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. 

COVID-19 Update #5 - The Paycheck Protection Program - SBA Loans Available to Nonprofit Organizations

Special Note:  Guidance and information has been issued from several sources over the past week.  In an attempt to provide accurate information, this blog post is updated as guidance is issued.  This blog was last updated on 4/7/2020 and includes information contained in the SBA Frequently Asked Questions (FAQs) issued on April 6, 2020 . 

On March 27, 2020, President Trump signed a second piece of legislation, the Corona Aid, Relief, and Economic Security Act (the  CARES Act) geared to keep the economy running during the COVID-19 pandemic.  One of the most popular provisions in the legislation is the provision to provide businesses and nonprofits operational loans to assist during this time in keeping employees gainfully employed until the crisis has passed. This provision is known as the paycheck protection program.

Source of the Loan

The loans are financed through the U.S. Small Business Administration (SBA).  While typically nonprofit organizations and churches are not eligible for SBA loans, the CARES Act allows 501(c)(3) organizations, including churches, to apply for this program.  Congress has allocated $349,000,000,000 for the program.

Eligible Organizations

Virtually any small business and/or nonprofit organization with less than 500 employees will qualify or that meet one of the other definitions of a "small business enterprise" as defined by the SBA.  However, for nonprofit organizations this appears to be a straight up count of employees, both full-time or part-time.  Also, business operations that are independent contractors or sole proprietors may qualify for the loan. Nonprofit organizations may require an organization's determination letter as proof of exemption under 501(c)(3).  A determination letter is issued to each nonprofit entity when the IRS approves its exempt status.

The organization must have been in operation on February 15, 2020 and had employees at that date. Additionally, the organization must be prepared to state the loan request is due to economic uncertainty due to the current COVID-19 pandemic.

Special Note for Churches:  Churches exempt under a group ruling issued to a denomination should obtain a letter verifying they are a part of the group ruling and the determination letter issued to the group verifying its exempt status.  Churches that have never officially requested IRS recognition of their exempt status and do not belong to a group, may encounter hurdles in verifying their status as a 501(c)(3) organization.  However in a set of "frequently asked questions" issued on April 3, 2020, the SBA clarified that churches do not have to formally apply for exempt status.  Additionally, after much confusion occurred in the lending community, the SBA clarified that churches do qualify for the PPP assistance and the SBA's nondiscrimination requirements cannot be applied to a church's religious activities.  

Loan Availability

Loans will be available through this program until the earlier of June 30, 2020 or the funds allocated by Congress are utilized.  Therefore, early application will assist an organization in securing the loan.  The loans may bear an interest rate not to exceed 4%.  The SBA has announced that the loan's rate of interest will be 1%.  Additionally, lenders are instructed to defer any required loan payments for six months to one year with a potential for all or most of the loan to be forgiven.   

Potential Funds Available

The maximum loan available through this program is 2.5 times the amount of the organization's average monthly payroll costs for the one-year period preceding the date of the loan not to exceed $10 million.  (Special rules may apply for organizations in existence for less than 1 year or with seasonal employees.)  The SBA has clarified that an employer may use the past 12 months or the calendar year 2019 for determining the potential loan amount.  If the 2019 calendar year is used to determine the amount, the employer must also confirm that it had employees at 2/15/20. Therefore, a payroll run covering that time period may also be requested. 

Payroll costs include:

• Salaries and other wages

• Employer-paid health care benefits

• Employer-paid retirement benefits

• Employer-paid state and local payroll taxes

Payroll costs do not include: 

• The amount of cash compensation exceeding $100,000 per any employee (clarified by the SBA FAQs issued 4/6/20.)
• Compensation paid to an employee residing outside the U.S.

• Federal payroll taxes - While the law indicates this includes any taxes withheld from the employee for FICA/Medicare and Federal Income Tax as well as the employer portion of the FICA/Medicare taxes assessed and withheld for the period 2/15/20 to 6/30/20, the SBA states in its FAQs that there would not be a reduction in payroll costs for any taxes withheld from the employee, but the employer share of FICA/Medicare should never be included in the calculation.  

• Any compensation paid under the Families First Coronavirus Response Act for sick leave or family leave (see other related blog posts.)
• For an employer, payroll costs do not include amounts paid to independent contractors reported on Forms 1099-Misc.  This is excluded because these individuals/businesses may apply for the loan on their own. (Clarified by the SBA in FAQs issued on 4/2/20.)

Potential Use of Funds

Funds from the loan may be used for: 

• Payroll Costs as previously defined

• Mortgage interest

• Interest on other debt obligations incurred before February 15, 2020

• Rent

• Utilities

Potential Loan Forgiveness

Entities receiving these loans may qualify for all or a portion of the loan to be forgiven.  The amount to be forgiven is based on the amount spent on the following expenses for the period of eight weeks beginning with the date of the loan. 

