Family First Coronavirus Response Act

Congress passed and the President signed a coronavirus-related bill this week. While mainly addressing employment benefits, it also includes payroll-tax-related provisions to mitigate the effect of the benefit expansion on employers.

Following is a recap of the Act. It is intended as an introduction and quick reference only. Please review the Act itself for detailed questions.

The Family First Corona Virus Response Act has two key employment-benefit components. Employers are to be reimbursed for the benefit expansion via a tax credit mechanism.

A. The Emergency Paid Sick Leave Act

1.  Private employers employing less than 500 employees shall provide an employee with paid sick time if:

i. The employee is subject to quarantine or isolation due to COVID-19.

ii.  The employee has been advised by a health care provider to self-quarantine due to concerns related to COVID– 19.

iii.  The employee is experiencing symptoms of COVID– 19 and seeking a medical diagnosis.

iv. The employee is caring for an individual described in (i) or has been advised as described in (ii).

v. The employee is caring for a son or daughter of such employee if the school or place of care of the son or daughter has been closed, or the child care provider of such son or daughter is unavailable, due to COVID–19 precautions.

vi. The employee is experiencing any other substantially similar condition specified by the Secretary of Health and Human Services in consultation with the Secretary of the Treasury and the Secretary of Labor.

2. Full-time employees are entitled to 80 hours of paid sick time.

3. Part-time employees are entitled to the average number of hours worked on over a 2-week period.  For employees with varying schedules, the employer shall use the employee’s average number of hours per day over the 6-month period ending on the date the employee takes leave under the Act.

4. If an employee takes time off for self-care, the employee shall be compensated at the employee’s regular pay rate.

     i. Not to exceed $511 per day and $5,110 in the aggregate

5. If an employee takes time off for a sick family member or child, the employee shall be compensated at 2/3 of the employee’s regular pay rate.

     i. Not to exceed $200 per day and $2,000 in the aggregate

6. There are comparable provisions for the self-employed.

7. The Act expires on December 31, 2020.

8. The Labor Secretary is authorized to exempt employers with less than 50 employees if the requirements would imperil the viability of the business.

9. Employers who violate this Act shall be considered to have failed to pay minimum wages in violation of the FLSA and be subject to penalties related to such a violation.

B. Emergency Family and Medical Leave Expansion Act (E-FMLA)

1. The Act expands coverage of the Family and Medical Leave Act (“FMLA”) for employers with fewer than 500 employees. Employees are typically not eligible for FMLA leave until they have worked at least 12 months and 1250 hours. 

i.  For purposes of E-FMLA, this threshold is reduced to 30 days.

2.  E-FMLA applies if the employee leave is to care for a child under 18 if the school or place of care has been closed or child care provider is unavailable due to a public health emergency.

3. Protected leave can be for up to 12 weeks, but the first 10 days may consist of unpaid leave.

4.  The employee shall be compensated not less than two-thirds of the employee’s regular rate of pay.

i. Not to exceed $200 per day and $10,000 in the aggregate (for each employee)  

5. There are comparable provisions for the self-employed.

6. The Act expires on December 31, 2020.

7. The Labor Secretary is authorized to exempt employers with less than 50 employees if the requirements would imperil the viability of the business.

8. Employers who violate this Act shall be considered to have failed to pay minimum wages in violation of the FLSA and be subject to penalties related to such a violation.

C. Tax Credits

1. The compensation paid under the Act is not subject to the Old-Age, Survivors and Disability portion of FICA (that is, the 6.2%).

2. The compensation paid under the Act is subject to the Hospital Insurance portion of FICA (that is, the 1.45%).

3. On a quarterly basis, employers can claim a payroll tax credit for the sum of the following:

                a. Wages paid under this Act

b. Allocable “qualified health plan expenses” 

      ... think health insurance

c. The employer portion of Hospital Insurance (that is, the 1.45%)

4. Treasury is authorized to issue Regulations waiving penalties for not making payroll tax deposits in anticipation of the credit to be allowed.

5. The credit is refundable if it exceeds the amount the employer owes in payroll tax.

6. Employer taxable income is to be increased by the amount of payroll credit received.

           i. Otherwise there would be a double tax benefit.    

Year-End Retirement Tax Changes

On Friday December 20, 2019 the President signed two spending bills, averting a government shutdown at midnight.

The reason we are talking about it is that there were several tax provisions included in the bills. Many if not most are as dry as sand, but there are a few that affect retirement accounts and are worth talking about.

Increase the Age for Minimum Required Distributions (MRDs)

We know that we are presently required to begin distributions from our IRAs when we reach age 70 ½. The same requirement applies to a 401(k), unless one continues working and is not an owner. Interestingly, Roths have no MRDs until they are inherited.

