can be found at the US Treasury PPP Assistance Page.

The U.S. Small Business Administration on Thursday issued an interim final rule (yes. . . that is right, an interim final rule. . .) for the Paycheck Protection Program (PPP), which is offering $349 billion in forgivable loans that small businesses impacted by the Coronavirus pandemic can use to cover costs including payroll and rent.

In addition, early this morning they have issued a NEW application form –  PPP – Final (hopefully) Borrower Application Form.  It is not clear if the SBA will accept the previously issued forms or not.  Therefore, we recommend that you consider completing the new form (unless your banker has instructed you otherwise).

Due to the quickly evolving nature of this situation, and the differing approaches certain banks are taking, we recommend that you stay in close contact with your banker in case anything else changes.  At this point, they are your best source of timely information. (I do feel compelled to say that they are in a difficult situation working through this void in guidance from the SBA and Treasury, so grace is likely warranted).

• Average Monthly Payroll Calculation — For most companies this will be calculated on the average monthly payroll of 2019. If your company is extremely seasonal you may elect to use the average payroll between 2/15/2019 and 6/30/2019.  (The guidance is still silent on Trailing 12 versus 2019 pay – stay in close contact with your banker on this.  . . many are calculating and preparing for both scenarios.)
• Loan interest rate has changed to 1%.
• Term of loan has changed to 2 years with payment deferral for 6 months.
• It appears that the other operating factors such as mortgage interest, rent and utilities could make up to, but not more than, 25% of the loan amount repaid by the government.

This week the IRS issued additional guidance on Families First Act

Click here for an updated overview of the law and up-to-date FAQ’s.

March 19, 2020 (Original Memo Date)
Revised March 25, 2020 (Revisions/Additions from Original Memo are in RED) 

For all further updates please click the Frequently Asked Questions information below.
FAQ’s March 27, 2020

Click here for some helpful flowcharts regarding Families First Coronavirus Response Act.

Families First Coronavirus Response Act – Guidance Related to Required Paid Sick Leave, Extended FMLA Requirements and Payroll Tax Credits Designed to Fund These Required Payments

Introduction

Please note that the items discussed in this memo should be discussed with legal counsel.  We are attempting to provide a summary of the rules based on our understanding of them but we are not a law firm and we cannot provide legal advice. 

Also, please note that the Department of Labor, at the time of this writing, has issued limited guidance on this act and we have incorporated that guidance into this memo. Additional guidance from the DOL will be critical in fully understanding the act in more detail.

The provisions discussed below become effective April 1, 2020 and extend through the end of 2020.  These rules apply to employers with fewer than 500 employees.  This is not retroactive and the paid leave and payroll tax credits discussed in this memo cannot be taken until April 1, 2020.  April 1^st  is a new date that was clarified by the DOL. It is also our current understanding that this act and the related credits are only available for paid leave for time paid starting April 1^st or after and is not based on the pay date but is based on the date the time was taken off and paid.  The check date does not appear to be the relevant date to focus on but the date that the leave is taken and paid for under this act.  Example:  If someone is off on March 29^th March 30^th and March 31st and the employer chooses to pay them for that time and that payroll is paid on April 2^nd, that time from March 29^th through March 31^st  is not eligible for this act and no payroll credits would be applied to it and those amounts paid would be taxed like normal paid leave.

Based on current materials available, we have created this guidance to help you understand these rules. This may be modified at a future time as more information becomes available. The Families First Coronavirus Response Act recently signed into law by President Trump is designed to do two primary things:

1. Provide a safety-net for employees of companies with fewer than 500 employees who cannot work due to Coronavirus related situations. The Department of Labor is using language pointing to FLSA and regular FMLA rules for determining which employers need to be aggregated for purposes of this determination. We recommend consulting a labor attorney for assistance with this determination if there is any question.  Please note that this determination is not based on tax code controlled group rules and the rules for aggregating employers for this purpose is different so please consider that.
   • Please note that this act does NOT require employers to pay employees if they are not working due to a business closure, lay-offs due to slow business or furloughs.
2. Provide employers a mechanism to be reimbursed via payroll tax credits to be claimed by reducing otherwise due and payable federal payroll and federal withheld income taxes as you submit them each pay cycle. This is the mechanism you will use to fund these new required payments to employees. An employer does not have to wait until they file their quarterly Form 941 to claim the credit but instead, it is immediately available as a reduction in otherwise payable taxes.

