Welcome to the latest edition of the Bertz, Hess & Co. bi-weekly update. We hope this message finds you well as we move towards re-opening Pennsylvania.
This week we will be giving a brief update on PPP loans, discussing the EIDL loan program in more detail and also examining the opportunities offered by the CARES Act regarding retirement plans.
Additional Q&A provided by SBA on PPP Loan details, especially forgiveness and whether a loan is “necessary“
The SBA recently added to the Q&A on the PPP. Pay particular attention to questions #31 through #45, as these are the newest additions. Note the increased flexibility for seasonal employers and extended deadline for returning PPP funds if you determine that you should not have received funds under the program. Go here to download the FAQ sheet.
Expenses connected to loan forgiveness not deductible
The IRS recently released a notice that addressed the deductibility of expenses paid with PPP loan proceeds. This has been a hot topic for several weeks now and the IRS has made it clear that any expenses that are paid with funds from a loan that is forgiven are not deductible. This makes logical sense, since the loan proceeds would not have been picked up as income. Deducting an expense that is paid with money that was never taxed would essentially be “double dipping”. There are legislators proposing that the IRS allow deductibility of expenses related to PPP, but for now, those expenses remain non-deductible.
What if my laid-off employees refuse a re-hire request and wish to keep drawing unemployment?
Another question that has surfaced over the past couple weeks is with respect to re-hiring workers who had previously been laid off. This issue was recently addressed by the SBA in a document that can be accessed here. The final rule will specify that so long as the borrower made a good faith offer, in writing, and the former employee rejects the offer, also in writing, that former employee will be excluded from loan forgiveness reduction calculations. Documentation is the key!
Economic Injury Disaster Loan (EIDL) Program
While the PPP loan program has received the most attention recently, business owners should also consider the EIDL program. This program offers up to $2 million in loan proceeds to businesses with less than 500 employees. If you are in need of money right away, it offers a $10,000 emergency grant that will be forgiven as long as it is used for maintaining payroll, mortgage or lease payments. This could be an attractive option for small businesses where they have immediate needs other than payroll, as the EIDL program is much less restrictive when it comes to how the funds can be used. Essentially, the funds can be used for most operational costs, just not to refinance existing debt or pay dividends. Also, it does not preclude you from applying for and/or receiving a PPP loan. The interest rate is higher at 3.75% and the term can be up to 30 years. Contact your lender to apply or apply online at https://disasterloan.sba.gov/ela/
CARES Act Retirement Plan Provisions
There are three major provisions in the CARES Act that impact retirement plans. It is critical that taxpayers fully understand these provisions so as to avoid unintended results.
Waiver of 10% additional tax on early distributions for coronavirus-related distributions – There are two significant items to note here. First, the funds need to be made to a “qualified individual”. A qualified individual is someone who is diagnosed with the SARS-CoV-2 virus or with COVID-19 by a CDC approved test, whose spouse or child is diagnosed with such a test, or who experiences adverse financial consequences as a result of being quarantined, furloughed or laid off as a result of the disease, lack of childcare due to the disease, or closing or reducing the hours of a business operated by the individual due to the disease. Also, while the 10% additional tax is waived, the distribution is still subject to ordinary income tax rates. In short, be sure you are aware of whether or not you meet these requirements before making a decision.
Limit on loans from retirement plans is increased to $100,000 – The CARES Act increases the allowable amount of a loan from a qualified plan from $50,000 to $100,000. Similar to the waiver of the 10% additional tax, this increase is only for qualified individuals.
Waiver of required minimum distributions (RMDs) for 2020 – Prior to the CARES Act, individuals were generally required to take RMDs from certain retirement plans upon reaching the age of 70 ½ or 72. This requirement is waived for the calendar year 2020. There is no requirement to be a qualified individual.
As previously mentioned, it is critical to have a full understanding of these provisions before making any decisions. The content above serves as a brief summary of these provisions. Be sure to reach out to your Bertz Hess contact for further discussion. Here is a link to recently issued FAQs posted to IRS.gov. https://www.irs.gov/newsroom/coronavirus-related-relief-for-retirement-plans-and-iras-questions-and-answers
Getting Back to Business!
Governor Wolf has announced his three-phased plan for getting Pennsylvania back to business. The “Red, Yellow, Green” is being implemented on a county by county basis with 24 counties moving to Yellow this week. Details of the plan can be found on the PA Department of Health website at https://www.pa.gov/guides/responding-to-covid-19/#PhasedReopening
As always, do not hesitate to reach out to us on any of these topics at 717-393-0767 or email us at firstname.lastname@example.org
The Bertz, Hess & Company Professional Team