COVID-19 Update for Local Governments

In these trying times of dealing with the Coronavirus pandemic, local governments find themselves on the front lines providing a wide variety of services for their residents. The federal government, through legislation such as the Families First Coronavirus Response Act (FFCRA) and the Coronavirus Aid, Relief, and Economic Security (CARES) Act, has provided a wide variety of resources to many segments of the population but notably excludes local governments from most of the aid programs. How are local governments expected to deal with rising costs associated with necessary services, while simultaneously planning for revenue reductions both present and future? This article is a summary of what we have learned to date, much of which came from a Treasury webinar that was held on April 20, 2020.

In terms of economic impacts that will affect local government revenue streams, the data is incomplete and conditions are changing fast, but some trends are emerging:

More than one million Michiganders have filed for unemployment since March 5.
Revenue shortfalls at the State level are expected to be about $2.6 billion for the current fiscal year and $3.1 billion for the 2020-21 fiscal year.
Sales tax collections are expected to be down 50% for April and May.
Constitutional revenue sharing payments scheduled to go out on April 30 are unaffected by recent events and should exceed January estimates due to increased sales tax collections in January and February. The June 30 payment will be based on March and April sales tax collections, so therefore it can be anticipated to be lower by possibly as much as 50%.
Statutory revenue sharing payments are based on State appropriations, so the April 30 payment should not be affected.
Local Community Stabilization Authority personal property tax reimbursements, as well as 911 fees disbursed to counties, are currently scheduled to be made in May. These payments are dependent on collections and can therefore be expected to decrease as well, but it is unclear at this time as to how much of a decrease to expect.

The CARES Act does provide some funding to the largest local units (over 500,000 in population), which only encompasses the State of Michigan and five large local governments in the State. The State of Michigan will also receive about $3.1 billion in aid under the Act but it is unclear whether any of that will be passed through to smaller local units. Other programs have received increased funding, but none of those will help address general revenue shortfalls. Those programs are as follows:

Transit programs
Community Development Block Grants
Community Services Block Grants
Federally Qualified Health Centers
Food and Nutrition Supports
Housing and Homelessness Supports
Low Income Home Energy Assistance
Election Security
Byrne Justice Grants

The Federal Emergency Management Agency (FEMA) has grant dollars available under its Public Assistance Grant Program to reimburse local governments for expenditures related to providing emergency protective measures. This program is administered through the Michigan State Police, and applications are due on April 30.

The Michigan Department of Treasury has established a website for COVID-19 resources at michigan.gov/treasury. In addition to these resources, the Michigan Municipal League, Michigan Association of Counties, and Michigan Townships Association also have COVID-19 pages on their websites.

Property taxes being levied for the upcoming summer and winter tax seasons are not anticipated to be affected by the COVID-19 crisis, as the taxable values and millage rates are already set at this point in the tax calendar.

For the time being, local governments can take the following actions now to be as prepared as possible for rapidly changing conditions that will affect the financial health of their local unit:

Review all revenue streams to plan for potential reductions.
Begin conversations now about controlling costs and preparing for reductions in spending.
Keep up the basics of management and control.
The tax calendar hasn’t changed; communities will send tax notices on the same calendar as always, per statute.

As always, Yeo & Yeo is here to assist our clients in any way possible with this or any other issue you may have. Please do not hesitate to reach out if we can be of assistance.

The information contained in this post may not reflect the most current developments, as the subject matter is extremely fluid and constantly changing. Please continue to monitor Yeo & Yeo’s COVID-19 Resource Center for ongoing developments. Readers are also cautioned against taking any action based on information contained herein without first seeking professional advice.

Millions of eligible Americans have already received their Economic Impact Payments (EIPs) via direct deposit or paper checks, according to the IRS. Others are still waiting. The payments are part of the Coronavirus Aid, Relief, and Economic Security (CARES) Act. Here are some answers to questions you may have about EIPs.

Who’s eligible to get an EIP?

Eligible taxpayers who filed their 2018 or 2019 returns and chose direct deposit of their refunds automatically receive an Economic Impact Payment. You must be a U.S. citizen or U.S. resident alien and you can’t be claimed as a dependent on someone else’s tax return. In general, you must also have a valid Social Security number and have adjusted gross income (AGI) under a certain threshold.

The IRS also says that automatic payments will go to people receiving Social Security retirement or disability benefits and Railroad Retirement benefits.

How much are the payments?

EIPs can be up to $1,200 for individuals, or $2,400 for married couples, plus $500 for each qualifying child.

How much income must I have to receive a payment?

You don’t need to have any income to receive a payment. But for higher income people, the payments phase out. The EIP is reduced by 5% of the amount that your AGI exceeds $75,000 ($112,500 for heads of household or $150,000 for married joint filers), until it’s $0.

The payment for eligible individuals with no qualifying children is reduced to $0 once AGI reaches:

$198,000 for married joint filers,
$136,500 for heads of household, and
$99,000 for all others

Each of these threshold amounts increases by $10,000 for each additional qualifying child. For example, because families with one qualifying child receive an additional $500 Payment, their $1,700 Payment ($2,900 for married joint filers) is reduced to $0 once adjusted gross income reaches:

$208,000 for married joint filers,
$146,500 for heads of household,
$109,000 for all others

How will I know if money has been deposited into my bank account?

The IRS stated that it will send letters to EIP recipients about the payment within 15 days after they’re made. A letter will be sent to a recipient’s last known address and will provide information on how the payment was made and how to report any failure to receive it.

Is there a way to check on the status of a payment?

The IRS has introduced a new “Get My Payment” web-based tool that will: show taxpayers either their EIP amount and the scheduled delivery date by direct deposit or paper check, or that a payment hasn’t been scheduled. It also allows taxpayers who didn’t use direct deposit on their last-filed return to provide bank account information. In order to use the tool, you must enter information such as your Social Security number and birthdate. You can access it here: https://bit.ly/2ykLSwa

I tried the tool and I got the message “payment status not available.” Why?

Many people report that they’re getting this message. The IRS states there are many reasons why you may see this. For example, you’re not eligible for a payment or you’re required to file a tax return and haven’t filed yet. In some cases, people are eligible but are still getting this message. Hopefully, the IRS will have it running seamlessly soon.

The law providing relief due to the coronavirus (COVID-19) pandemic contains a beneficial change in the tax rules for many improvements to interior parts of nonresidential buildings. This is referred to as qualified improvement property (QIP). You may recall that under the Tax Cuts and Jobs Act (TCJA), any QIP placed in service after December 31, 2017 wasn’t considered to be eligible for 100% bonus depreciation. Therefore, the cost of QIP had to be deducted over a 39-year period rather than entirely in the year the QIP was placed in service. This was due to an inadvertent drafting mistake made by Congress.

But the error is now fixed. The Coronavirus Aid, Relief, and Economic Security (CARES) Act was signed into law on March 27, 2020. It now allows most businesses to claim 100% bonus depreciation for QIP, as long as certain other requirements are met. What’s also helpful is that the correction is retroactive and it goes back to apply to any QIP placed in service after December 31, 2017. Unfortunately, improvements related to the enlargement of a building, any elevator or escalator, or the internal structural framework continue to not qualify under the definition of QIP.

