Important Information Regarding the CARES Act
Updated: Mar 31, 2020
In Collaboration: Kermith Boffill, CPA; Eddie Shamas, CPA; Rachel Rojany, CPA; Ken Solares, CPA; Silva Chamichyan, CPA; Jessie Chun; and Jackie Vacek
On March 27, 2020 the U.S. Senate and House of Representatives passed, and President Trump signed, a $2 trillion relief package designed to alleviate some of the worst effects of the economic downturn currently underway as a result of the COVID-19 pandemic.
2020 recovery rebate for individuals
The Coronavirus Aid, Relief, and Economic Security Act or “CARES Act” will provide a refundable tax credit to individuals (officially titled, the “2020 Recovery Rebate for Individuals”). The U.S. government will begin to immediately provide direct check payments to low and middle income American households. The rebate is $1,200 for single taxpayers and $2,400 for married taxpayers filing jointly. In addition, there’s a $500 rebate for each child under the age of 17, based on certain criteria.
The rebate is subject to a phase out beginning at: $75,000 of adjusted gross income for single taxpayers, $112,500 for taxpayers filing as head of household, and $150,000 for joint taxpayers. The rebate is reduced by $50 for each $1,000 of income earned above these thresholds. It phases out entirely at $99,000 for single taxpayers (with no children) and $198,000 for joint taxpayers (with no children).
Eligibility for the rebate will be based on the 2019 tax return. For most Americans who have not yet filed their 2019 tax return, the 2018 tax return will be the basis for qualification. In the alternative, Social Security statements will be used for individuals who do not meet the requirement to file tax returns.
Important, in the absence of tax returns and social security statements, the rebate will be reflected on the 2020 tax return as a refundable credit.
The rebate will not be counted as taxable income for recipients; it is a credit against tax liability and is refundable for taxpayers with no tax liability to offset.
Qualified Improvement Property
Within the December 2017 Tax Cuts and Jobs Act, Congress intended to accelerate depreciation on Qualified Improvement Property (“QIP”), generally defined as any improvement made to the interior portion of a nonresidential building any time after the building was placed in service. The depreciable life of QIP was intended to be reduced from 39 to 15 years, accompanied by 100% bonus depreciation available for all assets with a life of 20 years or less. Upon implementation, the final IRS regulations retained the QIP asset life at 39 years.
The CARES Act provides the technical correction to the QIP asset life language to 15 years, while also making the change retroactive to January 1, 2018. Taxpayers will be able to file amended tax returns to receive the relief of the accelerated depreciation.
Retirement funds special rules for Coronavirus costs
The CARES Act brings about a new exception to the early withdrawal, 10% penalty imposed when money is taken out of a qualified retirement plan before age 59 ½. The new code will allow a taxpayer to take a “coronavirus-related distribution” of up to $100,000 in the year 2020 free from penalty.
A “coronavirus-related distribution” is a distribution made during 2020:
1) To an individual who is diagnosed with SRS-COV-2 or COVID-19 by a CDC approved test; or
2) To an individual whose spouse or dependent is diagnosed with one of the two diseases, or who experiences adverse financial consequences as a result of being quarantined, furloughed or laid off or having work hours reduced, or being unable to work due to lack of childcare.
While the distribution may be free from penalty, it does not excuse income tax. The taxpayer can choose to spread this distribution as income over a 3-year period beginning with 2020. Additionally, the taxpayer also has the choice to avoid any income recognition by repaying the distribution to the retirement plan within three years of receiving it.
There are two other notable effects related to the retirement income aspect of the CARES Act. First, the required minimum distribution is temporarily waived for 2020. Second, the loan amount against an individual retirement plan has been increased from $50,000 to $100,000 for the 180-day period beginning after the enactment of the Act.
