COVID-19 Update #10 - The Housing Allowance and the PPP

Over the past two weeks many churches have applied for the a loan through the Paycheck Protection Program (PPP).  In determining average monthly wages, the banks consistently excluded compensation designated as housing allowance paid to ministers.  The housing allowance is not a taxable part of compensation, so it is not reported on a church's payroll reports or on a minister's Form W-2.  Since the banks were using these documents to support the payroll amounts, many refused to include the housing allowance.  Since the housing allowance may be a significant portion of a minister's cash compensation, omitting it from the calculation of average monthly compensation significantly reduced a church's qualifying amount for the PPP. 

SBA Clarifies the Issue of Housing Allowance

The SBA has been updating its frequently asked questions (FAQs) on a regular basis.  Today's addition to the FAQs specifically addresses the question of housing allowance.  Question 32 now specifically states that payroll costs include all cash compensation.  Therefore, the cash housing allowance paid to a minister may be included in a church's payroll costs for the PPP. 

What Does This Mean

This clarification has two applications:

Churches Already With A PPP:  Churches who have already received or been approved to receive a PPP loan cannot go back and request more funds.  However, the inclusion of the housing allowance as a payroll cost will make it easier to meet the expenditure tests that must be met to justify the use of the funds for the upcoming "forgiveness" phase of the program.   Compliance with this phase of the PPP is intricate, so professional assistance may be required.  Additionally, we are still waiting on further guidance regarding various aspects of the "forgiveness" phase.

Churches Applying For A PPP:  Starting Monday April 27, 2020, the PPP will be accepting more applications (new funding was approved on Friday April 24, 2020).  For churches and religious nonprofits applying in the new phase of funding, the average monthly payroll costs may be calculated including the housing allowance.  Lenders may not be fully aware of the intricacies of housing allowance and how it operates.  Therefore, churches should be ready to assist in educating lenders in these unique payroll aspects of ministers' compensation.

COVID-19 Update #9 - Deferral of Tax Deposits

The CARES Act provides for employers and self-employed individuals to shift the timing of certain tax payments over the next few months in the hopes of alleviating some of the financial burden felt at this time.  Of the CARES Act's programs, this one should be approached with the greatest amount of care, concern and planning.

What is Available for  Deferral

The Act allows employers to defer the deposit of the employer's share of Social Security taxes owed on employees' wages as determined by IRC Section 3111(a).  This is the OASDI portion of the taxes and is 6.2% of the first $137,700 of taxable wages.  The Act does not provide for the deferral of the employer's share of the Medicare taxes associated with employees' wages.

For the self-employed individual, a deferral of 50% of the tax determined under IRC Section 1402(a) is available.  This is the portion of the self-employment tax associated with the Social Security tax as calculated on Schedule SE.  Of the 15.3% of self-employment tax calculated, 12.4% is assessed as the Social Security tax.

The deferral of the applicable taxes is for taxes required to be paid or deposited during the period March 27, 2020 to December 31, 2020.   The deferral is not associated with the date the wages were paid, but rather when the taxes are required to be deposited or paid.

Provision for the Deferral

The tax available for the deferral will be due as follows: 

• 50% due by December 31, 2021 and 
• 50% due by December 31, 2022.

Late payment penalties or interest will not be charged on the taxes deferred through the program because the payments are considered as timely made as long as the above schedule is followed.  Of course, the deferred taxes may be paid at any time within this time schedule.  

Example for the Employer  

First Church pays wages to employees other than their ministers totaling $4,000 in April.  Normally First Church is a monthly payroll tax depositor, so its April tax deposit is due by May 15th.  When reviewing the tax deposit for April, First Church determines it consists of the following: 

Federal Income Tax Withholding       $  750

Social Security Tax Withholding        $  248

Medicare Tax Withholding                 $    58

Total Employee Withholding             $1,056

Social Security Tax - Employer          $248

Medicare Tax  - Employer                  $  58

Total Potential Tax Deposit              $1,362

First Church may defer the $248 of employer Social Security taxes.  The tax deposit required at May 15th is $1,114 ($1,362 - $248).  The $248 is now due as follows:  $124 by December 31, 2021 and the remaining $124 by December 31, 2022.  

Warning:  It is important to note there is no deferral of any of the taxes withheld from the employee.  This money doesn't belong to the employer.  There is never any reason to not timely remit employee withholdings.  These funds are called "trust funds".  If not remitted timely, penalties may be assessed against individuals with financial authority within an organization. 

