After days of Congressional negotiations, the President signed the CARES Act, the largest stimulus package in U.S. history. Below is an overview of the provisions included in the package:
Paycheck Protection Program
The largest benefit available for small businesses is the Paycheck Protection Program (PPP).
Qualifying small businesses are eligible for federal-guaranteed emergency loans for business interruption because of COVID-19. Allowable loan uses include:
- Payroll costs for domestic-based employees
- Mortgage or rent payments
- Utility payments
- Certain monthly debt obligations.
The maximum amount of the loan available is the lesser of $10 million, or the borrower’s average total monthly payroll costs (subject to certain limitations) for the previous year times 2.5.
To qualify for the program the business must have been in operation on March 1, 2020, had employees for whom salaries and payroll taxes were paid and did not have more than 500 employees.
Loans are eligible for forgiveness, with any unforgiven portion repayable over a maximum 10-year period with an interest rate not to exceed 4%.
Delay of Filing Deadlines and 2019 Payments
As has been widely publicized, the filing deadline for 2019 income tax returns due April 15, 2020, has been delayed until July 15, 2020. Income tax payments due with such 2019 tax returns are also due July 15, 2020, without limitation. For taxpayers that won’t be able to file by then and want an additional extension to file in September or October, the normal extension forms will need to be filed by July 15 and the related tax payments related to 2019 need to be paid with the extension.
The extended filing deadline does not apply to any taxpayer who has a filing or payment due date other than April 15, nor does it apply to items that are not income taxes. However, in IRS Notice 2020-20 the IRS did extend Estate and Gift Tax returns through July 15, 2020. This additional action was necessary since they are not an income tax return. Private Foundation returns due May 15 are also not extended.
The Families First Coronavirus Response Act also provided for a deferral of the 2020 first-quarter estimated income tax payment to July 15. This was not changed under the CARES Act, but it is important to note that the second quarter estimated income tax payment is due at its normal due date of June 15 for individual taxpayers.
Specific Business Provisions
- Employee Retention credit – A refundable payroll tax credit for 50% of wages paid by employers during the COVID-19 crisis is available to employers whose (1) operations were fully or partially suspended due to a COVID-19 related shut-down order, or (2) gross receipts declined by more than 50% when compared to the same quarter in the prior year. The credit is based on qualified wages paid to the employee. For employers with greater than 100 full-time employees, qualified wages are wages paid to employees when they are not providing services due to COVID-19 related circumstances. For employers with 100 or less full-time employees, all wages qualify for the credit, whether the employer is open for business or subject to a shutdown order. The credit is provided for the first $10,000 of compensation, including health insurance, paid to an eligible employee.
- Delay of Payment of Employer Payroll Taxes – Employers and self-employed individuals are allowed to defer payment of the employer share of Social Security taxes (6.2%) on taxable wages. Deferred employment tax will be required to be paid over 2 years, with half due by December 31, 2021, and the other half due by December 31, 2022.
- The limitation for charitable contributions has increased from 10% to 25% of taxable income.
- The provisions accelerate “refundability” of the corporate alternative minimum tax credit.
Temporary Repeal of Certain 2017 Tax Act Provisions
- Net Operating Losses – The limitation on a company’s use of losses has been temporarily removed. A corporation will be allowed to utilize an NOL incurred before 2021 to fully offset taxable income in future years. In addition, losses arising in 2018, 2019, or 2020 can be carried back 5 years. This gives a taxpayer the opportunity to amend prior year’s returns to claim refunds and generate additional cash flow. Because the taxpayer can go back 5 years, there is also the opportunity to claim refunds in a tax year with a 35% tax rate.
- Business Loss Limitation – The excess business loss limitation has been repealed for tax years 2018, 2019 and 2020. Taxpayers who were previously limited on the amount of business losses included in the 2018 or 2019 tax return have the opportunity to amend such returns to claim refunds. This limitation goes back into effect for tax years beginning after December 31, 2020.
- Limitation on Business Interest – The 2017 tax act imposed a limitation on the amount of interest businesses with gross receipts over $25 million could deduct. That limitation has been temporarily increased from 30% to 50% of adjusted taxable income for 2019 and 2020.
- Technical Corrections – Technical corrections have been provided with regard to depreciation on Qualified Improvement property to designate such property as 15 –year property under MACRS. This change will result in the property being eligible for bonus depreciation. The provision is retroactive to the effective date of the 2017 tax act, therefore taxpayers have an opportunity to amend returns and claim potential refunds.
Specific Individual Provisions
- Recovery Rebates – Taxpayers with adjusted gross income of up to $75,000 ($150,000 joint filers) are eligible for recovery rebates of $1,200 ($2,400 joint filers). In addition, they are eligible for an additional recovery rebate of $500 per child. The rebate phases out at $99,000 of adjusted gross income ($198,000 joint filers).Even though the credit was not available in 2019, the IRS will be estimating the credit based on 2019 income tax returns filed (2018 returns if 2019 has not yet been filed) and treating the amount as a payment made against the 2019 tax. The IRS has been directed to issue refunds as quickly as possible.
- Retirement Funds – Early distribution penalties have been waived on distributions of up to $100,000 from qualified retirement accounts for COVID-19 related purposes made on or after January 1, 2020. In addition, such distributions would be subject to tax over 3 years and the taxpayer may re-contribute the funds within three years without regard to that year’s cap on contributions. The CARES Act provides that the required minimum distribution rules for certain retirement plans and accounts do not apply.
- Charitable Contributions – Taxpayers may deduct up to $300 of charitable contributions, whether they itemize or not. This is known as an “above the line” deduction. In addition, the 60% of adjusted gross income limitation for is suspended with regard to qualifying charitable contributions. There are some very specific rules that need to be considered, but essentially, for contributions to avoid the deduction limitation they must go directly to a charity and cannot be given to a Donor Advised Fund or supporting organization.
- Employer Education Payments – Normally, student loan payments made on behalf of an employee are considered as taxable compensation. The CARES Act adds these payments to the types of educational payments that are excludable from income if they are made before January 1, 2021. The per-employee limit for all educational payments $5,250. An eligible student loan repayment includes payments by the employer, whether paid to the employee or a lender, of principle or interest on any qualified higher education for the education of the employee.
- Other – Unemployment benefits have been relaxed for those individuals unable to work as a direct result of COVID-19. Unemployment will include an additional $600 per week above the maximum state benefit available for up to four months.
The above represents our best understanding and interpretation of the material covered as of the date of this post. Things are moving at a rapid pace, and as such, information is subject to change. This information is provided for informational purposes only and is not intended to be a substitute for obtaining accounting, tax, or financial advice from an accountant.