In the current business climate, you may not be in a position to undertake new capital expenditures — even if they’re needed as a practical matter and even if the substitution of 100% bonus depreciation for a 39-year depreciation period significantly lowers the true cost of QIP. But it’s good to know that when you’re ready to undertake qualifying improvements that 100% bonus depreciation will be available.

And, the retroactive nature of the CARES Act provision presents favorable opportunities for qualifying expenditures you’ve already made. We can revisit and add to documentation that you’ve already provided to identify QIP expenditures.

For not-yet-filed tax returns, we can simply reflect the favorable treatment for QIP on the return.

If you’ve already filed returns that didn’t claim 100% bonus depreciation for what might be QIP, we can investigate based on available documentation as discussed above. We will evaluate what your options are under Revenue Procedure 2020-25, which was just released by the IRS.

If you have any questions about how you can take advantage of the QIP provision, don’t hesitate to contact us.

At long last, Congress passed legislation to correct a drafting error related to real estate qualified improvement property (QIP). The correction is part of the Coronavirus Aid, Relief, and Economic Security (CARES) Act, which was signed into law on March 27, 2020. The correction retroactively allows real property owners to depreciate QIP faster than before. Here’s how it could lower your tax bill for 2018 and beyond.

Background

When drafting the Tax Cuts and Jobs Act (TCJA) in 2017, members of Congress made it clear that they intended to allow 100% first-year bonus depreciation for real estate QIP placed in service in 2018 through 2022. Congress also intended to give you the option of claiming 15-year straight-line depreciation for QIP placed in service in 2018 and beyond.

QIP is defined as an improvement to an interior portion of a nonresidential building that’s placed in service after the date the building was first placed in service. However, QIP doesn’t include any expenditures attributable to:

The enlargement of the building,
Any elevator or escalator, or
The building’s internal structural framework.

Due to a drafting error, however, the intended first-year bonus depreciation break for QIP never made it into the actual statutory language of the TCJA. The only way to fix the mistake was to make a so-called technical correction to the statutory language.

Congress Fixes the Error

The CARES Act finally makes that correction. As a result, QIP is now included in the Internal Revenue Code’s definition of 15-year property. In other words, it can be depreciated over 15 years for federal income tax purposes.

In turn, that classification makes QIP eligible for first-year bonus depreciation. In other words, real estate owners can now claim 100% first-year bonus depreciation for QIP that’s placed in service in 2018 through 2022.

Important: The technical correction has a retroactive effect for QIP that was placed in service in 2018 and 2019. Before the correction, QIP placed in service in those years generally had to be treated as nonresidential real property and depreciated over 39 years using the straight-line method.

15-Year Depreciation vs. 100% First-Year Bonus Depreciation

Claiming 100% first-year bonus depreciation for QIP expenditures makes sense if your primary objective is to minimize taxable income for the year the QIP is placed in service. But should that be your primary objective? The rules are complex. But there are three reasons you might choose to depreciate QIP over 15 years, rather than claim 100% first-year bonus depreciation:

1. You may qualify for a lower tax rate on the gain from depreciation when you sell the property. When you sell property for which you’ve claimed 100% bonus depreciation for QIP expenditures, any taxable gain up to the amount of the bonus depreciation is treated as high-taxed ordinary income rather than capital gain. Under the current federal income tax regime, ordinary income recognized by an individual taxpayer can be taxed at rates as high as 37%.

In contrast, if you depreciate QIP over 15 years using the straight-line method, the current maximum individual federal rate on long-term gain attributable to that depreciation is “only” 25%. The gain is so-called “unrecaptured Section 1250 gain,” which is basically a special category of long-term capital gain. Higher income individuals may also owe the 3.8% net investment income tax on both ordinary income gain and long-term gain attributable to real estate depreciation.

The point is, claiming 100% bonus depreciation for QIP expenditures on a property can cause a higher tax rate on part of your gain when you eventually sell the property. Of course, if you don’t anticipate selling for many years, this consideration is less important.

2. Depreciation deductions may be more valuable in future years, if Congress increases tax rates or you’re in a higher tax bracket. When you claim 100% first-year bonus depreciation for QIP expenditures, your depreciation deductions for future years are reduced by the bonus depreciation amount. If tax rates go up, you’ve effectively traded more valuable future-year depreciation write-offs for a less-valuable first-year bonus depreciation write-off. Of course, there’s no certainty about where future tax rates are headed.

3. Claiming 100% bonus depreciation may lower your deduction for qualified business income (QBI) from a so-called “pass-through” entity, such as a sole proprietorship, partnership, limited liability company or S corporation. An individual taxpayer can claim a federal income tax deduction for up to 20% of qualified business income (QBI) from an unincorporated business activity. However, the QBI deduction from an activity can’t exceed 20% of net income from that activity for the year, calculated before the QBI deduction.

Net income from the activity of renting out nonresidential rental property will usually count as QBI. But claiming 100% first-year bonus depreciation for QIP expenditures for the property will lower the net income and potentially result in a lower QBI deduction.

In addition, the QBI deduction for a year can’t exceed 20% of your taxable income for that year, calculated before the QBI deduction and before any net capital gain (net long-term capital gains in excess of net short-term capital losses plus qualified dividends). So, moves that reduce your taxable income — such as claiming 100% bonus depreciation for QIP expenditures — can potentially have the adverse side effect of reducing your allowable QBI deduction.

Important: The QBI deduction may be a use-it-or-lose it proposition, because it’s scheduled to expire after 2025. And it could disappear sooner, depending on political developments. If you forgo claiming bonus depreciation, your QBI deduction may be higher — and the foregone depreciation isn’t lost. You’ll just deduct it in later years when write-offs also might be more valuable because tax rates are higher.

Amended Return Opportunity

The CARE Act’s technical correction retroactively affects how you can depreciate QIP that was placed in service in 2018 and 2019. Your QIP depreciation options are better than before the correction. So, you may benefit from amending your 2018 or 2019 federal income tax returns already filed. Contact your tax advisor to determine the right course of action based on your situation.

The coronavirus (COVID-19) pandemic has shut down many sectors of the U.S. economy, causing widespread job losses. Over 10 million Americans applied for unemployment benefits in March, according to the U.S. Department of Labor. And far more claims are expected in April. Some economists predict that the unemployment rate could rise to Depression-era levels of 10% to 15% before the crisis ends (compared to 3.5% in February 2020).

To help curb layoffs, Congress has created a new federal income tax credit for employers that keep workers on their payrolls. The credit amount equals 50% of eligible employee wages paid by an eligible employer in a 2020 calendar quarter. It’s subject to an overall wage cap of $10,000 per eligible employee. Here are the details.

