CARES Act Rules for IRAs, RMDs & the August 31 Deadline

Retirees over the age of 70 ½ might be struggling to make sense of the new regulations with the passage of the SECURE Act at the end of 2019 and the current CARES Act. These new regulations may be confusing for retirees in regard to required minimum distribution (RMD) rules.

The SECURE Act passed last December is permanent and essentially raises the age for RMDs to 72; however, it went into effect January 2020. Therefore, if an individual turned 70 ½ in 2019, RMDs must still be taken in 2019 and 2020, since the age of 72 would not be reached until 2021.

So, how does the CARES Act come into play? Some say it’s like an RMD holiday. The CARES Act legislation essentially suspended RMDs from IRAs, inherited IRAs, 401(k)s, and inherited 401(k)s during 2020 and gave everyone the chance to put it back into their account within 60 days without taxation.

If an individual has already taken some or all RMDs and has gone past the 60-day mark, these funds may still be rolled over. The recently issued Notice 2020-51 allows an account holder to rollover all RMDs funds, distributed January 2020 to now, provided the rollover is made by August 31, 2020. Additionally, this move will not count as the one-per-year rollover allowed, so you may still enact a rollover for another purpose.

Another new benefit for retirement accounts is the ability to make a withdrawal from a qualified retirement plan or IRA due to a COVID-19 related issue. An individual can “self-certify” they have been financially impacted due to coronavirus-related circumstances. Plus, individuals under 59 ½ will be exempt from the 10% penalty tax for early withdrawal. Congress realized the need for hardship withdrawals, which meant individuals could access funds in their accounts without penalty. The maximum withdrawal amount is capped at $100,000.00. Participants may be permitted to recontribute the amount over a 3-year period, following the date of distribution, without affecting normal contribution limits. Repayment may be spread over the years 2020, 2021, and 2022 equally, as opposed to the entire amount being taxable the year the distribution was taken.

IRS waives requirements.

The PPP Loan Program Extended

The Paycheck Protection Program (PPP) resumed accepting applications on July 6th, following the President signing the program’s extension over the July 4th weekend. According to the Small Business Association (SBA), approximately $130 billion allocated for PPP was left untapped once the original June 30th deadline expired. Small businesses now have an additional five weeks to apply for loans or until August 8th.

 

The SBA reported that 4.8 million businesses received funds, totaling $520 billion of the original $670 billion PPP funds authorized by Congress this past March. Businesses with fewer than 500 employees may apply for a PPP loan through any existing SBA 7(a) lender or FDIC bank, federally insured credit union, and Farm Credit System institution that is participating in the program.

 

Total loan forgiveness is available to businesses who prove they have suffered a 50 percent or more revenue loss, due to the pandemic. Additionally, at least 60% of the PPP funds must be spent on payroll costs, while the other 40% may be allocated for assistance with rent, utilities, and interest on mortgages.

 

Congress is expected to address further emergency relief funding in late July, as well as ways to repurpose any leftover funds. Lawmakers have also discussed the possibility of permitting businesses with fewer than 100 employees to apply for a second loan, as well as sole proprietorships and self-employed individuals, provided they have exhausted their original PPP loan.

Link to the SBA Application.

IRS Expands Eligibility on COVID-19 Distributions from IRAs

The IRS expanded its guidelines on June 20th with Notice 2020-50 that allows additional qualified individuals to take a coronavirus-related distribution (CRD) while avoiding the usual restrictions on early IRA distributions. Under the CARES Act, qualified individuals may receive favorable treatment for IRA distributions up to $100,000 from eligible retirement plans (i.e. 401k/403b and 457s) until December 31, 2020. Additionally, the 10% tax on early distributions is waived for any CRD if the distribution is taken before the account holder reaches 59 ½.

