Coronavirus Aid, Relief and Economic Security Act ("The CARES Act")
In response to the economic havoc caused by the coronavirus outbreak, the U.S. government passed a large stimulus package titled Coronavirus Aid, Relief, and Economic Security Act "The CARES Act".
The following is a summary of significant provisions of The CARES Act. The summary is divided into 3 parts,
A. Individual tax provisions
B. Business tax provisions
C. Loan programs
A. Individual tax provisions:
1. Tax credit/rebate.
All US residents who have a valid social security number and are not dependents of another may be eligible for a federal tax rebate.
The rebate amount is $1,200 per adult. If you have children who qualified for the child tax credit (they must be 16 years old or younger), you are eligible for an additional $500 per child.
The rebate phases out beginning at adjusted gross income of $150,000 for taxpayers who file married joint and $75,000 for all others. Payments will be based on 2019 returns, if filed, or 2018 returns if 2019 has not been filed yet.
The following is a stimulus check calculator tool from Kiplinger https://www.kiplinger.com/tool/taxes/T023-S001-stimulus-check-calculator-2020/index.php.
2. Retirement accounts.
a. Required minimum distribution rules. The RMD rules are waived for 2020. This means that instead of taking money out this year you can continue to let it grow tax deferred.
b. The 10% early withdrawal penalty. The 10% early withdrawal penalty is waived for certain retirement distributions of up to $100,000. The distribution must occur in 2020 and must have occurred for coronavirus related reasons.
Amounts withdrawn will be taxable over 3 years, but taxpayers can avoid income recognition by repaying these distributions during the 3 year period after the distribution date. Repayments will not count against the annual contribution limit for any year in which they are made.
c. Loans from retirement plans. Prior to the CARES Act, the standard maximum loan from a retirement plan was the lesser of $50,000 or 50% of the account balance. The CARES Act doubles both limits to $100,000 and 100%, respectively, for loans made between 3/27/2020 and 12/31/2020.
3. Charitable contributions.
a. Taxpayers who do not itemize. For 2020, taxpayers who do not itemize, are allowed a $300 above-the-line, deduction for certain cash charitable contributions, contributions to a non-operating private foundation or donor advised fund are excluded.
b. Taxpayers who do itemize. Prior to the CARES Act, taxpayers who do itemize were, generally, allowed to contribute up to 60% of AGI. The CARES Act allows contributions to be deducted up to 100% of AGI for 2020, with any excess contributions available for carryover to the next 5 years.
B. Business tax provisions.
1. Payroll taxes.
a. Delay of employer payroll taxes. Employers and self-employed individuals can defer payment of the employer's share (6.2%) of the social security payroll tax. The deferred amount must be repaid in two equal installments on 12/31/2021 and 12/31/2022.
Employers who receive SBA loans, discussed later, that are forgiven under CARES are not eligible for the payroll tax deferral.
b. Employee retention credit. Certain employers may receive a 50% payroll tax credit of up to $10,000 of qualified wages (including health benefits) paid to each employee (total maximum credit of $5,000 per employee) from 3/13/20 - 12/31/20.
Qualifying employers must have either (1) had their operations partially or fully suspended due to a coronavirus related shut-down order; or (2) had gross receipts decline by more than 50% when compared to the same quarter in the prior year. The amount of the credit is larger for employers with less than 100 full-time equivalent employees.
2. Excess business loss rules.
The 2017 tax reform put into place excess business loss limitation rules. Under these rules, the losses from all of your trades/businesses that could be used to offset other income on your tax return became limited to $250,000 or $500,000 in the case of a joint return.
Business losses in excess of the $250,000/$500,000 limit became disallowed and they became part of a net operating loss carryover to the following taxable year.
The CARES Act repeals the excess business loss limitation rules for 2018, 2019 & 2020.
3. Net operating losses.
The CARES Act relaxes the limitations on a taxpayer's use of losses from prior years. Currently, as a result of the 2017 tax reform, NOLs are subject to an 80 percent of taxable income limitation and cannot be carried back to reduce income in a prior tax year. The CARES ACT provides that an NOL generated in 2018, 2019, or 2020 may be carried back to the preceding five tax years. It also temporarily removes the taxable income limitation to allow an NOL to fully offset income.
4. Temporary modification of the business interest limitation.
The 2017 tax reform created new limitations on business interest deductions for tax years beginning after December 31, 2017 for certain taxpayers with gross receipts over $25 million.
The CARES Act increases the taxpayer’s permitted interest deduction by increasing the 30%-of-ATI limitation to 50% (with adjustments) for 2019 and 2020. Taxpayers generally can elect out of the 50% rule or can elect to use their 2019 ATI in the 2020 tax year, and there are certain limitations applicable to partnerships.
5. Technical amendments regarding Qualified Improvement Property.
The CARES Act makes a technical correction to a drafting error in the 2017 tax reform that required Qualified Improvement Property (QIP) to be depreciated over 39 years, rendering such property ineligible for bonus depreciation.
The technical correction applies retroactively to 2018. QIP is now 15-year property and eligible for 100% bonus depreciation. This will provide immediate current cash flow benefits and relief to taxpayers, especially those in the retail, restaurant, and hospitality industries.
Taxpayers that placed QIP into service in 2019 can claim 100% bonus depreciation prospectively on their 2019 return. Taxpayers that placed QIP in service in 2018 and that filed their 2018 federal income tax return treating the assets as bonus-ineligible 39-year property can either amend that return to treat such assets as bonus-eligible or in lieu of amending the 2018 return, taxpayers may file an automatic Form 3115, Application for Change in Accounting Method, with their 2019 return to take advantage of the new favorable treatment and claim the missed depreciation as a favorable Section 481(a) adjustment.