Eligible Employers

Eligible employer status for the 50% employee retention credit is determined on a 2020 calendar quarter basis. The credit is available to employers, including nonprofits, whose operations have been fully or partially suspended during a 2020 calendar quarter as a result of an order from an appropriate governmental authority that limits commerce, travel or group meetings due to COVID-19.

The credit can also be claimed by employers that have experienced a greater-than-50% decline in gross receipts for a 2020 calendar quarter compared to the corresponding 2019 calendar quarter. However, the credit is disallowed for quarters following the first calendar 2020 quarter during which gross receipts exceed 80% of gross receipts for the corresponding 2019 calendar quarter.

To illustrate, suppose ACE, a limited liability company (LLC), reports the following quarterly gross receipts for 2019 and 2020:

	First Quarter	Second Quarter	Third Quarter
2019 Gross Receipts	$210,000	$230,000	$250,000
2020 Gross Receipts	$180,000	$100,000	$230,000
2020 as % of 2019	86%	43%	92%

In this example, ACE had a greater-than-50% decline in gross receipts for the second quarter of 2020. So, ACE is an eligible employer for purposes of the 50% employee retention credit for the second and third quarters of 2020. For the fourth quarter of 2020, ACE is ineligible for the credit because its gross receipts for the third quarter of 2020 exceeded 80% of gross receipts for the third quarter of 2019.

Eligible Wages

The 50% employee retention credit is available to cover eligible wages paid between March 13, 2020, and December 31, 2020. For an eligible employer that had an average of 100 or fewer full-time employees in 2019, all employee wages are eligible for the credit (subject to the overall $10,000 per-employee wage cap), regardless of whether employees are furloughed due to COVID-19.

For an employer that had more than 100 full-time employees in 2019, only wages of employees who are furloughed or given reduced hours due to the employer’s closure or reduced gross receipts are eligible for the credit (subject to the overall $10,000 per-employee wage cap).

For purposes of the 50% employee retention credit, eligible wages are increased to include qualified health plan expenses allocable to those wages.

Important: The amount of wages eligible for the credit is capped at a cumulative total of $10,000 for each eligible employee. The $10,000 cap includes allocable health plan expenses.

For example, Alpha Co. is an eligible employer that pays $10,000 in eligible wages to an employee (Art) in the second quarter of 2020. The 50% employee retention credit is allowed for the wages. The credit equals $5,000 (50% × $10,000).

Alpha pays another employee (Bart) $8,000 in eligible wages in the second quarter of 2020 and another $8,000 in the third quarter of 2020. The 50% employee retention credit for wages paid to Bart in the second quarter is $4,000 (50% x $8,000). The credit for wages paid to Bart in the third quarter is limited to $1,000 (50% x $2,000) due to the $10,000 wage cap. Any additional wages paid to Bart are ineligible for the credit due to the $10,000 wage cap.

Additional Rules and Restrictions

The 50% employee retention credit is not allowed for:

Emergency sick leave wages or emergency family leave wages that small employers (those with fewer than 500 employees) are required to pay under the Families First Coronavirus Response Act (FFCRA). Those mandatory leave payments are covered by federal payroll tax credits granted by the FFCRA.
Wages taken into account for purposes of claiming the pre-existing Work Opportunity Credit under Internal Revenue Code (IRC) Section 21.
Wages taken into account for purposes of claiming the pre-existing employer credit for paid family and medical leave under IRC Sec. 45S.

In addition, the 50% employee retention credit isn’t available to a small employer that receives a potentially forgivable Small Business Administration (SBA) guaranteed Small Business Interruption Loan issued pursuant to the Paycheck Protection Program under the CARES Act. That program has been funded with $349 billion, so far. In general, a small employer for purposes of the Paycheck Protection Program is one that has fewer than 500 employees — including a sole proprietorship, self-employed person or private nonprofit organization. Businesses in certain industries can have more than 500 employees if they meet SBA size standards for those industries. For additional information on the Paycheck Protection Program, visit the SBA website or contact your CPA.

Need Help?

No employer wants to lay off employees during these difficult times, but sometimes it’s the only way to stay afloat. The 50% employee retention credit rewards employers that can afford to keep workers on the payroll during the crisis. For more information about this tax saving opportunity, contact your tax advisor.

Technically, an eligible employer’s allowable 50% employee retention credit for a calendar quarter is offset against the employer’s liability for the Social Security tax component of federal payroll taxes. That component equals 6.2% of the first $137,700 of an employee’s 2020 wages.

But the credit is a so-called “refundable” credit. That means an employer can collect the full amount of the credit even if it exceeds the aforementioned federal payroll tax liability.

The allowable credit can be used to offset all of an employer’s federal payroll tax deposit liability, apparently including federal income tax, Social Security tax and Medicare tax withheld from employee paychecks. If an employer’s tax deposit liability isn’t enough to absorb the credit, the employer can apply for an advance payment of the credit from the IRS. Your tax advisor can help you submit the correct form to the IRS.

The following example shows the mechanics of the refundable credit: Beta Corporation is an eligible employer. Beta paid $20,000 of eligible wages and is, therefore, entitled to a 50% employee retention credit of $10,000. The company has an upcoming quarterly federal payroll tax deposit obligation of $8,000, which includes taxes withheld from its employees on wage payments made during that quarter. Beta can keep the entire $8,000 as part of its allowable 50% employee retention credit — and then the company can file a request for an advance payment of the remaining $2,000 credit.

The Coronavirus Aid, Relief, and Economic Security (CARES) Act includes several changes that encourage charitable giving during the coronavirus (COVID-19) crisis. This is welcome news for certain public charities, including churches, educational organizations, hospitals, medical research organizations and food banks. Here’s an overview of the tax rules for deducting charitable contributions — and how they’ve temporarily changed for 2020.

Background on Deductions for Individuals

The tax law allows individuals who itemize to claim a federal income tax deduction for making qualified contributions to certain public charities. However, from 2018 through 2025, the Tax Cuts and Jobs Act (TCJA) nearly doubled the standard deduction to $12,000 for single filers and $24,000 for joint filers. (These amounts are adjusted annually for inflation. For 2020, they are $12,400 for singles and $24,800 for joint filers.)

The TCJA also reduces or eliminates several itemized deductions. As a result, millions of taxpayers who previously itemized deductions claimed the standard deduction for 2018 and 2019, thereby eliminating the tax benefit from their charitable donations.

On the flipside, the TCJA also encourages charitable giving by increasing the income-based limits on charitable deductions of cash for individuals from 50% to 60% of adjusted gross income (AGI). If the aggregate amount of an individual’s contributions for the year exceeds 60% of AGI, then the excess is carried forward and is treated as a deductible charitable contribution in each of the five succeeding tax years.

Background on Deductions for Businesses

Businesses also may be eligible for a federal income tax deduction for charitable contributions. Under tax law, a corporation’s charitable deduction for cash contributions generally can’t exceed 10% of its taxable income, as computed with certain modifications. If a corporation’s charitable contributions for a year exceed the 10% limitation, the excess is carried over and deducted for each of the five succeeding years in order of time, to the extent the sum of carryovers and contributions for each of those years does not exceed 10% of taxable income.