The Notice expands eligibility of “qualified individual” under the CARES Act

The original Act indicates a qualified individual is someone diagnosed with COVID-19, whose spouse or dependent is diagnosed with COVID-19 by a CDC approved test or a person who experienced adverse financial consequences resulting from being quarantined, furloughed or laid off or having hours reduced, unable to work due to lack of child care or closing or reduced hours for a business owned by the individual, any as a result of COVID-19.

The definition of “qualified” was expanded to include the individual and/or spouse, or a member of the individual’s household who had a job offer rescinded or start date delayed due to COVID-19. Additionally, a qualified individual includes someone whose income is affected by COVID-19 because a spouse or other household member (sharing the principal residence) experienced an income reduction due to COVID-19.

Also qualifying are household members unable to work due to lack of childcare because of COVID-19, as well as business owners/operators who lose income due to closing or reducing hours of business due to COVID-19.

Notice 2020-50 clarifies that while it is optional for employers and plans to designate distributions as COVID-related, qualified individuals whose distributions meet the above requirements will still receive this favorable federal tax treatment, even if a distribution is not classified as a CRD by the employer.

The CARES Act also provides somewhat of a tax holiday to a Qualified Individual

While a distribution from a qualified retirement plan is generally included in taxable income in the year of distribution, the CARES Act permits a qualified individual to include a CRD in taxable income ratably over a three-year period.  Notice 2020-50 clarifies this is an election on the part of the qualified individual who may choose instead to include the entire CRD in taxable income in the year of receipt; however, this election may not be changed. All CRDs must be treated in the same manner as reflected on the qualified individual’s 2020 tax return.

Additionally, the CARES Act permits a qualified individual to re-contribute a CRD to a qualified retirement plan. Unlike the tax treatment of a CRD, whether a CRD will be re-contributed to a qualified retirement plan or the manner in which it will be re-contributed, does not have to be determined before the filing of the qualified individual’s 2020 tax return.  Notice 2020-50 says that the decision can be made at any time during the three-year period and provides for the filing of amended returns to reflect the re-contribution of all or a portion of the CRD.

Link to IRS Notice 2020-50

COVID-19 Relief Under the Stafford Act

The President issued an emergency declaration in response to the coronavirus pandemic under the Stafford Act and subsequently approved major disaster declaration requests under Sec. 401(a) of the Stafford Act for all 50 states. Jurisdiction for the state of emergency, which took effect January 20, 2020, provides relief and assistance to businesses – including tax relief. Businesses experiencing financial loss directly due to COVID-19, during the disaster year, may elect to accelerate those losses to the 2019 fiscal year.

 

To accelerate a loss under these relief provisions:

  • Compensation for the loss cannot come from insurance or otherwise
  • It must be by a closed and completed transaction
  • The loss must be caused by an identifiable event
  • The losses sustained must relate to the disaster event and must be sustained during the taxable year of the event

Potential losses to accelerate on the preceding year tax return, if directly attributable to COVID-19:

  • Abandonment of business deals for costs otherwise capitalized
  • Abandonment of leasehold improvements
  • Costs related to the closure of store, branch, and facility locations
  • Inventory spoilage during the government shutdown
  • Losses from the sale or exchange of property
  • Mark-to-market securities
  • Permanent retirement of fixed assets
  • Prepaid events for travel, conference space, and hotel rooms when a refund or credit is not provided
  • Prepaid expenses to fulfill a contract when the contract is canceled
  • Payments to cancel contracts, leases, or licenses
  • Worthless securities (excluding bad debts)

The election to accelerate the loss is done on an original or amended 2019 tax return. This is a temporary tax adjustment, meaning any loss accelerated into the preceding tax year will no longer offset the current year activity.

For mortgage bankers, there may be losses on hedge positions or mortgage loans held for sale on closed deals that can be taken in 2019. All losses must be the direct result of the current coronavirus pandemic.

If the disaster loss creates a Net Operating Loss (NOL) in 2019, the taxpayer may have the added benefit of carrying back the NOL up to 5 years.

If you would like to discuss your filing options under the disaster relief provisions related to COVID-19, please contact your Spiegel tax manager.

