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What You Need to Know About the Tax Effects of Mandatory Leave Under the New Coronavirus Act

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What You Need to Know About the Tax Effects of Mandatory Leave Under the New Coronavirus Act

By Mel Schwarz, CPA, Director of Legislative Affairs at Eide Bailly

The House of Representatives recently passed The Families First Coronavirus Response Act.  This act could drastically impact those affected by COVID-19 and their employers.

The Senate is expected to take up the legislation this week. President Trump has announced that he will sign the legislation as soon as it is approved by Congress.

What is the Families First Coronavirus Response Act?
The Families First Coronavirus Response Act includes a number of provisions related to management of the coronavirus pandemic.  The legislation also mandates that, beginning no later than 15 days after the legislation is signed by the President through the end of 2020, private employers with less than 500 employees and all public employers provide expanded qualified family and medical leave and paid sick leave for a broad range of coronavirus related absences.

Additional wages paid by private employers as a result of these provisions offset the employer’s share of old age, survivors and disability insurance taxes.  Any excess over the amount of taxes due is refundable under terms to be established by the Secretary of the Treasury. Wages paid as a result of these provisions are excluded from the calculation of the employer’s share of social security (but not Medicare) taxes.

How will the Families First Coronavirus Response Act affect my organization?
Changes to the Internal Revenue Code are limited to determination of credits and income.  The requirements to provide paid sick leave and additional qualified family and medical leave are amendments to labor laws and are expected to be interpreted using definitions and standards established in that area.  Consultation with experts in the employee benefits area should be considered.

Application to Private Employers with Less than 500 Employees

Paid Sick Leave: Private employers with fewer than 500 employees are required to provide the following:

  • Two weeks of paid sick leave, at the employee’s regular rate, limited to $511 per day and $5,110 in total to all employees that are unable to work or telework because they are:
    • Subject to a federal, state or local quarantine or isolation order related to coronavirus,
    • Advised by a health care provider to self-quarantine due to coronavirus concerns, or
    • Experiencing symptoms of coronavirus and seeking a medical diagnosis.
  • Two weeks of paid sick leave, at the employee’s regular rate limited to $200 per day and $2,000 in total for employees who are unable to work or telework because they are:
    • Caring for an individual who is subject to a federal, state or local quarantine or isolation order or has been advised by a health care provider to self-quarantine due to coronavirus concerns,
    • Caring for a son or daughter whose school or place of child care of the child is closed or whose child care provider is unavailable due to coronavirus precautions, or
    • Experiencing a substantially similar condition that is specified by the Secretary of Health and Human Services (in consultation with the Secretaries of Treasury and Labor.

The paid sick leave mandated by the legislation is in addition to paid sick leave the employer would already provide.  Paid sick leave mandated by the legislation is not considered wages for the purpose of determining the employer’s share of social security taxes but will be considered wages in determining the employer’s share of Medicare taxes.  An employer may elect to exclude an employee who is a health care provider of an emergency responder from these rules.

tax credit against the employer’s portion of OASDI (social security) payroll taxes equal to the amount of sick leave wages is provided, limited to 10 days per affected employee (at $511 per day or $200 per day if caring for someone else or experiencing a substantially similar condition.  Any excess over the amount of those taxes due is refundable under terms to be established by the Secretary of the Treasury. The gross income of the employer is increased by the amount of such credit.

In addition, the credit amount, under the act, would be increased by an allocable portion of an employer’s “qualified health plan expenses.” Generally, these expenses include amounts paid for a group health plan that are excludable from employees’ income. The employer’s share of Medicare tax on sick leave wages is also added to the credit amount.

The paid sick leave requirement and related credit is effective no later than 15 days after the President signs the legislation and expires at the end of 2020.

Paid Family and Medical Leave: Private employers with fewer than 500 employees are also required to provide qualified family and medical leave of up to 12 weeks to any employee who has been employed for at least 30 calendar days if the employee is unable to work or telework due to a need for leave to care for a son or daughter under the age of 18 whose school or place of care has been closed, or whose child care provider is unavailable due to the coronavirus.