A donation of food inventory to a charitable organization that will use it for the care of the ill, the needy or infants is deductible in an amount up to:

The food inventory’s basis, plus
Half the gain that would be realized on the sale of the food (not to exceed twice the basis).

In the case of a C corporation, the deduction can’t exceed 15% of the corporation’s income. In the case of a taxpayer other than a C corporation, the deduction can’t exceed 15% of aggregate net income of the taxpayer for that tax year from all trades or businesses from which those contributions were made, computed without regard to the taxpayer’s charitable deductions for the year.

CARES Act Changes

The CARES Act makes four significant liberalizations to the rules governing charitable deductions:

For 2020, individuals will be able to claim an above-the-line deduction of up to $300 for cash contributions made to certain public charities. This rule effectively allows a limited charitable deduction to taxpayers who claim the standard deduction (rather than itemizing deductions) on their 2020 federal income tax returns.
For 2020, the limitation on charitable deductions for individuals that’s generally 60% of AGI doesn’t apply to cash contributions made to certain public charities. Instead, an individual’s qualifying contributions can be as much as 100% of AGI for 2020. No connection between the contributions and COVID-19 activities is required. This provision will benefit individuals who claim itemized deductions on their 2020 federal income tax return.
The limitation on charitable deductions for corporations that’s generally 10% of modified taxable income doesn’t apply to qualifying contributions made in 2020. Instead, a corporation’s qualifying contributions can be as much as 25% of modified taxable income. No connection between the contributions and COVID-19 activities is required.
For contributions of food inventory made in 2020, the deduction limitation increases from 15% to 25% of taxable income for C corporations and, for other taxpayers, from 15% to 25% of the net aggregate income from all businesses from which the contributions were made.

These CARES Act changes are for contributions made by individuals and businesses during the 2020 tax year only. For charitable contributions made after December 31, 2020, the prior (pre-CARES Act) rules will apply.

Reap the Benefits

Have you been thinking about donating to a charity in the wake of the COVID-19 crisis? Philanthropic individuals are usually motivated by doing good, not tax benefits. But the favorable changes to the charitable contribution rules for individuals and businesses provide a well-deserved bonus. Contact your tax advisor if you’d like to discuss your charitable-giving strategy for 2020.

Nonprofit organizations receive contribution revenue that comes in the form of funds with donor restrictions or without donor restrictions. Contributions with donor restrictions must be used for either a particular period or for a purpose that is narrower in scope than the organization’s general mission or programs. Some restrictions are temporary, while some are permanent.

Tracking these restrictions is an imperative process that allows the organization to demonstrate to the donor and auditor that the funds were spent according to the donor’s wishes. Additionally, this allows the organization to accurately present the amount of net assets remaining at year-end that are not available for general use.

Nonprofit organizations use several methods – here are four of the most common.

Fund accounting. Some organizations choose to use fund accounting and record all the activity for contributions with donor restrictions in a separate, restricted fund. Any unspent funds at year-end will remain in the fund and be recognized as net assets with donor restrictions. If your organization employs this method, you likely receive restricted contributions from multiple sources or for multiple purposes and will want to employ the next method as well.
Program codes. It will likely be necessary to use special codes to directly associate the expenses with the revenues for a restricted funding source. For example, you receive contribution A for $50,000, which is restricted for a special program. You would credit your contribution revenue account of 4000-001, where 001 is the program code that uniquely identifies this revenue as contribution A. When funds are spent, you would record expenses of (for example) $30,000 to various expense accounts ending with -001. At year-end, a profit and loss statement for program code 001 would show net assets of $20,000, which are restricted for program 001. Contribution B for $100,000 might get coded to 4000-002, and so on.
QuickBooks classes. Organizations that use QuickBooks sometimes use the classing system to track donor restrictions. This method will work only if you are sure to categorize all applicable revenues and expenses into classes. Should you forget to do so, any unclassified transactions will show up in the unclassified column when a profit and loss statement by class is run. This can create questions and cleanup at year-end and is not an ideal process.
Excel spreadsheets. In general, this is the least ideal method. Several problems can result with this method, one of which is potential double-counting of expenses. Any expenses listed to satisfy the restrictions of contribution A could also be listed to satisfy contribution B or C, which would not be appropriate. When using this method, it will be difficult for your auditor to have confidence that the spending was not double-counted.

On the flip side, there is also an opportunity for the spending to be incomplete or otherwise incorrect in an Excel spreadsheet since it is a manual process and you must remember to transfer any spending to it. Errors are possible due to changes in the general ledger. Since the Excel is not linked to your accounting system, a voided check or reclassification would need to be updated in the spreadsheet. The possibility of mis-keyed information exists as well. Limiting the opportunity to commit human error is vital when designing a system of internal controls, and a great deal of human error is possible with this method.

This method will cause the most headaches for both you and your auditor when auditing restricted contributions as it usually means more time and effort spent by both parties. It is also the least reliable documentation to have in future years after the audit is complete.

However, Excel spreadsheets can be essential in certain situations, such as endowment tracking. Some organizations have an endowment fund that may have been in existence for more than 50 years. Over the years, there likely have been contributions to the endowment and investment gains. The organization may even be using the investment accounts at its financial institution to invest unrestricted funds as well. Additionally, you may have switched banks multiple times over the years, your bank may have been acquired several times, and your nonprofit may have gone through several CFOs and CEOs who don’t have a lot of history with the organization. A spreadsheet for endowment funds can be vital to supporting the different components of the endowment, such as corpus and spendable earnings and showing any other unrestricted funds that may be invested with these at the bank.

At year-end, many organizations choose to supplement the above methods by making a physical or electronic file with the donor award, general ledger detail specific to the program code, and backup for the spending to have a complete record of how the contribution was spent. Consideration as to the significance and materiality of the contribution should be considered when using this method.

Sound internal control design is key to ensuring the above methods are implemented accurately. A qualified individual should review the recording of all contributions to ensure the presence or absence of donor restrictions are properly recorded. Further, the review should also ensure that expenses used to satisfy donor restrictions are following the donor’s wishes. This review should be conducted by someone separate from the individual responsible for recording the transactions to ensure the ideal separation of duties.

If you would like more information on methodologies for tracking donor restrictions, contact me via email at micevr@yeoandyeo.com or call 269.329.7007, or contact your Yeo & Yeo professional.

Providing meaningful leadership during prosperous times doesn’t happen without challenges. When prosperous times fade and we are faced with uncertain times, effective leadership becomes critical to how we weather the storm. Both internal and external stakeholders rely heavily on an organization’s leadership to provide direction, ease fears and minimize the negative impact resulting from uncertainty.

While the decisions required during these times can be quite complex, providing leadership can be simple. Complicated methods or systems are not required and, often, getting back to the basics is what people want. The following are four basic action items you can implement to maintain CALM.

