Update 4:45 p.m. March 27, 2020
Key Business and Personal Provisions of the CARES Act
Friday afternoon, March 27, the President signed the CARES Act which will provide over $2 trillion in relief to individuals and businesses. Below, is a summary of the key personal and business tax provisions. Thank you for your patience and understanding as we navigate through the information and sustain the pace of change. Feel free to contact us with questions or how these provisions may impact you.
Key Business Provisions
Small Business Loans – the Paycheck Protection Program
- The CARES Act provides that businesses with fewer than 500 employees, including sole proprietors and nonprofits, will have access to nearly $350 billion in loans under Section 7 of the Small Business Act during the covered period of February 15, 2020, to June 30, 2020. The Act terms the loans as “paycheck protection loans” and are fully guaranteed by the federal government through December 31, 2020.
- Generally, the loans are limited to the lesser of (1) the average monthly payroll costs incurred during the 1-year period before the date on which the loan is made multiplied by 2.5 (special computation available for seasonal employers) or (2) $10 million.
- The loans can be used during the covered period (February 15, 2020 – June 30, 2020) for the following:
- Payroll Costs
- Costs related to continuance of group health care benefits
- Employee salaries, commissions, or similar compensation
- Payments of interest on mortgage obligation (does not include principal payments or prepayments)
- Interest on other debt obligations incurred before the covered period
- The loans will have a 2-year maturity and an interest rate of 1%. No prepayment penalties apply.
- The Act allows for deferment of payment on the loan during the covered period of at least six months. Deferment includes principal, interest, and fees.
Loan Forgiveness for Paycheck Protection Loans
- The CARES Act allows for a portion of the aforementioned paycheck protection loans to be forgiven.
- The amount eligible to be forgiven is the sum of payments made during the 8-week period beginning on the date of the origination of the loan for:
- Payroll costs
- Interest payments on mortgage obligations
- Certain utility payments
- To obtain forgiveness, the borrower must submit an application to the lender verifying the number of employees, pay rates, and canceled checks for mortgage interest, rents, or utility payments.
- The amount of loan forgiveness is reduced by:
- Reductions in the workforce during the 8-week period, or
- Reductions in salary or wages paid to employees who earned less than $100,000 in annualized salary by more than 25% during the 8- week period.
- The reduction can be avoided if the employer rehires or increases the employee’s pay within the 8-week period.
Employee Retention Credit
- Employers are eligible for a one-year only 50% refundable payroll tax credit on wages paid up to $10,000 per employee. Employers are eligible by one of two ways:
- The operation of the business was fully or partially suspended during any calendar quarter during 2020 due to orders from an appropriate government authority resulting from COVID-19, or
- The business remained open but gross receipts for any calendar quarter during 2020 fell below 50% of gross receipts for the same calendar quarter in the prior year. The business would be eligible for the credit until gross receipts in any calendar quarter exceeded 80% of the same calendar quarter in the previous year.
- Employers who take out a small business interruption loan (paycheck protection loans mentioned in the section above) are not eligible for this credit.
Delay of Payment of Employer Payroll Tax and Self Employment Tax
- 50% of employer payroll taxes that would be due from 3/27/2020 through 12/31/2020 may be deferred with half of the deferral paid by 12/31/2021 and the other half paid by 12/31/2022.
- Employers who take out a small business interruption loan (paycheck protection loans mentioned in the section above) are not eligible for this deferral.
Changes to Net Operating Loss Rules (NOL)
- Beginning with NOLs created in the tax year 2018, NOLs were only eligible to offset 80% of taxable income in future years. The CARES Act removes this limit for tax years 2018 –2020.
- NOLs carried to 2019 and 2020 can offset 100% of taxable income (previously limited to 80%).
- NOLs for tax years 2018 – 2020 are also eligible for a five-year carryback (previously no carrybacks were allowed).
Deduction of Interest Expense
- For the 2019 and 2020 tax years, the Act replaces the 30% of adjusted taxable income limit for interest expense with 50% of adjusted taxable income. Furthermore, businesses can elect to use their 2019 adjusted taxable income in 2020 for purposes of the interest expense limitation.
Charitable Contributions by C-Corporations
- The act raises the charitable contribution limit for C-Corporations from 10% of taxable income to 25% of taxable income.