After the first 10 days (which may consist of unpaid leave, be covered and paid as sick leave, or for which the employee uses some other form of paid leave) the employee must be paid at two-thirds of the employee’s regular rate of pay for the number of hours the employee would otherwise normally be scheduled to work. This paid leave requirement is limited to $200 per day and $10,000 in total.

Family and medical leave payments mandated by the legislation are not considered wages for the purpose of determining the employer’s share of social security taxes but will be considered wages in determining the employer’s share of Medicare taxes.

A credit against the employer’s portion of OASDI (social security) payroll taxes equal to the amount of qualified leave wages is provided, limited to $200 per day per affected employee and $10,000 for the year per affected employee. Any excess over the amount of payroll taxes due is refundable under terms to be established by the Secretary of the Treasury. The gross income of the employer is increased by the amount of the such credit.

As with sick leave, the tax credit amount for family leave would be increased by an allocable portion of an employer’s “qualified health plan expenses” in addition to the employer’s share of Medicare tax on the family leave wages.

The requirement to provide paid family leave and the related credit is effective no later than 15 days after the President signs the legislation and expires at the end of 2020.  The Secretary of Labor may exclude certain health care providers, emergency responders and employees of businesses with less than 50 employees from the expanded qualified leave rules. This would occur when the imposition of these rules could jeopardize the viability of the business.

Application to Private Employers with 500 or More Employees

Private employers with 500 or more employees are not covered by these changes and are not eligible for credits for wages paid for sick leave or qualified family leave.

Public Employers
Public employers are subject to the paid sick leave and paid family leave provisions without regard to the number of employees.  Public employers include States, their political subdivisions and interstate governmental agencies (government employers), as well as any entity that is not a private entity or individual and is ether engaged in commerce or an industry or an activity affecting commerce. Government employers are not eligible for the credits.

How do I determine the number of employees I have?
The definition of employer and determination of the number of employees follows the existing law and regulations in the Family and Medical Leave Act.  Multiple entities may be treated as a single employer if they are joint employers or integrated employers as those terms have been interpreted under that Act.  In general, joint employers are two or more businesses that are simultaneously benefited by an employee’s work.  Integrated employers may be found where there is common management, interrelations between operations, centralized control of labor relations and common ownership.

How are individual taxes treated under The Families First Coronavirus Response Act?
Tax Treatment of Employees
Amounts received as paid sick leave or paid family and medical leave are taxable to the individual and subject to employment taxes.

Tax Treatment of Self-Employed Individuals

 A refundable credit is allowed to self-employed individuals for up to ten days that would qualify for mandatory paid sick leave.  The daily amount is equal to the net earnings from self-employment for the year divided by 260, and is subject to the same $511 or $200 per day limitation that applies in the case of an employee.

A refundable credit is allowed to self-employed individuals for up to 50 days the individual is unable to work because of events that would qualify for paid family and medical leave.  The amount per day is equal to net earnings from self-employment for the year divided by 260, subject to a maximum of $200 per day.

There is more to come on the legislative response to Coronavirus
There are a lot of moving parts related to the final passage of this Coronavirus Response legislation.  We are monitoring the bill’s progress and will be providing additional confirmed information as it becomes available.

Stay up to date on the latest coronavirus happenings.

The Inland Empire Business Journal (IEBJ) is the official business news publication of Southern California’s Inland Empire region - covering San Bernardino & Riverside Counties.

Banking & Financial Services

California’s Economic Horizon: Treasurer Ma’s Optimistic Forecast for the Inland Empire

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State Treasurer Fiona Ma outlines key initiatives and predicts robust growth for the region, highlighting major projects and economic strategies

By Ken Alan, Freelance Writer for IEBJ

California State Treasurer Fiona Ma presented an optimistic economic forecast for the Inland Empire at the Mid-Year Banking & Financial Industry Outlook. “I spend a lot of my time traveling to all 58 counties to understand their economic development needs and match them with investors,” she explained.

Treasurer Ma highlighted her support for the Brightline West high-speed rail project, which secured $3 billion in funding from President Biden’s Bipartisan Infrastructure Bill and an additional $3.5 billion through private activity bonds (PABs). The 218-mile train, running through the median of Interstate 15, will have stations in Las Vegas, Victor Valley, Hesperia, and terminate in Rancho Cucamonga, where it will connect with the California High-Speed Rail.

