Coronavirus relief grants for businesses carry a sting – opinion
Ypur Taxes: All in all, several stings in the tail.
By LEON HARRISCalculating taxes(photo credit: INGIMAGE)
On Friday, April 24, the Israeli government announced another series of economic measures regarding the coronavirus economic crisis, which are summarized below. They include long awaited grants for company owners, among others.Municipal taxes:New regulations and government funding reportedly enable municipalities to grant businesses a three month exemption from municipal tax (arnona) or a 25% annual reduction.Freelancers and company owners:Freelancers (self-employed) may soon receive a second round of government grants, joined this time by major shareholders (holding 10% or more) of private Israeli resident companies with five or fewer shareholders. There are two types of grant: 1) sales decrease grants, and 2) overhead expense participation grants.Sales decrease grants:These are available if sales of the freelance business or company in the period March-June 2020 decreased by over 25% compared with the same period in 2019. If business only began in 2019, four times the monthly average up to the end of February 2020 is used as the base.The grant for freelancers should be 70% of average monthly income in 2018 (2019 for a new business) but no more than NIS 10,500. If monthly income averaged more than NIS 40,000, the grant is reduced by 17.3% of the excess. For major shareholders of more than one company, income from all of them is aggregated.Main conditions:- In business as a freelancer a salaried worker-shareholder throughout the six months ended March 31, 2020- Age at least 20 in 2019- Israeli resident freelancer or Israeli resident company- Maximum income in 2018 NIS 1 million- Minimum monthly average income in 2018 NIS 714- Kept proper books- Filed a 2018 tax return (or 2019 tax return if started in 2019 or made losses in 2018)- Filed VAT returns or “exempt dealer” return for smaller freelancers- If a company major shareholder, national insurance reporting reflected this- Major shareholders must still hold 10% or more when filing the grant claim- The grants are liable to income tax, not national insurance or VATOVERHEAD EXPENSE participation grants:These grants are available to freelancers as well as companies and partnerships which suffered a sales/revenue decrease over 25% in March-April (not March-June) 2020 compared with the same period in 2019.Limits apply as follows:- Maximum sales in 2019: NIS 20 million for all businesses- Minimum sales in 2019: NIS 300,000 freelancers and NIS 18,000 for companies- Maximum overhead participation grant: NIS 400,000For companies with 2019 sales in the NIS 18,000-300,000 range, these additional grants are:- NIS 700 if 2019 sales were up to NIS 100,000- NIS 1,875 if 2019 sales were NIS 100,001-200,000- NIS 3,025 if 2019 sales were NIS 200,001-300,000For freelancers companies and partnerships with 2019 sales over NIS 300,000, grants are calculated using a complex set of formulas:- Sales in March-April 2019- TIMES a sales decline factor – from 10% to 50%.- TIMES an overhead expense participation factor – maximum 30%.- The sales decrease factor ranges from 10% (sales decrease 25.1%-40%) to 50% (sales decrease over 80%)- The overhead expense participation factor is 30% if 2019 sales were no more than NIS 1.5 million. Above that level, it cannot be more than 30% or less than zero.First, the overhead expense factor is calculated as:- 90% of 2019 overhead expenses divided by 2019 sales, plus annualized savings from employees laid off or dismissed in the period March-April 2020.The result is a percentage of sales.However, the “overhead expense participation factor” is the inverse of the “overhead expense factor.” The government has found a way of reducing the grant and making it your fault.Suppose your overheads were 80% of sales in 2019; only the inverse of 20% is recognized for grant purposes because you are assumed to be inefficient in controlling costs and/or you let employees go in 2020.But if your overheads were only 20% of sales in 2019; the inverse is 80% but this is unfortunately limited to 30% for grant purposes.All in all, several stings in the tail.Claim procedure:Claims for sales decrease grants and overhead participation grants must be filed online within 70 days from May 3, 2020, i.e. by July 12, 2020.Comment:For many businesses, these grants may turn out to be modestly helpful in these difficult times. However, there are reports that the Israeli government is considering requests for back-to-work job subsidies for laid-off employees who are taken back on by their employer.As always, consult experienced tax advisers in each country at an early stage in specific cases. The writer is a certified public accountant and tax specialist at Harris Horoviz Consulting & Tax Ltd. leon@h2cat.com
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