Download the document.

Financial Statement Reporting for Proceeds from PPP Loans

History of the Paycheck Protection Program

The Coronavirus Aid, Relief, and Economic Security (CARES) Act provided an estimated $2.2 trillion to fight the COVID-19 pandemic and stimulate the US economy, including $349 billion that was earmarked for the Paycheck Protection Program (PPP) to be administered by the U.S. Small Business Administration (SBA). An additional $310 billion was later authorized for the PPP.

Under the PPP, eligible businesses can apply to an SBA-approved lender for a loan that does not require collateral or personal guarantees. The loans have a 1% fixed interest rate and are due in two years. However, these loans are eligible for forgiveness (in full or in part, including any accrued interest) under certain conditions. For loans (or parts of loans) that are forgiven, the lender will collect the forgiven amount from the U.S. government. A recent bill has extended the repayment term to five years for any portion of the loan not forgiven.

Businesses, including mortgage bankers, must meet certain eligibility requirements to receive PPP loans and are required to meet PPP guidelines to receive loan forgiveness. Therefore, it is vital to maintain detailed documentation of the initially submitted eligibility criteria, submitted by management, as well as detailed PPP loan expenditure documentation to support payroll expenses and other eligible expenses used for loan forgiveness.

Loan forgiveness applications are subject to audit by the U.S. government with a 6-year statute; however, businesses that borrow less than $2 million are expected to receive an automatic “good faith” certification, which may mean these businesses will not be subject to an audit. Future scrutiny of the good faith certification will depend on additional guidance issued by the SBA.

Businesses that received a loan over $2 million will be subject to greater scrutiny, audit, and may be deemed ineligible. The SBA may request repayment if it is determined required expenditure guidelines were not met and more importantly, the business entity did not actually qualify for a PPP loan.

Authorized Use of Loan Proceeds

A bill passed June 5, 2020 has extended the forgiveness period from 8 weeks to 24 weeks, lowered the percentage spent on payroll costs from 75% to 60% with the remainder allotted for rent, utilities, and interest payments. This new legislation contained the stipulation that if a minimum of 60% is not used for payroll costs, no amount of the loan can be forgiven. However, following the bill’s passage, the U.S. Treasury and SBA released a joint statement clarifying that borrowers who fail to meet the 60% threshold would qualify for partial loan forgiveness. You can choose which accounting rule to apply with respect to the PPP loan. Costs are defined below:

“Payroll Costs” – This is a key term for PPP loans and includes virtually all compensation paid to employees, as salaries, commissions, or similar compensation, including tips, vacation pay, family/parental leave and sick leave. Total compensation is capped at $100,000 per year for any person, and does not include payroll taxes imposed on the employer or withheld from the employee, plus:

  • Any state or local taxes assessed on the compensation of employees paid by the employer
  • Severance pay (allowance for dismissal or separation)
  • Costs related to the continuation of group health benefits and any retirement benefits (presumably including all COBRA benefits) Payments of interest on any pre-existing debt or mortgage obligation (but not  payment or prepayment of principal on such obligations)
  • Rent (including rent under an equipment or other lease), and
  • Utilities.

Eligibility for Loan Forgiveness

PPP loan recipients must certify, in good faith, that the loan was required to continue operations due to the current economic circumstances and acknowledge that the funds have been used to retain workers and maintain payroll or make business interest, rental or lease and utility payments, and that the applicant does not have other “covered loan” applications pending for similar or duplicative purposes.

 Alternative Accounting Treatment for PPP Loan Proceeds

Under the Financial Accounting Standards Board, Accounting Standards Codification (ASC) 470, Debt, a PPP loan is considered debt, regardless of whether the borrower expects the loan to be forgiven. Alternatively, the borrower may choose to consider the loan as a government grant and amortize the funds as they are used and there is a reasonable possibility of the loan being forgiven.

