The Coronavirus Aid, Relief, and Economic Security Act (CARES Act) contains a business relief provision known as the employee retention credit, a refundable payroll tax credit for “qualified wages” paid to retained employees between March 13 and December 31, 2020.1

As a reminder, employers whose business has been financially impacted by COVID-19 can take advantage of the Employee Retention Credit, a refundable tax credit designed to encourage businesses to keep employees on their payroll. The credit is worth 50 percent of up to $10,000 in wages paid by an employer. Employers that are eligible for the credit for the first and second quarters of 2020, can apply for the credit when they file their second-quarter filing of Form 941, Employer’s Quarterly Federal Tax Return, which is due July 31st.

Available to all employers regardless of size, including tax-exempt organizations with only two exceptions: State and local governments and small businesses that make small business loans. Qualifying wages are based on the average number of a business’s employees in 2019 and are divided into employers with fewer than 100 employees and employers with more than 100 employees.

When employers report their qualified wages on Form 941, they can reduce their required deposits of payroll taxes withheld from employees’ wages by the amount of the credit. Eligible employers also may use the employee retention credit with other relief including payroll tax deferral and can also request an advance of the employee retention credit by submitting Form 7200, Advance Payment of Employer Credits Due to COVID-19. Please call our (561) 995-0064 office with any questions.

The SBA announced that it was again opening up its Economic Injury Disaster Loan (EIDL) grant and loan program on June 15th, 2020. This is great news for freelancers, contractors and gig workers, because they are eligible to receive a $1,000 grant that does not have to be repaid.

Small businesses and agricultural businesses also may apply for the grant, equal to $1,000 per employee of the business up to a maximum of $10,000.

There is some uncertainty as to the amount available, but a loan for favorable terms from the SBA up to $150,000 or $2 million may also be available.

Under the CARES Act passed on March 27, 2020, independent contractors, gig workers, and freelancers affected by the coronavirus crisis are eligible to receive the grant. The SBA sometimes refers to these grants as “advances,” but you are not required to repay this money to the government.

The application process involves filling out a simple SBA form requesting an Economic Injury Disaster Recovery Loan, which provides for the advance even if the loan is not granted.

Initially, $10 billion was allocated by the government for these grants, but due to the overwhelming amount of applications, the SBA suspended accepting new applications in mid-April 2020 due to a lapse in appropriations for the grants. But now the SBA has lifted the suspension because of legislation passed on April 24, 2020, that allocated another $60 billion for EIDL and grants thereunder.

The President is Expected to Sign

On June 3, 2020, the Senate passed the House version of the Paycheck Protection Flexibility Act (H.R. 7010). The President is expected to sign it into law. This legislation makes several key updates to the PPP loan forgiveness rules aimed at helping businesses better align forgiveness requirements with real-world recovery timelines.

Key Provisions of the PPP Flexibility Act

1. Payroll Expenditure Threshold Lowered

   • Reduces required payroll spending from 75% to 60% of total loan amount for forgiveness.

   • Important: The 60% threshold acts as a cliff—if not met, none of the loan will be forgiven.

2. Covered Period Extended

   • Borrowers may now use a 24-week covered period (up from 8 weeks).

   • Optional: Borrowers can still elect to use the original 8-week period.

3. FTE and Wage Restoration Deadline Moved

   • The deadline to restore full-time equivalent (FTE) headcount and/or wages has moved from June 30, 2020 to December 31, 2020.

4. New Exceptions for FTE Reductions

   • Loan forgiveness will not be reduced if:

     • The business is unable to rehire former employees or find similarly qualified workers.

     • The business is unable to return to pre-pandemic operating levels due to COVID-19 safety or health guidance.

5. Loan Term Extended

   • The term for any unforgiven portion of the loan is extended from 2 years to 5 years.

   • Interest remains at 1%.

Forgiveness Application Timing and Concerns

• The expanded 24-week period means forgiveness applications may begin as late as December 31, 2020.

• This raises questions about 2020 tax planning, particularly if forgiveness amounts or disallowed expenses remain unresolved at year-end. Businesses may need to consider:

  • Filing extensions

  • Preparing for amended returns in 2021

Strategic Considerations

• Businesses nearing the end of their original 8-week period and struggling to ramp up may benefit from slowing down rehires.

