March 27, 2020
The CARES Act
The CARES Act (Coronavirus Aid, Relief, and Economic Security) Act
President Trump signs the largest stimulus bill in history. The Economic Security (CARES) Act was enacted to boost the economy. This legislation is the most massive and most costly piece of legislation ever passed by Congress.
INDIVIDUAL TAX RELIEF
Individual stimulus payments will be available to taxpayers and determined based on income thresholds. According to the CARES Act, qualifying individuals earning up to $75,000 a year will be eligible for the full $1,200 check. Relief checks will go out to individuals making up to $99,000 a year (the payment amount falls by $5 for every $100 of income above $75,000).
Married couples are eligible for a $2,400 check as long as adjusted gross income is under $150,000 a year. Rebate checks will go out to married couples who earn up to $198,000. Married couples also will receive an additional $500 for every child under 17.
A taxpayer who files as a “head of household” is eligible for a $1,200 check if they earn up to $112,500 a year. The stimulus checks are available for heads of household earning up to $136,500 annually. Heads of household will also receive an additional $500 per child under 17.
The payments will be made between now and December 31, 2020. The funds will be paid electronically if the taxpayer has provided direct deposit information with the Internal Revenue Service (IRS) on either 2018 or 2019 tax returns. Click this link from Kiplinger to see how much your recovery rebate may be.
The 10% penalty is waived on early withdrawals up to $100,000 from qualified retirement plans for coronavirus-related distributions. A qualified retirement plan would include IRAs, 401(k) plans, and other qualified trusts, specific deferred compensation plans, and qualified annuities.
An eligible Coronavirus-related distribution is available during the 2020 calendar year for an individual (or the spouse of an individual) diagnosed with COVID-19 with a CDC-approved test.) Also, the penalty waiver is also available for individuals who experience adverse financial consequences as a result of quarantine, business closure, layoff, or reduced hours due to the virus.
Income due to an early withdrawal is subject to tax over a three-year period. A taxpayer may re-contribute the withdrawn amounts within three years without being concerned with annual caps. All required minimum distributions for 2020, regardless of whether the pandemic has impacted the taxpayer is also waived in the CARES Act.
The Act allows a partial above-the-line deduction of up to $300 for charitable contributions made by individuals who do not itemize. This deduction does not apply to non-cash contributions.
The percentage rates of adjusted gross income (AGI) limitations will increase for all taxpayers and specific contributions. During the 2020 tax year, individuals can claim an unlimited itemized deduction for a charitable contribution, which is normally limited to 60% of AGI. Corporations AGI increases from 10% to 25% on contributions. Donations of food inventory will be raised from 15% to 25% for the 2020 tax year.
These payments will be in addition to a broad expansion in unemployment benefits, which would be extended to non-traditional employees, including gig workers and freelancers. The act is also set to increase current unemployment assistance by $600 a week for four months.
Student Loans Paid by Employers
If an employer pays tuition for a direct employee’s education, there is an exclusion of up to $5,250 from income payments to an employee’s loan. This exclusion applies only to payments made to the employee or the lender from the Cares Act enactment date until December 31, 2020.
BUSINESS TAX RELIEF
Employee Retention Credit
The final version of the CARES Act is one year only credit against the employer’s share of social security payroll taxes for any business that is forced to suspend its operations due to COVID-19 but continues to pay its employees during the shutdown.
A business is eligible for the credit if the business operations are fully or partially suspended during 2020 resulting from the COVID-19 outbreak or the company remained open, but the gross receipts during any quarter during the 2020 calendar year were less than 50% of the same quarter in 2019.
For each eligible quarter, the business will receive a credit against its social security taxes equal to 50% of the “qualified wages” paid to each employee for each quarter from March 13, 2020 ending on December 31, 2020. The amount of qualified wages for each employee for all quarters may not exceed $10,000. IRS can grant authority to make an advance to eligible employers.
