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A Summary of the CARES Act

A Summary of the Coronavirus Aid, Relief, and Economic Security (CARES) Act

UPDATED APRIL 9th

On Friday, March 27th, the President signed into law the CARES Act, an historic $2.2 trillion aid package designed to help the US economy weather the effects of the coronavirus/COViD-19 pandemic. The Act contains several measures to provide liquidity and tax relief for individuals, small businesses, big businesses and non-profits.  We’ve summarized important parts of the CARES Act below, segregating the summary by support for businesses and that for individuals. This information is changing rapidly and, as of this writing, is accurate. We will update information as it becomes available. This information is changing rapidly and, as of this writing, is accurate. We will update information as it becomes available.

SUPPORT FOR BUSINESSES

Paycheck Protection Loans:  For businesses with fewer than 500 employees, including sole proprietors and nonprofits, the CARES Act provides almost $350 billion in Small Business Act (SBA) loans from February 15, 2020 through June 30, 2020 (the “covered period”).  These loans are referred to as Paycheck Protection Loans (PPL) and are designed to keep people employed. The loans are fully guaranteed by the federal government through December 31, 2020.  Federal guarantees are 85% for loans greater than $150,000 after December 31, 2020.  The loans can be forgiven in certain circumstances.

The amount of the PPL is limited to the lesser of:

  • The sum of the average monthly “payroll costs” for the one-year period ending on the date the loan was made, multiplied by 2.5, plus any SBA disaster loan funded after January 31, 2020 and before April 3, 2020, or
  • $10 million.

“Payroll costs” include:

  • Wages, commissions, salaries, or similar compensation to an employee,
  • For an independent contractor or sole proprietor, wage, commissions, income, or net earnings from self-employment or similar compensation.
  • Cash tips,
  • PTO, including vacation, parental, family, medical or sick leave,
  • Dismissal and/or separation pay,
  • Group healthcare benefits, including insurance premiums,
  • Retirement benefits, and
  • State or local taxes assessed on the compensation of employees.

“Payroll costs” exclude:

  • Annual compensation for an employee greater than $100,000,
  • Payroll taxes,
  • Payments to an employee whose principal place of residence is outside the U.S., and
  • Sick leave or family medical leave under the Coronavirus Relief Act where the employer receives a credit.

The CARES Act also has a provision allowing tax-free forgiveness of Paycheck Protection Loans if the funds are used for payroll costs, rent, mortgage interest, and/or utility payments made by the borrower during the eight weeks after the date of the loan. In order to seek loan forgiveness at least 75% of the loan proceeds must be used for payroll costs.  More detailed guidance on loan forgiveness will be issued by the SBA later but generally a borrower must submit to the lender an application that includes documentation verifying the number of employees and pay rates, and cancelled checks showing mortgage, rent, or utility payments. Forgiveness amounts will be reduced for any employee cuts or reductions in wages.  The loan amount forgiven is not included in the business’s taxable income.

For principal amounts that remain after any loan forgiveness the borrower may defer payments of the remaining principal, interest, and any fee balances for at least 6 months and not more than a year. All borrowers may apply for deferment and lenders must allow for such deferment for at least 6 months. So, businesses can get a substantial portion of their qualified expenses during the first 8 weeks forgiven and defer payments on the remaining balance for at least 6 months.

As noted above, Economic Injury Disaster Loans obtained after January 31, 2020 may be refinanced with proceeds of a PPL.  In such cases the maximum available PPP loan amount is increased by the amount of disaster loans being refinanced.  The refinanced loan proceeds become subject to all the conditions and limitations of the Paycheck Protection Program explained above.

After the 6-month payment deferral period, the remaining balance will be repaid over 2 years at an annual interest rate of 1%.

Expansion of SBA Disaster Loan Program:

In addition to the Paycheck Protection Loans described above, the CARES Act expands the SBA’s Disaster Loan Program. These loans are available between January 31, 2020-December 31, 2020. In addition to current eligible small business entities, the following may receive SBA disaster loans:

  • A business with 500 or fewer employees,
  • Sole proprietorships, with or without employees, and independent contractors,
  • Cooperatives with 500 or fewer employees,
  • ESOPs with 500 or fewer employees, and
  • Tribal small business concerns.