A Closer Look: Accounting for the PPP Loan as Debt

Under ASC 470, a business entity would record the full amount of the PPP loan as a liability and accrue interest over the term of the loan until the loan is forgiven. Considerations: This model would be more prudent for an entity that determines there is a reasonable possibility of not meeting the necessary criteria for loan forgiveness, or the business entity determines that maintaining the debt for financial statement reporting purposes does not impact debt eporting requirements or other financial metrics.

For income statement purposes, any PPP forgiveness would be considered gain on extinguishment of debt. For cash flow statement purposes, PPP loan proceeds would be considered a financing cash inflow; repayments would be considered a financing cash outflows; and forgiven amounts would be a noncash financing activity.

Accounting for the PPP Loan as a Government Grant

The current CARES Act/PPP framework provides clear guidance on the eligible uses of the PPP loan. Businesses that have high degree of confidence in their ability to qualify for loan forgiveness, and believe they have or will meet the authorized expenditure requirements are able to amortize the loan to income as expenses are accrued or paid. While there are no clear U.S. generally accepted accounting principles (U.S. GAAP), references related to this type of government loan provided to for-profit entities, an analogy could be made to ASC 958, Not-for-Profit Entities, Conditional Contribution or ASC 450, Contingencies, Gain Contingencies.  While not U.S. GAAP, International Accounting Standard (IAS) 20, Accounting for Government Grants and Disclosure, provides a model to account for and forgive government loans. Under this model, the PPP loan would be accounted for as a grant, and a deferred liability established when funds are received. The deferred liability would be recognized in earnings in accordance with the requirements of the authorized PPP expenditures. Considerations: If this accounting treatment is elected, the business entity will have to continually assess whether it continues to meet the eligibility criteria. The SBA has also stated that it will provide further guidance and clarification regarding acceptable PPP expenditures.

For income statement purposes, the amortization of the grant would be reflected as other income, or a reduction of the expense to which it pertains.

For cash flow statement purposes, loan proceeds could be considered operating cash inflows because of nature of the expenses for which the loan is intended (e.g., payroll, rent). However, loan proceeds from financing activities may also be acceptable.

Disclosures

For either accounting treatment, the business should disclose the nature of the PPP, including the funds received, the amount deferred, the recognition of deferred amounts, and the requirements to recognize the deferred amounts as income.

Download the Spiegel document.

PPP Loan Forgiveness Application

Treasury, SBA Release Loan Forgiveness Application

The US Treasury and the Small Business Administration (SBA) have coordinated to release the Paycheck Protection Program (PPP) Loan Forgiveness Application. The PPP was enacted under the CARES Act to provide eligible small businesses with loans during the COVID-19 pandemic. The application and corresponding instructions advise borrowers on how to apply for forgiveness of PPP loans under the CARES Act.

The SBA is expected to issue regulations and guidance to assist borrowers as they complete their applications, according to the Treasury. Spiegel has been providing guidance to its clients as they work to navigate their way through the application process. It is important to provide the correct information, regarding the business loan, to ensure loan forgiveness.

Measures intended to reduce compliance burdens and simplify the process for borrowers include:

  • options to calculate payroll costs using an “alternative payroll covered period” that aligns with borrowers’ regular payroll cycles;
  • flexibility to include eligible payroll and non-payroll expenses paid or incurred during the eight-week period after receiving their PPP loan;
  • step-by-step instructions on how to perform the calculations required by the CARES Act to confirm eligibility for loan forgiveness;
  • borrower-friendly implementation of statutory exemptions from loan forgiveness reduction based on rehiring by June 30; and
  • the addition of a new exemption from the loan forgiveness reduction for borrowers who have made a good-faith, written offer to rehire workers that was declined.

Reach out to Spiegel directly if you would like assistance with the application (below).

SBA Paycheck Protection Program Loan Forgiveness Application; Treasury Press Release, May 15, 2020

Auditing Standards Board Agrees to Defer SASs 134-140 For One Year

The Auditing Standards Board just issued Statements on Auditing Standards 141, which delays required implementation changes to auditor’s reports for audits and employee benefits plans from reporting periods ending from December 15, 2020 to December 15, 2021, with early adoption permitted.