Safety Net for Employees Portion of Law

This summary will first focus on item one above. This act addresses providing a safety net to employees in two primary ways. They are the “Emergency Paid Sick Leave” component and the “Emergency Family and Medical Leave Expansion” component of the act, each to be discussed now.

Emergency Paid Sick Leave Component

This provision provides for up to 2 weeks of fully paid leave for the reasons discussed below for any employee of the company, and there is no waiting period to be eligible for this portion of the law. This portion of the act requires employers to provide:

1. 80 hours of fully paid sick leave to full-time employees or
2. Two weeks of fully paid sick leave to part-time employees, based on the average hours that the part-time employee works.

This paid leave requirement would be triggered if an employee were unable to work for one of six reasons:

1. To self-isolate due to federal, state or local requirements. There are some unknowns in this category as to what rises to this level. If a governor of a state issues an order to close certain businesses, do the employees of that business fall into this category at that time?  We need additional guidance on this and this is a common question that is being asked. 
2. To quarantine due to COVID-19 concerns on the advice of a health care provider.
3. To obtain medical diagnosis or medical care if the employee has COVID-19 symptoms.
   • Please note these first three categories are referred to as “Self-Care Leave” to be discussed further below.
4. To care for someone (very broad definition, such as Parent, Spouse, Child, Sibling, Next of Kin, Grandparent, Grandchild, Senior Citizen, Individual with Disabilities) experiencing one of the first two situations listed above.
5. To care for the employee’s son or daughter (under age 18) if the school or daycare provider has closed or if the daycare provider is no longer available due to COVID-19.
6. The employee is experiencing another substantially similar condition to those above.
   • Please note these last three categories are referred to as “Family Care Leave” to be discussed next.

Leave in the first three categories, called “Self-Care Leave,” has to be paid at the employee’s full normal rate of pay but that is capped at $511 per day or $5,110 total for each employee. Leave in the last three categories, called “Family Care Leave,” has to be paid at 2/3’s of their normal rate of pay but that is capped at $200 per day or $2,000 total for each employee. It is important to note that an employer CANNOT require an employee to use any existing paid leave provided by an employer before using this newly required paid leave.

The DOL can exclude certain healthcare workers and emergency responders from having to comply with this act. At this time, the definition of what qualifies as a healthcare worker is not clear. Based on what we have read, the entire company that is a health care provider is not exempt from this act, only the employees that work for that employer as a health care provider are exempt.  Support employees not in the field of providing health care are required to be covered by this act.

The DOL MAY also exempt small businesses from portions of this act with fewer than 50 employees if complying would put the business in jeopardy.  At this time, the DOL has said they will be issuing more guidance on this under 50 employee exemption but in general it only applies if following this acts rules would jeopardize the viability of the business. 

PAYROLL TIP: It is important to note that from a payroll logistics standpoint, new and separate earnings codes will need to be set up in the payroll system to be able to track each of these newly required types of payments. That will be critical to effectively quantify the dollars paid for these types of leave and will make it possible to claim the payroll tax credit to be discussed later in this article.  Do not lump this pay in with any other PTO or sick leave payments that you might otherwise make.

Emergency Family and Medical Leave Expansion Component

This provision requires employers (even those with less than 50 employees who are not normally subject to normal FMLA rules) to protect an employee’s job and pay compensation after the first two-week period has lapsed as discussed below.

This new category of leave under FMLA rules is referred to as “Public Health Emergency Leave” and requires employers to pay employees who are unable to work due to a need to care for a child under age 18 if school or daycare is unavailable due to Covid-19.  Under this rule, employers are required to:

1. Provide “Public Health Emergency Leave” as part of FMLA leave.
2. Provide “Public Health Emergency Leave” if needed by ANY employee who has been employed for at least 30 calendar days.
3. Pay eligible employees at a leave rate of NO LESS than 2/3’s of their normal rate of pay. This kicks in after 10 days have passed.  Please note that this portion of the law is intended to run concurrent with the emergency paid sick leave component just discussed.  If an employee qualifies for this portion of the act based on the same event that qualified them for the emergency paid sick leave pay, this portion is an additional 10 weeks.  The total would be 12 weeks of protected leave and 12 weeks of pay.  This pay is capped at $200 per day and $10,000 in total per each employee.

