The Coronavirus Aid, Relief, and Economic Security (CARES) Act was passed by Congress on March 27, 2020, and the President is expected to sign it into law immediately. The CARES Act is the most expensive piece of Legislation passed to date with a total of 2.2 trillion dollar price tag.
The CARES Act provides tax and cash-flow relief for individuals and businesses alike. Below are some major points from the Act.
Paycheck Protection Program (PPP) (SBA 7(a) forgivable loans)
- Helps small businesses, 501(c)(3)’s, 501(c)(19)’s, and 31(b)(2)(c).
- Limited to businesses with 500 employees or less.
- Includes independent contractors, sole proprietors and the self-employed.
- Entities must have been operational by 2/15/20, had payroll, and paid taxes.
- Covered loan period is 2/25/20 through 6/30/20.
- Maximum loan amount via 7(a) set to $10 million through 12/31/20.
- Eligible expenses include payroll, insurance, rent, mortgage and utilities.
- Amount spent by borrower in the first 8 weeks from loan origination may be forgiven; amount reduced proportionate to reductions in workforce as compared to previous year; if rehires made during 8-week period, no penalty in reflection of possible layoffs early in the 8 week period.
- Borrower cannot apply/carry both PPP and Economic Injury Disaster Loan (EIDL) for
- COVID-19, but can carry previous, non-COVID-19 EIDL and participate in PPP.
- Borrow must good-faith certify that funds are needed for COVID-19 related purposes, the funds will be used to retain workers, and that their request is not duplicative with other SBA funds for the same purpose.
- Waives borrower and lender fees.
- Waives credit elsewhere requirements.
- Waives collateral and personal guarantees.
- Sets maximum interest rate of 4%.
- No prepayment fees.
- Delegates authority to all existing 7(a) lenders to expedite approvals/distributions
- Anything not forgiven or repaid by 12/31/20 will convert to a max 10 year loan at a max 4% interest rate.
Deferral of Payroll Taxes
The Act would defer employer payroll, railroad retirement, and self-employed Social Security tax payments through the end of 2020. Deferred funds would be paid over two years in 2021 and 2022. Deferral wouldn’t apply to employers with 7(a) small business loan debt forgiven under the bill.
Retirement Plans
- Individuals could withdraw as much as $100,000 from their retirement accounts through the end of 2020. Funds would be treated as a tax-exempt rollover contribution if repaid in the next three years. If funds are not repaid, they will be taxed as income over three years.
- Individuals would be eligible to make withdrawals if they or their spouse are diagnosed with Covid-19, or if the pandemic hurts their finances, such as through layoffs or reduced hours (is it necessary to repay for tax purposes?).
- Eligible individuals may receive loans for the lesser of $100,000 or the present value of their vested benefits in their employer retirement accounts in the 180 days after the bill’s enactment. The limit is currently $50,000 or half the account’s value.
- Plans would have to be modified to allow some of these provisions.
- Individuals affected by the coronavirus with retirement plan loans due by Dec. 31, 2020, have an extra year to repay.
Charitable Contributions
- The Act would create a permanent $300 above-the-line individual charitable contribution allowance, beginning in 2020, for individuals who don’t itemize their returns.
- The Act would also would suspend for 2020 the limit on the individual charitable deduction, which is available to filers who itemize. The deduction is limited to 60% of individual taxpayers’ adjusted gross incomes through 2025.
- The corporate charitable deduction limit would be increased in 2020 to 25% of taxable income, from 10%. A deduction for food inventory contributions would be increased to 25%, from 15%.
Business Provisions
- The Act would allow business losses from tax years after Dec. 31, 2017, and before Jan. 1, 2020, to be carried back five years. Net operating loss carrybacks were previously eliminated for most businesses by the 2017 tax overhaul.
- The Act would allow the full amount of net operating loss carryovers and carrybacks to be used for tax years beginning before Jan. 1, 2021. The deduction was limited to 80% of taxable income under the 2017 tax overhaul. A separate deduction limit would be established for tax years beginning after Dec. 31, 2020.
- The Act would modify the effective date of changes to the net operating loss deduction included in the 2017 tax overhaul.
- The measure would also modify net operating loss deduction limits for pass-through businesses and sole proprietorship as well as small business loss limitations.
- The measure would modify the interest limitation provision of 163(j) modifying the income threshold from 30% to 50%. For 2019 & 2020.
- Certain technical corrections are made to the TCJA including a correction of the rules related to qualified improvement property.
- The bill provides for an exclusion of up to $5,250 from income for payments of an employee’s education loans. In order for the exclusion to apply, the loan must have been incurred by the employee for the education of the employee. The payment can be made to the employee or directly to the lender. The exclusion only applies for payments made by an employer after the date of enactment and before January 1, 2021.
Recovery Rebates
- The Act would provide rebates of as much as $1,200 per individual or $2,400 for couples who file joint tax returns. An additional $500 would be provided for each child.
- Taxpayers are eligible if they had qualifying income on their 2018 tax returns – including earned income and certain retirement benefits – of at least $2,500, or net income tax liability greater than zero and gross income greater than the basic standard deduction.
- The credit will be reduced by $5 for each $100 that a taxpayer’s income exceeds $75,000, or $150,000 for joint filers. It would completely phase out for individual incomes greater than $99,000 or joint incomes greater than $198,000.
Employee Retention Benefit
- 50% refundable payroll tax credit during COVID-19 crisis for businesses that either fully or partially shut down OR have a 50% decrease in receipts versus the same quarter in the previous year and continue to pay employees.
- Based on qualified wages paid to employees during crisis, tied to number of employees (100+ full time employees = wages paid when they are not providing services due to COVID-19 and less than 100 full time employees = wages paid regardless of business closure status).
- Covers up to $10,000 paid per employee, including benefits, for the period 3/13/20-12/31/20.
Student Loans Paid by Employers
The bill provides for an exclusion of up to $5,250 from income for payments of an employee’s education loans. In order for the exclusion to apply, the loan must have been incurred by the employee for the education of the employee. The payment can be made to the employee or directly to the lender. The exclusion only applies for payments made by an employer after the date of enactment and before January 1, 2021.
Unemployment Insurance
- Provides an additional $600 per week in recipients of Unemployment Insurance (UI) for up to 4 months.
- Federal government will cover 100% of the cost of the first week of UI if states waive the 1 week waiting period to begin benefits.
