To our valued clients and associates,
March 26, 2020
The Senate has overwhelmingly passed the Coronavirus Aid, Relief, and Economic Security (CARES) Act, and it appears that the House is set to do the same on Friday, paving the way for the President to sign the bill into law. The CARES Act is a landmark package that will bring much needed relief to so many people who have been impacted by the COVID-19 pandemic. In addition to providing a large cash infusion to hospitals and broader access to COVID-19 testing to individuals, the CARES Act looks to boost the economy with more than $2 trillion in relief, including individual rebates, small business loans, increased unemployment benefits and a wide variety of tax breaks. While the House must still pass the CARES Act as of this writing, we wanted to share with you some of the tax breaks that are included in the Act.
We apologize in advance for the length of this newsletter, however, given the scope of the CARES Act, we thought it would be best to provide you with as much information as we presently have available. We are here for you in this trying economic time and we look forward to working with you to take advantage of as many of the provisions that may apply. Please keep in mind, since the Act has not passed the House as of this writing, we still do not have the exact guidance on these tax provisions. If you have any questions, please give us a call or send us an email. We will continue to monitor the passage of this Act and update you as we hear more. Now, for the details on the CARES Act that you have been waiting for….
The bill provides for payments to taxpayers — “recovery rebates” — which are being treated as advance refunds of a 2020 tax credit. Under this provision, individuals will receive a tax credit of $1,200 ($2,400 for joint filers) plus $500 for each qualifying child. The credit is phased out for taxpayers with adjusted gross income (AGI) above $150,000 (for joint filers), $112,500 (for heads of household), and $75,000 for other individuals. The credit is not available to nonresident aliens, individuals who can be claimed as a dependent by another taxpayer, and estates and trusts. The payments will be made between now and December 31, 2020 — in many cases, it will be paid electronically if you have provided direct deposit information to the IRS on your 2018 or 2019 tax returns — but it’s important to understand that any payment you receive acts as an advance payment of a credit you will compute AGAIN on your 2020 tax return.
Payroll tax credit refunds:
The bill provides for advance refunding of the payroll tax credits enacted last week in the Families First Coronavirus Response Act, P.L. 116-127. The credit for required paid sick leave and the credit for required paid family leave can be refunded in advance using forms and instructions the IRS will provide. The IRS is instructed to waive any penalties for failure to deposit payroll taxes under Sec. 3111(a) or 3221(a) if the failure was due to an anticipated payroll tax credit.
Employee retention credit:
The bill creates an employee retention credit for employers that close due to the coronavirus pandemic. Eligible employers are allowed a credit against employment taxes equal to 50% of qualified wages (up to $10,000 in wages) for each employee. Eligible employers are employers who were carrying on a trade or business during 2020 and for which the operation of that business is fully or partially suspended due to orders from an appropriate governmental authority limiting commerce, travel, or group meetings due to the COVID-19 outbreak. Employers that have gross receipts that are less than 50% of their gross receipts for the same quarter in the prior year are also eligible, until their gross receipts exceed 80% of their gross receipts for the same calendar quarter in the prior year. For employers with more than 100 employees, wages eligible for the credit are wages that the employer pays employees who are not providing services due to the suspension of the business or a drop in gross receipts. For employers with 100 or fewer employees, all wages paid qualify for the credit. If an employer takes out a payroll protection loan under Section 7(a) of the Small Business Act as detailed later in this newsletter, no employee retention credit will be available.
Payroll tax delay: The bill delays payment of 50% of 2020 employer payroll taxes until Dec. 31, 2021; the other 50% will be due Dec. 31, 2022. For self-employment taxes, 50% will not be due until those same dates.
The TCJA nearly doubled the standard deduction, while at the same time, limited or eliminated many itemized deductions. As a result, in 2018 only 8% of taxpayers itemized. To accommodate for this new reality, the CARES Act allows an individual to make a cash contribution of up to $300 made to certain qualifying charities and deduct the contribution “above-the-line” in computing adjusted gross income. Thus, the taxpayer receives the deduction in addition to the standard deduction. This above-the-line deduction is here for 2020 and beyond but is available only to a taxpayer who does not itemize their deductions.
For those taxpayers who DO itemize, the new law temporarily lifts the limits on charitable giving for 2020. After passage of the TCJA, cash contributions to public charities are generally limited to 60% of a taxpayer’s adjusted gross income (AGI). The CARES Act allows such contributions to be deducted up to 100% of AGI for 2020, with any excess contributions available to be carried over to the next five years. For corporate donors, the limit would increase from 10% of adjusted taxable income to 25%.
Taxpayers can take up to $100,000 in coronavirus-related distributions from retirement plans without being subject to the Sec. 72(t) 10% additional tax for early distributions. Eligible distributions can be taken up to Dec. 31, 2020. Coronavirus-related distributions may be repaid within three years. For these purposes, an eligible taxpayer is one who has been diagnosed with SARS-CoV-2 virus or COVID-19 disease or whose spouse or dependent has been diagnosed with SARS-CoV-2 virus or COVID-19 disease or who experiences adverse financial consequences from being quarantined, furloughed, or laid off, or who has had his or her work hours reduced, or who is unable to work due to lack of child care. Any resulting income inclusion can be taken over three years. The bill also allows loans of up to $100,000 from qualified plans, and repayment can be delayed. Of course, it’s always best to leave your retirement plan alone, but desperate times call for desperate measures. Should you need to withdraw in 2020, this new provision will soften the blow.