• The ability to spread payroll over 24 weeks can better align employee compensation with business reopening and recovery.

• Those who rehired early may find themselves at a disadvantage if business has not returned to sustainable levels of activity.

Loan Forgiveness Observations

• The new maximum payroll cost per employee under the 24-week period is $46,154 (24/52 of $100,000).

• Businesses need to carefully evaluate whether continuing payroll now or preserving funds for later periods makes better strategic sense.

Stimulus Payment Update

• Over 159 million stimulus payments have been issued.

• Non-filers must submit information through the IRS Non-Filers Tool by October 15.

• Eligible tax filers who did not receive a payment may claim it as a credit on their 2020 tax return.

• For assistance, call the IRS Economic Impact Payment line at 800-919-9835.

Have Questions?
Call our office at (561) 995-0064 or submit your question via our Q&A form on the website.

What’s in the Senate Bill-Not Law as of 3/26/2020

The Coronavirus Aid, Relief, and Economic Security Act (H.R. 748) had overwhelming support after almost a week of negotiations. Lawmakers announced a deal in the morning of March 25 and it was passed by the Senate later in the day. The bill now heads to the House, where it may encounter problems after some progressive Democrats criticized it. House Majority Leader Steny H. Hoyer, D-Md., said in a statement that he expects to hold a voice vote on the issue that will allow most members to stay in their districts.

Listed here are some of the things in the Senate Bill:

Section 1102 and 1106-Paycheck Protection: Forgiveness For Small Business Loans for Keeping Employees-The bill creates a “paycheck protection program” for small employers, self-employed individuals, and “gig economy” workers, with $350 billion to help prevent workers from losing their jobs and small businesses from going under due to economic losses caused by the COVID-19 pandemic. The “Paycheck Protection Program” would provide 8 weeks of cash-flow assistance through 100 percent federally guaranteed loans to small employers who maintain their payroll during this emergency. If the employer maintains payroll, the portion of the loans used for covered payroll costs, interest on mortgage obligations, rent, and utilities would be forgiven, which would help workers to remain employed and affected small businesses and our economy to recover quickly from this crisis. This proposal would be retroactive to February 15, 2020, to help bring workers who may have already been laid off back onto payrolls. Interest rate is not to be greater than 4%.

In general, the maximum amount of the loan is the lessor of:

• Multiplying the average monthly payroll cost incurred during the 1-year period before the date of the loan by 2.5, or $10,000,000.  Example-If you paid $1,200,000 in total payroll costs for the prior year, then your average would be $100,000.  Multiply this monthly average by 2.5 and your total loan amount would be $250,000.

The bill provides that the borrower shall be eligible for loan forgiveness equal to the amount spent by the borrower during an 8-week period after the origination date of the loan for payroll support (including paid sick, medical, or family leave, and costs related to the continuation of group health care benefits during those periods of leave) employee salaries, mortgage payments, rent, utilities and any other debt obligation that were incurred before February 15, 2020. Payroll costs do not include payroll where a payroll tax credit was received due to the qualified sick leave or family leave which was provided under Families First Coronavirus Response Act. Eligible payroll costs also do not include compensation above $100,000 in wages.

The amount forgiven will be reduced proportionally by any reduction in employees retained compared to the prior year and reduced by the reduction in pay of any employee beyond 25 percent of their prior year compensation. To encourage employers to rehire any employees who have already been laid off due to the COVID-19 crisis, borrowers that re-hire workers previously laid off will not be penalized for having a reduced payroll at the beginning of the period. Also, the bill allows forgiveness for additional wages paid to tipped workers.

Section 2113. Enhanced Benefits under the Unemployment Insurance Act-This section provides an additional $600 per week payment to each recipient of unemployment insurance or Pandemic Unemployment Assistance for up to four months.