In a favorable change, the minimum age for MRDs has been increased to 72.

Repeal the Age Limitation for IRA Contributions

Presently you can contribute to your 401(k) or Roth past the age of 70 ½. You cannot, however, contribute to your IRA past age 70 ½.

In another favorable change, you will now be allowed to contribute to your IRA past age 70 ½.

COMMENT: Remember that you generally need income on which you paid social security taxes (either employee FICA or self-employment tax) in order to contribute to a retirement account, including an IRA. In short, this change applies if you are working past 70 ½.

New Exception to 10% Early Distribution Penalty

Beginning in 2020 you will be allowed to withdraw up to $5,000 from your 401(k) or IRA within one year after the birth or adoption of a child without incurring the early distribution penalty.

BTW, the exception applies to each spouse, so a married couple could withdraw up to $10,000 without penalty.

And the “within one year” language means you can withdraw in 2020 for a child born in 2019.

Remember however that the distribution will still be subject to regular income tax. The exception applies only to the penalty.

Limit the Ability to Stretch an IRA

Stretching begins with someone dying. That someone had a retirement account, and the account was transferred to a younger beneficiary.

Take someone in their 80s who passes away with $2 million in an IRA. They have 4 grandkids, none older than age 24. The IRA is divided into four parts, each going to one of the grandkids. The required distribution on the IRAs used to be based on the life expectancy of someone in their 80s; it is now based on someone in their 20s. That is the concept of “stretching” an IRA.

Die after December 31, 2019 and the maximum stretch (with some exceptions, such as for a surviving spouse) is now 10 years.

Folks, Congress had to “pay” for the other breaks somehow. Here is the somehow.

Annuity Information and Options Expanded

When you get your 401(k) statement presently, it shows your account balance. If the statement is snazzy, you might also get performance information over a period of years.

In the future, your 401(k) statements will provide “lifetime income disclosure requirements.”

Great. What does that mean?

It means that the statement will show how much money you could get if you used all the money in the 401(k) account to buy an annuity.

The IRS is being given some time to figure out what the above means, and then employers will have an extra year before having to provide the infinitely-better 401(k) statements to employees and participants.

By the way …

You will never guess this, but the law change also makes it easier for employers to offer annuities inside their 401(k) plans.

Here is the shocked face:

 Expand the Small Employer Retirement Plan Tax Credit

In case you work for a small employer who does not offer a retirement plan, you might want to mention the enhanced tax credit for establishing a retirement plan.

The old credit was a flat $500. It got almost no attention, as $500 just doesn’t move the needle.

The new credit is $250 per nonhighly-compensated employee, up to $5,000.

At $5 grand, maybe it is now worth looking at.

Individual Changes In The New Tax Bill

We have a new tax bill, and it is considered the most significant single change to the tax Code over the last 30 years. Here are some changes that may affect you:

·     Your tax rate is likely going down. A single person making $150,000, for example, will see his/her rate dropping from 28% to 24%. A married couple making $250,000 will see their rate drop from 33% to 24%. Whether married or not, the top rate has gone from 39.6% to 37%.

·     You will lose your personal exemptions next year. For 2017 the exemption amount is $4,050 for you, your spouse and every tax dependent. 

·      To make up for the loss of the personal exemptions, your standard deduction is going up in 2018. A single taxpayer will increase from $6,350 to $12,000. A married taxpayer will go from $12,700 to 24,000.

·      Many of your itemized deductions will be limited or go away altogether next year:

o   For 2017 you can deduct interest on up to $1 million on a mortgage used to buy your home.  In 2018 that limit will drop to $750,000.

o   For 2017 you can deduct interest on (up to) $100,000 of home equity loans. In 2018 you will be unable to deduct any interest on home equity loans.

o   For 2017 you can deduct your state and local income and real estate taxes, without limit. In 2018 the maximum amount you can deduct is $10,000.

o   For 2017 you can deduct a personal casualty loss (such as a car flooding), subject to a $100-deductible-per-incident and-10%-of-income threshold. You will not be able to deduct such losses in 2018, unless you are in a Presidentially-declared disaster zone.

o   For 2017 you can deduct contributions up to 50% of your income. In 2018 that increases to 60%.

o   If your contribution provides the right to purchase seat tickets to an athletic event – say to Tennessee or Ole Miss – you can presently deduct a percentage of that contribution.  In 2018 you will not be able to deduct any portion.

o   In 2017 you can deduct employee business expenses, certain similar or investment expenses, subject to a 2% disallowance. Starting in 2018 no 2% miscellaneous deductions will be allowed.