These new reporting standards will change auditor’s reports and management’s responsibilities as follows:

Statement on Auditing Standards (SAS) 134, Auditor reporting and amendments, including amendments addressing disclosures in the audit of financial statements: The new standard makes significant changes to the layout and information to be included in the auditor’s report.  The new audit report will also provide for the option to report on key audit matters in the body of the report. The SAS standard was developed to better align reporting standards with those of the international and public company auditor reporting standards.

SAS 136, Forming an opinion and reporting on financial statements of employ benefit plan subject to ERISA: The new standard provides changes similar to those of SAS 134 to be included in the auditor’s report and will also eliminate the “disclaimer of opinion” as well as the reference to limited scope audits. The standard will also provide clarification on management’s required representations and responsibilities.

We will contact our clients to discuss how the additional auditor’s opinion requirements may be beneficial to the company’s overall financial statement reporting.

Spiegel is Working to Support Feeding America

Spiegel has teamed up with Feeding America in its effort to assist the millions of newly unemployed people in our communities who are turning to food pantries for help.

Your gift of $50, $75, $100, or whatever you choose to provide will help support local food banks in the Feeding America network as they work to meet the increased demand. Please give today.

Feeding America, the nation’s largest domestic hunger-relief organization, with a network of 200 member food banks across the country, established the COVID-19 Response Fund to help food pantires across the country as they support communities impacted by the pandemic.

The $2.65 million fund will enable food banks to secure the resources they need to serve the most vulnerable members of the community during this difficult time. Still, it is impossible for the Feeding America network to address this pandemic without public and government support, so that food banks can do what they do best — feed people in need within their communities.

Did You Really Qualify For PPP?

Did you receive money through the Paycheck Protection Plan that you’re not entitled to? There are ramifications if you actually do not qualify. The section, below, from a SBA document provides the answer.

Question: Do businesses owned by large companies with adequate sources of liquidity to support the business’s ongoing operations qualify for a PPP loan?

Answer: In addition to reviewing applicable affiliation rules to determine eligibility, all borrowers must assess their economic need for a PPP loan under the standard established by the CARES Act and the PPP regulations at the time of the loan application.

Although the CARES Act suspends the ordinary requirement that borrowers must be unable to obtain credit elsewhere (as defined in section 3(h) of the Small Business Act), borrowers still must certify in good faith that their PPP loan request is necessary. Specifically, before submitting a PPP application, all borrowers should review carefully the required certification that “[c]urrent economic uncertainty makes this loan request necessary to support the ongoing operations of the Applicant.”

Borrowers must make this certification in good faith, taking into account their current business activity and their ability to access other sources of liquidity sufficient to support their ongoing operations in a manner that is not significantly detrimental to the business. For example, it is unlikely that a public company with substantial market value and access to capital markets will be able to make the required certification in good faith, and such a company should be prepared to demonstrate to SBA, upon request, the basis for its certification.

Lenders may rely on a borrower’s certification regarding the necessity of the loan request. Any borrower that applied for a PPP loan prior to the issuance of this guidance and repays the loan in full by May 7, 2020 will be deemed by SBA to have made the required certification in good faith.11

Source:

Small Business Administration in partnership with the Department of the Treasury

4/23/2020

 

What You Should Know About the CARES Act

We’ve unpacked the information for you.

In response to the coronavirus pandemic, the CARES Act was signed into law on Friday, March 27, 2020.  The Spiegel team has compiled the necessary information within two separate documents regarding:

  • postponed dates for tax filings, payments and program contributions; and
  • resources for financial relief and assistance for individuals and businesses

There are time limits in which to take advantage of certain benefits.

We encourage you to review both of the attached information sources (links below) and contact us if you have any questions.
CARES Act Information
CARES ACT Overview of PPP and EIDL