Changes to Charitable Contributions
The December 2017 Tax Cuts and Jobs Act nearly doubled the standard deduction, while simultaneously eliminating the need for many to itemize. As an incentive to contribute to charities amidst this crisis, the CARES Act allows taxpayers to make cash contributions of up to $300 per qualifying charity as a direct deduction to adjusted gross income. This allows taxpayers to receive this deduction in addition to their standard deduction. This deduction is only available to taxpayers who do not itemize their deductions.
SBA Loans and Loan Forgiveness of Paycheck Protection Loans
The CARES Act provides $349 billion in Small Business Administration (“SBA”) loan guaranties and subsidies and additional funding for SBA programs.
The SBA loan terms have also been broadened to remove the requirement for personal or collateral guarantees. Eligible recipients no longer need to certify inability to obtain credit elsewhere and loan terms have been increased to a maximum of 10 years. SBA loan interest payments are completely deferred for one year and interest rates cannot exceed 4%.
The SBA’s 7(a) Loan Program to Support New “Paycheck Protection Program” Loans has been expanded to include an increase in maximum loan amounts to $10 million. The allowable uses have been expanded to include payroll support (including paid sick or medical leave), employee salaries, mortgage, rent and utility payments, insurance premiums, and other debt obligations.
Additionally, some borrowers will be eligible for loan forgiveness equal to the amount spent during an eight-week period after the origination date of the loan on payroll costs, mortgage interest, rent or lease payments, and utilities incurred before February 15, 2020.
Emergency Government Disaster Loan
The CARES Act expanded eligibility for Economic Injury Disaster Loans (“EIDL”) to include sole proprietorships, independent contractors, self-employed individuals, employee stock ownership plans, and small businesses that employ no more than 500 employees. For applicants eligible for disaster loans in the covered period (January 31, 2020 through December 31, 2020), the Small Business Administration will waive three requirements:
1. Personal guarantee on advances and loans that are less than $200,000 and;
2. The applicant needs to be in business for the 1-year period prior to the COVID-19 disaster. This waiver does not apply to businesses that were not in operation on January 31, 2020; and
3. An applicant is unable to obtain credit elsewhere.
Applicants may be approved based solely on their credit score and will not be required to submit a tax return or tax return transcripts.
Small businesses eligible for the EIDL may request an advance of $10,000 or less within three days after applying for said loan. The advance can be used to provide paid sick leave to employees who are unable to work due to COVID-19, maintain payroll in order to retain employees during this economic slowdown, meeting increased costs to obtain materials from secondary sources due to the interruption in supply chains, making rent or mortgage payments, and repaying obligations that cannot be met due to significant loss in earnings as a result of COVID-19. Applicants are not required to repay the advance if their application for the EIDL loan is denied.
Employee Retention Credit
Employers whose businesses were operating in 2020 but were suspended due to orders from a governmental authority will be eligible to receive a payroll tax credit to offset the employer’s portion of Social Security payroll taxes (6.2%) associated with qualified wages paid during the shutdown through December 31, 2020. In addition, the credit will be limited to 50% of the qualified wages paid to each employee each calendar quarter during the shutdown and the credit must not exceed the applicable employment taxes on the wages paid to employees each calendar quarter. If the credit exceeds the applicable employment taxes, the excess credit will be treated as an overpayment that will be refunded pursuant to IRC §6402(a) and 6413(b).
Qualified wages are determined by the average number of employees employed in 2019.
1. If the average is greater than 100, qualified wages for each quarter is solely limited to compensation paid to employees when the business was shut down.
2. If the average is less than 100, qualified wages include wages paid during the shutdown AND wages paid to each employee for each quarter the business collected 50% less in gross receipts compared to the same quarter in the prior year.
In addition, qualified wages include eligible employer’s qualified health plan expenses paid or incurred to maintain a group health plan. In total, qualified wages for the purposes of this credit is not to exceed $10,000.
