Experts say CARES Act prompted by pandemic provided short-term aid but created new tax uncertainties
Business experts routinely suggest planning and developing contingency plans as the best ways to prepare for unexpected events.
However, 2020 is a year unlike any other as the world coped with a global pandemic. Civic leaders quickly passed the federal Coronavirus Aid, Relief and Economic Security (CARES) Act and related legislation, which provided a range of assistance for people and businesses.
Earlier this year, the CARES Act introduced many tax breaks for businesses to get through the crisis. Quick passage of legislation meant businesses had little time to learn about new rules, so many turned to tax professionals for guidance.
Lindsay Peterson, a senior tax consultant and CPA with Rowley & Co. LLP in Michigan City, said the Paycheck Protection Program (PPP) loan forgiveness element is top of mind for many business owners. The program was established by the CARES Act and implemented by the Small Business Administration with support from the U.S. Department of the Treasury. The program provided small businesses with funds to pay up to eight weeks of payroll costs, including benefits, interest on mortgages, rent and utilities.
The dollars provided some relief, though help only was for the short term, and if all funds weren’t used under rules of the program, those receiving loans may be required to repay all or some portion of the loan. Peterson says PPP loan recipients should not panic.
“A lot of our clients are frantic about trying to get forgiveness on the PPP loan. They’re like, ‘I need to get it right now,’” Peterson said. “But we’re telling them that they have more time, as banks are still trying to figure out how to proceed.”
It also helps to understand the timeline outlined by the SBA.
“You have 10 months after your covered period ends to apply (for) forgiveness,” Peterson explained. “The covered period is eight or 24 weeks, (and) most people are doing 24 weeks, so that brings us to the end of (2020), so they have some time.”
Related to the PPP loan, Peterson said June’s Paycheck Protection Program Flexibility Act sweetened the deal for some loan recipients. Among other things, the act made it easier for the millions of small businesses who used the funds to apply for forgiveness.
This means employers who received or will receive loan forgiveness can take advantage of the employer payroll tax deferral provision under section 2302 of the CARES Act through the end of 2020, regardless of whether they obtain a PPP loan or if they obtain forgiveness under a PPP loan.
Tax deferral might be one perk, but Peterson stresses that employers should take care not to overestimate their tax deductions or risk getting hit with a heavy, unforeseen burden in the future. As it stands, businesses cannot write off expenses paid with Paycheck Protection Program loan funds that have been forgiven.
Marisa Smoljan, a CPA with McMahon & Associates in Munster, said this could muddy the waters come the spring. While the program helped a lot of businesses in a bind, its fast-tracked nature means that some of the details are still being hammered out.
“So, we might be in a situation where you’re paying the taxes next year, even though you had a pretty down year,” she said. “So, clients might be in a situation when they have to plan on it being taxable and plan on paying those taxes come April.”
The best-case scenario, according to Smoljan, is that legislation is passed that retroactively gives a loan recipient the loan tax free. As of late August, it’s a wait-and-see approach.
Peterson agrees, knowing that professional and trade groups have been lobbying Congress to amend this rule, so that loan recipients might have a lower tax bill come spring. In the meantime, Peterson said employers should exercise caution in their approach to corporate accounting.
That means due diligence such as keeping detailed bookkeeping and documentation.
“If those expenses are not deductible, that will cause more of a problem because we as tax professionals will have to add them back,” Peterson said. “So, this calls for loan recipients to have a clear idea about what they spent the loan money on.”
Understanding the CARES Act
Ed Simokaitis, a CPA with CLH CPAs & Consultants in Michigan City, said the fact expenses might not be deductible “negates” some of the benefit of the loan. He also recommends taking it slow and steady with respect to applying for forgiveness.
“You could take advantage of the eight weeks … and wait to file,” he explained. “Or go ahead and file, but you might be duplicating work that you wouldn’t otherwise have to do if we have a blanket forgiveness check.”
Tim Anderson, a CPA with CliftonLarsonAllen’s Schererville office, said the CARES Act has been dynamic and evolved during the last few months. While times have been tough for many of the PPP loan recipient businesses, he’s feeling optimistic about the state of affairs with respect to the program.
Anderson said the CARES Act was a boon for the business community and the economy at large.
“It looks pretty favorable that a lot of businesses are going to get them forgiven,” he said. “And as much as we (as tax professionals) all complained about vagueness and ambiguity in the rules, it’s a good program (because it) was a shot in the arm for a lot of local businesses.”
According to data released by the SBA in July, the PPP program supported 51.1 million jobs, as much as 84% of all small business employees. And small businesses, as defined by the U.S. Census Bureau, employ 59.9 million people across the country. The average loan size was $107,000, and 86.5% of all loans were for less than $150,000.
The Employee Retention Credit under the CARES Act encouraged businesses to keep employees on their payrolls. The refundable tax credit was 50% of up to $10,000 in wages paid by an eligible employer whose business was financially impacted by COVID-19.
According to Paul Applegate with Applegate & Co., CPAs in Michigan City, the credit applied to two thresholds of employers.
“One is employers who’ve had an average number of full-time employees in 2019, at 100 or fewer,” he explained. “And then there are employers that have over 100, and there is a little bit of difference in some of the credits (that) are available.”
Applegate said, for instance, employers who have 100 or fewer employees are eligible, regardless of whether the employee is furloughed.
“If it’s a larger employer that has (more than) 100 employees, those wages would only be applicable to employees who are furloughed or who face reduced hours as a result of the closure or the reduced gross receipts,” he said. “So that’s a little bit of a difference.”
Whether a business received a PPP loan or not, Anderson advises that businesses take a cautious and calculated approach to tax planning. For instance, the payroll tax deferral can be good for short-term cash flow purposes, but it must be paid eventually.
The CARES Act allows employers to defer deposits of their 6.2% share of the Social Security tax due from March 27, 2020, through Dec. 31, 2020. This targeted action applies to workers who generally make less than $4,000 every two weeks, which works out to an annual salary of $104,000.
Half of the deferred amount is due by Dec. 31, 2021, with the other half due by Dec. 31, 2022. There is no cap on the total amount of Social Security tax that can be deferred, but the Social Security taxes only apply to the first $137,700 of an employee’s wages for 2020, experts said.
Employers also may be entitled to credits against the employer’s share of Social Security tax, including refundable tax credits for paid leave under Families First Coronavirus Response Act or for qualified wages under the employee retention credit.
Employers should look at this as a temporary reprieve — ultimately the liability is delayed but not erased. That’s why Lisa Human, Simokaitis’ colleague at CLH, recommends employers stay on top of their tax obligations rather than defer, if possible.
“If you don’t have the funds now, chances are you don’t want to get caught up with payroll taxes down the road,” Human said. “This is a case when the IRS is certainly going to come knocking on your door, and the signer of those 940 forms has significant liability.”
And just as this deferral might soften the blow temporarily, employers looking to improve or renovate the interior of their facilities might find relief from a clarification on previous legislation.
Qualified improvement property (QIP) placed in service in 2018 under the Tax Cuts and Jobs Act of 2017 is now a 15-year period and is eligible for 100% bonus depreciation. Without the technical correction, a 39-year recovery period applied previously. This change means employers might find savings opportunities and an incentive to invest in their physical space.
Examples of such qualifying improvements include installation or replacement of drywall, ceilings, interior doors, fire protection, mechanical, electrical and plumbing.
Anderson said, while the shortened 15-year recovery period is attractive, the provision’s real significance is that most post-2017 QIP retroactively qualifies for the bonus depreciation deduction.
Because this is an evolving situation, new guidance from the federal government is issued regularly.