The CARES Act makes the following additional changes to the SBA Disaster Loan so that qualifying for these loans is made easier and available to more businesses:

  • Waives personal guarantees on loans of up to $200,000,
  • Waives the one year in business rule,
  • Loosens credit requirements, and
  • Allows for a onetime advance of not more than $10,000 to pay certain business expenses, including payroll, that does not have to be re-paid even if the loan is denied later.

Subsidy for Certain Loan Payments: The CARES Act also provides benefits to those with current SBA loans other than the new Paycheck Protection Loans.  The federal government will pay six months of principal, interest and fees on qualifying loans.

Employee Retention Credit:  The CARES Act includes a one-year credit against an employer’s 6.2% share of Social Security payroll taxes for any employer who is forced to suspend or close operations due to COVID-19, as long as the employer continues to pay employees during the shut-down.

Businesses qualify for this credit as follows:

  • For all employers, if the operation of the business was fully or partially suspended by order of an appropriate government authority resulting from COVID-19 during any calendar quarter of 2020, or
  • For employers with less than 100 employees, if the business remained open but gross receipts for any quarter in 2020 were less than 50% of gross receipts for the same quarter in 2019. The business will then be allowed a payroll tax credit for each quarter, until the business has a quarter where its gross receipts are 80% of what they were for the same quarter in the previous year. So, more relief for employers with less than 100 employees.

For each eligible quarter the business will receive a credit against its 6.2% share of Social Security payroll taxes equal to 50% of the “qualified wages” paid to employees for that quarter.  Qualified wages include group health plan expenses. The amount of qualified wages for each employee may not exceed $10,000 in total.  The credit is refundable if it exceeds the employer’s payroll tax liability.

Limitations on taking the Employee Retention Credit include the following:

  • Any wages used to calculate the new payroll tax credit for the expanded Family Medical Leave Act or the Emergency Paid Sick Leave Act which were part of the recently enacted Families First Coronavirus Relief Act may not be taken into account in for the employee retention credit.
  • If an employer takes out a Payroll Protection Loan as described above the employee retention credit will not be available to that employer.

Deferred Payment of Employer Payroll Tax and Self-Employment Tax: The CARES Act allows the employer’s share of the 6.2% Social Security tax that would otherwise be due from the date the Act passes to December 31, 2020, to be paid half (50%) on December 31, 2021, with the other half (50%) due on December 31, 2022.  The same rule applies to a self-employed individual with respect to half (50%) of their self-employment tax.

This payroll tax deferral is not available to an employer who receives a payroll protection loan that is ultimately forgiven as previously described.

Changes to the Interest Expense Deduction Limitation Rules:  The TCJA limited a business’ interest expense deduction to 30% of “adjusted taxable income,” and allowed any excess to be carried forward to subsequent tax years.  The CARES Act would increase that limit to 50% of adjusted taxable income for 2019 and 2020.   To help “even out business income in 2019 with probable business losses in 2020, businesses can use 2019 income to calculate their 2020 interest expense deduction, thereby generating an NOL and taking advantage of the less restrictive NOL rules under the CARES Act.

A partnership may not use the 50% limit of ATI for 2019. For partnerships, any interest disallowed at the partnership level is passed through to its partners.  The disallowed interest is “suspended” at the partner level under current rules. In 2020, 50% of the suspended interest will be deductible by the partner.  The remaining 50% will remain suspended until the partnership allocates to the partner excess taxable income, excess interest income, or until the partnership is no longer subject to Section 163(j).

Qualified Improvement Property:  The CARES Act makes technical corrections to the TCJA with respect to qualified improvement property making it 15-year property instead of 39-year property, which also makes it available for 100% bonus depreciation.  This change is retroactive to January 1, 2018.