Section 2201 and 2020 recovery rebates for individuals-All U.S. residents with adjusted gross income up to $75,000 ($150,000 married), who are not a dependent of another taxpayer and have a work eligible social security number, are eligible for the full $1,200 ($2,400 married) rebate. In addition, they are eligible for an additional $500 per child. This is true even for those who have no income, as well as those whose income comes entirely from non-taxable means-tested benefit programs, such as SSI benefits.

For most Americans, no action on their part will be required in order to receive a rebate check as IRS will use a taxpayer’s 2019 tax return if filed, or in the alternative their 2018 return. This includes many low-income individuals who file a tax return in order to take advantage of the refundable Earned Income Tax Credit and Child Tax Credit. The rebate amount is reduced by $5 for each $100 that a taxpayer’s income exceeds the phase-out threshold. The amount is completely phased-out for single filers with incomes exceeding $99,000, $146,500 for head of household filers with one child, and $198,000 for joint filers with no children.

Section 2203. Temporary waiver of required minimum distribution rules for certain retirement plans and accounts-The provision waives the required minimum distribution rules for certain defined contribution plans and IRAs for calendar year 2020. This provision provides relief to individuals who would otherwise be required to withdraw funds from such retirement accounts during the economic slowdown due to COVID-19.

Section 2301. Employee Retention Credit-An employee retention tax credit is one of the few new additions to the legislation. The credit would be available to businesses that have had to fully or partially suspend operations as the result of a government order or have seen their gross receipts decline by more than 50 percent compared with this quarter last year. The credit is aimed at encouraging businesses to keep employees on their payrolls and would fully cover 50 percent of the wages paid by an employer during the shutdown, up to $10,000 per employee.

Example: You have ten employees who each make $2000 a month. To keep the example simple, suppose that healthcare benefits run $500 a month per employee. In total, then, each employee costs $2500 a month and over the next four months, the employer would spend $10,000 on each employee.

The Section 2301 “employee retention credit” gives you, the employer, a $5,000 tax credit. That’s per employee. With ten employees, then, you $50,000 in tax credits. The tax credit is what’s called a “refundable tax credit.” That means you get the credit regardless of whether you’ve pay taxes.

Example: Your business generates no taxable income due to the COVID-19 crisis. As a result, you pay no income taxes. You still get a $50,000 “tax refund.”

Section 2303-Modifications for net operating losses-The provision provides that an NOL arising in a tax year beginning in 2018, 2019, or 2020 can be carried back five years. The provision also temporarily removes the taxable income limitation to allow an NOL to fully offset income. These changes will allow companies to utilize losses and amend prior year returns, which will provide critical cash flow and liquidity during the COVID-19 emergency.

Section 2307. Technical amendment regarding qualified improvement property-This provision enables businesses, especially in the hospitality industry, to write off immediately costs associated with

Section 2306. Modification of limitation on business interest-The provision temporarily increases the amount of interest expense businesses can deduct on their tax returns, by increasing the 30-percent limitation to 50 percent of taxable income (with adjustments) for 2019 and 2020. As businesses look to weather the storm of the current crisis, this provision will allow them to increase liquidity with a reduced cost of capital, so that they are able to continue operations and keep employees on payroll.

Other Items:

The bill would also permit both itemizers and non-itemizers to deduct up to $300 of cash contributions to charity in 2020, according to a section-by-section summary of the bill. The objective is to encourage greater charitable giving during the pandemic.

The bill adds a provision that waives the 10-percent early withdrawal penalty for distributions up to $100,000 from qualified retirement accounts for coronavirus-related purposes made on or after January 1, 2020. In addition, income attributable to such distributions would be subject to tax over three years, and the taxpayer may recontribute the funds to an eligible retirement plan within three years without regard to that year’s cap on contributions. Further, the provision provides flexibility for loans from certain retirement plans for coronavirus-related relief. A coronavirus-related distribution is a one made to an individual: (1) who is diagnosed with COVID-19, (2) whose spouse or dependent is diagnosed with COVID-19, or (3) who experiences adverse financial consequences as a result of being quarantined, furloughed, laid off, having work hours reduced, being unable to work due to lack of child care due to COVID-19, closing or reducing hours of a business owned or operated by the individual due to COVID-19, or other factors as determined by the Treasury Secretary.

