-By Donovan Thiessen, CPA

The amount of legislative relief for taxpayers that was enacted this year, as it relates to retirement accounts, loans, income tax relief, is staggering. Our office spent several weeks pouring over the Payment Protection Program (PPP), the Economic Injury Disaster Loan (EIDL) and the various tax provisions that have been released, during a tax season that was extended by three months. With no end in sight for the pandemic, it is my hope that this article provides you with broad knowledge and advice as it relates to recent legislative relief for your business and taxes.

Retirement Plan Distributions
Under Internal Code Section 72, the general tax rules as they relate to IRAs and qualified retirement plans are as follows:
• Normal distributions are included as ordinary income in the year of distribution.
• If you are under the age of 59 1/2, and an exception does not apply, your distribution is subject to a 10% early withdrawal penalty.
• You have 60 days to “roll-over” balances without tax consequences.

The Coronavirus Aid, Relief, and Economic Security Act (CARES Act) was signed into law on March 27, 2020. As it relates to IRAs and qualified retirement plans, for “coronavirus-related distributions” (definition to follow) made on or after January 1, 2020 and before December 31, 2020, the following changes apply:
• Distributions from the plan are included in taxable income ratably over the three years beginning with the year of the distribution.
• The 10% early withdrawal penalty does not apply.
• You may recontribute any portion of the distribution during the three-year period commencing the day after you receive the distribution, and treat it as a tax free rollover.

A coronavirus related distribution is any distribution from a qualified retirement plan, IRS Code Section 403(b) or 457(b) plans, and IRAs made to individuals diagnosed, or whose spouse or dependent is diagnosed with the virus. Additional to those who experience financial harm as of a result of being quarantined, furloughed or laid off, reduced work hours, unable to work due to lack of child care, closing or reducing hours of the business you own and other possible reasons reserved for future IRS guidance. Distributions covered by the CARES act are limited to $100,000.

Bonus Depreciation for Qualified Improvement Property
Prior to the Tax Cuts and Jobs Act (TCJA), which became effective generally for tax years beginning 1/1/2018, qualified improvement property was considered a specified type of property eligible for bonus depreciation. It appeared as though Congress intended to treat this type of property as eligible for bonus depreciation but the TCJA eliminated this provision for property placed in service after December 31, 2017 as a qualifying bonus depreciation category for qualified leasehold improvement property, qualified restaurant property, and qualified retail improvement property. This property type typically has a 15-year life, and includes leasehold improvements made to spaces you lease.

The CARES Act has changed this rule so that qualified improvement property placed in service by the taxpayer after December 31, 2017 is 15-year property and thus is eligible for bonus depreciation. In layman terms, you would capitalize these costs as fixed assets and depreciate 100% of the costs in the year that you place them in service. You should consult your tax advisor if you made significant improvements to your leased property in 2018; an amended tax return could be beneficial.

Payroll Protection Program (PPP)
This program has evolved since its announcement in March, with new updates generally in favor of the loan recipient. We saw many businesses apply and receive these funds. A full analysis would require a course several hours long; this will be necessarily concise for what you need to know today and explains rules as of August 8, 2020. It is possible that new rules could arrive before you read this article.

The PPP is a loan guaranteed by the Small Business Administration. If you use it to cover payroll, rent and utilities, the loan will be forgiven. Initially designed to cover an eight-week period, it is now expanded to cover twenty-four weeks. At the end of the qualifying period, you will complete the forgiveness application available from the SBA. Any amount not forgiven becomes a fixed rate loan payable over five years.

This window for applying for this loan expired on August 8, but that could change. There have been rumors that loans issued for less than $150,000 will be automatically forgiven. If you have one of these loans and you have not yet applied for forgiveness, given the current rules, you should apply before the twenty four week period ends, but should also wait until around the end of August to see if additional guidance is released. In the meantime, you should contact a CPA to discuss what workpapers you should keep in your files to support the qualified use of these funds for purpose of forgiveness.

The last notable item: at this time, the IRS is stating the forgiven expenses will essentially become taxable income. The AICPA is aggressively fighting this, and we are expecting for this to be confirmed or addressed soon.

Executive Order to defer payroll taxes
This is an item that was recently signed by President Trump on August 9, 2020 in response to failed agreements on the fourth round of COVID-19 legislative relief. The spirit of this EO is to increase employee paychecks by 7.65% (6.2% social security and 1.45% Medicare expenses paid by the employee). It is a deferral, not a windfall, so eventually the tax will be due. How the IRS will eventually collect this, and the employer’s role for withholding the funds is not yet clear. We are expecting more guidance on this as the increase to monthly pay is approximately $300 for a person earning a $50,000 annual salary.

Economic Impact Payments
You have probably received your $1,200 per individual and $500 per dependent stimulus check by now. Most were received via direct deposit in April. This is a refundable credit that will be reconciled on the 2020 Individual income tax return, Form 1040. The forthcoming tax return will ask if you have received it, if you have, then the return will not need to adjust for it. However, if you did not receive it, you will be eligible to receive it then, assuming you meet the general eligibility requirements. These payments are not considered to be taxable income. It was rumored that the fourth round of COVID-19 relief includes a second stimulus payment. The best advice is to make sure you have filed your 2018 and 2019 income tax returns as a starting point for eligibility.

Other areas that were expanded as a result of COVID-19: Charitable contribution deductions in 2020, expanded eligibility for medical expenses that qualify to be paid with a health savings account, FSA and HRA, Net Operating Loss carrybacks, increased ability to deduct business interest expenses, no minimum distribution is required for calendar year 2020 from an IRA, debt relief for certain SBA loans (limited to six months).

I encourage you to seek a professional tax advisor to ensure that any item in this article is applicable for your specific situation. The information is necessarily concise and may not account for your scenario.