While high-speed rail remains controversial due to its high construction costs, Ma argued that such systems are vital solutions to highway gridlock and the high cost of housing in major metro areas. With no significant highway projects in the planning stages, California legislators are considering electronic tolls to manage peak hour traffic. Additionally, the air travel industry continues to struggle with pilot shortages, high fuel costs, safety concerns, and customer service issues, which could be alleviated by increased competition. The persistent barriers to new housing—such as labor costs, high interest rates, and government red tape—also remain formidable.

The construction of the Brightline project is expected to take four years, aiming for completion in 2028 just in time for the Olympic Games in Los Angeles. Ma promised three years of high-paying construction jobs and mentioned plans for new affordable rental units and renovations to existing ones.

Treasurer Ma also referenced the Barstow International Gateway project (BIG) as another economic catalyst for the Inland Empire. Though not directly involved, she noted that the railroad company BNSF had purchased 4,000 acres on the west side of Barstow to develop a major transloading center for international freight from the ports of Los Angeles. This initiative is expected to significantly reduce truck traffic on Southern California freeways and boost San Bernardino County’s economy.

Treasurer Ma oversees a state budget of $3.7 trillion. During the first two years of the pandemic, California realized surpluses of $46 billion and $96 billion, respectively. However, in the third year, the state faced a $50 billion deficit due to layoffs in tech companies, declines in commercial leases, and reductions in individual and corporate tax revenue.

“Our state heavily relies on personal income tax, corporate tax, and sales taxes,” Ma added, noting that as of May, personal income taxes were up $1.4 billion over projections and corporate taxes had risen by $752 million.

Ma invited business leaders to explore the California State Treasurer’s website (www.treasurer.ca.gov) to learn more about state programs that support economic prosperity, including Cal Savers, the Scholarship 529, and CalABLE for disabled workers.

She is currently collaborating with a Blue Ribbon Commission to provide banking services to residents unable to afford traditional banking. Ma emphasized that California’s quality of life remains a competitive advantage over lower-tax states with laws she described as unfriendly to women, minorities, teachers, and doctors. She also noted the high interest from investors in the state.

The Mid-Year Outlook featured a panel discussion with industry leaders on the current and future states of finance. William Wang, MBA, a cash flow expert, encouraged business leaders to consider the opportunity costs against high interest rates, suggesting that a 5% rate change should not significantly impact businesses with a solid capital use strategy. Ursula Garrett, CPA, advised business owners to maintain accurate records to avoid audits and recommended consulting a CPA if contacted by the IRS. Krisante Gunewardena from RE/MAX Diamond Bar noted a recent reduction in lease rates, suggesting it’s an opportune time for office sector investments.

The event was hosted by the Inland Empire Regional Chamber of Commerce at Riverside City Hall’s Grier Pavilion on Thursday, June 6.

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Banking & Financial Services

Rate Changes are Looming: Follow Long-Term Game Plan for Winning Capital Decisions

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By Greg Martinez-Miller

While basketball fans everywhere are following NBA schedules, business owners are tracking the 2024 Fed meeting schedule. But just as true hoops enthusiasts know that game strategy is comprised of more than three-point shots, so should business owners remember that interest rates aren’t the only factor for long-term success. Last December, the Fed said that it expected to cut rates, which are at a 22-year high, three times in 2024. Yet when the central bank met in March, it left rates unchanged, saying it didn’t want to jeopardize lower inflation and healthy economic growth.

So, when the Federal Open Market Committee meets again on April 30-May 1, anticipation will be high. Prognosticators are on every channel, wondering whether the central bank will keep its 5.25-5.5% target rate unchanged again, or if it will announce the first of its three cuts. And if it does, observers ask, how could lower rates impact growth in the U.S. economy? 

As a commercial banker who has watched the interest rate scoreboard over the past 16 years, here’s my advice from the sidelines: Stick to your long-term game plan. Put your company in a position to win the balance-sheet game when it comes to the cost of capital.