How the CARES Act Eases Retirement Account Rules During COVID-19

The Coronavirus Aid, Relief, and Economic Security Act (CARES Act) aims to help Americans cope with the unprecedented financial fallout from the COVID-19 outbreak.

Among its provisions, the CARES Act makes it easier to withdraw funds saved in certain tax-advantaged retirement accounts like 401(k)s and traditional Individual Retirement Accounts (IRAs). These temporary changes eliminate tax penalties on certain early withdrawals and relax rules on loans you can take from some types of accounts.

COVID-19-Related Distributions from certain Retirement accounts, IRAs, 401-K’s Get Tax-Favored Treatment

If you are an IRA owner, or participant in another qualified retirement plan, who has been adversely affected by the COVID-19 pandemic, you are probably eligible to take tax-favored distributions from your IRA(s) or other retirement plans (certain plans if permitted.)

For brevity, let’s call these allowable COVID-19 distributions “CVDs.” They can add up to as much as $100,000. Eligible individuals can recontribute (repay) CVD amounts back into an IRA within three years of the withdrawal date and can treat the withdrawals and later recontributions as federal-income-tax-free IRA rollover transactions.

In effect, the CVD privilege allows you to borrow up to $100,000 from your IRA(s) and recontribute the amount(s) at any time up to three years later with no federal income tax consequences.

There are no income limits on the CVD privilege, and there are no restrictions on how you can use CVD money during the three-year recontribution period.

If you’re cash-strapped, use the money to pay bills and recontribute later when your financial situation has improved. Help your adult kids out. Pay down your HELOC. Do whatever you want with the money.

CVD Basics

Eligible individuals can take one or more CVDs, up to the $100,000 aggregate limit, and these can come from one or several IRAs. The three-year recontribution period for each CVD begins on the day after you receive it.

You can make recontributions in a lump sum or make multiple recontributions. You can recontribute to one or several IRAs, and they don’t have to be the same account(s) you took the CVD(s) from in the first place.

As long as you recontribute the entire CVD amount within the three-year window, the transactions are treated as tax-free IRA rollovers. If you’re under age 59 1/2, the dreaded 10 percent penalty tax that usually applies to early IRA withdrawals does not apply to CVDs.

If your spouse owns one or more IRAs in his or her own name, your spouse is apparently eligible for the same CVD privilege if he or she qualifies (see below).

Do I Qualify for the CVD Privilege?

That’s a good question. Some IRA and other pension plan owners will clearly qualify, while others may have to wait for IRS guidance. For now, here’s what the CARES Act says.

A COVID-19-related distribution is a distribution of up to $100,000 from an eligible retirement plan, including an IRA, that is made on or after January 2, 2020, and before December 31, 2020, to an individual

• who is diagnosed with COVID-19 by a test approved by the Centers for Disease Control and Prevention; or
• whose spouse or dependent (generally a qualifying child or relative who receives more than half of his or her support from you) is diagnosed with COVID-19 by such a test; or
• who experiences adverse financial consequences as a result of being quarantined, furloughed, laid off, or forced to reduce work hours due to COVID-19; or
• who is unable to work because of a lack of child care due to COVID-19 and experiences adverse financial consequences as a result; or
• who owns or operates a business that has closed or had operating hours reduced due to COVID-19, and who has experienced adverse financial consequences as a result; or
• who has experienced adverse financial consequences due to other COVID-19-related factors to be specified in future IRS guidance.

We await IRS guidance on how to interpret the last two factors. We hope and trust that the guidance will be liberally skewed in favor of IRA owners. We shall see.

What If I Don’t Recontribute a CVD within the Three-Year Window?

Another good question. You will owe income tax on the CVD amount that you don’t recontribute within the three-year window, but you don’t have to worry about owing the 10 percent early withdrawal penalty tax if you are under age 59 1/2.

If you don’t repay, you can choose to spread the taxable amount equally over three years, apparently starting with 2020.

Example. Tomorrow you withdraw $90,000 from your IRA, and you don’t recontribute it and don’t elect out of the three-year spread; you have $30,000 of taxable income in years 1, 2, and 3.