Example for the Self-Employed Individual

Pastor Joe is the senior pastor of First Church.  As a minister, he reports his wages on Schedule SE.  His estimated self-employment taxable income for 2020 is $50,000.  His estimated self-employment tax is $7,650 consisting of $6,200 Social Security tax and $1,450 of Medicare tax.  Pastor Joe decides to make use of the deferral program for 2020.  He may defer 50% of the $6,200, or $3,100, to be paid at a later date.  This deferral amount can be immediately used to reduce his 2020 estimated tax payments.  The deferral is due in two payments:  $1,550 must be paid by 12/31/2021 and the other $1,550 must be paid by 12/31/2022.  

The Deferral and the Paycheck Protection Program

All employers may use the deferral program, including those claiming credits for the paid sick or family leave programs provided for in the Families First Coronavirus Relief Act and the employee retention credits provided by the CARES Act.  However, employers participating in the Paycheck Protection Program (PPP) are limited in their use of the deferral program.  The employer receiving a PPP loan may participate in the deferral program until it has its PPP loan forgiven.  At the date the PPP loan is forgiven, the employer may no longer defer any taxes using the deferral program.  For the time period the PPP loan is outstanding, the deferral is available.  

Caution

As mentioned in the beginning, this is the program that requires care, caution and planning before implementing.  As a tax professional, it is the program that causes me the greatest consternation.  Taxes deferred can easily become a liability that cannot be paid.  While in the short term, the program provides a tremendous relief to the employer and the self employed person, in the long run it may also create a burdensome liability that cannot be easily met.  Any taxpayer using the program must be aware of the amount of the associated liability.  Organizations should record the unpaid tax in a special liability account to provide for clear tracking of amount.  Self-employed individuals may want to specifically set up a monthly savings plan to provide for funds at the applicable due dates.  In essence, the money is borrowed from the government and, as with any other debt, plans are needed to provide for its repayment. 

COVID-19 Update #8 - Update on the Paycheck Protection Program

The Paycheck Protection Program has created a whirlwind of activity over the past 10 days.  While it was the goal of everyone to provide needed funds quickly, rolling out a $349 billion dollar program is no small feat.  Over the past 10 days, the SBA has issued guidance three separate times.  Each set of frequently asked questions (FAQs) has answered another debate in the professional and banking communities.  There have been winners and losers on both sides of these debates and there have been some surprising resolutions by the SBA.  Rather than providing separate blog posts, I have opted to update the original post each time.  Therefore, despite the posting date on the blog on this topic of March 30th, please check the date at the top of the blog for the most recent update.  The blog has been updated as of April 7, 2020.

COVID-19 Update #6 - Individual Economic Impact Payments

To further assist in stabilizing the economy the CARES Act provides for economic impact payments to be automatically distributed to taxpayers.  According to IRS Information Release 2020-61, the payments will begin to be distributed within the next three weeks.  While the provision does not directly affect nonprofit organizations and churches, this information does affect your staff, members and those you serve.   The following information discusses the various aspects of the this new benefit.

Who may receive the payment & how much will it be?

The Act provides for a credit on a taxpayer's 2020 Form 1040 of $1,200 to individuals and $500 for each dependent child.  (The child must be a dependent under the age of 17.  This leaves a large number of young adults who will not be eligible for any payments because they are 17 or older and still dependents of their parents.)  The full credit is provided to tax filers whose adjusted gross income does not exceed $75,000 for single taxpayers and $150,000 for married couples filing a joint return.  For those with adjusted gross income in excess of these amounts, the credit phases out until it is totally unavailable when the taxpayer's adjusted gross income is $99,000 for single taxpayers and $198,000 for married couples filing jointly. 

While the Act provides for a credit (an item that would be applied directly to a person's federal tax liability)  calculated on a person's 2020 Form 1040, the Act also allows for an advance payment of the credit.  This is the payment qualifying taxpayers will soon receive from the IRS.  When a taxpayer files their 2020 Form 1040, the advance credit will be reconciled to the actual amount allowed.  If a greater credit is due, the taxpayer will get the additional amount.  This could occur, if the taxpayers income in 2019 (or 2018, see below) is in the range where the credit was either reduced or disallowed when calculating the amount of the advance payment. 

Obviously, the credit and advance system is confusing to taxpayers, so an example might best clarify the situation.

Example 1:  Sue is a single taxpayer making $65,000 a year as reported on her 2019 Form 1040 (Sue is a very with it taxpayer having already filed her return!)  The IRS sees that Sue's AGI (adjusted gross income) is less than $75,000, so they send her the full $1,200.  Sue enjoys her $1,200 of additional money during our time of economic disruption.  In 2021, Sue files her 2020 Form 1040.  Sue's return shows the following:

Economic Impact Credit Allowed:               $1,200
Economic Impact Advance Received:          $1,200

Credit to claim against 2020 tax liability:        -0-

The credit/advance arrangement has no affect on Sue's 2020 tax liability.  She will have the same tax liability she would have had without the passage of the credit.  Therefore, the $1,200 is additional money to Sue.

