Coronavirus aid, relief, and economic security act
NUANCES AND TAX IMPLICATIONS
The Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”) was passed by the U.S. lawmakers on March 27, 2020. CARES Act is intended to provide an economic stimulus to businesses and individuals.
A visual representation of where the $2 trillion will be spent is represented in the table below. There are five components to the COVID-19 stimulus bill:
|Category||Total Amount||Share of the Package|
|Big Business||$500 billion||25%|
|Small Business||$377 billion||19%|
|State and Local Government||$340 billion||17%|
|Public Services||$179 billion||9%|
Amount: $604 billion – 30% of total CARES Act
Individual US taxpayers will receive up to $1,200 for single filers for those earning up to $75,000 per year or $2,400 for joint filers earning up to $150,000 per year, increased by $500 for each qualifying child. For single filers with gross adjusted income of more than $99,000 ($198,000 for joint filers) the payment is eliminated. All US individuals are eligible for these payments except:
- nonresident aliens;
- individuals who can be claimed as a dependent by another taxpayer;
- an estate or a trust.
Eligible individuals are required to provide a Social Security number for themselves, their spouse and any child for whom the additional $500 credit is claimed. Taxpayers with ITINs are not eligible for the credit.
This stimulus bill is structured as a tax credit. The payment will be automatically made to eligible individuals starting in April 2020 as a direct deposit or a check by mail. The payment will be based on the taxpayer’s 2019 return or, if the taxpayer did not file, their 2018 return.
Retirement Withdrawals: The 10% early withdrawal penalty is waived for retirement plan distributions of up to $100,000 made after January 1, 2020 for coronavirus-related purposes. The distribution is considered income, the income would be recognized over 3 years, and taxpayers may pay back the funds to the retirement account within 3 years. Additionally, for individuals affected by the coronavirus, loan limits from retirement plans are increased from $50,000 to $100,000. For loans due in 2020, the repayment deadline is delayed.
Retirement Distributions: Individuals of a certain age who are required to withdraw minimum amounts annually from certain retirement plans on accounts, subject to a 50% penalty. The CARES Act waives the minimum distribution requirements for 2020.
Charitable Contributions: Individuals are permitted up to $300 of above-the-line deductions for charitable contributions made in 2020, regardless of whether the individual itemizes their deductions. For individuals who do itemize, the 50% of adjusted gross income limitation is suspended for 2020.
Student Loans: There will be a temporary suspension for any student loan held by the federal government. This means no payment is required and no interest will be accrued until the end of September 2020.
Employees who receive employer-sponsored educational assistance may exclude up to $5,250 of this payment from their income. Under current law this includes only tuition, fees, and related supplies.
Unemployment: The bill increases the benefits. States will continue to pay unemployment to people who qualify. This bill adds $600 per week for four months from the federal government on top of whatever base amount a worker receives from the state. The legislation also adds 13 weeks of unemployment insurance. People nearing the maximum number of weeks allowed by their state would get an extension. New filers would also be allowed to collect the benefits for a longer period.
Independent contractors: They can also claim unemployment benefit that will run through the year 2020. They will have to certify that they are able and available to work but for COVID-19 they are unable to work. These benefit calculations will be based on previous year’s net income of the contractors.
Amount: $500 billion – 25% of total CARES Act
This component of the package is aimed at stabilizing big businesses in hard-hit sectors.
Employee Retention Credit: This new provision allows eligible employers a refundable payroll tax credit for 50% of qualified wages paid to employees from March 13, 2020 – December 31, 2020. The credit is provided for the first $10,000 of compensation, including health benefits paid to an eligible employee.
An employer with more than 100 full-time employees in 2019 and if its operations were fully or partially suspended as a result of a coronavirus-related shut-down order. In this instance, qualified wages are those paid when employee services are not provided, limited to 30 days per employee.
An employer with 100 or fewer full-time employees in 2019 is an eligible employer if its gross receipts declined more than 50 % as compared to the same quarter in the previous year. In this instance, all employee wages are credit-eligible, and credit is available regardless of whether the business was closed.
Payroll Tax Deferment: A portion of employer payroll taxes are deferred. For employers, all the payroll tax attributable to Social Security payments, or 6.2% of wages, is deferred. For self-employed individuals, one-half of the 12.4% is eligible for deferral.
The deferred payments would be paid in two installments: half due on December 31, 2021, and half due on December 31, 2022. Social Security trust funds are unaffected.
Use of Net Operating Losses: Under current law, businesses may only carry forward NOLs. Under the TCJA, businesses may only use NOL carry forward to offset a maximum of 80% of computed taxable income.
This provision expands the use of NOLs:
- Temporarily suspending the 80% of taxable income limit for tax years 2018, 2019, and 2020;
- Allowing NOLs arising in tax years beginning in 2018, 2019, and 2020 to be carried back up to five years.
This carryback capability is also provided to pass-throughs or sole proprietorships.
Deduction for Business Interest Expense: Under IRC sec. 163(j) of the TCJA, the amount of business interest expense that may be deducted by a taxpayer is limited to the sum of:
- The taxpayer’s business interest income for the year;
- 30% of the taxpayer’s adjusted taxable income (“ATI”) for the year;
- The taxpayer’s floor plan financing interest expense for the year.
The Act increases the ATI limitation from 30% to 50% for tax years beginning in 2019 and 2020. Taxpayers may elect to use 2019 ATI for purposes of calculating their 163(j)-business interest expense limitation for 2020.
Corporate AMT: Under current law, corporate AMT credits for prior AMT payments are allowed as refundable credits until 2021. The Act accelerates the ability of corporations to recover their AMT credits and makes the credits refundable in tax years 2018 and 2019.