C. Loan programs:
The CARES Act features both a Paycheck Protection Program ("PPP") and an Economic Injury Disaster Loan Program ("EIDL"), both programs are federal loan programs.
Once the US Small Business Administration ("SBA") releases details and guidance, the programs will be administered by a network of SBA approved lenders. If you have an existing banking relationship, you should contact that bank first, if not, contact another SBA approved lender.
Please note that businesses cannot have both EIDL and PPP loans at the same time. You can apply for the EIDL loan now and the PPP loan when it becomes available. If you qualify and accept the EIDL loan, and you subsequently qualify for the PPP loan, you can re-finance the EIDL loan with the PPP loan, or you can apply for both loans and decide which one you take if you qualify for both. Loans are limited to one per taxpayer identification number.
Paycheck Protection Program Loans ("PPP").
The purpose of the PPP loan program is to help businesses keep their employees on their payroll and continue business operations.
Businesses with fewer than 500 employees are eligible for a loan. Sole proprietors, independent contractors, and self-employed individuals are also eligible.
The SBA has affiliation rules for determining if a business meets the fewer than 500 employee test. For example, two separate businesses are affiliates of each other if one person or related persons have the power to control both entities. The affiliation rules are waived for certain businesses in the food and accommodations businesses, such as hotels and restaurants that employ no more than 500 employees per physical location.
Any individual employed on a full-time, part-time, or other basis is considered an employee.
Your lender will also take into consideration whether you were in business on February 15, 2020
2. Amount available to borrow.
For most organizations, the maximum loan amount will be limited to whichever of the following is less:
1. The average total of monthly payroll costs during the one-year period before the loan date x 2.5
2. $10 million
Payroll costs consist of the sum of payments to any employee in an amount not more than $100,000 for one year and prorated for the covered period. Payroll costs include salary; overtime; commissions; paid time off; severance; group health care costs; including insurance premiums; retirement benefits; and payment of any state or local tax assessed on the compensation of employees.
The payroll costs of any employee in excess of $100,000, prorated for the coverage period, is excluded from the calculation of total monthly payroll costs.
For a sole proprietor or independent contractors, it includes net earnings from self-employment, or similar compensation and that is in an amount that is not more than $100,000 in 1 year, as prorated for the covered period.
3. Loan application.
Loans are available until June 30, 2020 and you can apply through an SBA preferred lender.
When you apply for a loan, you will need to provide a good-faith certification that the current economic conditions justify the loan request in order for you to support ongoing operations.
You must also acknowledge that you will use the funds to retain your employees and maintain payroll or make mortgage, rent, and utility payments.
4. Loan forgiveness.
If you use the loan to pay the following costs, the amount used for these costs will be forgiven:
a. Payroll costs.
b. Payments of interest on any mortgage obligations;
c. Rent & utilities;
d. Interest on debt incurred before the covered period.
Your loan forgiveness may be reduced if:
e. You don’t use the funds for payroll costs, utilities, rent, etc.;
f. You cut employees’ salaries by more than 25% of the total wages they received in the most recent quarter before the loan period – February 15, 2020, to June 30, 2020; or
g. You reduce your number of employees during this time period.
5. The loan forgiveness request process.
To request loan forgiveness, you must submit an application to your lender that includes the following:
a. Documentation verifying the number of full-time equivalent employees on your payroll and their pay rates;
b. Payroll tax filings you reported to the IRS;
c. State income, payroll, and unemployment insurance filings;
d. Documents verifying payments on covered mortgage obligations, covered lease obligations, and covered utility payments;
e. Certification from an authorized representative that the documents are correct and true and the loan forgiveness request reflects retaining employees and making the necessary rent or utility payments. The lender may require additional documentation as needed.
Within 60 days, your lender should make a decision on your application. If approved, your lender will submit a report to the SBA with the expected forgiveness amount of up to 100% of the principal balance. No more than 15 days later, the SBA should forgive the amount.
6. Other Paycheck loan terms:
Loans are available for up to a 10-year term, with six months (and up to one year) deferral of principal and interest payments. Notably, certain SBA requirements are waived.
The interest rate for these loans will be negotiated with the lender and it is capped at 4%.
Loans are available with:
a. No personal guaranties of shareholders, members or partners;
b. No collateral;
c. No proving recipient cannot obtain funds elsewhere;
d. No SBA fees but the borrower may still have to pay lender processing fees;
e. No prepayment fee;
f. If your loan is partially forgiven, there’s no penalty for prepaying the remaining balance;
g. The loan may include certain covenants that will be set forth in the loan document.
Economic Injury Disaster Loan Program (EIDL).
This program allows for emergency loans of up to $2 million to assist companies affected by Coronavirus.
Under the CARES Act, emergency EIDLs are available for businesses or cooperatives with fewer than 500 employees, sole proprietors or independent contractors with fewer than 500 employees.
Additionally, the CARES Act waives requirements that (1) the borrower provide a personal guarantee for loans up to $200,000, (2) that the eligible business be in operation for one year prior to the disaster, and (3) that the borrower be unable to obtain credit elsewhere. The SBA is also empowered to approve applicants for small-dollar loans solely on the basis of their credit score or "alternative appropriate methods to determine an applicant's ability to repay."
Borrowers seeking an immediate influx of funds may receive a $10,000 emergency advance of EIDL proceeds within three days after applying for an EIDL grant.
The advance is not required to be repaid, even if the applicant does not obtain a loan under the EIDL program, or if the applicant instead obtains a grant under the PPP. But if the applicant does instead obtain a grant under the PPP, the amount of the advance will be reduced from the forgivable amount of such PPP loan.
As of this date, the final rules have yet to be written and should be reviewed before proceeding.