Example 2:  Sue is a single taxpayer making $105,000  a year as reported on her 2019 Form 1040.   The IRS sees that Sue's AGI is more than $99,000, so they do not send her any payment.  However, Sue is unable to work all of 2020, so her AGI in 2020 is $50,000.   In 2021, Sue files her 2020 Form 1040.  Sue's return calculates the economic impact credit as follows:

Economic Impact Credit Allowed:               $1,200
Economic Impact Advance Received:          $   -0-

Credit to claim against 2020 tax liability:     $1,200

Because Sue did not qualify for the advance payment but did qualify for the final credit, she may take the credit against her 2020 income tax liability.   The result being that if a taxpayer qualifies for the $1,200 (or any part of it) he/she will get that money either as an advance paid by the IRS in the upcoming weeks or as a credit against income taxes on the 2020 Form 1040. The credit is a gift from Congress that is either received in advance from the IRS or received by reducing the 2020 tax liability.  This is simply a timing issue of when you receive the "free" money.

Initial information indicates that if the reconciliation on the 2020 return determines the advance credit paid was larger than it should have been, the excess received does not have to be paid back. Therefore,  the 2020 federal tax liability will either be exactly the same as it would have been without the credit (Example 1) or it will be a little less, creating a refund, with the credit/advance adjustments (Example 2).

How will the IRS determine the advance credit payment? 

The IRS will use a taxpayer's 2019 Form 1040 to determine qualification for the payment and the amount of the payment.  If the 2019 return has not been filed, then the IRS will base the payment on the 2018 return. If a taxpayer has not filed a Form 1040 for either 2018 or 2019, they should file a return immediately.  

Many older taxpayers do not file returns since their income is below the filing thresholds.  The Act does provide for the IRS to based the payment qualification on the SSA-1099 issued to recipients of Social Security if the tax returns are not available.  Therefore, if older taxpayers have not filed due to the filing thresholds, they may still receive their payment.  The IRS originally advised these taxpayers to file a return for 2019, so their information is in the system and their payment is not delayed.  However, in a recent press release, the IRS has announced they will use the SSA-1099 to determine payment recipients and these taxpayers do not need to file a return to receive a payment. 

How will the payments be delivered?

It is the desire of the IRS to direct deposit the payments into a taxpayer's bank account based on the information provided on the tax return utilized to determine the payment.  However, many taxpayers do not include this information on their tax returns unless they are receiving a refund.  

For taxpayers who have not provided banking information on a prior return, the IRS is establishing a web-based portal for taxpayers to use in providing the information to the IRS.  If the IRS does  not receive any banking information for direct deposit, it will mail checks to the taxpayers.  However, this significantly delays a taxpayer receiving the payment.  

The IRS is required to send a notice, by mail, to the taxpayer within 15 days of issuing the payment.  The notice will provide IRS contact information for a taxpayer to use, if the payment is not received. 

Note:  If a taxpayer's information, either mailing or direct deposit information, on the 2018 Form 1040 has changed and the 2019 Form 1040 has not been filed, then a taxpayer may desire to quickly file the 2019 return with updated information to avoid delays in receiving the advance credit payments. 

With all the isolation orders, how can a tax return be completed? 

This is a great question considering many people are currently under an isolation order and most tax preparers have closed their doors to any outside clientele.  However, CPA firms and tax preparers are resilient people and most have established mechanisms for continuing to serve their clients.  At Sommerville & Associates, P.C. we are utilizing our client portals and electronic communications to continue to prepare returns.  Clients are encouraged to submit tax documents electronically through their client portals and completed returns are electronically submitted to the client alleviating any exchange of physical packages.  While our staff is working remotely, we continue to work on client returns.  Most tax preparers have similar structures in place, so taxpayers should continue to seek a preparer that can move forward in preparing the 2019 Form 1040.  The due date for the 2019 Form 1040 has been extended to July 15, 2020 as well as the payment of related taxes.  If a taxpayer owes with their 2019 Form 1040, they should still proceed with filing the return.  The taxes due with the return would still be due at July 15, 2020.  

As with all of our COVID-19 posts, the information contained in the post is based on guidance issued at the time of the post.  Continual guidance is being issued by the IRS and the DOL, so above information may be updated in the future as guidance is published. This blog was updated on 4/3/2020.