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IRS, Treasury Department and Department of Labor Give Guidance on Small Business Leave and Tax Credit

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IRS, Treasury Department and Department of Labor give guidance on small business leave and tax credit

The U.S. Treasury Department, Internal Revenue Service (IRS) and the U.S. Department of Labor (Labor) have announced that small and midsize employers can begin taking advantage of two new refundable payroll tax credits, designed to immediately and fully reimburse them, dollar-for-dollar, for the cost of providing Coronavirus-related leave to their employees.

This relief to employees and small and midsize businesses is provided under the Families First Coronavirus Response Act (Act), signed by President Trump on March 18, 2020.

The Act will help the United States combat and defeat COVID-19 by giving all American businesses with fewer than 500 employees funds to provide employees with paid leave, either for the employee’s own health needs or to care for family members.

The legislation will enable employers to keep their workers on their payrolls, while at the same time ensuring that workers are not forced to choose between their paychecks and the public health measures needed to combat the virus.

Key Takeaways

* Paid Sick Leave for Workers

* For COVID-19 related reasons, employees receive up to 80 hours of paid sick leave and expanded paid child care leave when employees’ children’s schools are closed or child care providers are unavailable.

* Complete Coverage

* Employers receive 100% reimbursement for paid leave pursuant to the Act.

* Health insurance costs are also included in the credit.

* Employers face no payroll tax liability.

* Self-employed individuals receive an equivalent credit.

* Fast Funds

* Reimbursement will be quick and easy to obtain.

* An immediate dollar-for-dollar tax offset against payroll taxes will be provided

* Where a refund is owed, the IRS will send the refund as quickly as possible.

* Small Business Protection

* Employers with fewer than 50 employees are eligible for an exemption from the requirements to provide leave to care for a child whose school is closed, or child care is unavailable in cases where the viability of the business is threatened.

* Easing Compliance

* Requirements subject to 30-day non-enforcement period for good faith compliance efforts.

To take immediate advantage of the paid leave credits, businesses can retain and access funds that they would otherwise pay to the IRS in payroll taxes. If those amounts are not sufficient to cover the cost of paid leave, employers can seek an expedited advance from the IRS by submitting a streamlined claim form that will be released next week.

Background

The Act provided paid sick leave and expanded family and medical leave for COVID-19 related reasons and created the refundable paid sick leave credit and the paid child care leave credit for eligible employers. Eligible employers are businesses and tax-exempt organizations with fewer than 500 employees that are required to provide emergency paid sick leave and emergency paid family and medical leave under the Act. Eligible employers will be able to claim these credits based on qualifying leave they provide between the effective date and December 31, 2020. Equivalent credits are available to self-employed individuals based on similar circumstances.

Paid Leave

The Act provides that employees of eligible employers can receive two weeks (up to 80 hours) of paid sick leave at 100% of the employee’s pay where the employee is unable to work because the employee is quarantined, and/or experiencing COVID-19 symptoms, and seeking a medical diagnosis. An employee who is unable to work because of a need to care for an individual subject to quarantine, to care for a child whose school is closed or child care provider is unavailable for reasons related to COVID-19, and/or the employee is experiencing substantially similar conditions as specified by the U.S. Department of Health and Human Services can receive two weeks (up to 80 hours) of paid sick leave at 2/3 the employee’s pay. An employee who is unable to work due to a need to care for a child whose school is closed, or child care provider is unavailable for reasons related to COVID-19, may in some instances receive up to an additional ten weeks of expanded paid family and medical leave at 2/3 the employee’s pay.

Paid Sick Leave Credit

For an employee who is unable to work because of Coronavirus quarantine or self-quarantine or has Coronavirus symptoms and is seeking a medical diagnosis, eligible employers may receive a refundable sick leave credit for sick leave at the employee’s regular rate of pay, up to $511 per day and $5,110 in the aggregate, for a total of 10 days. For an employee who is caring for someone with Coronavirus, or is caring for a child because the child’s school or child care facility is closed, or the child care provider is unavailable due to the Coronavirus, eligible employers may claim a credit for two-thirds of the employee’s regular rate of pay, up to $200 per day and $2,000 in the aggregate, for up to 10 days. Eligible employers are entitled to an additional tax credit determined based on costs to maintain health insurance coverage for the eligible employee during the leave period.

Child Care Leave Credit

In addition to the sick leave credit, for an employee who is unable to work because of a need to care for a child whose school or child care facility is closed or whose child care provider is unavailable due to the Coronavirus, eligible employers may receive a refundable child care leave credit. This credit is equal to two-thirds of the employee’s regular pay, capped at $200 per day or $10,000 in the aggregate. Up to 10 weeks of qualifying leave can be counted towards the child care leave credit. Eligible employers are entitled to an additional tax credit determined based on costs to maintain health insurance coverage for the eligible employee during the leave period.