Payroll Tax Deferral
The CARES Act defers the payment of the employer portion of payroll taxes due from the period beginning on the enactment date of the CARES Act through December 31, 2020. Half of the deferred payroll taxes are due by December 31, 2021, with the remainder due by December 31, 2022.
BUSINESS LOAN PROGRAMS
Economic Injury Disaster Loan (EIDL)
SBA disaster loans are low-interest federal disaster loans. These funds from these loans are to pay fixed debts, payroll, accounts payable, and other bills that are unable to be paid due to the Coronavirus impact. Applications can be completed online directly at the SBA website, or by mail.
The EIDL program is structured to provide small businesses who are experiencing ‘substantial economic injury’ the necessary working capital to help survive until normal operations resume after a disaster. Substantial economic injury means the business is unable to meet its obligations and to pay its ordinary and necessary operations expenses.
The SBA can provide up to $2 million to help meet future financial obligations and operating expenses from the onset of the shutdown. The loan amount is reflective of your actual economic injury and your company’s financial needs, regardless of whether the business suffered any property damage. The interest rate on EIDL will not exceed 4% per year and the term will not exceed 30 years. The repayment term is negotiable and by your ability to repay the loan.
According to Dr. Kelly Hunt district director for the U.S. Small Business Administration (SBA) Pittsburgh District Office, you can expect a decision to be made on your loan application within 21 days. The expected receipt of disbursements is approximately 4-5 weeks from application submission. The interest rates of EIDLs are 3.75% for For-Profit companies and 2.75% for Non-profit organizations. Applicants are encouraged to request the most money as soon as possible, even if the business owner does not believe they will need the funds. You can always refuse future disbursements from the SBA.
Paycheck Protection Program Loans (PPP)
The SBA administers the program under 7(a) lending program with $349 billion in new lending available to small businesses. Under the Small Business Act, the “covered period” runs from February 15, 2020, through June 30, 2020. The program intends to help businesses, non-profits, Tribal businesses, and veteran’s organizations with 500 employees or less to pay for near-term operating expenses and incentivize employers to retain their employees.
Eligible entities are those with less than 500 employees, including the following:
- 501(c)(3) non-profit organizations
- Veterans organizations
- Certain tribal business concerns
- Eligible self-employed individuals
- Independent contractors
- Sole proprietorships
- Food services industry (NAICS 72) with less than 500 employees per physical location
To determine the 500 employee threshold, applicants should include full time, part-time, and other basis employees. General SBA affiliations apply except such rules are waived for the following:
- Businesses in the accommodation and food service industry (NAICS 72)
- Franchises assigned a franchise identifier code
- A business licensed under Section 301 of the Small Business Investment Act
The federal government fully guarantees these loans through December 31, 2020. Only 85% guarantee for loans that are greater than $150,000 after that date and are generally limited to the lesser of:
- The sum of the average monthly payroll costs for the one year period ending on the date the loan was made multiplied by 2.5 or by 2 for seasonal employers or
- $10 million
Payroll costs include wages, salaries, commissions, payment of cash tips, vacation pay, retirement contributions, healthcare benefits, covered leave, sole proprietor income, or independent contractor compensation not in excess of 100,000 and other expenses.
Payroll costs do not include the following:
- The compensation of any individual employee in excess of an annual salary of $100,000
- Payroll taxes
- Any compensation of an employee whose principal place of residence is outside the US
- Any qualified sick leave or family medical leave for which a credit is allowed under the new Coronavirus Relief Act
The loans are available for up to a 10-year term (amortized) at 4% interest, for a period of six months and up to one year of deferral of principal and interest payments.
