A Lesson in Applying All the New Laws Enacted During the Pandemic

A Lesson in Applying All the New Laws Enacted During the Pandemic

In working on our upcoming Fall Tax School program, I recently found myself in a position we hope you discover as an attendee: while reviewing, learning, and applying recently enacted legislation, we consider clients who could benefit from new laws or clients for whom we perhaps missed in providing new benefits when filing their 2020 returns.

That’s what happened to me and the case in point I want to you to consider today is the sick leave tax credit provided under the Families First Coronavirus Response Act (FFCRA) as it applies to self-employed persons with no employees.

Let me give you a scenario to help in your understanding of this law. In 2020, we have Bernadette, a self-employed hair stylist who has no employees. She was forced by government order to shutter her business for 90 days. That’s the first provision to consider in qualifying for the FFCRA benefit— contracting COVID-19, caring for a family member with COVID-19, or being forced to close their business under a government order. Bernadette did not contract COVID-19 nor was she caring for a family member with COVID-19, but she was forced to close for 90 days by government order.

So, we have a qualifying client…what is she entitled to as a benefit? The provisions of the FFCRA would permit Bernadette up to $511 per day for a maximum of 10 days. The way we calculate her actual benefit begins with following the instructions for Form 7202.

1. Enter the number of days of COVID-19 related impact. In our example, the result was 90.
2. Use no more days than the law allows, which is 10.

So far, so good.

The next part is where the benefit becomes apparent. The form instructs us to enter net earnings from self-employment which is the amount of net income subject to self-employment tax (the 92.35% remainder from the 2020 Schedule SE on Line 6 unless income was so low that the client did not owe self-employment tax. If that’s the case, you can still enter a minimum amount). For Bernadette, as was the case for many taxpayers, her 2020 income was devastated, so her 2020 net profit was only about $3,800. The instructions tell us that a client who has been in business for a while to also review their 2019 Schedule SE, Line 4.  If the 2019 result is higher than 2020, use the 2019 results for the 2020 benefit. For Bernadette, her 2019 net self-employment income was $11,000, so we used it. (Note: My software created a worksheet to indicate we were using 2019 net earnings, which I thought was a nice touch to provide a complete explanation to IRS as to what we were doing).

3. The net self-employment income result you chose is divided by 260, then multiplied by 10 (that relates to the 10-day maximum described earlier). For our example, the result was around $430. Had we been required to use actual 2020 net self-employment income, the result would have been only about $130. So you can see the benefit in being able to use 2019 net earnings.

4. The rest of Part I of the Form 7202 is used to compare the results to the $511 maximum per day, etc. For your clients for whom their net earnings from self-employment (remember I’m talking about the 92.35% of net profit) is $132,860 or LESS, you should end up with a benefit of less than $5,110 ($511 x 10 days) as our example of Bernadette bore out. For your clients with net earnings GREATER than $132,860, the most you should be calculating is $5,110, which is the maximum benefit allowed under the FFCRA rules.

Bernadette is entitled to $430, which I missed when originally preparing her 2020 return. She had received two rounds of PPP loans for which forgiveness had already been submitted and approved, but this was a benefit I missed. My mother used to say “haste makes waste,” so that’s why I’m telling myself, teacher teach thyself.

She was glad to hear about some more money coming her way (by the way the FFCRA benefit is a refundable credit) and that I decided not to charge for amending the return since I should have thought about this credit when the original return was being prepared (my call, you might feel differently, which is fine). You might argue that $430 isn’t much money, but I’m glad I told her about it instead of her hearing about this benefit from someone else.

I’m willing to bet, however, that Bernadette will be a client for life and will refer others to my practice. I’m also glad that the 2020 amended filing can be e-filed since I can’t imagine how long a paper filed 1040-X would take to be accepted with the current IRS processing backlog.

One other thought on the benefits of FFCRA. Your client may be able to use the credit for family leave if they were caring for a child impacted by COVID-19 or, while their school or daycare was closed your client was not to be able to work because of the child staying at home. That’s covered in Part II of the Form 7202 and could be as much as $10,000 ($200 per day times a maximum of 50 days). Just don’t use the same days for this credit that were used for the sick leave credit we calculated before. In our example of Bernadette, there were no children involved.

It’s my hope that you’re thinking of your own Bernadettes right now and will be reaching out to them so they might have more money coming their way. We are in our profession to help our clients maximize all tax benefits for which they are entitled.

You may just want to wait to contact your Bernadettes until you get those S-corp and partnership returns on extension filed and third quarter estimates submitted by Wednesday—the due dates just keep marching along.

Stay thirsty for knowledge my friends.

By Tom O’Saben, EA