Prompt Payment for the Cost of Providing Leave

When employers pay their employees, they are required to withhold from their employees’ paychecks federal income taxes and the employees’ share of Social Security and Medicare taxes. The employers then are required to deposit these federal taxes, along with their share of Social Security and Medicare taxes, with the IRS and file quarterly payroll tax returns (Form 941 series) with the IRS.

Under guidance that will be released next week, eligible employers who pay qualifying sick or child care leave will be able to retain an amount of the payroll taxes equal to the amount of qualifying sick and child care leave that they paid, rather than deposit them with the IRS.

The payroll taxes that are available for retention include withheld federal income taxes, the employee share of Social Security and Medicare taxes, and the employer share of Social Security and Medicare taxes with respect to all employees.

If there are not sufficient payroll taxes to cover the cost of qualified sick and child care leave paid, employers will be able file a request for an accelerated payment from the IRS. The IRS expects to process these requests in two weeks or less. The details of this new, expedited procedure will be announced next week.

Examples

If an eligible employer paid $5,000 in sick leave and is otherwise required to deposit $8,000 in payroll taxes, including taxes withheld from all its employees, the employer could use up to $5,000 of the $8,000 of taxes it was going to deposit for making qualified leave payments. The employer would only be required under the law to deposit the remaining $3,000 on its next regular deposit date.

If an eligible employer paid $10,000 in sick leave and was required to deposit $8,000 in taxes, the employer could use the entire $8,000 of taxes in order to make qualified leave payments and file a request for an accelerated credit for the remaining $2,000.

Equivalent child care leave and sick leave credit amounts are available to self-employed individuals under similar circumstances. These credits will be claimed on their income tax return and will reduce estimated tax payments.

Small Business Exemption

Small businesses with fewer than 50 employees will be eligible for an exemption from the leave requirements relating to school closings or child care unavailability where the requirements would jeopardize the ability of the business to continue. The exemption will be available on the basis of simple and clear criteria that make it available in circumstances involving jeopardy to the viability of an employer’s business as a going concern. Labor will provide emergency guidance and rulemaking to clearly articulate this standard.

Non-Enforcement Period

Labor will be issuing a temporary non-enforcement policy that provides a period of time for employers to come into compliance with the Act. Under this policy, Labor will not bring an enforcement action against any employer for violations of the Act so long as the employer has acted reasonably and in good faith to comply with the Act. Labor will instead focus on compliance assistance during the 30-day period.

For More Information

For more information about these credits and other relief, visit Coronavirus Tax Relief on IRS.gov. Information regarding the process to receive an advance payment of the credit will be posted next week.

© Copyright 2020, The Courier, All Rights Reserved.

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Have a 401k? You Can Now Invest In Private Equity Funds

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Have a 401k? You Can Now Invest In Private Equity Funds

There’s good news for investors who are looking to add a little spice to their retirement accounts. For the first time ever, defined contribution plans – like 401ks – have access to private equity investments.

U.S. Secretary of Labor Eugene Scalia said in a statement yesterday that this step “will help Americans saving for retirement gain access to alternative investments that often provide strong returns.”

Typically viewed as a way to outperform the stock market, the average private equity investment has actually underperformed the stock market over the last 10 years. According to a study by Bain & Company, private equity investments returned an average of 15.3% compared to 15.5% for the S&P 500. The study does mention that top-tier private equity funds did manage to outperform the market.

Scalia’s announcement went on to add, “The Letter helps level the playing field for ordinary investors and is another step by the Department to ensure that ordinary people investing for retirement have the opportunities they need for a secure retirement.”

You won’t be able to invest directly into private equity funds in your 401k. You’ll only have access through specific investment vehicles like target-date funds. Defined benefit plans – like pensions – have had access to private equity investments for some time now. So, as Scalia mentions, this move now levels the playing field for investors.

Securities and Exchange Commissioner Jay Clayton supports the decision to allow defined contribution plans access to private equity investments. He also mentions that the new capital coming in will increase the funding sources available to private businesses.

How It Should Be Perceived

Investors, however, shouldn’t look at the ability to invest in private equity funds as a panacea of retirement riches.

Private equity investments are often much riskier than traditional stocks. As we mentioned earlier, they don’t always provide greater returns.

In an interview with Fox Business, Ed Slott, founder of IRAHep.com, said that investment losses in February and March may have caused a sense of panic among savers who might be searching for larger returns.

“Some of those [private equity] returns are sensational but, with anything, you could lose a boatload too,” Slott said. “It doesn’t mean private equity always makes money.”

You may lose money while investing in private equity funds. When that happens, you’ll likely have no recourse against your broker or fiduciary who put you in those investments.

As part of the announcement, Slott noted that there is a “liability shield” for fiduciaries. As long as they follow the guidelines set out by the Department of Labor, they will be within their fiduciary obligations. This makes it harder for investors to sue over losses.

The ability to invest in a private equity fund is alluring. However, the best advice comes from Alano Massi, the managing director of Palm Capital Management.

“Should that investor not feel comfortable with private equity, or simply does not understand it, then he or she should not participate,” Massi said.

