CORONOVIRUS AID, RELIEF AND ECONOMIC SECURITY ACT (CARES ACT)
Paycheck Protection Program
$350 billion allocated for the Paycheck Protection Program, which is meant to help small businesses (fewer than 500 employees—including sole-proprietors and nonprofits) impacted by the pandemic and economic downturn to make payroll and cover other expenses from February 15 to June 30. Notably, small businesses may take out loans up to $10 million—limited to a formula tied to payroll costs—and can cover employees making up to $100,000 per year.
The loans are limited to the LESSER OF 1) the average total ‘payroll costs’ for the 1-year period ending on the date the loan was made (an alternative calculation is available for seasonal employees) multiplied by 2.5 or 2) $10 million.
Example. Rob’s Car Wash applies for a paycheck protection loan on May 1, 2020. The business had $1 million in payroll costs for the period May 1, 2019 through May 1, 2020. Rob’s Car Wash is entitled to a fully guaranteed federal loan – assuming it’s made before December 31, 2020 equal to the LESSER OF: $2.5 million ($1 million of payroll costs x 2.5) OR $10 million.
The loans will have a maximum maturity of 10 years and an interest rate not to exceed 4%. The standard fees imposed under Section 7 of the Small Business Act are waived and no personal guarantee is required by the business owner.
An additional provision in the CARES Act provides for possible deferment of the loans for a period of at least six months, but not to exceed a year.
Loan Forgiveness of Paycheck Protection Loans
A separate section of the CARES Act calls for a portion of the aforementioned paycheck protection loans to be forgiven on a tax-free basis. The amount to be forgiven is the sum of the following payments made by the borrower during the 8-week period beginning on the date of the loan: payroll costs, mortgage interest, rent and certain utility payments. (Payroll costs do NOT include compensation of any individual employee in excess of an annual salary of $100,000; payroll taxes; any compensation of an employee whose principal place residence is outside the US; and any qualified sick leave or family medical leave for which a credit is allowed under the Coronavirus Relief Act.)
To seek forgiveness, a borrower must submit to the lender an application that includes documentation verifying the number of employees and pay rates, and cancelled checks showing mortgage, rent, or utility payments.
Example. Continuing the previous example with Rob’s Car Wash, in the first 8 weeks after the business borrows the $2.5 million, the business pays $250,000 in payroll costs, mortgage interest, and utility payments. Rob’s Car Wash is eligible to have $250,000 of the $2.5 million loan forgiven. The forgiveness will not create taxable income. In addition, because of the deferment rules in the CARES Act, any payments due on the $2.25 million of remaining loan will not be due for six months.
There is a provision, however, that reduces the amount that may be forgiven if the employer either:
- Reduces its workforce during the 8-week covered period when compared to other periods in either 2019 or 2020, or
- Reduces the salary or wages paid to an employee who had earned more than $100,000 in annualized salary by more than 25% during the covered period.
This reduction can be avoided, however, if the employer rehires or increases the employee’s pay within an allotted time period.
SBA Emergency Government Disaster Loans
The CARES Act also expands access to Economic Injury Disaster Loans under Section 7(b) of the Small Business Act to include not only businesses with fewer than 500 employees, but also sole proprietors and ESOPs. For any loan made under this program before December 31, 2020, no personal guarantee will be required on loans below $200,000. Even better, under Section 1112 of the Act, the government will pay the principal and interest on a paycheck protection loan for the first six months for which payments are due. This government subsidy does NOT apply to the paycheck protection loans discussed above.
In addition, the Act creates a new Emergency Grant to allow a business that has applied for a disaster loan to get an immediate advance of up to $10,000. The advance can be used to maintain payroll, and is not required to be repaid, even if the borrower’s request for a 7(b) loan is denied.
Unemployment Insurance Enhancements
Unemployment insurance provisions now include an additional $600 per week payment to each recipient for up to four months, and extend UI benefits to self-employed workers, 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.
The bill provides for payments to taxpayers — “recovery rebates” — which are being treated as advance refunds of a 2020 tax credit. Under this provision, individuals will receive a tax credit of $1,200 ($2,400 for joint filers) plus $500 for each qualifying child. The credit is phased out for taxpayers with adjusted gross income (AGI) above $150,000 (for joint filers), $112,500 (for heads of household), and $75,000 for other individuals. The credit is not available to nonresident aliens, individuals who can be claimed as a dependent by another taxpayer, and estates and trusts. Taxpayers will reduce the amount of the credit available on their 2020 tax return by the amount of the advance refund payment they receive.