 

SUPPORT FOR INDIVIDUALS

Recovery Rebates: Individual stimulus payments, called “recovery rebates,” are designed to infuse nearly $507 billion into the economy.  These payments provide immediate cash for families and individuals.  Essentially, they are advance payments on a 2020 tax credit.  Individuals will receive a payment of $1,200 ($2,400 for couples) plus $500 per child.  Payments are phased out at the rate of $5 per $100 of adjusted gross income (AGI) in excess of $150,000 for taxpayers filing jointly, $112,500 for individual taxpayers filing as head of household, and $75,000 for singles.

The IRS will calculate recovery rebates based on AGI on the 2019 tax return or the 2018 return if a 2019 return has not yet been filed.  For taxpayers who haven’t reached the income threshold to file a return, the IRS will calculate the recovery rebate based on their Social Security Benefit Statement.

As mentioned, this payment is an advance payment of a 2020 tax credit, so you’ll have to recompute the amount of the recovery rebate on your 2020 return.  If your recovery rebate received in 2020 based on your 2018 or 2019 tax return was less than what you’re entitled to based on your 2020 tax return, you’ll get a credit on your 2020 return to “true things up.”  There is no provision in the CARES Act for a repayment recovery rebate.  We’ll see how things progress as the CARES Act moves through the House of Representatives.

Unemployment Insurance:   The CARES Act includes a $600 per week unemployment benefit payment per recipient for up to four months.  This is in addition to any State unemployment benefits ($450/week in CA).  The Act also extends Unemployment Insurance (UI) benefits to self-employed workers, independent contractors, and those with limited work history. The federal government will fund the first week of regular unemployment for states with no waiting period and extend UI benefits for an additional 13 weeks, through December 31, 2020.

Early Distribution from Retirement Plans: Taxpayers under the age of 59 1/2 can take up to $100,000 in “coronavirus related distributions” from their retirement plans on or before December 31, 2020, without being subject to the standard 10% penalty for early distributions. Taxpayers will be required to pay income taxes on the distribution but can spread the income over three years or repay the amount over three years.

Coronavirus related distributions are defined as “distributions to an individual who is diagnosed with, or has a spouse or dependent who is diagnosed with, SRS-COV-2 or COVID-19 by a test approved by the CDC, and that individual has experienced adverse financial consequences as a result of being quarantined, furloughed or laid off or having work hours reduced, or being unable to work due to lack of child care.”

The CARES Act also increases the loan amounts from qualified plans to $100,000, provides for delayed repayment, and waives the required minimum distribution rules for IRAs, 401(k)s and certain other retirement plans.

Charitable Deductions: The CARES Act creates an “above-the-line” (i.e. used to compute AGI) charitable deduction not to exceed $300 for individuals who use the standard deduction and do not itemize deductions.  For taxpayers who do itemize deductions, the CARES Act modifies the AGI limitations on charitable contributions for 2020, to 100% of AGI for individuals and 25% of taxable income for corporations.

Net Operating Losses: The Tax Cuts and Jobs Act of 2017 (TCJA) eliminated the ability for taxpayers to carry back net operating losses (NOLs) and limited carry forwards to 80% of taxable income.   The CARES Act allows 2018, 2019, and 2020 NOLs to be carried back up to 5 years.  Alternatively, taxpayers may carry the NOLs forward to 2019 and 2020 without the 80% income limitation.

Removal of Net Business Loss Limitation:  The TCJA placed limitations on an individual’s ability to use losses from a business (“net business loss”) to offset other sources of income.  Net business losses are capped at $500,000 for joint filers and $250,000 for single filers, with any loss above those thresholds converted into an NOL.  The CARES Act temporarily lifts this limitation for 2020 and retroactively to January 1, 2018. Therefore, taxpayers whose net business losses were limited in 2018 or 2019 can file an amended return to claim a refund.

The CARES Act is the largest stimulus package in U.S. History, and we will be working closely with clients to determine how best to apply the aspects of the Bill to mitigate losses, manage issues, and uncover opportunities. For more information, or to schedule a phone/Skype/Zoom meeting to begin planning, contact us at (408) 287-7911.