On March 27th, 2020, the House passed an amended version of the Senate’s Coronavirus Aid, Relief, and Economic Security (CARES) Act sending to the President to sign into law.
The Act provides an infusion of cash into the economy aimed at helping individuals and businesses. Below is a brief summary of the Act explaining all the key details for individuals and businesses including the various loan programs.
Direct financial help to individuals:
- Rebates of up to $1,200 for individuals and $2,400 for married couples. People with children can receive $500 per child. Amounts start to phase out for individuals with more than $75,000 adjusted gross income (AGI) and $150,000 for joint filers based on the taxpayer’s 2019 tax returns or 2018 if 2019 not yet filed. The amount is completely phased-out for single taxpayers with AGI exceeding $99,000 and $198,000 for joint filers.
- Waive the 10% early withdrawal penalty for distributions up to $100,000 from qualified retirement accounts for Coronavirus-related purposes. In addition, income attributable to such distributions would be subject to tax over three years, and the taxpayer may recontribute the funds to an eligible retirement plan within three years without regard to that year’s cap on contributions. Further, the provision provides flexibility for loans from certain retirement plans for Coronavirus-related relief.
- Waive the required minimum distribution rules for certain defined contribution plans and individual retirement accounts in calendar year 2020.
- Encourages Americans to contribute to churches and charitable organizations in 2020 by permitting them to deduct up to $300 of cash contributions, whether they itemize their deductions or not.
- Increases the limitations on deductions for charitable contributions by individuals who itemize, as well as corporations. For individuals, the 50-percent of adjusted gross income limitation is suspended for 2020. For corporations, the 10-percent limitation is increased to 25 percent of taxable income.
- Permit employers in 2020 to provide a student loan repayment benefit to employees on a tax-free basis. An employer may contribute up to $5,250 annually toward an employee’s student loans and the payment would be excluded from the employee’s income. The $5,250 cap applies to both the new student loan repayment benefit as well as other educational assistance (for example, tuition, fees, books) provided by the employer under current law.
- Separately with the IRS announced postponement of April 15, 2020 tax payments now being owed July 15, 2020 individual 2019 IRA contribution deadlines are now extended until July 15, 2020 as well.
- Refundable employee retention credit to encourage employers to maintain headcounts computed on a calendar-quarter basis against the 6.2% employer-side social security payroll tax applicable to employers carrying on a trade or business in 2020 which either fully or partially suspend operations due to a government order or which sustain a significant decline in gross receipts (defined as the first calendar quarter after December 31, 2019, for which gross receipts are less than 50% of the amount in the corresponding prior-year quarter and ending with the next quarter in which gross receipts exceed 80% of the corresponding prior year quarter). The refundable credit is only applicable for wages paid after March 12, 2020, and before January 1, 2021 up to $10,000 in qualifying wages per employee. The credit is available to certain tax-exempt organizations as well. If an employer takes out a payroll protection loan under Section 7(a) of the Small Business Act (detailed below) no employee retention credit will be available.
- Allows employers and self-employed individuals to defer payment of the employer share of the 6.2% Social Security tax on employee wages to be paid over the following two years, with half of the amount required to be paid by December 31, 2021 and the other half by December 31, 2022.
- Allows net operating losses incurred in 2018, 2019 or 2020 to be carried back five years without limitation.
- Excess business loss rules that originally suspended non-corporate taxpayer losses to $250,000 ($500,000 in the case of joint filers) has been suspended through December 31, 2020.
- Temporarily increases the amount of interest expense businesses are allowed to deduct on their returns, by increasing the 30-percent limitation to 50-percent of taxable income for 2019 and 2020 and allow businesses to use their adjusted taxable income from 2019 in tax year 2020 for the taxable income limitation.
- Qualified improvement property (facility improvements) tax life will be corrected to 15-year and be eligible for 100% bonus depreciation retroactively starting 9/28/17 allowing for amended returns.
Relief for small businesses:
- Extends the qualifications for borrowers and the size of loans that are available through the U.S. Small Business Administration (SBA):
- During the covered period from February 15, 2020 through June 30, 2020 payroll protection loans fully guaranteed by the federal government through December 31, 2020 [SBA 7(a) loans] are available to any business, private nonprofit, or public nonprofit organization with under 500 employees. Borrowers can receive loans equal to 2.5 times their monthly payroll (up to $100,000 per U.S. employee excluding payroll taxes), mortgage, rent, and debt payment expense, up to $10 million. Borrowers can use these loans for a broad range of business expenses including payroll, paid sick leave, mortgage, rent, utilities, and payments on existing debts. No collateral or personal guarantee is required for a loan and the standard fee is waived. The loans will have a maximum maturity of 10 years and an interest rate not to exceed four percent. An additional provision in the CARES Act provides for possible deferment of repayment of the loans for a period of at least six months, but not to exceed a year.
- The requirements to obtain a loan are as follows:
- The loan is needed to continue operations during the COVID-19 emergency.
- Funds will be used to retain workers and maintain payroll or make mortgage, lease, and utility payments.
- There is a special eligibility rule for businesses in the hospitality and dining industries that have more than one physical location, employ 500 or fewer employees per location and are assigned to the accommodation and food services sector 72 under the North American Industry Classification System.
- Business that were operating on February 15, 2020 and that have a pending or approved loan application under this program are presumed to qualify for complete payment deferment relief (for principal, interest, and fees) for six months to one year. Lenders are required to provide such relief during the covered period (if secondary market investors decline to approve a lender’s deferral request, the Administration must purchase the loan).
- Indebtedness is forgiven (and excluded from gross income) in an amount (not to exceed the principal amount of the loan) equal to the following costs incurred and payments made during the eight week period beginning on the date of the loan:
- Payroll costs (up to $100,000 per U.S. employee excluding payroll taxes)
- Interest payments on mortgages
- Utility payments
- Forgiveness amounts will be reduced for any employee cuts or reductions in wages below the average number of full-time equivalent employees as of February 15, 2019 to June 30, 2019 or January 1, 2020 until February 29, 2020 (at election of borrower) calculated on a monthly basis.
- There is relief from these forgiveness reduction penalties for employers who rehire employees or make up for wage reductions by June 30, 2020 and will not apply to an employer between February 15, 2020 and 30 days following enactment of the CARES Act.
- Expands the SBA’s Disaster Loan Program through 2020 for businesses with 500 or fewer employees as follows:
- Waives rules related to personal guarantees on advances and loans of $200,000 or less for all applicants;
- Waives the requirement that an applicant be unable to find credit elsewhere
- Allows lenders to approve applicants based solely on credit scores
- Applicants can request an emergency advance from the Administrator of up to $10,000, which does not have to be repaid, even if the loan application is later denied.
- Advances may be used for purposes already authorized under the SBA Disaster Loan Program including:
- Providing sick leave to employees unable to work due to direct effect of COVID-19
- Maintaining payroll during business disruptions during slow-downs
- Meeting increased supply chain costs
- Making rent or mortgage payments
- Repaying debts that cannot be paid due to lost revenue
- The CARES Act also provides benefits to those with loans under Section 7(a) of the Small Business Act OTHER THAN the new paycheck protection loans, in the form of a government subsidy whereby the SBA will pay six months of principal, interest and fees on qualifying loans.