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We Just Set A Record For The Greatest 50-Day Rally In Stocks

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We Just Set A Record For The Greatest 50-Day Rally In Stocks

The S&P 500 just turned in its best 50-trading day rally since the index expanded to 500 companies in 1957, according to research from LPL Financial.

Over that time period, the index has returned 37.7%. If history is any indication, there are plenty more gains ahead.

LPL went back and looked at every 50-day rally since 1957 when the index expanded. Their research found that six and 12 months later, stocks were higher 100% of the time.

The average return for the six months following a 50-day rally was 10.2%. On the other hand, the average return for the 12 months following a 50-day rally was 17.3%.

After the longest bull market in history ended this year when the S&P 500 dipped all the way down to 2,191.86 on March 23, the market has been on a rocket ship higher. In just 50 trading days, the index has climbed 41.7% from the March 23 low. This puts it only 9% below the all-time high set in February.

Markets have been pushed higher by a combination of record stimulus packages and low-interest rates. In March, President Trump signed the $2 trillion CARES Act that provided financial aid to families and small businesses. Around the same time, the Federal Reserve cut interest rates to zero. Also, more recently it started directly purchasing Treasury bonds, mortgage-backed securities and even bond ETFs as it pledges an unlimited amount of asset purchases.

Uneven Recoveries Despite A Rally

While the stock market has surged higher over the last 50 trading days, recovery has been uneven, to say the least. This comes with some stocks – and entire industries – getting hammered by the economic lockdown caused by the coronavirus. Meanwhile, others, particularly those that benefit from people being home all day – and working from home – have lead the charge.

Amazon, Facebook and Netflix have all surged to all-time highs. Meanwhile, the video conferencing platform Zoom has jumped 228% this year alone.

On the other side are stocks like cruise line operator Carnival Corporation or American Airlines. Both have fallen 66% as the travel industry came to a standstill.

Despite the appearance of strength by the stock market, even the greatest 50-day rally in history can’t shake the doubters loose.

Since the rally began back in late March, the country has had more than 40 million people file for unemployment. Our country’s economic output is expected to drop by as much as 50% this quarter, and numerous CEOs refused to provide forward guidance for their companies as they just simply don’t know how bad and for how long the economy will suffer.

Throw in ongoing civil unrest and a very strong likelihood of a full-blown trade war between the US and China, and it remains to be seen if the economic recovery can continue to blossom in the coming weeks and months.

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Nobel-Prize Winning Economist: Time to Admit Our Programs Have Failed

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Nobel-Prize Winning Economist: Time to Admit Our Programs Have Failed

Senate Republicans have endorsed a bipartisan bill that would give small business owners more flexibility on how they choose to spend their PPP loans. However, at least one outspoken critic has said the program failed American workers.

Senate Majority Leader Mitch McConnell and Senator Marco Rubio, who chairs the Small Business Committee, both endorsed the Paycheck Protection Program Flexibility Act. This almost passed last week, in a nearly unanimous 417-1 vote.

“I hope and anticipate the Senate will soon take up and pass legislation that just passed the House by an overwhelming vote of 417-1 to further strengthen the Paycheck Protection Program so it continues working for small businesses that need our help,” McConnell said during a speech on the Senate floor Monday.

The Paycheck Protection Program provides forgivable loans of up to $10 million to businesses. The money is for businesses with fewer than 500 workers that were affected by the coronavirus pandemic.

Originally, for the loans to be forgiven, the businesses had to abide by strict requirements. They need to let loaners know how the money could be used. Around 75% of the loan had to go towards maintaining the businesses’ payroll. This includes salaries, health insurance, leave and severance pay, as well as having to rehire workers by June 30.

Easing Up Restrictions of Programs

The bill endorsed by McConnell and Rubio that passed on Thursday would ease some of those restrictions. This includes allowing businesses to spend 60% of the money on payroll. It also includes freeing up 40% of other expenses like rent and utilities. The new bill would also remove the requirement of rehiring workers by June 30. Also, it gives businesses 24 weeks to spend their PPP money on. This is far longer than the current 8-week limit.

The new bill isn’t perfect. However, they created programs such as this in an effort to address concerns by small business owners. Many of these business owners think the loan forgiveness requirements can become too strict to meet their needs. Many are fearful of inadvertently violating the rules and being on the hook to repay the loans.

Nobel Prize-winning economist Joseph Stiglitz says that no matter how they structure PPP loans, they have failed the American worker.

During an appearance on CNBC, Stiglitz said “The problem wasn’t just the amount of money. It was how the programs were designed. Our programs have failed, and we have to admit that.”

He says the loans went to the businesses who were most connected, not the ones who were most in need.

“The businesses with the best connections with the banks, the best customers, got at the head of the line, and those weren’t the smallest businesses, they weren’t the people who needed it most,” he said.

He said a better way to keep workers employed is looking at a model from Denmark or New Zealand. In the said countries, the government paid companies directly to keep workers on their payroll.

Stiglitz added, “We just haven’t thought enough about how we get money to the businesses in ways that make sure they really keep the attachment to the workers with those businesses.”

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