On March 25, 2020, the Senate unanimously passed the Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”). The CARES Act provides much needed stimulus to individuals, businesses, and hospitals in response to the economic distress caused by the coronavirus (COVID-19) pandemic. On March 27, 2020, the House of Representatives passed the CARES Act by voice vote. President Trump signed the bill into law that same day.
Here are some of the major takeaways for the CARES Act:
Paycheck Protection Program
The Paycheck Protection Loan Program covers the period February 15, 2020 through June 30, 2020. The loan program will allow businesses suffering due to the coronavirus outbreak to borrow money for a variety of qualified costs related to employee compensation and benefits, including payroll costs, mortgage interest obligations, rent, continuation of health care benefits, employee compensation (of those making less than $100K), and utilities incurred before the covered period.
The legislation greatly expands the number of businesses, including individuals who operate as a sole proprietor, or independent contractor (including non-profits). The loans are fully guaranteed by the federal government through December 31, 2020 and are generally limited to the lessor of the average monthly payroll costs for the 1 year period ending on the date the loan was made ( an alternative calculation is available for seasonal employers) multiplied by 2.5 or up to $10 million.
The loans will have a maximum maturity of 10 years and in interest rate not to exceed 4%. In addition, the standard fees imposed under section 7 of the Small Business Act are waived, and no personal guarantee is required by the business owner.
The CARES Act calls for a portion of the above-mentioned paycheck protection loans to be forgiven on a tax-free basis. Amounts to be considered for forgiveness is the sum of payments that were made by the borrower that are considered qualified costs, during the 8-week period following the date of the loan. The loan forgiveness cannot exceed the principal.
Please find this link to the US Chamber of Commerce and its guide and checklist.
Emergency Government Disaster Loan and Grant
The CARES Act expanded the Economic Injury Disaster Loans to include businesses under 500 employees but also sole proprietors. Loans under $200,000 made under this program before December 31, 2020 will have no personal guarantees. This permits a disaster loan to be taken out between January 31, 2020 and the date on which a paycheck protection loan is available for reasons “other than payroll costs”.
Individual Stimulus Payments
The individual stimulus payment or “2020 recovery rebate for individuals” , the government will start to distribute checks directly to taxpayers. “Eligible individuals” can benefit from a tax credit equal to the sum of $1,200 for single filers and $2,400 for those filing a joint return plus an amount equal to $500 multiplied by the number of qualifying children. However, the aforementioned tax credits will be “phased-out” by $5 dollars of your payment for every $100 your adjusted gross income (AGI) exceeds the following thresholds: $150,000 for joint-filers, $112,500 for heads of household, and $75,000 for single filers.
The IRS will determine the eligibility by reviewing your 2019 return, or if not available they will use your 2018 return to determine your AGI. If you weren’t required to filed for example, you collect social security and did not have enough taxable income to necessitate the filing of a return, the IRS will review your social security benefit statement. The payments will be made between now and December 31, 2020 and in many cases will be made electronically if you have provided direct deposit information on either your 2018 or 2019 returns. It’s important to note that these payments received act as an advance payment of a credit towards your 2020 taxes and will be recalculated when that return is filed in 2021.
Distributions from Retirement funds
Coronavirus-related distributions (i.e. those who are directly afflicted with the disease, spouse or dependent or who experiences adverse financial consequences as a result of being quarantined, laid off or being unable to work due to lack of child care) made from both eligible employer sponsored retirement plans and individual retirement accounts are exempt from the 10% early distribution penalty tax. These distributions can be made up to $100,000. These distributions are subject to regular income tax, although it may be spread over three years.
The CARES Act temporarily waives the minimum distribution requirements for qualified plans and other individual retirements account (IRA). This applies for all required minimum distributions that otherwise would have been required to be made in 2020.
Tax Treatment of Charitable Donation
Beginning in 2020, the CARES Act allows taxpayers to take an “above-the-line” deduction for qualified charitable contributions of up to $300 in computing their adjusted gross income. This deduction is only available to a taxpayer who does not itemize their deductions such as mortgage interest, real estate taxes and medical expenses.
Employer Payment of Student Loan Debt
The CARES Act permits an employer to pay up to $5,250 in 2020 of an employee’s student loan or other qualified educational expenses (master’s program), with the payments being tax-free to the employee. To the extent that the employee’s student loan is paid, the employee cannot deduct the interest on the related debt under Section 221.
The CARES Act extends unemployment insurance to workers who are not normally eligible for such benefits at the state level so long as their unemployment is connected to COVID-19. Those who will now be eligible include part-time employees, independent contractors, the self-employed, freelancers and gig workers. In addition, the federal government will provide $600/week to individuals who are eligible for unemployment insurance for up to four months, through July 31, 2020, which will complement existing state unemployment benefits. The CARES Act also extends state-level unemployment insurance by an additional 13 weeks (from 26 to 39 weeks in Pennsylvania) through December 31, 2020.
Qualified Improvement Property Fix
As part of the CARES Act, it corrects a much-needed technical correction in the Tax Cuts Act and Jobs Act of 2017 (TCJA), whereby changing the life on certain “qualified improvement property” (QIP). The depreciation life on QIP property was reduced from 39 years to 15 years and thus enables companies to have 100% bonus depreciation being available for all assets with lives less than 20 years. This change is retroactive to January 1, 2018, thus, enabling taxpayers to file amended returns for the benefit of this accelerated depreciation.
Delay of Payment of Employer Payroll Taxes
The CARES Act will allow for most employers to defer paying their share of applicable employment taxes from the time the CARES Act is signed into law through December 31, 2020. Half of this deferred amount would be due on December 31, 2021 and the other half by December 31, 2022 under Section 1109.
Changes to Net Operating Loss Rules
The CARES Act temporarily reversed the TCJA, whereas post 2017 net operating losses were disallowed to be carried back and provided for an indefinite carryforward period. The CARES Act permits losses from years 2018, 2019 and 2020 to be carried back for a period of 5 years. As was the previous case, a taxpayer can forgo the carryback and instead elect to carry the loss forward.
As a result, the taxpayers can file an amended return to claim a refund.
Limitation on Business Interest
The CARES Act temporarily increases the amount of interest expense businesses are allowed to deduct on their tax returns, by increasing the 30-percent limitation of adjusted taxable income (as imposed under the Tax Cuts and Jobs Act) to 50 percent of adjusted taxable income (with adjustments) for 2019 and 2020. A partnership does not get to use the 50% limited adjusted taxable income, instead and disallowed interest is passed out to the partners and is suspended at the partner level under normal rules. In 2020, 50% of the suspended interest will be permitted to be freed up and will be fully deductible. The remainder is suspended until the partnership allocates excess taxable income or excess interest income to the partner.