Coronavirus Aid, Relief, and Economic Security Act
We hope you are all staying safe during this time. Rest assured that Rosanna and I are here for you to help in any way that we can.
The $2.2 trillion “CARES” Act passed on Friday. The CARES Act is designed to provide loans and loan forgiveness, tax incentives, credits and deductions to Americans and American businesses.
Below are the highlights of the CARES Act. The list is not all inclusive, just a quick read. Further detailed analysis will come in the near future, but we wanted to outline the major points of the Act for your reference and take this opportunity to begin some planning conversations.
1. Expanded Unemployment Insurance
The bill includes a $600 per week increase in benefits for up to four months. Unemployment Insurance has also been expanded to cover those individuals not usually eligible for UI, such as the self-employed, independent contractors, and those with limited work history. The federal government is incentivizing states to repeal any “waiting week” provisions that prevent unemployed workers from getting benefits as soon as they are laid off by fully funding the first week of UI for states that suspend such waiting periods. Additionally, the federal government will fund an additional 13 weeks of unemployment benefits through December 31, 2020 after workers have run out of state unemployment benefits.
2. Retirement Account Distributions:
The bill waves the 10 percent early withdrawal penalty on retirement account distributions for taxpayers facing virus-related challenges. Withdrawn amounts are taxable over three years, but taxpayers can recontribute the withdrawn funds into their retirement accounts for three years without affecting retirement account caps. Eligible retirement accounts include individual retirement accounts (IRAs), 401Ks and other qualified trusts, certain deferred compensation plans, and qualified annuities.
The bill also waives all required minimum distributions for 2020, regardless of whether the taxpayer has been impacted by the pandemic.
3. Recovery Rebates:
Equal to $1,200 for individuals, or $2,400 for joint filers, with a $500 credit for each child. The amount of each rebate is phased out by $5 for every $100 in excess of a threshold amount. This threshold amount is based upon 2018 adjusted gross income (unless a 2019 return has already been filed), and the phaseout begins at $75,000 for single filers, $112,500 for heads of households, and $150,000 for joint filers. Thus, the rebates are completely phased out for single filers with 2018 (or 2019, if applicable) adjusted gross income over $99,000, heads of household with $136,500, and joint filers with $198,000.
4. Above-the-line Charitable Contribution:
The bill creates a $300 partial above-the-line charitable contribution for filers taking the standard deduction and expands the limit on charitable contributions for filers who do itemize.
5. Student Loan Relief:
For 2020, employers may contribute up to $5,250 toward an employee’s student loan and the payment will not be taxable to the employee. The cap ($5,250) applies to this new student-loan repayment benefit as well as other educational assistance.
1. Payroll Tax Deferral:
In order to free up employers’ cash flow and retain employees during times of quarantine or shutdown, the CARES Act defers the payment of payroll taxes. Payroll taxes due from the period beginning on the date the CARES Act is signed into law and ending on December 31, 2020, are deferred. The entirety of payroll taxes incurred by employers, and 50 percent of payroll taxes incurred by self-employed persons qualify for the deferral. Half of the deferred payroll taxes are due on December 31, 2021, with the remainder due on December 31, 2022.
2. Net operating losses:
The bill allows for a five-year carryback of net operating losses (NOLs) arising in 2018, 2019, or 2020 by a business. Businesses will be able to amend or modify tax returns for tax years dating back to 2013 in order to take advantage of the carryback. Under current law, only farming NOLs are allowed to be carried back, and the carryback is limited to two years.
3. Employee Retention Credit:
A credit against employment taxes equal to 50 percent of qualified wages paid to employees who are not working due to the employer’s full or partial cessation of business or a significant decline in gross receipts. the credit can be claimed is limited to $10,000 in aggregate per employee for all quarters.
4. Qualified Improvement Property:
Due to a technical error in the drafting of the Tax Cuts and Jobs Act, which was effective on January 1, 2018, certain qualified improvement property was excluded from the opportunity to utilize bonus depreciation. Bonus depreciation provides first year depreciation expense of 100%. Section 2306 of the new Bill allows for qualified improvement property to utilize the bonus depreciation 100% deduction, instead of the 39 year recovery period. This change is retroactive to property placed in service after September 27, 2017 and amended returns can be filed for 2017 and 2018.
5. Business Loans:
The bill provides two lending programs for small and medium-size businesses to obtain disaster relief, and allows both to be used though not for the same purpose. There is the Paycheck Protection Program (PPP), which is an expansion of the existing 7(a) program, and the Economic Injury Disaster Loan (EIDL) program.
Paycheck Protection Program:
· This is the lending program that allows for some loan forgiveness.
· Applies to businesses with 500 or fewer employees, and certain affiliation rules apply to combine businesses with common ownership, though they are waived hotels and restaurant franchises. The borrower must have been in operation on 2/15/2020.
· Loans will be made by banks and commercial lenders authorized to make SBA loans, and the application period ends 6/30/2020.
· The amount of the loan is limited to the lesser of (i) $10M or (ii) the borrower’s average total monthly “payroll costs” for the 1-year period ending on the date the loan is made multiplied by 2.5, plus any refinanced loan under the EIDL program obtained after 1/31/2020.
· Payroll costs generally include employee salaries and tips, retirement benefits, severance payments, state and local taxes on employee compensation, but does not include compensation paid to employees and independent contractors in excess of $100,000/year, and amounts paid to persons who reside outside the US.
· The loan proceeds may be used for payroll costs (as defined), employee benefits and commissions, interest payments on mortgages, rent, utilities, and interest on debt incurred before 2/15/2020.
· Loan terms:
o No collateral required.
o Loan cannot be obtained if taxpayer also receives the employee retention tax credit (see summary above).
o Maximum interest rate of 4%.
o Maximum term of 10 years.
o No interest or principal payments are required for a period between 6 months and 1 year (though interest will accrue from the day the loan is made).
o Prepayment penalties are prohibited.
· Borrower may apply for loan forgiveness in an amount equal to the cumulative amount of payroll costs, rent, utilities, and interest paid on mortgages during the 8 weeks after the loan is made. The amount forgiven is limited to the extent compensation and headcount are reduced relative to a base period, and any amount forgiven will not be taxable to the borrower (as it otherwise would have been).
· This program currently allows for emergency loans of up to $2M to assist companies affected by COVID-19.
· The bill would waive the requirement for personal guarantees on loans under $200K, it would waive the requirement that the borrower not be able to obtain credit elsewhere, and provide emergency grants of up to $10K within 3 days of the borrower filing an application, though the amount of the grant would reduce any loan forgiveness under the PPP.
· The bill also would streamline the loan application process.
We hope you found the above helpful. And again, we are available if you have questions, concerns or need assistance.
Please stay safe and healthy!