On March 27, 2020, President Trump signed into law the Coronavirus Aid, Relief and Economic Security (CARES) Act, which provides relief to taxpayers affected by the novel coronavirus (COVID-19). The CARES Act is the third round of federal government aid related to COVID-19. We have summarized the top provisions in the new legislation below, with more detailed alerts on individual provisions to follow. Click here for a link to the full text of the bill.
The House of Representatives and Senate have passed, and the President has signed, a $2.2 trillion coronavirus spending bill that establishes:
- $349 billion lending program for small businesses,
- increases unemployment insurance payments, and
- includes benefits for those who are unemployed because of the virus and normally would not qualify. The latter group includes self-employed individuals, independent contractors, and other “gig economy” workers.
$349 billion in loans, loan guarantees and investments through the Treasury Department
The Small Business Administration under Section 7 of the Small Business Act will have access to approximately $350 billion in loans during the covered period as defined from February 15, 2020 through June 30, 2020. Eligible organizations can apply for “paycheck protection loans” that are fully guaranteed by the Federal Government through December 31, 2020 (returning to an 85% guarantee for loans greater than $150,000 after that date). The loans are available to companies with not more than 500 employees and those which have below a gross annual receipts threshold in certain industries. Under the legislation, 501(c)(3) nonprofits, sole-proprietors, independent contractors, and other self-employed individuals are eligible for loans.
A payroll protection loan will have a maximum maturity of 10 years bearing an interest rate not to exceed 4%. The loan proceeds may be used to cover the following business expenses: payroll; costs related to group health care benefits; employee salaries, commissions, or similar compensation; mortgage payments; rent (including rent under a lease agreement); utilities, and any other debt service requirements.
The loan forgiveness amount is equal to the payroll costs, mortgage interest payments, rent, and utilities (the “forgivable costs”) incurred or paid by a recipient during the covered period. For purposes of determining the loan forgiveness amount, “covered period” means the 8-week period beginning on the date of the origination of a covered loan. (the “covered period”). The loan forgiveness amount is excluded from taxable income.
The amount of loan forgiveness will be reduced by the amount of any reduction in total salary or wages of any employee during the covered period that is in excess of 25 percent of the total salary or wages during the most recent full quarter during which the employee was employed before the covered period.
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 in order to seek debt forgiveness.
The SBA must issue regulations within 15 days of enactment of the CARES Act without regard to notice and comment requirements. Hence, it is possible that lenders could begin taking loan applications as soon as mid-April.
There is an additional provision for possible deferment of repayment of the loans for a period of at least six months, but not to exceed a year.
Emergency Government Disaster Loan
Emergency Government Disaster Loan and Grant 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, sole proprietors with or without employees or as an independent contractor, an ESOP as defined in Section 3 of the Small Business Act with not more than 500 employees, or a tribal small business concern with not more than 500 employees.
Economic Injury Disaster Loans in the amount below $200,000 that are made before December 31, 2020 will not require personal guarantees. A disaster loan can be taken out between January 31, 2020 and the dates on which a paycheck protection loan is available for reasons “other than paying payroll costs.” Any loan for payroll purposes will be restricted to the paycheck protection loan as described above.
The CARES Act creates a new Emergency Grant to allow a business that has applied for a disaster loan to receive an immediate advance up to $10,000. This grant can be used for the following expenses: paid sick live for employees unable to work due to the direct effect of COVID-19; payroll costs to maintain employees; increased costs to obtain materials unavailable from the grant applicant’s original source because of interrupted supply chains: rent or mortgage payments; or repaying obligations that cannot be met due to revenue decline. This grant is not required to be repaid, even if the borrower’s request for a 7(b)(2) loan of the Small Business Act is denied.
Recovery rebates: 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.
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: 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
Retirement plans: 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. 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.
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.
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).
Interest limitation: 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.
Technical Correction to Qualified Improvement Property (QIP): With the technical correction applying retroactively to 2018, QIP is now 15-year property and eligible for 100% bonus depreciation. This will provide immediate current cash flow benefits and relief to taxpayers, especially those in the retail, restaurant, and hospitality industries. Taxpayers that placed QIP into service in 2019 can claim 100% bonus depreciation prospectively on their 2019 return and should consider whether they can file Form 4464 to quickly recover overpayments of 2019 estimated taxes. Taxpayers that placed QIP in service in 2018 and that filed their 2018 federal income tax return treating the assets as bonus-ineligible 39-year property should consider amending that return to treat such assets as bonus-eligible. For C corporations, in particular, claiming the bonus depreciation on an amended return can potentially generate NOLs that can be carried back five years under the new NOL provisions of the CARES Act to taxable years before 2018 when the tax rates were 35%, even though the carryback losses were generated in years when the tax rate was 21%.
This CARES Act is a far-reaching measure that will put money into the hands of small business owners who are really suffering right now. The challenge is to get the funding to them before it is too late, since many of them are currently struggling to meet payroll and their other bills.
We will be continually monitoring additional guidance as it is released and will provide updated information on this page as it becomes available, so please check back often. In addition, please feel to reach out to your PGCPA advisor with any questions you may have.