- No personal guarantees of shareholders, members, or parties
- No collateral
- No proving recipient cannot obtain funding elsewhere
- No SBA fees
- No prepayment fee
These loans may be deferred six months to one year before repayment, fee waivers, and streamlined application requirements. Businesses are eligible for loan forgiveness on covered expenses during the eight-week period after the loan is originated. Expenses include payroll, rent, utilities, and mortgage interest obligations. To qualify for forgiveness, employers must maintain their pre-Covid-19 shutdown level of full-time equivalent employees. Otherwise, there is a reduction in loan forgiveness proportional to the reduction in headcount. If businesses re-hires employees to pre-crisis levels by June 30, 2020, the businesses are eligible for loan forgiveness. Officers or employees that received more than $425,000 in 2019 total compensation will have future compensation capped.
SBA Express Loans
These loans are approved or denied within 36 hours and offer up to $5 million and have a guarantee of up to 85% of the loan amount. There is a federal guarantee of 50% of the loan amount to third-party lenders by the Small Business Administration. This loan is for business owners who don’t meet the eligibility requirements of traditional financial institutions or lack a credit history. Once a business owner is approved, funds are available within 90 days. Entrepreneurs are eligible for up to $1 million of capital in the form of either a term loan or line of credit at a negotiated interest rate not to exceed the SBA maximum rate.
This capital will pay for long and short-term working capital, purchasing real estate, purchasing equipment, furniture, machinery, supplies, and materials. The funds will also cover construction and/or renovation costs, establishing or acquiring a new business, expanding an existing business, or refinancing existing business debt.
Funds from these loans may not be used for reimbursing an owner for previous personal investments toward the business, repaying delinquent withholding taxes, or any purpose not deemed a “sound business purpose,” per SBA guidelines.
Business eligibility requirements include two years in business, for-profit business, operate in the US, prove needs for financing, and have proof of previous business financing, no government delinquencies. The company must qualify as a small business according to SBA size standards and show the use of loan funds are per SBA sound business purposes.
Net Operating Losses
The CARES Act includes temporary modifications to net operating losses (NOLs) limitations and rules relating to carrybacks enacted under the Tax Cuts and Jobs Act (TCJA). For the 2019 and 2020 tax years, a business will be able to use NOLs in previous years to offset 100% of taxable income. For tax years 2021 and after, the 80% offset of taxable income will be reinstated.
This provision will allow for a five-year carryback of net operating losses (NOLs) arising in 2018, 2019, or 2020 by a business. A company can take full advantage of losses when they amend or modify tax returns back to the 2013 tax year. The bill also eliminates loss limitation rules for sole proprietors and pass-through entities, and they, too, can take advantage of the NOL carryback.
AMT Credit Carryforwards
Businesses can claim a refund for the full amount of alternative minimum tax credits available, as reported on previously filed returns. To claim this refund before filing a 2019 return, Form 1139, Corporation for Tentative Refund, prior to December 31, 2020. The bill accelerates the year for which a fully refundable credit can be claimed to 2019, and allows corporations to elect to claim the fully refundable minimum tax credits in 2018.
Business Interest Expense Limitation
The TCJA limited the amount of allowable deductions for business interest (regardless of the type of entity) for tax years beginning after 2017. The bill increases the limitation amount to 50% of the taxpayer’s adjusted taxable income (ATI) for 2019 and 2020. In calculating the limitation for 2020, the taxpayer may elect to use the adjusted taxable income for 2019. For tax years 2021 and after, the deduction will return to 30% of ATI.
Qualified Improvement Property
Businesses with qualified improvement property can write-off 100% costs for improvements to facilities. Previously, improvements depreciated over 39 years. Businesses can receive these deductions when they file amended returns for previous years or file a Form 3115 to take the added deduction in 2019 or 2020.
Consider leaning on your CPA for cash flow guidance, tax deadlines, and help in completing SBA loan and the new CWCA loan applications, and the CARES Act. Our CPAs are available, and we have the knowledge, skill, and information that you need right now to address your financial needs in a timely fashion properly.
Maria is a partner at Wilke & Associates servicing closely-held businesses in manufacturing, real estate, transportation/logistics, and technology industries as well as high net worth individuals and executives in delivering effective tax strategies.