Communicate clearly and frequently using appropriate channels. Uncertainty can lead to confusion, incorrect assumptions and actions that are not in alignment with the organization’s plan. Communication should be to the point and include direction on the action desired. Stakeholders should receive information timely enough to carry out their duties effectively. Proactively providing messaging can reduce negative talk around the water cooler, put questioning minds at ease, and mitigate reduction in morale.
Ask others in the organization for their input. Find ways to include those at multiple levels of the organization. A list of ideas or concerns generated by multiple people will likely ensure better coverage of the concerns felt by a wider array of the organization. This also allows people to be heard so they can feel as though they’ve had an impact on the organization.
Listen to others throughout the organization. If you’re going to take the time to ask others for their input, then take the time to truly listen. Paying attention to verbal and nonverbal communication from others is essential to read the pulse of your people. Depending on their comfort level, some employees will be quick to speak up while others will provide only nonverbal clues. Sometimes it is what people aren’t saying that matters the most.
Motivate your people! Uncertainty tends to increase stress levels and demotivate people. Show you care by checking in regularly. Congratulate those who are demonstrating excellence. Let people know they are appreciated through small gestures. Picking up a person’s favorite coffee drink in the morning, giving a handwritten thank-you card or bringing in a few baked goods are all inexpensive and can go a long way to lift spirits.

Uncertain times can come in many forms and may be different for each organization. Providing effective leadership during these times impacts how organizations emerge from the storm. To increase the impact of the organization’s ultimate message, manage morale and keep the organization moving forward, keep the CALM tips in mind.

Offering the right compensation plan is essential to hiring and retaining good employees while keeping payroll costs under control. Employees should feel as though they are being compensated fairly for the work they do, the education they possess, and the standards of the industry in which they work.

Questions to Consider Before Choosing a Compensation Plan

What are the pay ranges for each job classification?
What are other companies in the industry paying their employees?
Under what conditions will employees receive a pay increase?
What benefits will be included in the compensation plan?
Will employees’ pay be increased based on annual inflation?

Once employers answer these questions, they can determine which compensation plan is right for them. In general, physicians can be paid on a salary basis, a production basis, or a combination of both. The following are some of the common compensation plan models.

100% Salary: Physicians are paid a fixed salary. This is the easiest compensation plan to manage, but it does not provide incentives for physicians to bring in new patients.
100% Salary Plus Incentive: Physicians are paid using a fixed salary and an additional incentive based on personal productivity.
Relative Value Unit (RVU): RVUs involve assigning work values (wRVUs) to codes and determining a set compensation amount for each wRVU. For example, if an office visit is coded 99213 and the work value assigned to it is 1, the physician will receive one wRVU whenever they code 99213. Compensation is then calculated by determining the dollar value per wRVU and multiplying it by the actual wRVUs recorded. If the physician in the previous example earns $60 for each wRVU and records 4,000 total wRVUs, they will earn $240,000 for that year.
Percent of Revenue: Physicians are paid a percentage of the total revenue the practice collects. For example, if revenue is $400,000, and the physician is compensated based on 50% of net revenue, they will receive $200,000.
Tiered Model: The RVU and percent of revenue models can be established in a tiered format. As a physician generates more revenue for the organization, they earn more money per work unit or receive a higher percentage of revenue.

In addition to salary, employers must also consider benefits packages for their employees. Benefits impact position attractiveness, morale, productivity and retention. Different benefit offerings have varying degrees of complexity and cost. Benefits such as vacation, holidays, and sick leave can be simple to administer, whereas benefits such as healthcare, retirement, disability, and dental can be more complex and expensive. When deciding which benefits to offer, identify those that are most desirable to your employees, yet most cost-effective for your organization.

Ensuring that your employees receive adequate compensation can be complex and difficult to manage. To make sure that your plan works for both you and your employees, contact your Yeo & Yeo advisor.

In recognition of the continued disruption of businesses that are required to file returns and remit sales, use and withholding taxes, the Michigan Department of Treasury is waiving penalty and interest for the late payment of tax or the late filing of any monthly or quarterly return due on April 20, 2020. The waiver is effective for 30 days; therefore, any monthly or first-quarter payment or return currently due on April 20, 2020, may be submitted to the Department without penalty or interest through May 20, 2020.

This waiver also includes sales, use, and withholding returns or payments due on April 20, 2020, as a result of the previous 30-day waiver of penalty and interest for payments or returns due on March 20, 2020. Taxpayers originally required to remit tax and file returns on March 20, 2020, therefore have until May 20, 2020, to remit tax and file returns without penalty and interest.

Taxpayers may still remit tax and file a return by the original due date and are encouraged to do so.

Any payment or return otherwise due after April 20, 2020, will not be eligible for the current waiver. The waiver is not available for accelerated sales, use or withholding tax filers. Those taxpayers should continue to file returns and remit any tax due as of the original due dates.

By now, most employers have presumably read up on the basic tax relief and financial assistance aspects of the Coronavirus Aid, Relief, and Economic Security (CARES) Act. What you may not have heard much about is how the law affects employer-sponsored benefit plans. Here are some highlights of its impact:

Coverage mandates. Under the Families First Coronavirus Response Act, an earlier law passed in response to the outbreak, health insurers and group health plans were required to cover coronavirus (COVID-19) testing and related provider visits without cost-sharing. The CARES Act has extended this requirement to additional categories of COVID-19 tests — even if not FDA-approved.

Health plans and insurers must reimburse the diagnostic testing provider according to any negotiated rate with the provider, or they must pay the provider’s publicized cash price for the diagnostic test in the absence of a negotiated rate. Health insurers and group health plans will have to cover, without cost-sharing, COVID-19 preventive services and immunizations that receive specified recommendations from the CDC’s United States Preventive Services Task Force. This requirement will apply 15 business days after the task force’s recommendation.

Telehealth exemption for high-deductible health plans (HDHPs). A safe harbor allows HDHPs to cover telehealth and other remote care services without a deductible for plan years beginning on or before December 31, 2021. This provision is effective March 27, 2020, the date of the law’s enactment.

Over-the-counter (OTC) drugs and certain other products. The CARES Act removes the prescription requirement for OTC drug reimbursements that previously applied to:

Health Flexible Spending Arrangements,
Health Reimbursement Arrangements,
Health Savings Accounts (HSAs), and
Other accident and health plans.

In addition, menstrual care products now qualify as medical care for purposes of reimbursement or tax-free distribution. These changes generally apply to expenses incurred after December 31, 2019; however, in the case of HSAs, they apply to amounts paid after that date. (As of this writing, there’s no expiration date.)

HIPAA privacy. The CARES Act aligns the Federal Confidentiality of Alcohol and Drug Abuse Patient Records Act with privacy rules under the Health Insurance Portability and Accountability Act (HIPAA). That is, the law generally allows disclosure and redisclosure of covered records for treatment, payment or health care operations to the extent permitted by HIPAA after a patient provides initial written consent. The U.S. Department of Health and Human Services (HHS) has been instructed to update its regulations and issue guidance regarding this change.