·     Medical expenses – for some reason – go the other way. Congress reduced the threshold from 10% to 7.5%, and it made the change retroactive to January 1, 2017. It is one of the few retroactive changes in the bill, and it will exist for only two years – 2017 and 018.

·     Get divorced and you might pay alimony. For 2017 you can deduct alimony you pay, and your ex-spouse has to report the same amount as income. Get divorced in 2019 or later, however, and your alimony will not be deductible, and it will not be taxable to your ex-spouse.

·      Move in 2017 and you may be able to deduct your moving expenses. There is no deduction if you move in 2018 or later.

·      You still have the alternative minimum tax to worry about in 2018, but the exemption amounts have been increased.

·      If you own a business, chances are the new tax law will affect you. For example,

o   If you own a C corporation, you will now pay tax at one rate – 21%. It does not matter how big you are. You and Wells Fargo will pay the same tax rate.

o   If you are self-employed, a partner or a shareholder in an S corporation, you might be able to subtract 20% of that business income from your taxable income. There are hoops, however. The new law will limit your deduction if you do not have payroll or have no depreciable assets, although you can avoid that limit if your income is below a certain threshold.

·     Your kid will provide a larger child tax credit. The credit is $1,000 for 2017 but will go to $2,000 in 2018.

What can you do now to still affect your taxes?

·      Rates are going down. Delay your income if you can.

·      For the same reason, accelerate your expenses, especially if you are cash-basis.

·      Prepay your real estate taxes. Yes, that means pay your 2018 taxes by December 31.

·      Pay your 4^th quarter state (and city) estimated tax by December 31. You may even want to sweeten it a bit, although the tax bill does not permit one to prepay all of 2018’s state tax by December 31.

·      Remember that you are losing your 2% miscellaneous deductions next year. If you use your car for work and are not reimbursed, you will lose out. It is the same for an office-in-home. 

·   Congress is limiting or taking away many popular itemized deductions and replacing them with a larger standard deduction. This means your remaining deductions – mortgage interest, taxes (what’s left) and contributions are under pressure to exceed that standard deduction. If you do not think you will be able to itemize next year, you may want to accelerate your contributions to 2017. Remember that the check has to be in the mail by December 31 to claim the deduction in 2017.

There are some surprises to be had, folks. I was looking at an estimated 2018 workup for a routine-enough-CPA-firm client. The result? An over 16% tax increase. What caused it? The loss of the personal exemptions. It was simply too much weight for the increased standard deduction and slightly lower tax rates to pull back up. 

I hope that is not the norm. This is a hard-enough job without having that conversation. 

Ohio Reforms Its Local Income Taxation

I remember having to quickly ramp-up on local taxes after moving to Cincinnati. I grew up in Florida, which has no state or local individual income taxes. We moved here from Georgia, which has a state but no local income taxes. I did not realize at the time that I was moving to a region which has approximately 80% or more of all the local income taxes in the nation – Ohio, Indiana, Pennsylvania and Kentucky.

The Kentucky local individual taxes are – for the most part – occupational taxes. If you do not work in one of those counties or cities, you generally do not have to worry about it. I live in Kentucky, for example, but I pay no Kentucky local income taxes. I do not work in Kentucky.

Indiana has county taxes, but they are filed with the state individual income tax return. Think of it as a “piggy-back” tax.

Ohio had to be different. For one thing, Ohio cities tax their residents, meaning that – if you live within the city – you have yet one more tax return to file. It doesn’t matter whether you work there (in contrast to Kentucky), and in many cases you have to file a return whether you owe tax or not. You might not owe tax, for example, if the city allows (at least some) credit for the local taxes paid to the city where you work (for example, if you live in a suburb but work downtown).

Add to this that each city has local autonomy to determine its taxable base, within the limits of Ohio law. One city could tax supplemental retirement benefits (SERPs), while another would not. One city could allow you to carry over a net operating loss (NOL) to future years, while another city would not.  Even if the city allowed an NOL, your city might allow a carryover of five years, while another would allow only three.

Even for a tax pro, it is a pain.

On December 19, 2014 the Governor signed a bill that promises to bring some standardization to the wild west of Ohio local income taxation. It is called the Ohio Municipal Income Tax Reform Act, and it will be effective for tax years beginning on and after January 1, 2016. The delay was intentional, as tax forms may need to be redesigned and instructions updated. A tax bill signed in December does not leave much time for that. 

Let’s go over the high points:

(1) The calculation of local taxable income will begin with federal adjusted gross income. The adjustments to federal AGI have been significantly standardized and include, for example, interest, dividends and capital gains.