For those required to withdraw a “required minimum distribution” from their retirement plan in 2020, the CARES Act temporary waives the requirement for this year only.
Net operating losses:
The bill temporarily repeals the 80% income limitation for net operating loss deductions for years beginning before 2021. For losses arising in 2018, 2019, and 2020, a five-year carryback is allowed (taxpayers can elect to forgo the carryback).
Excess loss limitations:
As part of the TCJA, Congress added a fourth limitation on an individual’s ability to use losses from a business. New Section 461(l) provides that the amount of “net business loss” an individual may use in a year to offset other sources of income is capped at $250,000 if single ($500,000 if married filing jointly).
The latest legislation, however, puts a temporary halt on Section 461(l); not only for 2020, but retroactive to January 1, 2018. As a result, taxpayers who found a loss limited by the provision in 2018 or 2019 can file an amended return to claim a refund.
For tax years beginning in 2019 and 2020, Sec. 163(j) is amended to increase the adjusted taxable income percentage from 30% to 50%. Also, taxpayers can elect to use 2019 income in place of 2020 for the computation.
Qualified improvement property:
The CARES Act provides a much-needed technical correction to the QIP problem by giving it its intended 15-year life, while making the change retroactive to January 1, 2018. Thus, taxpayers should be entitled to file amended returns to reap the benefits of accelerated depreciation in 2018 and 2019.
Small Business Loans:
Aimed at keeping small businesses afloat, the CARES Act provides that businesses with fewer than 500 employees — including sole proprietors and nonprofits— will have access to nearly $350 billion in loans under Section 7 of the Small Business Act during the “covered period,” which runs from February 15, 2020 through June 30, 2020.
The loans, which are referred to as “paycheck protection loans” are generally limited to the LESSER OF:
- the sum of 1) average monthly “payroll costs” for the 1 year period ending on the date the loan was made multiplied by 2.5, and 2) any disaster loan (discussed below) taken out after January 31, 2020 that has been refinanced into a paycheck protection loan, and
- $10 million.
Payroll costs, in turn, are the sum of the following:
- wages, commissions, salary, or similar compensation to an employee or independent contractor,
- payment of a cash tip or equivalent,
- payment for vacation, parental, family, medical or sick leave,
- allowance for dismissal or separation,
- payment for group health care benefits, including premiums,
- payment of any retirement benefits, and
- payment of state or local tax assessed on the compensation of employees,
Payroll costs do not include, however:
- the compensation of any individual employee in excess of an annual salary of $100,000,
- payroll taxes,
- any compensation of an employee whose principal place of residence is outside the U.S., or
- any qualified sick leave or family medical leave for which a credit is allowed under the new Coronavirus Relief Act passed last week.
The loans will have a maximum maturity of 10 years and an interest rate not to exceed 4%. Proceeds may be used to cover payroll, mortgage payments, rent, utilities, and any other debt service requirements. The standard fees imposed under Section 7 of the Small Business Act are waived, and no personal guarantee is required by the business owner. An additional provision in the CARES Act provides for possible deferment of repayment of the loans for a period of at least six months, but not to exceed a year
Loan Forgiveness of Paycheck Protection Loans:
A separate section of the CARES Act calls for a portion of the paycheck protection loans discussed above to be forgiven on a tax-free basis. The amount to be forgiven is the sum of the following payments made by the borrower during the 8-week period beginning on the date of the loan:
- payroll costs (as defined above)
- mortgage interest,
- certain utility payments.
To seek forgiveness, a borrower must submit to the lender an application that includes documentation verifying the number of employees and pay rates, and cancelled checks showing mortgage, rent, or utility payments.
There is a provision, however, that reduces the amount that may be forgiven if the employer either reduces its workforce during the 8-week covered period or reduces the salary or wages paid to an employee (who earned less than $100,000) by 25% or more.
This reduction can be avoided, however, if the employer rehires or increases the employee’s pay within an allotted time period.
Emergency Government Disaster Loan and Grant:
The CARES Act also expands access to Economic Injury Disaster Loans under Section 7(b)(2) of the Small Business Act to include not only businesses with fewer than 500 employees, but also sole proprietors and ESOPs. For any loan made under this program before December 31, 2020, no personal guarantee will be required on loans below $200,000. The bill allows 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 paying payroll costs.” Presumably, any loan taken out for payroll purposes will be confined to the paycheck protection loans described above.
In addition, the Act creates a new Emergency Grant to allow a business that has applied for a disaster loan to get an immediate advance of up to $10,000. The advance can be used to maintain payroll, and is not required to be repaid, even if the borrower’s request for a 7(b) loan is denied.
Subsidy for Certain Loan Payments:
The CARES Act also provides benefits to those with loans under Section 7(a) of the Small Business Act OTHER THAN the new paycheck protection loans, in the form of a government subsidy whereby the SBA will pay six months of principal, interest and fees on qualifying loans.