Key Takeaways of The CARES Act:
From Small Business Relief To Rebate Checks For The Coronavirus Pandemic
On March 25, 2020 the senate unanimously passed The Coronavirus Aid, Relief and Economic Security Act (“CARES Act”) to provide relief for individuals and businesses suffering from the negative economic effects of the coronavirus. We have studied the 880-page Act and provided a summary of the key takeaways. To jump to a particular section, click on the links below:
We encourage you to contact us at your earliest convenience so we can help develop a customized strategy that best meets your needs.
1. Paycheck Protection Loan Program
To curb the negative economic impact the coronavirus has had on small businesses, the CARES Act provides businesses with fewer than 500 employees access to $350 billion in loans which are commonly being referred to as payroll protection loans. The intent of these loans is to assist employers with specific operational costs, most notably payroll, during the covered timeframe of February 15, 2020 to June 30, 2020.
The loans are generally limited to the lesser of:
$10 million or,
2.5 times the average total monthly payroll costs (see below) for one calendar year ending on the date the loan was made. There is an alternative calculation for seasonal businesses
What IS Included in Payroll Costs
What is NOT Included in Payroll Costs
Compensation to employees; Wages, commissions, salaries, or similar compensation to an employee or independent contractor
Group health benefits, including insurance premiums
State and local payroll taxes
Compensation to an employee whose annual salary exceeds $100,000
Certain Federal taxes
Compensation to employees whose principal place of residence is outside of the U.S.
Sick and family leave wages for which a credit is allowed under the Families First Act
These loans will have a maximum maturity of 10 years and an interest rate not to exceed 4% and can also be used for business operational costs such as rent, utilities, and payments of interest on mortgage/debt obligations.
Important Note: recipients receiving loans under this program must also not be receiving duplicative funds from another SBA program.
Either of these can be avoided if the employer rehires or increases the wages of the employee(s) within the applicable time period.
2. Paycheck Protection Loan Forgiveness
Another added benefit of the aforementioned payroll protection loan is the ability to have the loan forgiven tax –free. The amount qualifying for tax forgiveness is equal to the total amount of qualified payments (described above) made by the borrower during the first 8 weeks, beginning on the day the loan was issued. Documentation and a formal request will need to be submitted to the lender to apply for the loan forgiveness and substantiate the costs.
The employer reduced their workforce when compared with other periods
There was a reduction of more than 25% of wages for any employee whose annual earnings were less than $100,000.
There is a subsequent provision in the CARES Act which may reduce the amount eligible to be forgiven if the following actions are taken:
3. Employer Payroll Tax and Self-Employment Tax Deferral
The CARES Act provides for deferral of payment for eligible employers and self-employed individuals with regards to certain payroll taxes:
Please note: This deferral benefit is not available to any business that has a paycheck protection loan forgiven as described above.
An employer can defer their share of the 6.2% social security tax that would otherwise be due from the date of the enactment of the CARES Act through December 31, 2020.
The employer can defer 50% of the amount due until December 31, 2021 and the other 50% until December 31, 2022
A self-employed individual can defer 50% of their 2020 self-employment tax (representing the employer portion) using the same timeframe as described above.
4. Employee Retention Credit
The CARES Act provides for a refundable credit, applicable for only one-year, against the employer’s share of the 6.2% social security tax. In order to be eligible for the credit, one of the following tests must be satisfied. In either test, the employer needs to continue to pay their employees.
Please note: This Employee Retention Credit is not available to any business that has a paycheck protection loan as described above.
Business operations were fully or partially suspended by order of an applicable government authority
The business continued operations but there was a decline in gross receipts by more than 50% compared to the same quarter in the prior year.
Each quarter the business will receive a credit, equal to 50% of the qualified wages paid to each employee for that quarter, against its 6.2% share of social security taxes. The credit is based on qualified wages paid to employees, and provided for the first $10,000 of compensation paid to an eligible employee, including health insurance. The amount of the credit may be limited if a business has more than 100 employees.
5. Qualified Improvement Property
Under the Tax Cuts and Jobs Act, there was a drafting error in the legislation in which Qualified Improvement Property remained as property with a 39-year depreciable life instead of the expected 15-year depreciable life. Qualified Improvement Property is generally defined as any non-structural improvement to an interior portion of a non-residential building.
The distinction between years is important as assets with a depreciable life of 20 years or less qualify for Sec. 168 (100% bonus) depreciation. The CARES Act retroactively changes the Qualified Improvement Property to a 15-year depreciable life effective January 1, 2018. Therefore, taxpayers may need to file an amended tax return for 2018 or 2019 to take advantage of accelerated depreciation.