(Cares Act of 2020, H.R. 748, 116th Cong. §2301)
Exclusion for Certain Employer Payments of Student Loans
The CARES Act expanded gross income exclusions of an employee’s qualified education expense as outlined in IRC §271 to include employer payments to employees or a lender of principal or interest on any qualified education loan up to $5,250 in 2020. Any amounts exceeding $5,250 will not be tax free to the employee and will need to be included in gross income. If an employee’s student loan meets this threshold, the associated student loan interest will not be deductible on the employee’s tax return.
Employer payroll tax and self-employment tax payment deferral (§ 2302)
Employers may now defer their share of social security payments made. The current rate is 6.2% paid monthly or semiweekly. This defers all social security tax payments owed for the time period from March 26, 2020 through December 31, 2020. The new payment schedule defers 100% of amounts due during this period to the following due dates:
50% due on December 31, 2021
50% due on December 31, 2022
Self-employed taxpayers may also defer payments of self-employment tax (Medicare at 2.9% and Social Security taxes at 12.4% on first $132,900 of income with extra Medicare withholding of 0.9% on anything over threshold). This defers only 50% of the payments due between March 26, 2020 through December 31, 2020. Only payments applicable to the 2020 tax year may be deferred; payments owed on the 2019 tax year are unaffected. New payment due dates are as follows:
25% due on December 31, 2021
25% due on December 31, 2022
IMPORTANT NOTE: For businesses that take an SBA payroll protection loan that is forgiven on a tax-free basis, deferment is not allowed. However, the Emergency Medical Leave, Sick Leave, and New Employee Retention credits do not affect the deferral.
Changes to NOL Rules (§2303)
The Net Operating Loss (“NOL”) rules have changed to allow carry back & carry forward periods as follows:
Temporary (and Retroactive) Removal Excess Business Loss
Prior to the CARES Act, Section 461(I) disallowed excess business losses to offset other taxpayer income if the amount of the loss was in excess of $250,000 ($500,000 in the case of a joint return). The disallowed amount was carried forward as a net operating loss to the following tax year.
For example, assume a single taxpayer has business losses of $500,000 and business income of $200,000 in 2018. The taxpayer will have an excess business loss of $50,000 ($500,000 loss – $200,000 income + $250,000 limitation) for the current year. The $50,000 loss will not be allowed to offset other 2018 nonbusiness income. It will become part of the taxpayer’s net operating loss and can be carried over to 2019.
The CARES Act has put a temporary hold on Section 461(l) for 2020 and retroactively for 2018 and 2019 as well. This means that taxpayers who were affected by this provision can file an amended tax return to claim a refund for those years. However, the provision will return in 2021 with technical corrections to disallow employee wages from being used as business income.
Changes to the Interest Limitation Rules
Section 163(j) limits a business’ ability to deduct interest expense beginning in tax year 2018. Certain taxpayers are excluded. Interest expense is limited to 30% of the taxpayer’s adjusted taxable income (“ATI”). Any interest expense disallowed as a current year deduction can be carried forward indefinitely to future years and will be considered as business interest paid, subject to that year’s limitation.
The CARES Act has increased the limit on interest expense from 30% of ATI to 50% for tax years 2019 and 2020. It has also allowed businesses to elect the use of its 2019 ATI in computing its 2020 limitation. This is important as most businesses may not have taxable income in 2020 given the circumstances.
To demonstrate the calculation, assume that for 2019 a business has $250,000 of business interest expense and $400,000 of ATI. Under the CARES Act, the $250,000 of business interest expense is deductible only to the extent of $200,000 (50% X $400,000). The excess $50,000 of business interest expense is nondeductible in 2019 and is carried over to 2020 to be treated as business interest paid in that year. In 2020, if the business had $0 ATI, they could elect to use their 2019 ATI of $400,000 for the 2020 interest limitation calculation.
If you have any other questions regarding the CARES Act, please feel free to contact one of our tax experts.
Kermith Boffill, Partner
Jeff Leonard, Partner
Eddie Shamas, Partner
Rachel Rojany, Director