The DOL can exclude certain healthcare workers and emergency responders from having to comply with this act.  At this time, the definition of what qualifies as a healthcare worker is not clear. Based on what we have read, the entire company that is a health care provider is not exempt from this act, only the employees that work for that employer as a health care provider are exempt.  Support employees not in the field of providing health care are required to be covered by this act.

 The DOL MAY also exempt small businesses from portions of this act with fewer than 50 employees if complying would put the business in jeopardy.  At this time, the DOL has said they will be issuing more guidance on this under 50 employee exemption but in general it only applies if following this acts rules would jeopardize the viability of the business.  Employers with fewer than 25 employees do not have to comply with the job protection aspect of this bill, but do have to provide the pay.

It is important to note that this provision is in addition to all normal FMLA rules that already exist for employers that must comply with the existing FMLA rules.

PAYROLL TIP: It is important to note that from a payroll logistics standpoint, new and separate earnings codes will need to be set up in the payroll system to be able to track each of these newly required types of payments. That will be critical to effectively quantify the dollars paid for these types of leave and will make it possible to claim the payroll tax credit to be discussed later in this article. Do not lump this pay in with any other PTO or sick leave payments that you might otherwise make.

Funding Mechanism Available to Employers to Pay These New Wages

Now that we have addressed the safety-net components set in place to protect employees, let us turn our attention to the second component of this act, which is the mechanism put in place to fund these payments for the employer.

Any wages paid as a result of the provisions discussed above are not subject to the Employer portion of Social Security Tax (the 6.2% payroll tax). They are subject to the Employee portion of this tax, however – that must be withheld from the payments made to the employee. Because these wages are not taxed the same as normal sick pay or PTO pay, you must segregate these wages in your payroll system.

In addition to these new wages not being subject to the employer portion of Social Security tax as they are paid, this law also provides a refundable credit to be applied to reduce otherwise due and payable federal social security, Medicare and federal income tax withholdings on normal wages paid each pay period.  In essence, a credit is given to the employer that allows them not to have to pay otherwise required payroll taxes and that is the mechanism to quickly reimburse the employer for having to pay wages under this act.  If the amount of the credit is more than otherwise due and payable taxes for a pay period, there is going to be a process (not yet defined) to allow the employer to get a refund check mailed to them within 2 weeks of that submission.   Also, the process to claim the credit at the time of submitting otherwise due and payable payroll taxes is not yet defined. Finally, there is a component to this credit also for health insurance costs paid on behalf of an employee on leave under this act as well.  We need additional guidance on that at this time. As we mentioned earlier in our PAYROLL TIP sections, this is why it is important for employer to be able to separately identify compensation paid to employees as a result of this act. The amount of the credits available are as follows:

1. For the wages paid as a result of the “Emergency Paid Sick Leave Component” (first two weeks) of the act, the credit is equal to the amount of the wages paid required by this act.
2. For the wages paid as result of the “Emergency Family and Medical Leave Expansion Component” (after first two weeks) of the act, the credit is equal to the amount of wages paid required by this act and is capped at $10,000 per employee.
3. In the aggregate, the sum of the credits available in number 1 and 2 can be as much as $15,100 per employee. (Up to $5,100 in wages for the first two weeks + $10,000 for the FMLA portion). Given that the employer’s share of social security tax on any individual employee is limited to $8,537.40 ($137,700*6.2%), this credit is meaningful and actually can exceed the actual social security tax paid for an individual.
4. As mentioned earlier, there is also a component of this credit that is tied to the amount of health insurance paid by the employer on behalf of an employee out on leave under this act. At this time, we need more clarification on this part of the credit. One unknown is does it go above and beyond the caps discussed in number 3 above or is that cap inclusive of this portion for the credit?

We feel it is important that employers that may be potentially impacted by these new rules work now with their payroll systems to create the earnings codes necessary to track and tax these new types of wages correctly.

Click here for a PDF version of this article.

Please reach out to Matt Folz 812-491-1391 or Lisa Frank 812-491-1312 at Harding, Shymanski & Company, P.S.C. for further discussions related to this matter