The CARES Act
Senate Approved Coronavirus Aid, Relief and Economic Security Act
Below are the key aspects of the Coronavirus Aid, Relief, and Economic Security (CARES) Act, H.R. 748, which was passed on March 27, 2020. This Act builds on the two former pieces of legislation by providing more robust support to both individuals and businesses, including changes to tax policy.
Paycheck Protection Program
Please note that this program is different from the SBA’s Economic Injury Disaster Loan Program. The Paycheck Protection Program includes the forgiveness portion of the bill. Loans taken under the economic injury disaster loan program are offered at low interest for working capital loans of up to $2 million and are not forgiven.
The paycheck protection program provides short-term cash flow assistance to small businesses to help them and their employees deal with the economic impact of the COVID-19 pandemic to make payroll and cover other expenses from February 15 to June 30. Loans are made by FDIC lenders certified by the Small Business Administration (SBA) and guaranteed by the Federal government. We recommend contacting your banking representative to begin gathering the information required.
Eligible businesses include small businesses, nonprofits, veteran’s organizations and tribal business concerns with fewer than 500 employees (full and part-time). Also included are self-employed individuals, independent contractors and gig economy workers. Documentation will be required for self-employed and independent contractors as necessary to establish eligibility, including payroll tax and 1099s, and income and expenses.
Small businesses may take out loans up to $10 million based on a formula tied to payroll costs. The formula is essentially 2 ½ times the monthly payroll costs.
Payroll costs include salaries and wages, severance, vacation, family and sick leave, health and retirement benefits, state employer payroll taxes, compensation to sole proprietor, independent contractor or self-employed individuals. Payroll to employees, independent contractors, sole proprietors and self employed individuals are limited to 100,000 annually, or 8,333 a month.
Payroll costs do not include compensation paid to any employee, sole proprietor or self-employed individual in excess of $100,000, annually, Federal payroll taxes, compensation paid to a non-resident of the US, and sick and family leave covered under the Families First Act.
Allowable uses of the loan include payroll, healthcare, salaries, commissions or similar compensation, interest on mortgage, rent, utilities and interest or other debt.
Loans will be forgiven if they are used for payroll, interest payments on mortgages, rent, and utility payments. Loan forgiveness would be reduced proportionally if there is a reduction in the number of full-time equivalent employees retained compared to the prior year or by the amount any employees salary or wages are reduced by more than 25%. An employer may rehire employees, terminated prior to enactment and be eligible for forgiveness, if they have met the prior year full-time equivalent employees and salary by June 30, 2020. Loan forgiveness is not taxable.
Recovery Rebate for Individual Taxpayers
The bill provides for payments to taxpayers (recovery rebates) which are being treated as advance refunds of a 2020 tax credit. Under this provision, individuals will receive a tax credit of $1,200 ($2,400 for joint filers) plus $500 for each qualifying child. The credit is phased out for taxpayers with adjusted gross income (AGI) above $150,000 (for joint filers), $112,500 (for heads of household) and $75,000 for other individuals.
The credit is not available to nonresident aliens, individuals who can be claimed as a dependent by another taxpayer, and estates and trusts. Taxpayers will reduce the amount of the credit available on their 2020 tax return by the amount of the advance refund payment they receive.
Expanded Unemployment Insurance (UI)
Unemployment insurance provisions now include an additional $600 per week payment to each recipient for up to four months, and extend UI benefits to self-employed workers, independent contractors, and those with limited work history.
The federal government will provide temporary full funding of 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 after state UI benefits end.
Payroll Tax Credit Refunds:
The bill provides for advance refunding of the payroll tax credits enacted last week in the Families First Coronavirus Response Act. The credit for required paid sick leave and the credit for required paid family leave can be refunded in advance using forms and instructions the IRS will provide. Penalties will be waived for failure to deposit taxes if the failure was due to an anticipated payroll tax credit.
Employee Retention Payroll Credit
There will be an employee retention credit for employers who close due to the coronavirus pandemic. Eligible employers are allowed a credit against employment taxes equal to 50% of qualified wages (up to $10,000 in wages) for each employee. For employers with more than 100 employees, wages eligible for the credit are wages that the employer pays employees who are not providing services due to the suspension of the business or a drop in gross receipts. For employers with 100 or fewer employees, all wages paid qualify for the credit.
Eligible employers are employers who were carrying on a trade or business during 2020 and is fully or partially suspended due to orders from an appropriate governmental authority limiting commerce, travel, or group meetings due to the COVID-19 outbreak. Employers that have gross receipts that are less than 50% of their gross receipts for the same quarter in the prior year are also eligible, until their gross receipts exceed 80% of their gross receipts for the same calendar quarter in the prior year.
Retirement Plans
Taxpayers can take up to $100,000 in coronavirus-related distributions from retirement plans without being subject to the 10% additional tax for early distributions. Eligible distributions can be taken up to Dec. 31, 2020. Coronavirus-related distributions may be repaid within three years.
An eligible taxpayer:
- has been diagnosed with COVID-19
- has a spouse or dependent who has been diagnosed with COVID-19
- has experienced adverse financial consequences from being quarantined, furloughed, or laid off
- who has had his or her work hours reduced, or who is unable to work due to lack of childcare
Any resulting income inclusion can be taken over three years. The bill also allows loans of up to $100,000 from qualified plans and repayment can be delayed.
The bill temporarily suspends the required minimum distribution for 2020 and delays the 2020 minimum required contributions for single-employer plans until 2021.
Charitable deductions
The bill would temporarily suspend limits on cash donations and creates an above-the-line charitable deduction for 2020 not to exceed $300. It also modifies the adjusted gross income (AGI) limitations on charitable contributions for 2020 to 100% of AGI for individuals and 25% of taxable income for corporations. It also increases the food contribution limits to 25%.
Delay of Payment for Payroll Tax
The bill delays payment of 50% of 2020 employer payroll taxes until December. 31, 2021. The other 50% will be due December 31, 2022. For self-employment taxes, 50% will not be due until those same dates.
Net Operating Losses
It allows for a temporary repeal of the 80% income limitation for net operating loss deductions for years beginning before 2021. For losses arising in 2018, 2019, and 2020, a five-year carryback is allowed (taxpayers can elect to forgo the carryback).
Excess loss limitation
CARES repeals the excess loss limitation which was added to the tax code by the Tax Cuts and Jobs Act, and it disallows excess business losses of noncorporate taxpayers if the amount of the loss exceeds $250,000 ($500,000 for married taxpayers filing jointly).
Corporate alternative minimum tax (AMT)
The bill modifies the AMT credit for corporations to make it a refundable credit for 2018 tax years.
Interest limitation
For tax years beginning in 2019 and 2020, the adjusted taxable income percentage will increase from 30% to 50%. Taxpayers can also elect to use 2019 income in place of 2020 for the computation.
Qualified Improvement Property
The bill makes technical corrections regarding qualified improvement property by making it 15-year property. The depreciable life is changed from 39 years to 15 years retroactive to the beginning of 2018. Taxpayers will now also be able to take bonus depreciation on qualified improvement property. No guidance yet on whether amended returns will be required.
Health Plans
The bill amends the rules for high-deductible health plans to allow them to cover telehealth and other remote care services without charging a deductible.
If you have any questions or concerns, please contact Deirdre Hartmann at (973) 298-8500.