NOTE: There are two cities in Ohio that start with Ohio adjusted gross income (from the Ohio state income tax return). Those two do not have to change to the new law. One of them is in Cincinnati and rhymes with Indian Hill. The effect for residents of Indian Hill is to tax their interest, dividends and capital gains. 

(2) Partnerships and LLCs will be taxed at the entity level only. Partners and members will subtract this income (as an adjustment under (1) above) when calculating their city tax.

That leaves Subchapter S shareholders to discuss.

(3) Subchapter S corporations will also be taxed at the entity level.

In addition, S shareholders may also continue to be taxed at the individual level if they live within 119 selected municipalities.

OBSERVATION: Obviously not as good as the rule for partnerships and LLCs. Why the difference? Who knows.          

(4) Losses from a passthrough entity (that is, a partnership, LLC, Subchapter S or (unlikely) a trust) may offset self-employment, rental, royalty and farming income. The reverse is also true.

(5) Net losses from (4) however cannot offset wages and salaries.

(6) Employee business expenses (that is, “Form 2106” expenses) will be deductible to the extent deducted for federal purposes.

(7) Ohio cities will have to limit their consideration of “domicile” to 25 common law-type tests. The cities are not permitted to add to these 25 tests.

NOTE: This is the “snowbird” test. I have had cities tell me they do not recognize snowbirds. A house there means you are taxed there, whether you spend much time at the house or not.

(8) An employee or sole proprietor is allowed to go into and out of a city for up to 20 days without triggering withholding for that city’s income tax.

NOTE: The previous threshold was 12 days. Notice that we are discussing withholding taxes only. A city may still contact a business for business income taxes if it spots business vans and work trucks stopping within the city.

(9) Pensions are not taxable.

NOTE: SERPs are considered to be wages, not pensions. SERPS are deferred compensation plans, usually funded exclusively by the employer. The tax reporting for a SERP is done on Form W-2 - the same reporting as one's wages or salary - so the cities take the position that SERPs are wages and not pension income.

(10)        Returns will be due (for a calendar year taxpayer) on April 15.

(11)        The returns will be automatically extended if a federal extension is requested.

(12)        Estimated individual income taxes will be required only if the estimated tax due is $200 or more.

(13)        Any tax due (before withholdings or estimates) of $10 or less will be reduced to zero.

NOTE: You still have to file the tax return, though.

(14)        Any interest due will charged at the federal rate plus 5% (Ohio’s rate is federal plus 3%).

(15)        Net operating losses are standardized.

a.     Beginning January 1, 2017 all cities will allow a uniform 5-year carryover (with a phase-in).

b.     Earlier NOLs will be permitted as allowed by pre-change city law.

c.      City NOLs will be calculated using federal limitations such as passive activity, basis or at-risk limitations.

NOTE: This is a subtle but very significant change – in favor of the cities.

(16)        Certain administrative changes, such as requiring the cities to send out an assessment notice -clearly marked “ASSESSMENT” – before they can change your numbers on the city return.

The Ohio Society of CPAs was an outspoken advocate of these changes. I am  sympathetic to arguments the cities raised, but I am nonetheless thankful for some standardization. I prepare or review local returns. I have to bill for this, as this is my profession. I have routinely seen business clients with multiple local returns where the cumulative tax is a fraction of the professional fee to prepare the returns. I submit that a tax is unfair when the preparation fee routinely exceeds any tax so raised. Call it Hamilton's razor if you wish. 

By the way, I would apply the same razor to federal and state taxes. A corollary to the razor would require Congress to reduce its revenue estimates from any proposed tax by the compliance costs (that is, the professional fees) of complying with said proposed tax. I suspect we wouldn't see as much nonsense as we presently have in the tax Code.
 

Payroll Tax Cut Voted Down

I was reading this morning that the Senate was unable to pass a payroll tax cut bill yesterday. There were two bills and neither passed.

You may recall that the employee share of FICA was reduced from 6.2 to 4.2 percent for 2011. The balance of 1.45 percent for Medicare was untouched. The purpose was to stimulate, or at least not depress, the economy.

The problem is that the 2 percent reduction expires at the end of 2011.

The politicians now want to extend the program. The Senate Democrats proposed a plan to reduce the 6.2 percent withholding to 3.1 percent. In an unanticipated move, the Democrats proposed this be paid for by a tax increase on the wealthy.

The Republicans proposed extending the tax cut at 2 percent and paying for it by freezing federal salaries and streamlining the federal workforce by 10 percent. This was predictably described as extreme.

The President demanded action and announced his next vacation.

The House is taking up the issue next.