The recovery rebates will use 2019 tax returns (2018 if the taxpayer has not filed in 2019) to determine the advanced rebate amount and reconcile the rebate based on 2020 income. IRS will rely on your Form 1099-SSA Social Security Benefit Statement if the taxpayer has not filed in the last two years. This means that taxpayers who receive a smaller rebate than they are eligible based on 2020 income will receive the difference after filing a 2020 tax return, but overpayments of rebates due to a higher income in 2020 will not be clawed back.
For example, a single taxpayer with $100,000 in 2019 income would not receive an advance rebate but would receive the $1,200 credit on their 2020 return if their income for the year fell below the phaseout. On the other hand, a single taxpayer with $35,000 in income receives a $1,200 advance rebate but would not have to pay the rebate back on the 2020 return if they make $100,000 this year.
The payments will be made between and December 31, 2020 and in many cases will be paid electronically if you have provided direct deposit information to the IRS.
Employee Retention Plan
The bill creates an employee retention credit for employers that close due to the coronavirus pandemic. Eligible employers are allowed a credit against employment taxes equal to 50% of qualified wages (up to $10,000 in wages) for each employee. Eligible employers are employers who were carrying on a trade or business during 2020 and for which the operation of that business is fully or partially suspended due to orders from an appropriate governmental authority limiting commerce, travel, or group meetings due to the COVID-19 outbreak. Employers that have gross receipts that are less than 50% of their gross receipts for the same quarter in the prior year are also eligible, until their gross receipts exceed 80% of their gross receipts for the same calendar quarter in the prior year. For employers with more than 100 employees, wages eligible for the credit are wages that the employer pays employees who are not providing services due to the suspension of the business or a drop in gross receipts. For employers with 100 or fewer employees, all wages paid qualify for the credit.
For each eligible quarter, the business will receive a credit against its 6.2% share of Social Security payroll taxes equal to 50% of the “qualified wages” paid to EACH employee for that quarter, ending on December 31, 2020.
The business’s qualified wages depend on its size; if there were more than 100 employees during 2019, the qualified wages are limited ONLY to those wages that were paid by the employer during the quarter for the period of time the business was shut down.
If there were less than 100 employees for 2019, however, qualified wages include not only those paid to employees during a shut-down, but also wages paid for each quarter that the business has suffered a sharp decline in year-over-year receipts, as described in #2 above.
In both cases, qualified wages include any “qualified health plan expenses” allocable to the wages, such as amounts paid to maintain a group health plan. In either case, however, the amount of qualified wages for EACH employee for ALL quarters may not exceed $10,000.
Any wages taken into account in determining the new payroll tax credit for family medical leave or sick leave as part of the Coronavirus Relief Act may not be taken into account in determining qualified wages for the employee retention credit.
The credit is refundable if it exceeds the business’s liability for payroll taxes, a likely outcome given the two new payroll tax credits mentioned immediately above that were created as part of the Coronavirus Relief Act late last week.
Finally, if an employer takes out a payroll protection loan under Section 7(a) of the Small Business Act as detailed above in this article, no employee retention credit will be available.
Delay of Payment of Payroll Tax and Self-Employment Tax
In addition to the various new payroll tax credits created by the Coronavirus Relief Act and the CARES Act, the new law would again seek to alleviate the burden on employers struggling to make payroll by allowing the employer’s share of the 6.2% Social Security tax that would otherwise be due from the date of enactment through December 31, 2020, to be paid on December 31, 2021 (50%) and December 31, 2022 (50%).
Similarly, a self-employed taxpayer can defer paying 50% of his or her self-employment tax that would be due from the date of enactment through the end of 2020 until the end of 2021 (25%) and 2022 (25%).
An employer that incurs its 6.2% share of Social Security tax in 2020 may 1) defer payment of that tax until 2021 and 2020, but 2) receive an immediate credit against those yet-to-be paid payroll taxes via the sum of the emergency medical leave credit, sick leave credit, and new employee retention credit.
Also note, this deferral is not available to any business that takes out a payroll protection loan forgiven as discussed earlier in this article.
Payroll Tax Credit Refunds
The bill provides for advance refunding of the payroll tax credits enacted last week in the Families First Coronavirus Response Act, P.L. 116-127. The credit for required paid sick leave and the credit for required paid family leave can be refunded in advance using forms and instructions the IRS will provide. The IRS is instructed to waive any penalties for failure to deposit payroll taxes under Sec. 3111(a) or 3221(a) if the failure was due to an anticipated payroll tax credit.
