CARES Act Overview: The impact to taxpayers and businesses
The President signed the latest COVID-19 relief bill on March 27: The Coronavirus Aid, Relief, and Economic Security (CARES) Act. The bill brings with it several elements of relief for businesses, employees and families, in an effort to maintain livelihoods throughout the crisis and after. The expected cost of the bill is nearly $2 trillion and includes nearly $500 billion for in economic distress relief for businesses, states and municipalities.
For funding dedicated to taxpayers and businesses, the bill includes provisions related to taxes, unemployment, small business loans, and a large business lending program. Below is a summary of the key provisions impacting taxpayers and businesses.
Tax provisions in the CARES Act for individuals and families:
Financial relief for American families is provided with direct payments of an advance 2020 tax credit issued in the amount up to $1,200 per adult, $2,400 for married filing jointly (MFJ), and $500 per child under age 17. Higher-earning taxpayers with Adjusted Gross Income (AGI) above $75,000 filing single or $150,000 MFJ will receive reduced amounts subsequently by 5% of AGI. Payments will be based on 2019 returns if filed, or 2018 returns, and a provision exists for those who don’t earn enough to file a return to still be able to claim the credit. The amount of credit available on a taxpayer’s 2020 return will be reduced by the amount of the advance refund payment they receive. Payments would be made by December 31, 2020. The Tax Policy Center estimates 90% of Americans will be eligible for these direct payments.
The 10% tax for early distributions on retirement plans is waived for up to $100,000 in coronavirus-related distributions. Qualifying events include a coronavirus diagnosis, adverse financial consequences as a result of the virus such as quarantine, furlough, lay off, reduced hours, or an inability to work due to lack of childcare. Distributions can be taken up until December 31, 2020.
Older Americans will be able to keep their retirement capital invested instead of taking required minimum distributions for 2020 and minimum required distributions for single-payer plans in 2020 would be delayed until 2021.
Student loan payments would be suspended by the Department of Education without penalty through September 30, 2020.
Coverage for high deductible health care plans with health savings accounts (HSAs) can be used pre-deductible for telehealth services.
Tax provisions in the CARES Act for businesses and employers:
The credit for paid sick leave and paid family leave in the Families First Coronavirus Response Act enacted March 18 is available for advance refunding via forms on the IRS website (not yet released). Penalties for failure to deposit payroll taxes will be waived in the event of anticipated payroll tax credit.
An employee retention credit is available for eligible employers who close due to coronavirus and who pay wages to employees who are not working. Eligibility as currently defined will be limited to businesses that are fully or partially suspended because of government order and employers whose gross receipts are less than 50% of their gross receipts for the same quarter the prior year. Certain tax-exempt organizations also qualify.
50% of 2020 employer payroll taxes may be delayed until December 31, 2021, with the remaining 50% due December 31, 2022. The same provisions exist for self-employment taxes.
Businesses suffering losses can carry back losses from 2018, 2019 and 2020 to the previous 5 years allowing for access to immediate tax refunds. Additionally, the 80% income limitation for net operating loss deductions is temporarily repealed for years beginning before 2021. It also repeals the excess loss limitation created by the Tax Cuts and Jobs Act which disallowed excess business loss of noncorporate taxpayers if the amount exceeds $250,000 ($500,000 for MFJ).
Corporate alternative minimum tax (AMT) is made a refundable credit for 2018 tax years.
Qualified Improvement Properties were made a 15-year property as a technical correction.
Unemployment provisions of the CARES Act
The bill provides $600 per week in addition to state unemployment benefits and includes an additional 4 months of benefits. It also ensures state and local governments and nonprofits can provide employees with unemployment.
Self-employed, partially employed, and those unable to work will also qualify for unemployment benefits who previously would not have qualified.
Small business assistance in the CARES Act
The bill includes $349 billion in loans for small businesses and allows the Small Business Association (SBA) to serve as guarantor for 7(a) loans of up to $10 million for small businesses to maintain payrolls and pay off debts.
Small employers, self-employed, and gig economy workers are eligible for paycheck protection which provides 8 weeks of cash-flow assistance through 100% federally guaranteed loans for small businesses who maintain payroll. The portion of loans used for payroll, mortgage interest, rent and utilities may be forgiven for small businesses who maintain payroll. Retroactive to February 15, 2020, this allows employers to bring back workers who have already been laid off.
Additionally, contract performance periods would be extended by federal agencies for small business contractors.
The SBA will pay all principal, interest, and fees on existing SBA loan products for six months, and programs must be enacted by the SBA within 15 days after the Act is signed.
Distressed business lending program in the CARES Act
$500 billion in loans, loan guarantees, and investments from the Treasury Department were allocated. Direct lending was granted for passenger airlines at $25 billion, cargo airlines at $4 billion, and businesses critical for national security at $17 billion. Loan provisions include:
- Businesses who receive loans may not issue dividends for up to one year after the loan is no longer outstanding and must retain employment levels of 90% from March 24 to September 30, 2020.
- The loan program also includes a specific provision for businesses between 500 and 10,000 employees and nonprofit organizations which includes a 6-month grace period for payments after the loan is issued.
- Employee and executive total compensation may not exceed $425,000.
- Stock buybacks are prohibited during the duration of the loan.
- Borrowers must maintain existing payroll as of March 24, 2020, through September 30, 2020.
Furthermore, the bill allocates $150 billion for states and localities to help mitigate costs related to the virus.
The bill includes provisions that prevent President Trump, his family, and top government officials from receiving loans or investments from Treasury programs in the stimulus. Additionally, concerns regarding oversight of large loans for major industries were addressed with the creation of an oversight board and inspector general position to review loan spending.
Additionally, federally backed mortgage loans are eligible for forbearance for up to 180 days with the opportunity for an additional 180 days if either the initial or extended forbearance period can be shortened. Fees, penalties and additional interest cannot be charged from delayed payments. For those with federally backed loans with tenants, eviction is not allowed for tenants who fail to pay rent for a 120-day period and fees and penalties may not be charged.
Darnall, Sikes & Frederick will continue to provide updates and assistance with these changes.