The following are some of the key takeaways and strategies we have been discussing lately with our clients to help them during this tumultuous time.
- Unemployment Benefits – If you own your own business or are self employed you might not think that you would normally qualify for unemployment benefits like your regular rank and file employees do. But if your business has suffered a recent downturn and you are no longer able to pay yourself. You may want to consider collecting unemployment benefits from the state. If you are an employee of your business (S corp or C Corp) meaning you pay yourself wages through payroll you can most likely qualify for unemployment benefits through the state since you would pay taxes with each check into the state unemployment fund. Normally, sole proprietors or partners don’t qualify for unemployment benefits but with the passage of the new CARES act signed into law by the president on 3/27/20 this benefit was extended to “gig workers” as well as the self employed. Here’s a link to the CA EDD website where you can find out more information and apply.
- Individual Tax Credit Rebate – All individuals who are not dependents are eligible to receive a rebate of up to $1,200 rebate ($2,400 for married filing joint taxpayers). In addition, taxpayers with children dependents qualify for up to a $500 rebate per child. The payment will be based on the 2018 tax return (2019 if already filed) and includes a phase out for AGI over thresholds of $75,000 ($150,000 for married filing joint and $112,500 head of household filers). The rebate acts as an advanced tax credit and will be reconciled on the 2020 tax return.
Payment of this rebate will be issued based on the most recent return payment/refund method. Estimates on receipt of funds is approximately 3 weeks for EFT, and an anticipated 3 month minimum for hard-copy checks. In light of this we encourage anyone who is eligible and who did NOT utilize EFT for 2018 to efile your 2019 return immediately with your bank info for EFT in an attempt to receive those funds sooner via electronic deposit. There is no guarantee the 2019 returns filed now will facilitate the direct deposit but in our book, it’s worth a try.
- Small business loans – For most of our affected clients we are recommending applying for the SBA Economic Injury Disaster Loan (EIDL) or Paycheck Protection Program (PPP).
Economic Injury Disaster Loan (EIDL)
The program currently allows for emergency loans of up to $2M to assist companies affected by COVID-19. The new law waives the requirement for personal guarantees on loans under $200K, it also waives the requirement that the borrower not be able to obtain credit elsewhere, and provide emergency grants of up to $10K within 3 days of the borrower filing an application, though the amount of the grant would reduce any loan forgiveness under the PPP. The law also streamlines the loan application process.
Paycheck Protection Program (PPP)
For businesses with 500 or less employees and in operation on 2/15/2020 new modified loans are made available through the SBA. The amount of the loan is limited to the lesser of $10 million or 2.5 times the borrower’s average total monthly payroll costs. The application period ends June 30, 2020.
The loan proceeds may be used for payroll costs (as defined), employee benefits and commissions, interest payments on mortgages, rent, utilities, and interest on debt incurred before 2/15/2020.
No collateral is required with a maximum interest rate of 4% and a maximum term of 10 years. While interest will accrue from the day the loan is made, not interest or principal payments are required for a 6-12 month period of time. The loan may be paid off at anytime without prepayment penalties.
The PPP loan has a forgiveness provision allowing the borrower to apply for loan forgiveness in an amount equal to the payroll costs, rent, utilities, and interest paid on mortgages during the 8 weeks after the loan is made, provided no less than 75% of funds are used for payroll. The amount of forgiveness will not be taxable to the borrower, but the taxpayer may not use both the loan and the employee retention tax credit as described above. Important to note that in order to be eligible for forgiveness
- Payroll Taxes – CA is offering an additional 2 months to pay CA payroll taxes if you submit the proper paperwork work within 2 months of the due date. With the passage of the CARE’s act the IRS is allowing for Employers and Self-Employed taxpayers can defer the employer’s portion of the social security tax (6.2%) to be repaid in equal payments by 12/31/2021 and 12/31/2022. While not ideal we have a couple of clients not remitting any payroll taxes until they get through there current hardship. The gov’t will charge additional interest and penalties for non payment of payroll taxes. If you go down this path you should always file all payroll returns on time since you will incur additional penalties if you do not.
- Employee Retention Tax Credit – Up to 50% of qualified wages paid between 3/13/2020 and 12/31/2020 are eligible for a tax credit related to COVID-19. In order to qualify the business must have been fully or partially shut down due to COVID-19 or have gross income that is 50% less than the same quarter in the prior year.
About the Author
David Heistein, CPA
Dave is co-founder and managing partner at Profitwise Accounting. Dave is a Certified Public Accountant in the state of California, as well as an advanced QuickBooks Pro Advisor and Instructor. As a small business owner, he is dedicated to educating and informing other business owners on bookkeeping and accounting matters.