Taxpayers can take up to $100,000 in coronavirus-related distributions from retirement plans without being subject to the Sec. 72(t) 10% additional tax for early distributions. Eligible distributions can be taken up to Dec. 31, 2020. Coronavirus-related distributions may be repaid within three years. For these purposes, an eligible taxpayer is one who has been diagnosed with SARS-CoV-2 virus or COVID-19 disease or whose spouse or dependent has been diagnosed with SARS-CoV-2 virus or COVID-19 disease or who experiences adverse financial consequences from being quarantined, furloughed, or laid off, or who has had his or her work hours reduced, or who is unable to work due to lack of child care. Any resulting income inclusion can be taken over three years. The taxpayer also has the choice to avoid any income recognition by repaying the distribution to the retirement plan within three years of receiving it. The bill also allows loans of up to $100,000 (an increase from $50,000) from qualified plans for the 180-day period beginning after the enactment of the Act and repayment can be delayed. The bill temporarily suspends the required minimum distribution rules in Sec. 401 for 2020. The bill delays 2020 minimum required contributions for single-employer plans until 2021.
The bill creates an above-the-line charitable deduction for 2020 (not to exceed $300). This deduction is only available to taxpayers who do not itemize. The bill also modifies the AGI limitations on charitable contributions for 2020, to 100% of AGI for individuals and 25% of taxable income for corporations. The bill also increases the food contribution limits to 25%.
Net Operating Losses
The bill temporarily repeals the 80% income limitation for net operating loss deductions for years beginning before 2021. For losses arising in 2018, 2019, and 2020, a five-year carryback is allowed (taxpayers can elect to forgo the carryback).
Prior to 2018, net operating losses of a business or individual could be carried back two years and forward 20, and when carried forward, they could offset 100% of taxable income. The TCJA altered these rules, disallowing all carrybacks related to post-2017 losses, providing for an indefinite carryforward period, and limiting the use of post-2017 losses when carried forward to 80% of taxable income.
This, clearly, was unfortunate timing. Rare will be the business that doesn’t run at a loss in 2020; as a result, Congress temporarily reversed the TCJA changes:
- Losses from 2018, 2019 and 2020, will be permitted to be carried back for up to five years. As was previously the case, a taxpayer will be permitted to forgo the carryback, and instead carry the loss forward.
- Losses carried TO 2019 and 2020 will be permitted to offset 100% of taxable income, as opposed to 80% under the TCJA.
Example. In 2015 and 2016, X Co. broke even. In 2017, X Co. reported taxable income of $1 million and paid federal income tax of $350,000. In 2018, X Co. reported taxable income of $2 million and paid tax of $420,000. In 2020, X Co. recognizes a net operating loss of $3 million. X Co. may carry $1 million of the loss back to 2017 and recover the taxes paid (subject to the alternative minimum tax), and then carry the remaining $2 million loss to 2018 and recover that $420,000 as well.
Excess Loss Limitations – Temporary (and Retroactive) Removal of Section 461(l):
The bill repeals the Sec. 461(l) excess loss limitation. Sec. 461(l) was added to the Code by the law known as the Tax Cuts and Jobs Act, P.L. 115-97, and it disallows excess business losses of noncorporate taxpayers if the amount of the loss exceeds $250,000 ($500,000 for married taxpayers filing jointly).
As part of the TCJA, Congress added a fourth (yes, fourth) limitation on an individual’s ability to use losses from a business. New Section 461(l) provides that the amount of “net business loss” an individual may use in a year to offset other sources of income is capped at $250,000 (if single; $500,000 if married filing jointly). Any excess loss is converted into a net operating loss, which as we discussed above, was — prior to the passage of the CARES Act — subject to more stringent utilization rules than prior to the TCJA.
The latest legislation, however, puts a temporary halt on Section 461(l); not only for 2020, but retroactive to January 1, 2018. As a result, taxpayer who found a loss limited by the provision in 2018 or 2019 can file an amended return to claim a refund.
It’s not ALL good news with regard to Section 461(l), however. The CARES Act clarifies that when the provision kicks back in for 2020 and beyond, wages will NOT be considered business income. This will, in many cases, result in significantly more loss being limited.
Corporate Alternative Minimum Tax (AMT)
The bill modifies the AMT credit for corporations to make it a refundable credit for 2018 tax years.
Qualified Improvement Property
The bill makes technical corrections regarding qualified improvement property under Sec. 168 by making it 15-year property.
Certain employer payments of student loans on behalf of employees are excluded from taxable income. Employers may contribute up to $5250 annually toward student loans, and the payments would be excluded from an employee’s income.
The rules for high-deductible health plans (HDHPs) are amended to allow them to cover telehealth and other remote care services without charging a deductible. Over-the-counter menstrual care products are added to the list of items that can be reimbursed out of a health savings account, Archer medical savings account, or health reimbursement arrangement.