Here are my four key strategies from my dogeared playbook to keep your head in the game:

1. See the court

Do not focus on interest rates alone for your capital strategy. You need to be aware of other negotiated factors when funding your company’s financial future. Besides interest rates, other terms — loan maturity, advance rates, and guarantees — can offer important value. Many times, it makes good strategic sense to pivot from the interest rate toward other terms to advance your company’s medium- and long-term game plan.

2. Do not overreact to the officials

The Fed is like an economic referee, making calls to control the economy’s pace. Do not lose your cool when the whistle blows. Three rate reductions are still expected this year, but when the central bank plans to make that call, no one knows – yet.

3. Manage the clock

Think about timing when it comes to borrowing. When rates dip, you might consider making a few key borrowing moves to fund some crucial projects and wait to fund other projects later in the game. Consider the purpose of the debt on your balance sheet. Would your company benefit from having a mix of floating and fixed rates? This may allow you to hedge and still potentially benefit from low floating rates, while also maintaining certainty for longer-term, fixed rates.

4. Stick with your game plan

When rates do change, do not throw out your playbook. Instead, call a time out and consult with your banker or interest rate risk advisor to help ensure your borrowing decisions match your company’s long-term plans and goals for continued growth and success.

If you do not need capital, do not borrow just to lock in a lower rate. Interest rates should not be the driving factor when making borrowing decisions. Borrow when you need to; have a good reason for it.

Remember, interest rate changes will always interrupt the flow of your game. But your goal is to ensure that your financial future is deliberate – not purely defensive, based on the ebb and flow of interest rates.

Greg Martinez-Miller is the commercial banking leader for Wells Fargo in Inland Empire. Based in Ontario, Martinez-Miller leads a team of commercial relationship managers in Riverside and San Bernardino Counties. The views expressed present the opinions of the author on prospective trends and related matters in middle market banking trends as of this date, and do not necessarily reflect the views of Wells Fargo & Co., its affiliates and subsidiaries.

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Banking & Financial Services

2024 Inland Empire Financial Summit: A Milestone in Economic Empowerment

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Uniting Leaders and Innovators for a Thriving Economic Future in Southern California’s Inland Region

The Inland Empire Regional Chamber of Commerce proudly announces the resounding success of the 2024 Financial Industry Update, a landmark event that convened key figures in California’s financial sector. Held on January 18, 2024, at the Ontario International Airport Authority Conference Center, this summit marked a significant moment for economic empowerment and collaboration in the region.

California State Treasurer Fiona Ma, the keynote speaker, expressed her admiration for the region’s financial community: “As State Treasurer, I find constant inspiration in California’s vibrant financial community. The 2024 Financial Industry Update event highlighted not only the dynamic Inland Empire economic landscape but also emphasized the crucial role of collaboration and forward-thinking in our sector. The meaningful discussions and connections formed here reflect our collective dedication to fostering a resilient and prosperous financial future for California. Proud to contribute to this vital conversation, I eagerly anticipate witnessing the positive impacts of our shared efforts unfold statewide.”

Ivo A. Tjan, Chairman, President & CEO of CommerceWest Bank, shared his enthusiasm: “It was an honor to be invited as a guest speaker. The IE has a strong, diversified, and robust business community that is an important economic engine for California. CommerceWest Bank is excited to continue supporting local businesses in the IE and expanding our footprint.”

Hilda Kennedy, President & Founder of AmPac Business Capital, praised the event’s impact: “The Inland Empire Chamber did it again! They brought relevant, high-level content to help businesses plan for success in 2024. State Treasurer Fiona Ma and Ivo Tjan were exceptional! I agree with State Treasurer Ma, the Inland Empire region will save California.”

Christina Scranage, Business Development Manager at Keystone Advanced Solutions, reflected on the event’s value: “Grateful for the insightful conference today! The speakers provided valuable information, making me optimistic about our community’s economic outlook. Huge thanks to everyone involved for such an informative and helpful event!”

The event was highlighted by the participation of industry leaders who provided invaluable insights into the region’s economic landscape. The Financial Industry Update served as a crucial platform for networking, knowledge sharing, and exploring the challenges and opportunities facing the financial sector in the Inland Empire and beyond.

For more information about the event and the Inland Empire Regional Chamber of Commerce, visit www.iechamber.org.

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