Here it gets tricky, because the three-year recontribution window won’t close until sometime in 2023. Until then, it won’t be clear that you failed to take advantage of the tax-free CVD rollover deal.

So, you may have to amend a prior-year tax return to report some additional taxable income from the three-year spread. The language in the CARES Act does not address this issue, so the IRS will have to weigh in. Of course, the IRS may not be in a big hurry to issue guidance right now, because it has three years to mull it over.

You also have the option of simply electing to report the taxable income from the CVD on your 2020 Form 1040. You won’t owe the 10 percent early withdrawal penalty tax if you are under age 59 1/2.

Can the One-IRA-Rollover-Per-Year Limitation Prevent Me from Taking Advantage of the CVD Deal?

Gee, you ask a lot of good questions. The answer is no, because when you recontribute CVD money within the three-year window, it is deemed to be done via a direct trustee-to-trustee transfer that is exempt from the one-IRA-rollover-per-year rule. So, no worries there.

Can I Take a CVD from My Company’s Tax-Favored Retirement Plan?

Yes, if your company allows it. The tax rules are similar to those that apply to CVDs taken from IRAs.

That said, employers and the IRS have lots of work to do to figure out the details for CVDs taken from employer-sponsored qualified retirement plans. Stay tuned for more information.

More Good News: Retirement Account Required Minimum Distribution Rules Are Suspended for 2020

In normal times, after reaching the magic age, you must start taking annual required minimum distributions (RMDs) from traditional IRAs set up in your name (including SEP-IRA and SIMPLE-IRA accounts) and from tax-favored company retirement plan accounts. The magic age is 70 1/2 if you attained that age before 2020 or 72 if you attain age 70 1/2 after 2019.

And you must pay income tax on the taxable portion of your RMDs. Ugh!

Thankfully, the CARES Act suspends all RMDs that you would otherwise have to take in 2020.

The suspension applies equally to your initial RMD if you turned 70 1/2 last year and did not take that initial RMD last year (the initial RMD is actually for calendar year 2019). Before the CARES Act, the deadline for taking that initial RMD was April 1, 2020. Now, thanks to the CARES Act, you can put off any and all RMDs that you otherwise would have had to take this year. Good!

For 2021 and beyond, the RMD rules will be applied as if 2020 never happened. In other words, all the RMD deadlines will be pushed back by one year, and any deadlines that otherwise would have applied for 2020 will simply be ignored.

Takeaways

The CVD privilege can be a very helpful and very flexible tax-favored financial arrangement for eligible IRA owners.

• You can get needed cash into your hands right now without incurring the early withdrawal penalties.
• You can then recontribute the CVD amount anytime within the three-year window that will close sometime in 2023—depending on the date you take the CVD—to avoid any federal income tax hit.

The suspension of RMDs for this year helps your 2020 tax situation, because you avoid the tax hit on RMDs that you otherwise would have had to withdraw this year.

If you would like to discuss the COVID-19 changes to your IRA or other retirement accounts, please call us a call at 561-995-0064.

Paycheck Protection Loan Forgiveness Application released on May 15, 2020

On Friday night, May 15, 2020, the Small Business Administration published its Paycheck Protection Program Loan Forgiveness Application. Here’s a link to the actual loan forgiveness application.

The loan forgiveness application clarifies some questions we had and provides some shortcuts for borrowers.

We were all concerned as to how the pay period would work. If we could only count “paid and incurred” during the eight weeks following the loan, do we have to do it on an accrual basis (when the pay period ran) or do we count the actual paycheck date. The application now clarifies this and basically gives us two alternatives for figuring this out. It’s, sort of, using an accrual basis. But here are the two methods for accumulating your payroll costs. The loan application describes the requirement that spending be “paid and incurred” during the eight-week covered period or alternate payroll covered period.

Here is the actual language from the application instructions for the two methods:

“Covered Period: Enter the eight-week (56-day) Covered Period of your PPP loan. The first day of the Covered Period must be the same as the PPP Loan Disbursement Date. For example, if the Borrower received its PPP loan proceeds on Monday, April 20, the first day of the Covered Period is April 20 and the last day of the Covered Period is Sunday, June 14.”

