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Coronavirus Relief Package Impact on Small Firms and Solo Practitioners

This article originally appeared on the website for the Ohio State Bar Association (OSBA).  The OACDL thanks the OSBA for sharing this valuable resource with our members.  The original article, with updates, can be found here:  Coronavirus Relief Package:  Impact on Small Firms and Solo Practitioners.

Coronavirus Relief Package: Impact on Small Firms and Solo Practitioners

by Stephen D. Estelle

With the passage of the federal CARES Act in the final days of March, some economic relief may be available to owners of small law firms or solo practitioners. This relief comes in two forms: Relief at the individual level and relief for businesses. For employers, there are generally two thresholds that may affect benefits: 500 employees and 100 employees. 

Individual Relief

Government Payment

The government is going to send you a check (or direct deposit) between now and Dec. 31, 2020 if your adjusted gross income (AGI) for tax year 2019 is $75,000 (single) or $150,000 (married filing joint) or less. Your AGI is line 8 on the 1040, just before the standard deduction. If your AGI is at or below this threshold, the government is going to pay you $1,200 (if single) or $2,400 (if married filing joint) plus $500 for every child dependent under the age of 17.

If you have not filed your 2019 tax return yet, the IRS will determine your AGI based on your 2018 tax return.

If your AGI exceeds the thresholds, $5 will be deducted for every $100 your AGI exceeds the threshold. For a single person with no children, the benefit is reduced to $0 at an AGI of $99,000. For a married couple with no children, the benefit is reduced to $0 at an AGI of $198,000. Charts showing the phase-down of benefits is provided below (benefit amounts are in blue).

Payment - Single

Payment - Married Filing Joint

Early Retirement Withdrawal

Generally, if you take money out of a qualified retirement plan before you reach 59.5, you’ll pay a 10 percent penalty and owe tax on the distribution. Under the CARES Act, you can take a “coronavirus-related distribution” of $100,000 without a penalty, but you’ll still owe income tax on the withdrawal. The act allows you, however, to spread the income over three years, and if you repay the amount within three years you can avoid the income tax.

A “coronavirus-related distribution” is one taken by an individual:

• diagnosed with COVID-19 or SRS-COV-2,
• whose spouse or dependent has been so diagnosed, or
• who has experienced adverse financial consequences as a result of a quarantine, furlough, lay-off or being unable to work due to lack of child care. 

The CARES Act also raises the amount you can borrow from your retirement plan from $50,000 to $100,000. The deadline to contribute to an IRA for 2019 has been extended to July 15, 2020.

Charitable Contributions

Under the CARES Act, even if you use the standard deduction, on your 2020 tax return you can deduct up to $300 in charitable contributions made to qualified charities.

If you itemize your deductions, on your 2020 tax return your charitable donations may reduce your AGI to $0 with any excess carried forward.

Business Relief

Paycheck Protection Program

Under this Small Business Administration (SBA) program, an employer (including sole proprietors and independent contractors) with 500 employees or fewer can apply for a forgivable loan equal to 2.5 times their average monthly payroll (average of 2019). The amount forgiven equals the amount of payroll, mortgage interest, rent and utilities paid during the eight weeks following the start of the loan. The forgiven portion of the loan does not constitute taxable income, as it would normally. For both the loan amount and amount forgiven, eligible payroll includes:

• payment for vacation, parental, family, medical or sick leave,
• allowance for dismissal or separation,
• payment for group health care benefits, including premiums,
• payment of any retirement benefits, and
• payment of state or local tax assessed on the compensation of employees,

Eligible payroll excludes:

• compensation in excess of $15,384 (i.e., the portion of a $100,000 per-year salary paid over eight weeks),
• payroll taxes,
• qualified sick or family medical leave for which a credit is available under the Coronavirus Relief Act.

For sole proprietors who do not have W-2 wages, compensation is determined by reference to Schedule C income subject to self-employment tax, which is calculated on Form 1040SE. The law does not specifically address whether partners in a partnership or members of an LLC (who are not technically employees and are also not sole proprietors) may be included in the partnership’s or LLC’s application or loan forgiveness. The law refers only to “employees,” “sole proprietors” and “independent contractors.”

The law is also not clear as to exactly how to calculate the salary and wage amount. Most of the uncertainty surrounds whether FICA and withholdings should be subtracted from the gross wages.

Our assumption, and the most reasonable interpretation of the statute in our opinion, is that such partners would (1) be eligible to be included in the PPP loan and forgiveness calculation and (2) would determine their compensation in the same manner as a sole proprietor. Hopefully, guidance will be provided on this issue.

If the loan is not entirely forgiven, the remainder is payable over two years at one percent interest with the possibility of deferring the first payment for six months.

