The CARES Act Provides Over $2 Trillion of Aid
The Coronavirus Aid, Relief and Economic Security Act (CARES Act or the Act) was signed into law by President Trump on March 27, 2020. The CARES Act is estimated to provide over $2 trillion of aid to the American economy including an array of programs and tax provisions focused on small businesses and individuals.
Reese Henry’s team is uniquely suited to help you navigate the countless business, financial and tax issues you are facing today. We are prepared to work with you in maximizing the funds receivable and tax benefits available to you under the CARES Act. Please contact us with questions, or if you would like our assistance in understanding how you can benefit from the CARES Act.
Summaries of the key CARES Act small business subsidy programs and tax provisions follow.
CARES Act: Small Business Emergency Funding and Loan Programs
Paycheck Protection Program
The Paycheck Protection Program is meant to help small businesses, qualifying nonprofits and sole proprietors impacted by the pandemic and economic downturn cover payroll and other operating costs. This Program will be administered by Small Business Administration (SBA) approved banks and commercial lenders.
Step 1 • Funds Disbursed As A Loan
A small business (fewer than 500 employees), qualifying nonprofit or sole proprietor may borrow up to 2.5x their average monthly payroll costs up to a maximum of $10 million. Payroll costs include wages, salaries, certain employee benefits, commissions or similar compensation (guaranteed payments and payments to independent contractors) up to $100,000 per employee in annual compensation.Step 2 • Loan Is Forgiven If Used For Payroll, Rents and Other Qualifying Expenses
A Paycheck Protection Loan may be forgiven entirely if the borrower uses the loan for payroll, employee benefits, interest on mortgages, rent and utilities and does not reduce its workforce or reduce wages below certain thresholds during the 8-week period following the loan origination date (“covered period”). Only a prorated portion of the loan will be forgiven if the borrower reduces its workforce or employee wages during the covered period as compared to other periods in 2019 or 2020. Certain remediation measures may be available prior to June 30, 2020 if a borrower reduces its workforce or employee wages. The amount of the Paycheck Protection Loan forgiven is not taxable.Any portion of the loan not forgiven will have a maximum term of 10 years and an interest rate not to exceed 4%. Initial repayments of the loans may be deferred between 6-months and 1-year. No collateral or personal guarantee is required, and the borrower shall owe no closing fees.
We recommend eligible small businesses, qualifying nonprofits and sole proprietors contact SBA approved banks or commercial lenders to request a Paycheck Protection Loan as soon as possible.
Emergency Economic Injury Disaster Loan (Disaster Loan)
This program is administered by the SBA, applications are available online and funds received under this program may disqualify you for the Paycheck Protection Program if funds are borrowed for the same purposes. Disaster Loan applicants should indicate they are for purposes other than payroll costs. Unlike the Paycheck Protection Program, Disaster Loans are not intended to be forgiven. Under certain circumstances, Disaster Loans may be refinanced into the Paycheck Protection Program. The Paycheck Protection Program’s terms are significantly better than the terms available under the Emergency Government Disaster Loan program.
Emergency Grants of $10,000
An eligible entity who has applied for a Disaster Loan due to COVID-19 may request an advance of up to $10,000 which the SBA must distribute within 3 days. No repayment of advanced funds is required, even if the Disaster Loan is ultimately denied. This program may not be available to companies utilizing the Paycheck Protection Program.
Federally Backed Mortgage Forbearance
Under the Act, certain taxpayers and businesses with federally backed mortgage loans may request forbearance. Duration of forbearance is dependent on the type of loan. Contact your mortgage service provider for more information.
Employee Retention Tax Credit
Employers receive a refundable quarterly payroll tax credit equal to 50% of qualified wages paid to an employee. For purposes of the credit, up to $10,000 of qualified wages per employee is taken into account. Excess credits are refundable. Employee retention tax credits are not available to employers utilizing the Paycheck Protection Program.
Delay of Payroll Tax Payments
Employers and self-employed taxpayers can delay payment of the employer portion of payroll taxes through the end of 2020. Fifty percent of any payroll taxes deferred under this provision must be paid by December 31, 2021, with the remaining fifty percent paid by December 31, 2022. The delay of payroll tax payments is not available to employers utilizing the Paycheck Protection Program.
CARES Act: Tax Relief Provisions
Net Operating Loss Carrybacks
Business Net Operating Losses (NOLs) from 2018, 2019 and 2020 may be carried back to each of the five taxable years preceding the taxable year of such loss. Or taxpayers may elect to forgo the carryback, and instead carryforward the NOLs indefinitely. In addition, NOLs carried back may offset 100% of taxable income, as opposed to 80% under prior law.
Excess Business Losses
The Act removes the limitation on excess business losses of $250,000 for individuals and $500,000 for married couples for tax years 2018-2020. These losses generally took the form of losses from closely-held business in an individual’s tax return that could not be utilized to offset other investment income, e.g. interest, dividend and capital gain. Taxpayers may amend their 2018 return and generate a tax refund for limitations applied under prior law in the original filing of their 2018 tax returns (2019 tax returns as well, if applicable).
Qualified Improvement Property Depreciation
The Act includes a technical correction to the Tax Cuts and Jobs Act allowing Qualified Improvement Property (QIP) to be depreciated over 15-years (as opposed to 39-years under prior law), now qualifying QIP for 100% bonus depreciation. Previously filed 2018 and 2019 tax returns should be reviewed for potential amendments.
Business Interest Expense Limitations IRC 163(j)
Under the Act, taxpayers may temporarily deduct a larger amount of interest expense than otherwise allowed under prior law. For tax years beginning in 2019 and 2020, the deduction for business interest expense is limited to 50% of adjusted taxable income (ATI) (increased from 30% of ATI). Taxpayers may elect not to use the increased limitation. Given that many taxpayers may have significantly reduced income in 2020, taxpayers may elect to substitute 2019 ATI for 2020 ATI. Special rules apply for short tax years. In the case of a partnership, the increase to the ATI portion of the limitation applies only to tax years beginning in 2020. Any election not to use the increased limitation must be made at the partnership level. Like other taxpayers, partnerships may elect to substitute 2019 ATI for 2020 ATI.
Charitable Contribution Deductions
For the 2020 tax year, the deduction percentage limitation for charitable contributions of cash has been removed for individual taxpayers that itemize deductions. Individuals that do not elect to itemize are entitled to an above-the-line deduction of up to $300 for qualified charitable contributions. For C Corp entities, the corporate charitable contribution deduction is increased from 10% of taxable income to 25% of taxable income for 2020.
Retirement Plan Temporary Tax Rule Changes
Temporary Suspension of the Excise Tax for Early Withdrawals: Coronavirus-related distributions from eligible retirement plans are not subject to the 10% excise tax on early distributions. Distributions must be made on or after January 1, 2020 and before December 31, 2020 to an individual who is diagnosed with SARS-CoV-2 or COVID-19, whose spouse or dependent is so diagnosed, or who experiences financial hardship because of quarantine or other factors. Income taxes associated with the withdrawal may be paid over three years. Taxpayers may re-contribute distributed funds within the three year term and avoid income taxes.
Qualified Plan Loans Increased
Loans from qualified employer plans up to $100,000 (increased from $50,000) are permitted in the 180 days beginning on the date of enactment.
Temporary Waiver of Required Minimum Distribution Rules
The required minimum distribution rules are waived for calendar year 2020 for IRAs and certain defined contribution plans.