ERISA deadlines. The law adds public health emergencies declared by HHS to the list of events permitting the U.S. Department of Labor to delay, for up to one year, deadlines under the Employee Retirement Income Security Act (ERISA). Examples include deadlines for filing claims or appeals under a plan’s internal claims procedures.

Employers may need to immediately adjust their benefits administration systems to the many changes occurring because of the COVID-19 emergency. Contact us for help understanding how the CARES Act, or any other actions in response to the pandemic, may affect your organization.

View all Yeo & Yeo’s COVID-19 Resources.

The IRS has issued guidance providing relief from failure to make employment tax deposits for employers that are entitled to the refundable tax credits provided under two laws passed in response to the coronavirus (COVID-19) pandemic. The two laws are the Families First Coronavirus Response Act, which was signed on March 18, 2020, and the Coronavirus Aid, Relief, and Economic Security Act (CARES) Act, which was signed on March 27, 2020.

Employment tax penalty basics

The tax code imposes a penalty for any failure to deposit amounts as required on the date prescribed, unless such failure is due to reasonable cause rather than willful neglect.

An employer’s failure to deposit certain federal employment taxes, including deposits of withheld income taxes and taxes under the Federal Insurance Contributions Act (FICA) is generally subject to a penalty.

COVID-19 relief credits

Employers paying qualified sick leave wages and qualified family leave wages required by the Families First Act, as well as qualified health plan expenses allocable to qualified leave wages, are eligible for refundable tax credits under the Families First Act.

Specifically, provisions of the Families First Act provide a refundable tax credit against an employer’s share of the Social Security portion of FICA tax for each calendar quarter, in an amount equal to 100% of qualified leave wages paid by the employer (plus qualified health plan expenses with respect to that calendar quarter).

Additionally, under the CARES Act, certain employers are also allowed a refundable tax credit under the CARES Act of up to 50% of the qualified wages, including allocable qualified health expenses if they are experiencing:

A full or partial business suspension due to orders from governmental authorities due to COVID-19, or
A specified decline in business.

This credit is limited to $10,000 per employee over all calendar quarters combined.

An employer paying qualified leave wages or qualified retention wages can seek an advance payment of the related tax credits by filing Form 7200, Advance Payment of Employer Credits Due to COVID-19.

Available relief

The Families First Act and the CARES Act waive the penalty for failure to deposit the employer share of Social Security tax in anticipation of the allowance of the refundable tax credits allowed under the two laws.

IRS Notice 2020-22 provides that an employer won’t be subject to a penalty for failing to deposit employment taxes related to qualified leave wages or qualified retention wages in a calendar quarter if certain requirements are met. Contact us for more information about whether you can take advantage of this relief.

More breaking news

Be aware the IRS also just extended more federal tax deadlines. The extension, detailed in Notice 2020-23, involves a variety of tax form filings and payment obligations due between April 1 and July 15. It includes estimated tax payments due June 15 and the deadline to claim refunds from 2016. The extended deadlines cover individuals, estates, corporations and others. In addition, the guidance suspends associated interest, additions to tax, and penalties for late filing or late payments until July 15, 2020. Previously, the IRS postponed the due dates for certain federal income tax payments. The new guidance expands on the filing and payment relief. Contact us if you have questions.

View all Yeo & Yeo’s COVID-19 Resources.

The IRS and the U.S. Department of Treasury have announced new relief for federal taxpayers affected by the coronavirus (COVID-19) pandemic. The IRS had already extended certain deadlines to file and pay federal income taxes and estimated tax payments due April 15, 2020, without incurring late filing penalties, late payment penalties or interest. The additional relief, outlined in Notice 2020-23, applies to a wider variety of tax filers. The IRS also has announced new tools for taxpayers expecting Economic Impact Payments (also known as “recovery rebates”).

The extensions in a nutshell

The extensions apply to taxpayers, including Americans living and working abroad, with filing or payment deadlines on or after April 1, 2020, and before July 15, 2020. Covered tax forms and payments include:

Individual income tax payments and returns,
Calendar-year or fiscal-year corporate income tax payments and returns,
Calendar-year or fiscal-year partnership return filings,
Estate and trust income tax payments and returns,
Gift and generation-skipping transfer tax payments and returns, and
Tax-exempt organizations’ payments and returns.

The due dates for these payments and returns are automatically postponed to July 15, 2020. Taxpayers don’t need to contact the IRS, file any extension forms, or send letters or other documents to take advantage of the extensions. The accrual of interest, penalties and additions to tax for failure to file or pay will be suspended from April 1, 2020, to July 15, 2020, resuming on July 16, 2020.

The IRS is also extending the earlier relief regarding quarterly estimated tax payments. As of now, the payments ordinarily due on both April 15 and June 15 aren’t due until July 15. This applies to individual and businesses that must make estimated tax payments.

Extensions for other time-sensitive actions

Notably, the IRS is giving taxpayers extra time to perform specified other time-sensitive actions originally due to be performed on or after April 1, 2020, and before July 15, 2020. Those include filing petitions with the U.S. Tax Court or seeking review of a Tax Court decision, filing claims for tax credits or refunds, and filing a lawsuit based on a tax credit or refund claim. Taxpayers generally have three years to claim refunds, so the deadline for 2016 refunds otherwise would be April 15, 2020 (three years after the April 2017 filing date for 2016 tax returns).

Unfortunately for some taxpayers, the notice also provides the IRS with additional time to perform certain time-sensitive acts. It allows a 30-day postponement if the last date for performance of an action is on or after April 6, 2020, and before July 15, 2020. This extension could affect taxpayers who are currently under IRS examination, whose cases are with the Independent Office Appeals or who file amended returns or submit payments for a tax for which the assessment period would expire in that time period.

Economic Impact Payment tools

On April 10, 2020, the day after announcing the deadline extensions, the IRS launched a new online tool allowing quick registration for Economic Impact Payments for individuals who don’t normally file an income tax return. The Coronavirus Aid, Relief, and Economic Security Act (CARES Act) provides for payments of up to $1,200 for eligible individuals or $2,400 for married couples, plus $500 for each qualifying child. Eligible taxpayers who filed tax returns for 2019 or 2018 will receive the payments automatically.

The non-filer tool is intended for people who didn’t file a tax return for 2018 or 2019 and who don’t receive Social Security retirement, survivors or disability benefits. It’s available at IRS.gov.

The IRS says it expects to launch another tool, called “Get My Payment,” by April 17. It will provide taxpayers with information on the status of their payments, including the date payments are scheduled to be deposited in their bank accounts or mailed to them. Eligible taxpayers also will be able to provide their bank account information to expedite payment, assuming the payment hasn’t already been scheduled for delivery.

Stay tuned

The IRS, Department of Treasury, Congress and the Trump administration continue to work on new forms of relief to help individuals and businesses cope with the effects of the COVID-19 crisis. Turn to us for all of the latest developments and available opportunities.

View all Yeo & Yeo’s COVID-19 Resources.