Qualified Improvement Property (“QIP”): The Act reduces the recovery period to 15 years and makes the relevant costs eligible for bonus depreciation under IRC sec. 168(k). This provision is effective for property placed in service after December 31, 2017. Taxpayers that placed qualified property in service in 2018 should consider amending their 2018 income tax return to treat the property as eligible for bonus depreciation.
Amount: $377 billion – 19% of total CARES Act
Emergency grants: The bill provides $10 billion for grants of up to $10,000 to provide emergency funds for small businesses to cover immediate operating costs.
Relief for existing loans: There is $17 billion to cover 6 months of payments for small businesses already using SBA loans.
Forgivable loans: There is $350 billion allocated for the Small Business Administration to provide loans of up to $10 million per business. Any portion of that loan used to maintain payroll, keep workers on the books or pay for rent, mortgage and existing debt could be forgiven, provided workers stay employed through the end of June. Different SBA loan programs available are as follows:
Economic Injury Disaster Loans (EIDL):
- This loan can be used for rent, mortgage payments, utilities, payroll etc.
- Self-employed can apply
- 75% interest rate up to 30 years repayment term
- First payment can be deferred up to 1 year
- Applying on-line will be fastest
Small Business Interruption Loans (SBIL):
- This loan funds can be used for payroll, mortgage payments, rent, utility expenses etc. for the period February 15th through June 30, 2020
- Self-employed can apply
- Loan up to $10 million if business falls under the SBA standards (less than $22 million in annual revenue and less than 500 employees)
- No collateral or personal guarantees are required
- Loan may be eligible for forgiveness in whole or in part
- Up to 10 years loan repayment term
Paycheck Protection Program (PPP):
- The Act creates the Paycheck Protection Program (PPP), which expands the Small Business Administration 7(a) loan guaranty program, by providing 100 % federally guaranteed loans that are partially forgivable to qualified small businesses who maintain their payroll.
- The maximum amount of the loan (subject to a $10 million cap) is the sum of:
- 5 times the average monthly payroll prior to the coronavirus pandemic;
- The amount of any other debt approved for refinancing.
- Importantly, a portion of the loan is an amount equal to up to 8 weeks of payroll and other qualifying cost can be forgiven so that the recipient never has to pay that money back.
- The amount of loan forgiveness includes the employer’s:
- Payroll costs;
- Interest on certain mortgage obligations;
- certain payments of rent obligations; and certain utility payments.
- The amount of loan forgiveness will be reduced based on any reduction in the number of employees during the covered 8-week period as well as for any reduction of wages of more than 25% of employees who are making $100,000 or less. Detailed documentation is required in connection for request of forgiveness.
- Small businesses and other eligible entities may apply for a loan under the Paycheck Protection Program if they were harmed during the coronavirus emergency between February 15, 2020 and June 30, 2020. Such business must have been in operation on February 15, 2020.
Based on the legislation, it may be helpful for interested business owners gather the following information about their business:
- 2019 Payroll — including the last 12 months of payroll
- 2019 Employees — 1099’s for 2019 employees and independent contractors that would otherwise be an employee of your business. (Note: Do NOT include 1099’s for services)
- Healthcare costs — all health insurance premiums paid by the business owner under a group health plan.
- Retirement — your company retirement plan funding paid for by the company.
PPP Application Form and Instructions are available below:
State and Local Governments
Amount: $340 billion – 17% of total CARES Act
The legislation designates $339.8 billion for programs that will go to state and local governments. It is divided up to $274 billion toward specific COVID-19 response efforts, including $150 billion in direct aid for those state and local governments running out of cash because of a high number of cases.
It also includes $5 billion for Community Development Block Grants, $13 billion for K-12 schools, $14 billion for higher education and $5.3 billion for programs for children and families, including immediate assistance to childcare centers.
The bill includes relief for college students and graduates with outstanding federal student debt.
Temporary student loan relief: All loan and interest payments would be deferred through September 30th without penalty to the borrower for all federally owned student loans.
Work-study funds: It allows schools to turn unused work-study funds into supplemental grants and continue paying work-study wages while schools are suspended.
Students who are forced to drop out: Students who drop out of school as a result of the coronavirus wouldn’t have that time away from school deducted from their lifetime limits on subsidized loan and Pell Grant eligibility. Those students would also not be asked to pay back any grants or other aid they have already received.
Public and Health Services
Amount: $179 billion – 9% of total CARES Act
The biggest part of the CARES Act goes to healthcare providers, who will receive $100 billion in grants to help fight COVID-19. This was a major ask from groups representing the healthcare industry, as they look to make up the lost revenue caused by focusing on the outbreak — as opposed to performing elective surgeries and other procedures. There will also be a 20% increase in Medicare payments for treating patients with the virus.
Hospitals: There is $100 billion for hospitals responding to the coronavirus.
Community health centers: The bill provides $1.32 billion for community centers that provide health care services.
Drug access: There is $11 billion for diagnostics, treatments and vaccines.
Centers for Disease Control and Prevention: CDC programs and response efforts are getting $4.3 billion.
Veterans’ health care: There is $20 billion set aside for veterans.
Telehealth: The bill reauthorizes a critical telehealth program to extend the reach of virtual doctors’ appointments.
Medicine and supplies: The bill provide $16 billion to the Strategic National Stockpile to increase availability of equipment, including ventilators and masks.
Child nutrition: There is $8.8 billion for schools to provide meals for students.
Food stamps: $15.5 billion is going to the Supplemental Nutrition Assistance Program. The money will help cover the expected cost of new applications to the program as a result of the coronavirus.
Food banks: There is $450 million for food banks and other community food distribution programs.