“Alternative Payroll Covered Period: For administrative convenience, Borrowers with a biweekly (or more frequent) payroll schedule may elect to calculate eligible payroll costs using the eight-week (56-day) period that begins on the first day of their first pay period following their PPP Loan Disbursement Date (the “Alternative Payroll Covered Period”). For example, if the Borrower received its PPP loan proceeds on Monday, April 20, and the first day of its first pay period following its PPP loan disbursement is Sunday, April 26, the first day of the Alternative Payroll Covered Period is April 26 and the last day of the Alternative Payroll Covered Period is Saturday, June 20. Borrowers who elect to use the Alternative Payroll Covered Period must apply the Alternative Payroll Covered Period wherever there is a reference in this application to “the Covered Period or the Alternative Payroll Covered Period.” However, Borrowers must apply the Covered Period (not the Alternative Payroll Covered Period) wherever there is a reference in this application to “the Covered Period” only.”

The application instructions also provide that only payroll is eligible to use the “Alternative Payroll Covered Period.”

This is method is available for both payroll and non-payroll costs: “Payroll costs incurred but not paid during the Borrower’s last pay period of the Covered Period (or Alternative Payroll Covered Period) are eligible for forgiveness if paid on or before the next regular payroll date.” And for non-payroll costs, “An eligible nonpayroll cost must be paid during the Covered Period or incurred during the Covered Period and paid on or before the next regular billing date, even if the billing date is after the Covered Period.”

Clarified and Simplified Full Time Equivalent Employee (FTE) Formula

You can lose forgiveness if a reduction in the FTE employee headcount as compared to a certain chosen period is not restored by 6/30/2020. The new simplified method of calculating FTE that we can use is to count employees who work more than 40 hours in a week as one FTE. You would also count each employee who works less than 40 hours as .5 of an FTE. So, if you have a lot of part-time workers with 10 to 25 hours, for example, each of those who worked for the week to count as .5.

The 75% Threshold of Loan Proceeds having to be spent on Payroll Costs?

There was some concern out there that you needed to spend at least 75% of the loan amount on payroll to get forgiveness. As an example of what could have been was if you were inadvertently advanced a higher amount, because you included 1099-Misc independent contractors in your payroll loan calculation. Later, we found out that they were not eligible for the forgiveness amounts and that might leave us short when paying out our W-2 employees. Would we lose all the forgiveness amounts because we would be under the 75% of loan proceeds going to Payroll Costs?  Luckily, the application clarifies that loan forgiveness just needs to include at least 75% payroll costs.

The actual formula does this by limiting forgiveness to the amount calculated as your total payroll costs divided by .75.

Filling out the application

While the SBA has posted the Forgiveness Application, lenders can create their own version of the application that includes all the application line items and requirements.  This would, most likely, be like the loan application process you went through with attaching certain documents to support your numbers.

Although many of our small business clients who received PPP Loans are equipped to understand the accounting terminology, like accrual based, some of you may need help with the application. Completing the PPP loan forgiveness application and understanding all the rules and instructions could be quite overwhelming for most of you. There’s a link to the form and instructions below.  Should you need assistance, please contact us at 561-995-0064.

SBA Application Link.

For years, financial and tax advisors have lectured about how wonderful Roth IRAs are and why you should convert traditional IRAs into Roth accounts.

But like most of us, you didn’t get around to it. In hindsight, maybe that was a good thing.

For many, the financial fallout from the COVID-19 crisis creates a once-in-a-lifetime opportunity to do Roth conversions at an affordable tax cost and gain insurance against potential future tax rate increases that might be needed to cover all of the government spending being accumulated.

Roth IRAs Have Two Big Tax Advantages

1. Tax-Free Withdrawals

Unlike withdrawals from a traditional IRA, qualified Roth IRA withdrawals are federal-income-tax-free and usually state-income-tax-free, too.

What is a qualified withdrawal? In general, the tax-free qualified withdrawal is one taken after you meet both of the following requirements:

You had at least one Roth IRA open for over five years, and

You reached age 59½, became disabled, or died.