The Coronavirus Aid, Relief and Economic Security Act (CARES Act) allocates nearly $350 billion to a new lending program through the Small Business Administration (SBA), aimed at helping employers cover their payrolls during the coronavirus (COVID-19) pandemic. The loans under the Paycheck Protection Program (PPP) are subject to 100% forgiveness if certain criteria are satisfied, and neither the government nor lenders will impose fees.

The program is open to virtually every U.S. small business — including sole proprietors, self-employed individuals, independent contractors and nonprofits — affected by COVID-19. It’s available through June 30, 2020, but on a “first-come, first-served” basis. The U.S. Treasury Department is urging businesses to apply promptly.

Eligible borrowers

The PPP generally is available to small organizations with fewer than 500 employees. The term “employees” includes full-time, part-time and any other status workers.

For businesses in the accommodation and food services sector, the 500-employee threshold is applied on a per physical location basis. The SBA’s normal affiliation rules also don’t apply to companies that receive financial assistance from an SBA-licensed Small Business Investment Company or certain franchises.

Loan requirements

The SBA is waiving its usual requirements for loans. Businesses need not provide personal guarantees or collateral — or demonstrate the inability to obtain some or all of the loan funds from other sources (also known as the Credit Elsewhere requirement).

Instead, borrowers must certify in good faith all of the following:

They were operating on February 15, 2020, and had employees for whom they paid salaries and payroll taxes or paid independent contractors, as reported on Form 1099-MISC,
Current economic uncertainty makes the loan necessary to continue ongoing operations,
The funds will be used to retain workers and maintain payroll, or to make mortgage interest, rent and utility payments for eight weeks (75% of loan proceeds must be used for payroll costs),
They don’t have, and won’t receive, another loan under the PPP, and
The number of full-time equivalent employees on payroll and the dollar amounts of payroll costs, covered mortgage interest payments and covered rent payments and utilities.

Independent contractors, sole proprietors and self-employed individuals must provide additional documentation, such as payroll processor records, payroll tax filings, Form 1099s and, for sole proprietors, income and expenses.

Note that, in the days leading up to the opening of the application process, some banks expressed concern that a lack of guidance could result in significant delays in issuing loans. The Treasury Department didn’t release its interim final rule until the evening before the program began accepting applications, so lags in funding may occur.

Loan amounts and terms

Eligible businesses can obtain loans for 2 1/2 months of their average monthly payroll costs plus the outstanding amount of an Economic Injury Disaster Loan (EIDL) made between January 31, 2020, and April 3, 2020 (less the amount of any advance under an EIDL COVID-19 loan, which doesn’t have to be repaid). Seasonal or new businesses will use different applicable time periods for the calculation.

Loans are subject to a $10 million cap. Payroll costs are limited to $100,000 annualized for each employee; amounts above that must be excluded from the calculation. Independent contractors who have the ability to apply for a PPP loan on their own don’t count for purposes of a borrower’s payroll.

Payroll costs include compensation, cash tips, severance, employee benefits (including leave), and state and local taxes on compensation. For sole proprietors, independent contractors and self-employed individuals, payroll includes wages, commissions, income and net earnings from self-employment.

Payroll excludes payroll and income taxes and compensation paid to employees who don’t live in the United States. It also doesn’t include qualified sick or family leave wages paid under the recent Families First Coronavirus Response Act.

The loans carry a fixed interest rate of only 1% and, although the CARES Act provided for terms of up to 10 years, will run for two years. All payments are deferred for six months, but interest will continue to accrue. Borrowers can pre-pay without penalties or fees.

Loan forgiveness

Businesses can qualify for loan forgiveness for amounts used for payroll costs, mortgage interest, and rent and utility payments over the eight weeks after receiving the loan. While the CARES Act provides that a borrower can spend up to 50% of loan proceeds on nonpayroll costs and still qualify for forgiveness, the final regulations indicate that no more than 25% of the loan proceeds can be used for such costs and benefit from forgiveness.

Borrowers also must maintain staff and payroll to qualify for full forgiveness. Loan forgiveness will be reduced if salaries and wages are reduced by more than 25% for any employee who made less than $100,000 annualized in 2019. Businesses will have until June 30, 2020, to restore full-time employment and salary levels from reductions made between February 15, 2020, and April 26, 2020.

Businesses can submit a request for forgiveness to their lenders. Requests must include documents verifying the number of full-time equivalent employees and pay rates, as well as the payments on eligible mortgage, lease and utility obligations. Lenders must make forgiveness decisions within 60 days.

Act now!

The application process for eligible small businesses and sole proprietors began April 3, 2020, and independent contractors and self-employed individuals can began to apply on April 10, 2020. Businesses might be able to expedite the process by seeking loans from financial institutions where they have existing lending relationships. Contact us for additional information.

View all Yeo & Yeo’s COVID-19 Resources.

Due to the coronavirus (COVID-19) pandemic, employers are now faced with many challenges with their workforces, including responding to changes in employee benefits programs. In response, they have many questions. Here’s one question from an employer:

Q. One of our employees has approached us with a dilemma. She would like to revoke her dependent care assistance program (DCAP) election under our calendar-year cafeteria plan. The reason is that her dependent care provider has closed due to the coronavirus (COVID-19) pandemic. She tells us that a neighbor has offered to take care of her children at no cost. Can we allow a midyear election change under these circumstances?

A. Yes, if your plan document has been drafted as expansively as IRS rules allow for midyear election changes due to changes in cost or coverage. The rules apply broadly to dependent care assistance programs (DCAPs), permitting midyear election changes in a variety of circumstances that involve changes in care providers or in the cost of care.

IRS officials have informally commented that a DCAP election change is permitted when a child is switched from a paid provider to free care (or no care, in the case of a “latchkey” child). Other circumstances in which IRS rules would allow a DCAP election change include a modification in the hours for which care is provided or in the fee charged by a provider. However, an election change isn’t allowed if a modified cost is imposed by a care provider who is the employee’s relative, as defined in IRS rules.

Note: While the cost or coverage election change rules apply broadly to DCAPs, they don’t apply to health flexible spending arrangements (FSAs). This is one of several areas in which the rules differ for health FSAs and DCAPs.

Contact your tax or employee benefits advisors with any questions.

View all Yeo & Yeo’s COVID-19 Resources.

Adjusted taxable income (ATI) refers to taxable income calculated by making adjustments to factor out the following:

Items of income, gain, deduction or loss that aren’t allocable to a business,
Any business interest income or business interest expense,
Any net operating loss deduction,
The deduction for up to 20% of qualified business income from a pass-through business entity,
For tax years beginning before 2022, allowable depreciation, amortization and depletion deductions, and
Other adjustments listed in IRS proposed regulations.

Deductions for depreciation, amortization and depletion are added back when calculating adjusted taxable income for tax years beginning before 2022. For tax years beginning in 2022 and beyond, these deductions won’t be added back, which may greatly increase the taxpayer’s adjusted taxable income amount and result in a lower interest expense limitation amount.

View all Yeo & Yeo’s COVID-19 Resources.

Eligible real property and farming businesses can elect out of the business interest expense limitation. However, electing to be exempt has a tax cost.

