On March 27, 2020, President Trump signed into law the “Coronavirus Aid, Relief and Economic Security (“CARES”) Act”. The CARES act provides over $2 Trillion in relief to many groups, including hospitals, airlines, small businesses and individuals.
We have highlighted the provisions of the law that will have an impact on small businesses and individuals.
INDIVIDUAL STIMULUS PAYMENTS
Individuals and married couples will receive checks of $1,200 and $2,400, respectively.
An additional $500 will be added for children under the age of 17.
Phase out begins at $75,000 for individuals (complete phase out at $99,000) and $150,000 for married couples (complete phase out at $198,000).
Although payment is based on the last tax return filed, the amount will be recalculated using the 2020 tax return information filed in 2021.
PAYROLL PROTECTION LOANS
– Maximum Amount of the Loan: The lesser of the average monthly payroll costs incurred by the applicant for payroll during the 1-year period ending on the date the loan is made multiplied by 2.5, or $10,000,000.
– Eligibility: Business must have been in operation prior to February 15, 2020 AND affected by COVID-19.
– Loan Forgiveness: Business shall be eligible for forgiveness of indebtedness in an amount equal to the payroll costs, mortgage interest, rent and certain utility payments during the 8-week period beginning on the loan date (“covered period”).
– Forgiveness Reduction: The amount of loan forgiveness would be proportionately reduced by the reduction, if any, in full-time equivalent employees (“FTE”) for the “covered period” when compared to the same period during 2019. An employer’s decision to reduce a salary by more than 25% from 2019 to 2020 could also reduce the amount of forgiveness
– Forgiveness Application: Businesses seeking loan forgiveness shall submit to the lender that originated the loan, documentation verifying the number of full-time equivalent employees on payroll and pay rates for the “covered period” and the same period during 2019, including (1) payroll tax filings reported to the Internal Revenue Service; (2) State income, payroll, and unemployment insurance filings; and (3) financial statements and cancelled checks verifying qualified payments of mortgage/debt interest, utilities and rent.
– Cancelled Indebtedness: The amount forgiven shall be excluded from gross income for income tax purposes.
TAX CODE CHANGES
– Qualified Improvement “Fix”: Reduces the depreciable life of Qualified Improvement Property (QIP) from 39 years to 15 years retroactive to January 1, 2018.
– Special Rules on Retirement Funds: Ability to withdraw up to $100,000 during 2020 from a retirement plan without incurring a 10% penalty for individuals directly impacted by COVID-19. Amount will still be subject to regular income tax but can be spread over 3 years. Option to repay also exists within 3 years to avoid regular income tax.
– Loans from Retirement Plans: Increased from $50,000 to $100,000 for six months after the CARES act is placed into law.
– Changes to Charitable Contributions: Allows for charitable contribution deductions “above the line” of up to $300 for individuals that use the standard deduction.
– Employer Payment of Employee Student Loans: Employers can pay up to $5,250 of an employee’s student loan obligation on a tax-free basis.
Employer Retention Credit: Credit available to businesses that had to shut down or close its operations due to COVID-19 but continued to pay its employees. The refundable credit is applied to the 6.2% share of Social Security payroll taxes equal to 50% of the employee’s wages for a quarter through December 31, 2020. Maximum credit allowed for all quarters is $5,000 per employee. If business obtained a “Paycheck Protection Loan”, it would not qualify for this credit.
– Delay of Payment of Payroll Taxes and Self-Employment Tax: Deferral of the 6.2% of social security for wages paid in 2020 until December 31, 2021 (50%) and December 31, 2022 (50%). For self-employed individuals, a deferral of 50% of their SE tax for 2020 is available until December 31, 2021 (25%) and December 31, 2022 (25%).
– Changes to Net Operating Rules: Losses from 2018, 2019 and 2020 will be allowed to be carried back for up to five years. Losses incurred in 2019 and 2020 will be permitted to offset 100%. TCJA had previously disallowed all carrybacks related to post-2017 losses
– Temporary (and Retroactive) Removal of Section 461(l): TCJA capped the amount a taxpayer could claim as business losses ($250,000 for single and $500,000 for married filing jointly). The CARES act puts a temporary reprieve on these caps retroactive to 2018. The previously stated caps will continue in 2021.
– Changes to Interest Limitation Rules: The act increases the limit of interest allowed to 50% of “adjusted taxable income” from the 30% imposed under TCJA. Companies will be able to use their 2019 “adjust taxable income” if they have losses during 2020 to calculate their interest limitation. Partnerships will not be able to use the 2019 amounts to calculate their interest limitation but 50% of any suspended interest will become available and fully-deductible in 2020.