6. Business Interest Limitation
Under the Tax Cuts and Jobs Act some businesses may have been limited on the amount of business interest they were able to deduct. The amount limited was equal to 30% of adjusted taxable income with any excess business interest expense being carried over. The CARES Act replaces 30% with 50% for the 2019 and 2020 tax years. The CARES Act also allows taxpayers to elect to use their 2019 adjusted taxable income in computing the 2020 business interest limitation. This is important as many businesses may not exceed their adjusted taxable income from 2019 in 2020 due to the effects of the coronavirus on their business.
Under the Tax Cuts and Jobs Act some businesses may have been limited on the amount of business interest they were able to deduct. The amount limited was equal to 30% of adjusted taxable income with any excess business interest expense being carried over. The CARES Act replaces 30% with 50% for the 2019 and 2020 tax years.
The CARES Act also allows taxpayers to elect to use their 2019 adjusted taxable income in computing the 2020 business interest limitation. This is important as many businesses may not exceed their adjusted taxable income from 2019 in 2020 due to the effects of the coronavirus on their business.
7. Net Operating Losses
The Tax Cuts and Jobs Act significantly overhauled the application of net operating losses (NOLs) for businesses and individuals which limited NOLs to 80 percent of current year taxable income and, in most cases, did not allow NOLs to be carried back to prior tax years. The CARES Act temporarily applies the net operating loss rules that were in place prior to the passing of the 2017 Tax Cuts and Jobs Act.
Net operating losses arising in 2018, 2019, and 2020 may be carried back up to five years
Net operating losses carried to 2019 and 2020 can offset 100% of taxable income as opposed to the 80% limitation that was put in place under The Tax Cuts and Jobs Act.
8. Net Business Losses
The Tax Cuts and Jobs Act added a limitation on the amount of net business losses that a taxpayer can deduct in a tax year. The CARES Act has suspended that limitation and made the suspension retroactive to January 1, 2018. Therefore, a taxpayer who had a net business loss limited by the provision of IRC 461(I) can file an amended tax return for the impacted tax year(s).
9. Charitable Contributions
The CARES Act offers an “above-the-line” deduction for charitable contributions up to a maximum of $300. Therefore, taxpayers do not need to itemize their deductions to qualify. The charitable contribution needs to be paid in cash and paid to certain qualifying charitable organizations.
Taxpayers who itemized their deductions already receive a benefit for their charitable contributions but the CARES Act also increases the adjusted gross income (AGI) limitation applicable to certain charitable contributions. Previously, a taxpayer’s charitable contributions were generally limited to 60% of their AGI. For 2020 only, this limitation has increased to 100% of their AGI.
10. Retirement Plans
Typically, if a taxpayer receives a distribution from a qualified retirement plan before age 59 ½, there is a 10% penalty imposed. There are several exceptions under which the 10% penalty can be nullified and the CARES Act added one more. A taxpayer may take up to a $100,000 distribution in 2020 without incurring the 10% penalty if the distribution is coronavirus-related. The criteria for deeming a distribution to be related to the coronavirus is:
A taxpayer, spouse or dependent was diagnosed with SARS-COV-2 or COVID-19 by a test approved by the CDC
A taxpayer experienced adverse financial consequences as a result of being quarantined, furloughed, laid off, reduced working hours, or being unable to work due to lack of child care
If the distribution meets any of the above qualifications it is not subject to the 10% penalty but would still be subject to income tax consequences. However, the CARES Act allows a taxpayer to spread the taxable distribution over a three-year period beginning in 2020 and also provides the ability to avoid income tax consequences if the distribution is repaid to the retirement plan within three years of receipt.
In addition, the CARES Act waives the requirement to take a required minimum distribution (RMD) for the 2020 year only.
11. Stimulus Payment
The most talked about provision of the CARES Act is the individual stimulus payment plan. To provide immediate cash assistance to Americans and their families, the Act would provide stimulus payments to many U.S. taxpayers.
$1,200 if single or $2,400 if married filing jointly
Increased by $500 for each child under the age of 17
Important Note: AGI is determined based on your 2019 tax return but if you haven’t filed your 2019 tax return yet then AGI is determined based on your 2018 tax return.
The stimulus payment begins to phase out once your adjusted gross income (AGI) exceeds:
Single: $75,000 and is completely phased out once AGI exceeds $99,000
Married Filing Jointly: $150,000 and is completely phased out once AGI exceeds $198,000
These are only some of the key takeaways from The CARES Act. We expect administrative guidance in the days and weeks to come and are watching developments closely. As more details become available, we will be sure to provide you with the latest updates.