On March 27, 2020, President Trump signed into law H.R. 748, the Coronavirus Aid, Relief, and Economic Security Act (CARES Act or Act). Included in this bill is both tax relief for tax payments and current filings, as well as economic stimulus, by allowing for tax refunds on amended returns for the last several years.
This article is a brief summary of the CARES Act. These benefits are in addition to the provisions of the Phase II stimulus H.R. 6201, which provided provisions for paid sick leave, additional unemployment benefits, and additional protections for health care workers.
Small Business Loan Program (SBA)
- Increases the maximum Small Business Administration’s 7(a) loan amount to $10 million and would expand allowable uses of 7(a) loans to include payroll support (including paid sick or medical leave), employee salaries, mortgage payments, insurance premiums and any other debt obligations.
- Under the current draft of the Cares Act, the SBA is authorized to guarantee up to $349 billion in 7(a) loans to businesses with not more than 500 employees or the applicable size standard established by the SBA for the industry in which the business operates, if greater. The loan period for this program would begin on February 15, 2020, and end on December 31, 2020.
- Eligibility evaluations are to be limited to whether a business or certain non-profits was:
- Operational on February 15, 2020, and
- had employees for whom the borrower paid salaries and payroll taxes, or paid independent contractors, and
- Is substantially impacted by public health restrictions related to COVID-19. (Eligible borrowers would be required to make good faith certification that they have been affected by COVID-19 and will use funds to retain workers and maintain payroll and other debt obligations.) There is no requirement to evaluate the borrowers’ ability to repay the covered loan or that the borrower not be able to find credit elsewhere, unlike the normal 7(a) requirements.
- Loan Amount and Purpose. Eligible borrowers will be allowed to borrow up to the lesser of (i) $10 million or (ii) the business’s average total monthly payroll costs during the one-year period prior to the loan being made multiplied by 2.5. Payroll costs include salaries, wages, tips, payments for sick leave, insurance premiums and state and local taxes assessed on the compensation of employees, but does not include compensation of individual employees in excess of annual salary of $100,000, as prorated for the relevant period. The loan proceeds may be used to cover payroll costs, mortgage, rent and utility payments, and interest on other debt obligations.
- Loan Forgiveness. Borrowers will be eligible to apply for loan forgiveness equal to the amount spent by the borrower during an 8-week period after the loan closing date on payroll costs, interest on mortgages, payments of rent, and utility payments, in each case that were in place before February 15, 2020. Principal payments of mortgage payments will not be eligible for forgiveness. The amount forgiven is reduced proportionally by any reduction in employees retained compared to the previous year and by the reduction in pay of any employee beyond 25 percent of the prior year’s compensation; however, reductions in pay for employees who have an annualized salary of more than $100,000 are not considered in this calculation. Independent contractor fees paid by an employer are not eligible for loan forgiveness.
- Borrowers which re-hire workers previously laid off from February 15 through April 1, 2020 shall not have those numbers counted against them during such period for loan forgiveness purposes, so long as they are rehired by June 30, 2020. Cancelled indebtedness shall not be included in the borrower’s taxable income for this year, and upon a lender’s report of expected loan forgiveness for a covered loan or pool of covered loans, the SBA will purchase such amount of the loan from the lender.
- The amount forgiven would be reduced in proportion to any reduction in employees retained compared to the prior year and to the reduction in pay of any employee beyond 25% of her prior year compensation. Borrowers that rehire workers previously laid off will not be penalized for having reduced payroll at the beginning of the period.
Economic Stimulus through Tax Refunds
- Net operating losses (NOLs) incurred in 2018, 2019, and 2020 can be carried back five years and fully offset taxable income. [The Tax Cuts and Jobs Act (TCJA) passed in 2017 limited NOL usage to 80% of taxable income and prevented carrybacks.] The Act also provides elections to avoid the NOL applying to Section 965 amounts, thus increasing the likelihood of the carryback leading to a refund.
- The excess business loss limitation would be suspended for 2018, 2019, and 2020 and may now be used in full to reduce a taxpayer’s current or prior year (2018 only) income tax liability. Previously, the TCJA changed the amount of business losses a noncorporate taxpayer may deduct, limiting that amount to $250,000 ($500,000 in the case of a joint return). Losses above those amounts had to be carried forward.
- Any unused corporate AMT credits remaining are fully refundable (either on a 2019 tax return or a 2018 amended return).
- A fix to the bonus depreciation rules, retroactive to the beginning of 2018, allows a 100% write-off for qualified improvement property (correcting an error in the TCJA).
- The Section 163(j) business interest expense deduction limitation is 50% of adjusted taxable income for 2019 and 2020, up from 30% as outlined by the TCJA. Taxpayers may also elect to use 2019 adjusted taxable income to calculate the 2020 limitation.
Other Provisions for Individuals and Businesses in 2020
The Act provides:
- Payment of Social Security taxes due through January 1, 2021 is delayed for employers and self-employed individuals; taxes for this period will be due in equal installments on December 31, 2021 and December 31, 2022. Employers who choose to take advantage of the SBA loan forgiveness will not be eligible for this deferment.
- Employers whose business is closed because of COVID-19 or who experience a significant decline in gross receipts are allowed a credit of 50% of quarterly employment taxes per quarter for each employee during the quarters the business is affected. The credit cannot exceed $10,000 per employee over the year. For businesses with more than 100 employees, the credit is only allowed for employees not providing services.
- For individuals affected directly by COVID-19, the 10% early withdrawal penalty is eliminated for IRA and workplace-based retirement plan distributions up to $100,000 in 2020. In addition, tax on the distribution is due over the next 3 years. The withdrawn funds can be recontributed over the next 3 years without regard to yearly caps. This relief applies for anyone diagnosed with COVID-19, who has a spouse or dependent diagnosed, or who experiences financial hardship as a result of being quarantined, laid off or having reduced work (also applies if childcare is not available due to the virus). There is also an increase to the amount that may be taken as a loan from an IRA and workplace-based retirement plan up to $100,000 (previously $50,000) and a delay in repaying loans from such plans.
- There will be no limitation on cash charitable contribution deductions for individuals in 2020. For corporations, the 10% limit is increased to 25% for 2020. These changes do not apply to donations to donor advised funds. Individuals who do not itemize can deduct up to $300 of charitable deductions, in addition to their standard deduction.
- Individuals are eligible to receive rebate checks of $1,200 ($2,400 for joint filers). Each dependent claimed would increase the amount by $500. Eligibility is based on 2018 adjusted gross income; the amount begins to phase down at $75,000 of income ($150,000 for joint filers, $112,500 for heads of households), down to zero at $99,000 of income ($198,000 for joint filers) for those with no dependents.
- The Act temporarily suspends the required minimum distribution rules for 2020. RMD distributions are not allowed to be treated as eligible rolled-over distributions, regardless of the suspension of the RMD rules.
- Employer payments of employee student loans will not be included in income for 2020.