To meet the five-year requirement, start the clock ticking on the first day of the tax year for which you make your initial contribution to any Roth account. That initial contribution can be a regular annual contribution, or it can be a contribution from converting a traditional IRA into a Roth account.

1. Exemption from RMD Rules

Unlike with the traditional IRA, you as the original owner of the Roth account don’t have to take annual required minimum distributions (RMDs) from the Roth account after reaching age 72. That’s good, because RMDs taken from a traditional IRA are taxable.

Under those rules, if your surviving spouse is the sole account beneficiary of your Roth IRA, he or she can treat the inherited account as his or her own Roth IRA. That means your surviving spouse can leave the account untouched for as long as he or she lives.

If a non-spouse beneficiary inherits your Roth IRA, he or she can leave it untouched for at least 10 years. If an inherited Roth account is kept open, it can keep earning tax-free income and gains. Nice!

Silver Lining for Roth Conversions

A Roth conversion is treated as a taxable distribution from your traditional IRA, because you’re deemed to receive a payout from the traditional account with the money then going into the new Roth account.

So, doing a conversion will trigger a bigger federal income tax bill for the conversion year, and maybe a bigger state income tax bill, too. That said, right now might be the best time ever to convert a traditional IRA into a Roth IRA. Here are three reasons why.

1. Current tax rates are low thanks to the TCJA.

Today’s federal income tax rates might be the lowest you’ll see for the rest of your life.

Thanks to the Tax Cuts and Jobs Act (TCJA), rates for 2018-2025 were reduced. The top rate was reduced from 39.6 percent in 2017 to 37 percent for 2018-2025.

But the rates that were in effect before the TCJA are scheduled to come back into play for 2026 and beyond.

And rates could get jacked up much sooner than 2026, depending on politics and the need to recover some of the trillions of dollars the federal government is dishing out in response to the COVID-19 pandemic.

Believing that rates will only go back to the 2017 levels in the aftermath of the COVID-19 mess might be way too optimistic.

2. Your tax rate this year might be lower due to your COVID-19 fallout.

You won’t be alone if your 2020 income takes a hit from the COVID-19 crisis.

If that happens, your marginal federal income tax rate for this year might be lower than what you expected just a short time ago—maybe way lower. A lower marginal rate translates into a lower tax bill if you convert your traditional IRA into a Roth account this year.

But watch out if you convert a traditional IRA with a large balance—say, several hundred thousand dollars or more. Such a conversion would trigger lots of extra taxable income, and you could wind up paying federal income tax at rates of 32, 35, and 37 percent on a big chunk of that extra income.

3. A lower IRA balance due to the stock market decline means a lower conversion tax bill.

Just a short time ago, the U.S. stock market averages were at all-time highs.

Then the COVID-19 crisis happened, and the averages dropped big-time.

Depending on how the money in your traditional IRA was invested, your account might have taken a substantial hit. Nobody likes seeing their IRA balance go south, but a lower balance means a lower tax bill when (if) you convert your traditional IRA into a Roth account.

When the investments in your Roth account recover, you can eventually withdraw the increased account value in the form of federal-income-tax-free qualified Roth IRA withdrawals. If you leave your Roth IRA to your heirs, they can do the same thing.

In contrast, if you keep your account in traditional IRA status, any account value recovery and increase will be treated as high-taxed ordinary income when it is eventually withdrawn.

As mentioned earlier, the current maximum federal income tax rate is “only” 37 percent. What will it be five years from now? 39.6 percent? 45 percent? 50 percent? 55 percent? Nobody knows, but we would bet it won’t be lower than 37 percent.

The Bottom Line

If you do a Roth conversion this year, you will be taxed at today’s “low” rates on the extra income triggered by the conversion.

On the (far bigger) upside, you avoid the potential for higher future tax rates (maybe much higher) on all the post-conversion recovery and future income and gains that will accumulate in your new Roth account.

That’s because qualified Roth withdrawals taken after age 59½ are totally federal-income-tax-free, as long as you’ve had at least one Roth account open for more than five years when withdrawals are taken.