Real Property Businesses

Real property businesses can elect out of the business interest expense limitation rules if they use the slower Alternative Depreciation System (ADS) method to depreciate their nonresidential real property, residential rental property and qualified improvement property. Using the ADS method results in lower annual depreciation deductions because its depreciation periods are longer than the depreciation periods under the regular MACRS (Modified Accelerated Cost Recovery System) method. Real property businesses include developing, redeveloping, constructing, reconstructing, acquiring, converting, renting, operating, managing, leasing and brokering real property.

Affected real estate businesses should evaluate the tax benefit of gaining bigger interest expense deductions by electing out of the interest expense limitation rules vs. the tax detriment of lower depreciation deductions under the ADS method. If the election out is made, first-year bonus depreciation that would otherwise be allowed for eligible real property is not allowed under the ADS method.

Farming Businesses

Eligible farming businesses can also elect out of the business interest expense limitation rules. Farming businesses include nurseries; sod farms; raising or harvesting of tree crops, other crops, or ornamental trees; and certain agricultural and horticultural cooperatives. These businesses can elect out of the rules if they use the ADS method to depreciate assets used in the farming business that have MACRS depreciation periods of 10 years or more.

View all Yeo & Yeo’s COVID-19 Resources.

On April 1, the U.S. Department of Labor (DOL) issued preliminary regulations covering two emergency laws that are part of the response to the coronavirus (COVID-19) pandemic. The laws require new paid sick leave and family leave benefits for most employers with fewer than 500 full-time and part-time employees. Employers with fewer than 50 employees could be exempt from the rules if compliance “would jeopardize the viability of the business as a going concern,” according to the DOL

“To elect this small business exemption,” the DOL adds, “you should document why your business with fewer than 50 employees meets the criteria set forth by the Department, which will be addressed in more detail in forthcoming regulations.” As of this writing, further details aren’t yet available.

Fleshing Out the New Law

The new regulations put some meat on the bones of the Families First Coronavirus Response Act (FFCRA), which contains a component known as the Family and Medical Leave Expansion Act (FMLEA). The law was enacted March 19.

Important: The FMLEA was based on the original Family and Medical Leave Act, which doesn’t apply to employers with fewer than 50 employees. However, the FMLEA modifications do apply to these smaller businesses, except for those that apply for and receive an exemption.

The regs — plus a set of questions and answers issued by the DOL — spell out what the new law requires. ERISA attorneys are examining the regs in detail and should be consulted as thorny “what-if” questions arise. But the following benefits must generally be provided to employees who are quarantined “pursuant to federal, state or local government order or advice of a health care provider” or are “experiencing COVID-19 symptoms and seeking a medical diagnosis:”

Full-time workers, regardless of hire date, are eligible for up to two weeks (80 hours) of paid sick leave at their “regular rate of pay” (an average, including overtime).
For part-time employees, the duration of this benefit is the number of hours they work over an average two-week period.

Two-Thirds Pay Requirement

In addition, all eligible employees are entitled to sick leave at two-thirds of their normal rate of pay, for up to 80 hours. To be eligible they must be “unable to work because of a bona fide need to care for an individual subject to quarantine, or care for a child under 18, whose school or child care provider is closed or unavailable for reasons related to COVID-19.” As for employees experiencing a “substantially similar condition,” the requirements for leave haven’t yet been defined by the government.

Employees who have been on your payroll for at least 30 days are entitled to another ten weeks, at two-thirds pay, to cover childcare needs as described above.

The law puts a ceiling on some benefits. For example, the limit on the value of paid leave that can be offset by tax credits when given to employees who are quarantined or experiencing COVID-19 symptoms or being tested for the virus, is $511 per day and $5,110 over the two-week period. Lower limits apply to different leave scenarios.

Employees can’t claim both kinds of paid leave benefits simultaneously. Also, these benefits are taxable, and you’ll need to withhold federal income tax and the employee’s share of Social Security and Medicare taxes on paid sick leave amounts.

Pre-April 1 Paid Leave Benefits Must Remain

The FFCRA regs make it clear that the law’s new requirements can’t justify taking away any paid sick leave benefits employees already were entitled to prior to the law’s April 1 effective date.

As with many labor laws, the FFCRA requires not only that you comply with the law itself but also inform employees about their rights under the law. The DOL has created a model poster for that purpose; it’s available on its Wage and Hour Division’s website. Employees can also be notified via email.

The preliminary regs indicate that employees who need to stay home for COVID-19-related childcare reasons don’t have a blank check. “The FFCRA and these regulations encourage employers and employees to implement highly flexible telework arrangements that allow employees to perform work, potentially at unconventional times, while tending to family and other responsibilities, such as teaching children whose schools are closed for COVID-19-related reasons.”

What about the Credits?

To offset the added cost of providing these new benefits, the FFCRA includes an employer tax credit. The credits are available only for leave taken from April 1, 2020, to December 31, 2020.

Credits are claimed when a business files its quarterly payroll tax returns and withholds the amounts eligible for the credit from the payroll tax owed. According to the U.S. Department of Treasury, “Employers can be reimbursed immediately by reducing their federal employment tax deposits. If there are insufficient federal employment taxes to cover the amount of the credits, employers may request an accelerated payment from the IRS.” The IRS has created a new form, Form 7200, for that purpose. (See “Claiming the Credit,” at right.)

Important: Tax credits can offset more than wages paid to employees on leave. “Applicable tax credits also extend to amounts paid or incurred to maintain health insurance coverage,” according to the DOL.

Claiming the Credit

Here’s an example from the IRS of how your business can quickly be reimbursed for paid leave and other allowed expenses mandated by the Families First Coronavirus Response Act.

ABC Co., an eligible employer, paid $10,000 in qualified leave wages (including allocable qualified health plan expenses and ABC’s share of Medicare tax on the qualified leave wages). ABC is otherwise required to deposit $8,000 in federal employment taxes, including taxes withheld from all employees, on wage payments made during the same quarter.

However, under the new law, ABC can keep the entire $8,000 of taxes that the company was otherwise required to deposit without penalties as a portion of the credits it’s otherwise entitled to claim on the Form 941. In addition, ABC may file a request for an advance credit for the remaining $2,000 by completing Form 7200.

Documentation Is Critical

Employers seeking tax credits under the new paid leave program must retain all supporting documentation. Specifically, the IRS indicates that employers must have on file a written request for leave from affected employees which lists the following:

The employee’s name,
Dates for which leave is requested,
A statement of the COVID-19-related reason for the request and written support for such reason, and
A statement that the employee is unable to work, including by means of telework, for such reason.

The DOL emphasizes the point that employers must retain documentation, but not send it to the DOL unless specifically requested.

Final Thoughts

As employers process leave requests and apply for credits, more leave-related questions are bound to arise. The DOL will continue to support employers by adding clarity where needed to existing regulations and addressing new situations in detail. Contact your HR advisor or employment attorney for help in applying the new leave regs to your specific circumstances.