Coronavirus Aid, Relief, and Economic Security Act (“CARES” Act)

On March 27, 2020, the House passed the Coronavirus Aid, Relief, and Economic Security (CARES) Act. The Senate previously passed the bill on March 25, 2020. The bill will go to President Trump who is expected to sign into legislation. The bill provides significant tax and non-tax stimulus to businesses and individuals. Below is a summary of the key provisions:

Businesses

• Net Operating Losses – Losses arising in 2018, 2019 and 2020 can be carried back to the five preceding years. Losses can fully offset taxable income. The previous 80% limitation is temporarily removed. The bill also eliminates loss limitation rules applicable to sole proprietors and passthrough entities to allow them to take advantage of the NOL carryback.
• The business interest deduction limitation will be increased to 50% from 30% of adjusted taxable income for 2019 and 2020.
• Acceleration of refundability of corporate alternative minimum (AMT) credits.
• Retroactive correction to the Tax Cuts and Jobs Act to treat qualified improvement property as 15 year property under MACRS, making it eligible for bonus depreciation.
• Employers are allowed to defer payment of the employer share of the social security tax they are responsible for paying the federal government from the effective date of the legislation through December 31, 2020. The provision requires that the deferred employment tax be paid back over the following two years. However, employers who receive Small Business Act loans that are forgiven under the CARES act (explained below) are not eligible for this payroll tax deferral.
• Establishment of the Employee Retention Credit:
  • Certain employers may receive a payroll tax credit of up to $5,000 per employee of wages and health benefits paid after March 12, 2020 through December 31, 2020.
  • If the credit amount exceeds the employer’s liability, the excess is refundable.
  • Any employer whose business was fully or partially suspended in 2020 due to COVID-19 or experienced a 50% decline in 2020 quarterly gross receipts when compared to the same quarter in 2019, ending with the 4^th quarter 2020, may be eligible to receive this refundable employment tax credit.
  • Qualified wages vary depending on whether the employer has more or less than 100 full-times employees.
    1. More than 100 full-time employees: qualified wages are those paid to employees when they are not providing services due to the COVID-19 pandemic.
    2. 100 or fewer full-time employees: all wages qualify for the credit.

• Business Loan Programs – SBA 7(a) Loan Program Expansion
   
  1. Paycheck Protection Program
     • Program provides forgivable Small Business Administration (SBA) loans to businesses with 500 or fewer employees. Loan amounts are determined by a formula tied to the businesses’ payroll costs. The maximum loan you can receive will equal 2.5 times your average payroll costs during the 1- year period before the loan is taken. Payroll costs are defined very broadly and include:
       1. Employee salaries, wages, and commissions up to $100,000 (per employee)
       2. Payment for vacation, parental, family, medical or sick leave
       3. Severance payments
       4. Group health insurance
       5. Retirement plan contributions
       6. State and local taxes

The maximum loan amount is $10 million. Allowable loan uses include payroll costs as defined above, mortgage interest, rent and utility payments.

• Forgiveness on the loan is equal to the amount spent by the borrower during an 8-week period after the origination date of the loan on payroll costs as defined above, interest on any covered mortgage obligation (does not cover principal payments or prepayments), rent and utilities. Eligible payroll costs are the amount incurred during the 8-week period after the origination of the loan compared to the previous year’s 8-week time period. If wages are reduced, the loan forgiveness will be reduced proportionately. Eligible payroll costs include compensation up to $100,000 per person.
• To encourage employers to rehire any employees who have already been laid off due to the COVID-19 pandemic, borrowers that re-hire workers by June 30, 2020, who have been previously laid off will not be penalized for having a reduced payroll at the beginning of the loan period.
• Portions of the loan not forgiven are payable over a maximum of 10 years at a maximum interest rate of 4%.
• The SBA is guaranteeing these loans, and businesses will need to apply through banks and credit unions. Approximately 1,800 lenders are already approved to issue 7(a) loans. Your current bank is a good starting point to apply for these loans and obtain additional information.
• Borrowers can defer repayment of principal and interest for at least 6 months but not more than one year.
• The forgiven debt will be excluded from taxable income.
• There will be no prepayment penalties.

Individuals 

• Stimulus Payments – Rebates of up to $1,200 for single filers and $2,400 for joint filers (with amounts increased by $500 per child under the age of 17). Payments start phasing out for those with income above $75,000 in adjusted gross income for individuals, $112,500 for heads of households, and $150,000 for married couples. For those with no children, the benefit completely phases out at $99,000 for individuals and $198,000 for married couples.
  1. The Internal Revenue Service (IRS) could start issuing payments within three weeks. The IRS will be able to move faster for people who have filed 2019 tax returns with direct-deposit information, as it will be significantly slower for those who will need paper checks.
  2. The government will use 2019 tax returns to set the payment amounts and 2018 tax returns if 2019 is not available.
  3. The final amount of all benefits will be determined based on 2020 income and settled on the 2020 tax return. If once you file your 2019 and 2020 returns, you were entitled to a smaller stimulus payment than you actually received, you will not have to pay it back.
  4. The stimulus payments will not be considered taxable income.

• Unemployment
  1. Established a temporary Pandemic Unemployment Assistance Program through December 31, 2020, to provide payment to those not traditionally eligible for unemployment benefits (self-employed, independent contractors,) who are unable to work as a direct result of the COVID-19 pandemic.
  2. Provides an additional $600 per week payment to each recipient of unemployment insurance or Pandemic Unemployment Assistance for up to four months.
  3. Provides an additional 13 weeks of unemployment benefits through December 31, 2020, to help those who remain unemployed after state unemployment benefits are no longer available.
• Retirement Distributions – The 10% early withdrawal payment is waived for distributions up to $100,000 from qualified retirement accounts for COVID-19 related purposes. Any income tax attributable to an early withdrawal is subject to repayment over a three-year period. The legislation also waives all 2020 required minimum distributions (RMD’s).
• Student Loan Repayment – Student loan repayment contributions by the employer for an employee are not taxable to the employee up to a $5,250 annual cap for contributions made prior to January 1, 2021.

• Charitable Contributions – Allows an above the line deduction of up to $300 for charitable contributions made by individuals for those taxpayers who do not itemize. Individuals can claim an unlimited itemized deduction for a charitable contribution, which was previously limited to 50% of adjusted gross income.

Lutz, Selig & Zeronda, L.LP. is here to serve as your trusted advisor as we navigate these difficult times. Please do not hesitate to contact us with any questions.

Kind Regards,

The Partners of Lutz, Selig & Zeronda, CPAs, L.L.P.