• Payroll costs

• Mortgage interest payments for loans incurred before February 15, 2020

• Rent for lease agreements in force at February 15, 2020

• Utilities that were obligations as of February 15, 2020

Since the purpose of the provision is to keep people working, the amount of the loan forgiven is directly tied to the accomplishment of this purpose.  Therefore, the amount of the loan forgiveness is reduced if the recipient reduces its workforce either in numbers of employees or in the amount of salaries paid is significantly reduced.  

The amount forgiven is limited to the principal of the loan and accrued interest.  Additionally, only 25% of the amount of the loan can be justified with non-payroll costs; i.e., rent, utilities, etc.  The forgiven portion of the loan is not  taxable.  

Any portion of the loan that is not forgiven must be repaid within 2 years (the Act states up to 10, but the guidance indicates the loans are 2 year loans.)

SBA Guidance

Guidance from the SBA was issued on 4/2/2020 and can be located at https://content.sba.gov/sites/default/files/2020-04/PPP--IFRN%20FINAL.pdf.

Application can be located at https://www.sba.gov/sites/default/files/2020-04/PPP%20Borrower%20Application%20Form.pdf

Frequently Asked Questions (FAQs) related to faith-based organizations applying for the PPP and the EIDL can be located at https://www.sba.gov/document/support--faq-regarding-participation-faith-based-organizations-ppp-eidl

Alternate Loan Program

Secular nonprofit organizations may also explore the Economic Injury Disaster Loan (EIDL) provided for in earlier legislation.  This program may also provide funding for operations but it does not include any loan forgiveness provisions.  However, once an organization has applied for this program, it may be eligible for an immediate grant of up to $10,000 in addition to its loan.  Organizations who have previously received an EIDL may be eligible to roll it into the Paycheck Protection Loan. 

COVID-19 Update #4 - Emergency Family Leave Provisions and Related Tax Credits

On March 18, President Trump signed into law the Families First Coronavirus Response Act (the Act, PL 116-127), which eased the compliance burden on businesses. The Act includes several tax credits as well as mandated leave requirements.  To assist with application of the provisions, the various provisions are discussed in separate blog posts.  

Required Paid Family Leave for Employees

In addition to the required sick leave employers must offer, the Act also added some emergency provisions to the Family Medical Leave Act of 1993 (FMLA).  The effective date of these provisions is April 1, 2020.

Applicable Employers:  While the FMLA does not generally apply to employers with less than 50 employees, the emergency provisions have changed the applicable definitions of "employer" to address the current circumstances.  The Emergency Family and Medical Leave Expansion Act (EFMLEA) division of the Act requires employers with fewer than 500 employees to provide both paid leave (with an administrative exemption for less-than-50-employee businesses that the leave mandate puts in jeopardy). 

Required Leave Circumstances:  The leave generally is available when an employee must take off to care for the employee's child under age 18 because of a COVID-19 emergency declared by a federal, state, or local authority that either (1) closes a school or childcare place or (2) makes a childcare provider unavailable.   Note:  the act specifically indicates an employee's son and/or daughter.  This does not extend to care of others at this time.  Therefore, it would not extend to employees who need to care for their grandchildren.  

Amount of Required Leave:  This amount of paid leave is more extensive than the other required sick leave provisions.  (Generally, the first 10 days of leave can be unpaid.  If qualifying, these leave days may have to be considered under the required sick leave provisions of this legislation.  For more information on the required sick leave, see Update #2.)  After 10 days, then paid leave is required, pegged to the employee's pay rate and pay hours. The paid leave rate must be at least 2/3 of the employees regular pay, but it may be capped at  $200 per day and $10,000 in the aggregate per employee.  

For part-time or irregular work schedules, the amount of paid leave is calculated based on the average number of hours the employee was scheduled to work per day for the last six months prior to the date the leave starts. 

Eligible Employee:  An eligible employee is an employee who has been employed for 30 days.  If an employee was laid off after March 1, 2020 and has been rehired, he/she must have been employed for 30 out of the last 60 days prior to the lay off.  

Taxation of Wages:  The required leave payments are taxable, but the compensation is not subject to the employer's portion of OASDI (Social Security tax of 6.2%)

Corresponding Tax Credits for Paid Family Leave

Tax Credits for Employers

Calculating the Credit:  The credit consists of the amount of:

1. The wages paid for the family leave (see note below) subject to the above discussed limits; and 
2. The amount of the cost of maintaining a health plan that is allocable to the paid leave time.

In addition to the base calculation for the credit, an employer is also eligible for a credit on the employer's portion of the Medicare taxes paid on the family leave wages paid. 

Nuance for churches and ministers:  The definition of wages eligible for the credit is defined by IRC Section 3121(a).  Wages paid to ministers performing ministerial duties and to employees of churches that have elected out of the FICA/Medicare system are not wages for purposes of IRC Section 3121(a).  Therefore, the wages paid to ministers and to employees of "electing" churches are not eligible for the credit.  Unless guidance is issued to the contrary, these individuals will need to look to the provisions for self-employed taxpayers to claim the credits.  See the discussion below on self-employed taxpayers claiming a family leave credit. 