If you leave your Roth IRA to an heir, he or she can take tax-free qualified withdrawals from the inherited account—as long as at least one of your Roth IRAs has been open for more than five years when withdrawals are taken.

If you want our help thinking this through or executing on the Roth conversion, we are here to help. Call us on at 561-995-0064.

May 13, 2020

The Small Business Administration’s (SBA) has been shifting guidance and has been confusing most of us on the economic necessity certification required by the Paycheck Protection Program (PPP) application. Many small businesses that made certifications and obtained the PPP loans have been on a roller coaster ride the past few weeks. The SBA originally provided a safe harbor deadline of May 7, 2020 for PPP applicants who lacked an adequate basis for the certification to return their loans. Then, two days before the deadline, the SBA extended this deadline to May 14, 2020, while promising additional guidance on how the SBA “will review the certification.” And NOW, one day before the May 14 deadline issues a new Frequently Asked Question and Answer (FAQ) #46.

On May 13, 2020, the Treasury and SBA released a new Frequently Asked Question and Answer (FAQ) #46 that states, “Any borrower that, together with its affiliates, received PPP loans with an original principal amount of less than $2 million will be deemed to have made the required certification concerning the necessity of the loan request in good faith.”

The FAQ also clarifies that for borrowers who received loans in excess of $2 million, that, “[i]f SBA determines in the course of its review that a borrower lacked an adequate basis for the required certification concerning the necessity of the loan request, SBA will seek repayment of the outstanding PPP loan balance and will inform the lender that the borrower is not eligible for loan forgiveness. If the borrower repays the loan after receiving notification from SBA, the SBA will not pursue administrative enforcement or referrals to other agencies based on its determination with respect to the certification concerning necessity of the loan request. SBA’s determination concerning the certification regarding the necessity of the loan request will not affect SBA’s loan guarantee.”

This is a meaningful and significant improvement for borrowers in comparison to the Treasury’s and SBA’s earlier statements regarding eligibility. This is good news for any borrower (with their affiliates) received a PPP loan of less than $2 million. “Such entities will be deemed to have made the economic necessity certification in good faith, and the SBA has indicated it will not focus its finite audit resources on these borrowers’ economic necessity certifications.”

The link and full text of FAQ #46 are below.

Click Link to FAQ’s

Question: How will SBA review borrowers required good-faith certification concerning the necessity of their loan request?

Answer: When submitting a PPP application, all borrowers must certify in good faith that “[c]urrent economic uncertainty makes this loan request necessary to support the ongoing operations of the Applicant.” SBA, in consultation with the Department of the Treasury, has determined that the following safe harbor will apply to SBA’s review of PPP loans with respect to this issue: Any borrower that, together with its affiliates, received PPP loans with an original principal amount of less than $2 million will be deemed to have made the required certification concerning the necessity of the loan request in good faith.

SBA has determined that this safe harbor is appropriate because borrowers with loans below this threshold are generally less likely to have had access to adequate sources of liquidity in the current economic environment than borrowers that obtained larger loans. This safe harbor will also promote economic certainty as PPP borrowers with more limited resources endeavor to retain and rehire employees. In addition, given the large volume of PPP loans, this approach will enable SBA to conserve its finite audit resources and focus its reviews on larger loans, where the compliance effort may yield higher returns.

Importantly, borrowers with loans greater than $2 million that do not satisfy this safe harbor may still have an adequate basis for making the required good-faith certification, based on their individual circumstances in light of the language of the certification and SBA guidance. SBA has previously stated that all PPP loans in excess of $2 million, and other PPP loans as appropriate, will be subject to review by SBA for compliance with program requirements set forth in the PPP Interim Final Rules and in the Borrower Application Form. If SBA determines in the course of its review that a borrower lacked an adequate basis for the required certification concerning the necessity of the loan request, SBA will seek repayment of the outstanding PPP loan balance and will inform the lender that the borrower is not eligible for loan forgiveness. If the borrower repays the loan after receiving notification from SBA, SBA will not pursue administrative enforcement or referrals to other agencies based on its determination with respect to the certification concerning necessity of the loan request. SBA’s determination concerning the certification regarding the necessity of the loan request will not affect SBA’s loan guarantee.