Qualified Improvement Property Fix
- A drafting error in the 2017 Tax Cuts and Jobs Act left qualified improvement property (QIP) with an unintended 39-year depreciable life. QIP is generally defined as improvements made to the interior portion of a building after the building is placed in service. The CARES Act corrects the language in the 2017 Act to allow QIP to have a 15-year depreciable life. Therefore allowing 100% bonus depreciation as well. This change is retroactive for tax years 2018 and 2019.
Additional Government Guaranteed Lending
- The CARES Act also provides additional emergency government disaster loan and grant money through the Small Business Administration.
Key Personal Provisions
Personal Tax Rebates
- Based on your 2019 tax return, or your 2018 tax return if 2019 has not been filed, the IRS is going to be cutting a check of $1,200 if single, $2,400 if married filing jointly, plus $500 for each child under the age of 17. The current version of the bill is not limited to your tax liability nor to a minimum income requirement. Furthermore, if you have not filed a 2018 or 2019 tax return, but you did receive Social Security benefits, you will also be receiving a payment.
- Individuals with higher incomes in 2018 or 2019 will have their payments phased out based on their reported Adjusted Gross Income (AGI). The phase-out begins at $75,000 for single filers and $150,000 for joint filers. Once an individual exceeds these thresholds, the payment is reduced $5 for every$100 your AGI is over the threshold.
- If you are single with no kids, your $1,200 would be eliminated if your AGI exceeded $99,000 (($99,000 – $75,000) * 5% = $1,200)
- If you are married with no kids, your $2,400 would be eliminated if your AGI exceeded $198,000 (($198,000 – $150,000) * 5% = $2,400)
- Obviously, if you have kids and are receiving an additional $500 per qualifying child, then it would take more income to fully eliminate your payment.
- The IRS is tasked with issuing these payments as quickly as possible between the passage of this bill and December 31, 2020. The payments will be delivered via direct deposit if the IRS has that authorization on file or by check in the mail.
- When you file your 2020 tax return, you will reconcile the advance payment you received against what you would be allowed using your 2020 AGI. If you were due more than what you received, you will receive a credit on your 2020 tax return to offset your tax liability. At this time, it does not appear that you would be required to pay back any excess amount that you received based on your 2018 or 2019 AGI. For example, if your AGI was higher in 2020 or you have a child who turned 18 during 2020, it does not appear you would be required to pay back any excess advanced payment received.
Special Relief from Retirement Plan Rules
- Distributions to an individual of up to $100,000, deemed to be a coronavirus related distribution, will not be penalized as a premature distribution if the taxpayer is under age 59 ½. Typically premature distributions are subject to a 10% penalty.
- A coronavirus related distribution is a distribution made during 2020 to an individual:
- Diagnosed with COVID-19 or SRS-COV-2, by a test approved by the CDC,
- Whose spouse or dependent is diagnosed with one of the two diseases, or
- Who experiences adverse financial consequences as a result of being quarantined, being furloughed or laid off or having work hours reduced due to the virus, closing or reducing hours of a business owned or operated by an individual due to the virus, or other factors as determined by the Secretary of the Treasury.
- This distribution does not escape income tax. The Act does allow a taxpayer to take the distribution into income over three years beginning with 2020, or the taxpayer can repay the withdrawal within three years to avoid the income tax on the withdrawal.
- The amount a taxpayer can borrow from their eligible retirement plan is increased from $50,000 to $100,000 for the 180-day period beginning when this Act is signed.
- Required Minimum Distribution (RMD) requirements are waived for 2020. This includes RMDs due 4/1/2020 for taxpayers who turned 70 ½ during 2019.
- For 2020 only, the Act allows for an “above-the-line” deduction of up to $300 to qualified charitable organizations. An “above-the-line” deduction is a deduction allowed in computing AGI. The majority of taxpayers were no longer receiving a benefit for charitable contributions as the standard deduction was increased with the Tax Cuts & Jobs Act of 2017 to $12,000 for single taxpayers ($24,000 for married filing jointly) which exceeded itemized deductions of most taxpayers. Charitable contributions are itemized deductions. To claim the $300 “above-the-line” deduction, the taxpayer must be taking the standard deduction.
- For taxpayers who do take itemized deductions, the Act temporarily lifts the limit on charitable giving for 2020. Cash contributions to public charities are generally limited to 60% of AGI. The CARES Act allows a deduction of up to 100% of AGI for cash contributions. This does not include contributions of property or contributions made to a donor-advised.