Claiming the Credit:  The tax credit corresponding with the EFMLEA mandate is a credit against the employer's 6.2% portion of the Social Security (OASDI) payroll tax.  In the event the credit is more than an employer's OASDI, then the amount is refundable.  

Note:  While guidance as to how to claim the credit is still forth coming, right now we are anticipating the credit being claimed on an employer's Form 941.  

Family Leave Credit for Self-Employed Taxpayers

The Act provides to the self-employed a refundable income tax credit (including against the taxes on self-employment income and net investment income) for family leave similar to the self-employed sick leave credit discussed in a separate blog post.

Applicable Taxpayers: The taxpayers eligible for this credit are those who regularly carry on a trade or business as defined by IRC Section 1402 and would qualify for the paid leave and the related credits, if they were employees for an applicable employer.  As noted above, this should also apply to ministers and to employees of churches electing out of the FICA/Medicare program.  

Limit on the Credit:  The allowable credit is limited to the lesser of either 67% of the average daily self-employment income for the days attributable to family leave or $200 per day.   Average daily self-employment income is determined by taking the self-employment income for the year and dividing by 260 days.  

Additionally, the credit is decreased to the extent that the self-employed person has received days of  paid sick leave from an employer under the Act. The credit applies to a period (1) beginning on a date determined by the IRS that is no later than April 2, 2020 and (2) ending on December 31, 2020. Applicable taxpayers should be able to estimate the amount of the credit and decrease required estimated tax payments.  

Technical guidance from the IRS and the DOL is forthcoming and the above interpretation of the law is subject to change based on newly issued guidance. FAQs from the DOL are available at https://www.dol.gov/agencies/whd/pandemic/ffcra-questions.

COVID-19 Update #3 - Families First Coronavirus Response Act - Sick Leave Tax Credits for the Self-Employed

On March 18, President Trump signed into law the Families First Coronavirus Response Act (the Act, PL 116-127), which eased the compliance burden on businesses. While the Act requires mandated paid sick leave in certain instances (covered in a separate blog post), the Act also provides limited relief for taxpayers who are self-employed.  

Tax Credit for Sick Leave 

The Act provides a refundable income tax credit (including against the taxes on self-employment income and net investment income) for sick leave to a self-employed person by treating the self-employed person both as an employer and an employee for credit purposes. Thus, with some limits, the self-employed person is eligible for a sick leave credit to the extent that an employer would earn the payroll sick leave credit if the self-employed person were an employee.

Applicable Taxpayers: The taxpayers eligible for this credit are those who regularly carry on a trade or business as defined by IRC Section 1402 and would qualify for the paid leave and the related credits, if they were employees for an applicable employer.  

Warning:  An unusual nuance is the law's application to ministers and employees who work for churches making the election under IRC Section 3121(w).  Income earned by ministers is taxed under IRC Section 1402 as self-employment income as is income paid to all employees that work for a church electing out of the FICA/Medicare system.  Therefore, these employees, even if provided with required sick leave by an employer, must claim the credit on their personal tax returns.  The employers will not be eligible to claim the credit.  At this time, guidance has not been issued by the IRS to confirm this interpretation.

Qualifying Time:  The taxpayer must have incurred days that he/she could not have performed their regular work duties for one of the following stated reasons: 

1. the taxpayer is subject to a Federal, State or local quarantine or isolation order related to COVID-19;
2. the taxpayer has been advised to self-quarantine due to COVID-19;
3. the taxpayer is experience symptom of COVID-19;
4. the taxpayer must care for an individual who is subject to a quarantine order; 
5. the taxpayer is caring for a son or daughter, if the child's school has been closed; or 
6. the taxpayer qualifies due to a subsequent factor defined by the Secretary of Health & Human Services.

Amount of the Credit:  The amount of the credit is either $511 per day, not to exceed 10 days, for the days qualifying under #1, #2 or #3 or $200 per day, not to exceed 10 days, for the days qualifying under #4, #5 or #6 above.  Accordingly, the self-employed person may receive an income tax credit with a maximum value of $5,110 or $2,000 per the payroll sick leave credit. 

Limit on the Credit:  The allowable credit is limited to either 100% for days qualifying under #1, #2 or #3 or 67% for days qualifying under #4, #5 or #6, of the average daily self-employment income.  Average daily self-employment income is determined by taking the self-employment income for the year and dividing by 260 days.  Additionally, the credit is decreased to the extent that the self-employed person has received days of  paid sick leave from an employer under the Act. The credit applies to a period (1) beginning on a date determined by the IRS that is no later than April 2, 2020 and (2) ending on December 31, 2020. Applicable taxpayers should be able to estimate the amount of the credit and decrease required estimated tax payments.  

Please note that guidance on the legislation is being issued and may provide further clarification on the application and operation of the new law. 

Further analysis of COVID-19 relief legislation is discussed in separate blog posts.