Example. Koch & Hass, LLC has 5 employees and two owners, who take guaranteed payments. The annual salaries, healthcare premiums and retirement benefits are in the chart below.

There is an open question whether an individual’s wages plus the employer’s portion of the healthcare premium and retirement contribution are capped at $100,000 or whether the employee’s base salary is capped at $100,000 and then you add the healthcare premium and retirement contribution. We’ll have to wait for further guidance on that.

Assuming, the $100,000 cap applies to the “Total” column above, the average monthly wages for 2019 (including the guaranteed payments) is $49,520. 2.5 x $49,520 = 123,802.

So, the loan amount is $123,802. Over the eight weeks after Koch & Hass receive the loan proceeds, they pay two months’ worth of salaries and benefits taking into consideration the $100,000 caps ($99,404), and rent and utilities of $25,000 for a total of $124,404. Because eligible expenses exceed the amount of the loan, the entire loan is forgiven.

Question: If we hired the paralegal in the middle of 2019, do we include his entire annual salary in the 12-month average, or just the amount we paid?

This is an unanswered question, but our best guess is that the paralegal’s salary should be annualized before the average is taken.

Next steps are to call an SBA-approved lender and get an application (as soon as it becomes available), get an idea of what documents the application will require, and begin to assemble those documents. It would also be a good idea to calculate the anticipated loan and anticipated eligible expenses so you’re sure the entire loan will be forgiven.

Employee Retention Tax Credit

If you’re going to do the PPP loan, then you can skip this one because you don’t qualify. If you’re not, read on. The CARES Act provides a tax credit against an employer’s portion of the Social Security tax equal to 50 percent of qualified wages. Qualified wages include qualified health plan expenses but are limited to a maximum of $10,000 per employee (i.e., a maximum qualified wages of $5,000 per employee).

An employer must meet one of two requirements to qualify:

• The employer’s operations were at least partially suspended during the quarter due COVID-19-related government orders. (If the employer had more than 100 employees during 2019, the qualified wages are limited to those that were paid during the quarter, during the shut-down.)
• The employer’s gross receipts for the quarter were at least 50 percent less than they were compared to the same quarter last year. (If the employer had 100 or fewer employees, qualified wages includes wages paid during any shut-down and during any quarter meeting this criterium until the employer has a quarter where its receipts exceed 80 percent of its receipts in the corresponding quarter for 2019.)

The credit is refundable, which means the employer will receive a check if the credit exceeds the tax due.

Example: Using the facts from the above example, but no PPP loan was sought, the firm office was closed beginning March 10 and remained closed through June 30 government requirements concerning the Coronavirus epidemic. It reopened July 1. Despite the closure, employees were able to work at home, and revenues did not fall below 50 percent for either Q1 or Q2. The firm would be able to claim a credit for Q1 and Q2 against the employer portion of FICA (6.2 percent). The Q1 credit would equal Box 5 wages paid from March 10 through March 31 multiplied by 50 percent. During Q2, the partners, attorneys, and paralegal will hit the $5,000 qualified wage cap, and their wages will no longer qualify going forward. The total credit taken for Q1 and Q2 should be $30,000 plus approximately $3,460 for the administrative employee.

Social Security Tax / Self-Employment Tax Deferral

If you’re going to do the PPP loan, then you can skip this one because you don’t qualify. Otherwise, read on. Employers can defer payment of their portion of the Social Security tax due from the enactment of the CARES Act through Dec. 31, 2020. Fifty percent will be due Dec. 31, 2021, and the other 50 percent will be due Dec. 31, 2022. Self-employed persons can defer 25 percent to 2021 and 2022.

Notably, this deferral can be used in conjunction with the Employee Retention Tax Credit above, and the tax credits available for payments of emergency sick leave and emergency family medical leave.

Other Benefits

Other relief measures have been enacted but are unlikely to affect small law firms and solo practitioners. These measures include changes to the net operating loss deduction limitations and interest deduction limitations.

This article originally appeared on the website for the Ohio State Bar Association (OSBA).  The OACDL thanks the OSBA for sharing this valuable resource with our members.  The original article, with updates, can be found here:  Coronavirus Relief Package:  Impact on Small Firms and Solo Practitioners.

About the Author

Steve Estelle is a licensed attorney and tax manager at Clark Schaeffer Hackett CPA's & Advisors in Columbus, OH. He provides expert guidance on state and local tax issues to clients across multiple industries. He uses his expertise to identify tax savings for clients and helps them develop strategies to reduce risks. Estelle became an expert on Ohio tax law while working at the Ohio Legislative Service Commission and he practiced tax law on a national level at a Big Four accounting firm. He has also worked as a commercial litigation and bankruptcy attorney and frequently works with corporate CFOs, controllers and accounting personnel at Fortune 500 companies and small businesses.