Key Business Provisions
Small Business Loans – the Paycheck Protection Program
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 of February 15, 2020 to June 30, 2020. The Act terms the loans as “paycheck protection loans” and they are fully guaranteed by the federal government through December 31, 2020.
The applicant is required to certify:
- Current uncertain economic times make the loan request necessary to support ongoing operations; and
- Funds will be used to keep workers and make payroll, mortgage payments, lease payments and utility payments; and
- Applicant does not already have an application pending for other payroll assistance under the CARES Act.
Generally, the loans are limited to the lesser of (1) the average monthly payroll costs incurred during the 1-year period before the date on which the loan is made multiplied by 2.5 (special computation available for seasonal employers) or (2) $10 million.
Payroll costs are generally broadly defined to include:
- Salaries, wages, commissions, or similar forms of compensation
- Payments for vacation, parental, family, medical or sick leave
- Retirement benefits and certain other employee benefits
- Certain types of compensation of sole proprietors or independent contractors
- Employee compensation is capped at $100,000 per employee. Excess compensation will not be included.
The loans can be used during the covered period (February 15, 2020 – June 30, 2020) for the following:
- Payroll Costs
- Costs related to continuance of group health care benefits
- Employee salaries, commissions, or similar compensation
- Payments of interest on mortgage obligation (does not include principal payments or prepayments)
- Interest on other debt obligations incurred before the covered period
The loans will have a maximum maturity of 10 years and an interest rate not to exceed 4%.
The Act allows for deferment of payment on the loan during the covered period of at least six months, but no longer than one year. Deferment includes principal, interest, and fees.
Other key provisions:
- Loans are made by SBA-approved lenders that have delegated authority to make the loans without approval from the SBA.
- In reviewing the application, a lender has to evaluate whether the borrower was in business on February 15, 2020 and had employees and paid salaries and taxes or had independent contractors and filed 1099- MISC for them.
- Guarantee fees are waived.
- Loans are non-recourse to the borrower.
- No “credit elsewhere test.” That is, the borrower does not have to demonstrate it was unable to secure financing elsewhere before qualifying for SBA financing.
- No collateral requirement.
- No prepayment penalties.
NOTE: A loan under the Paycheck Protection Program makes the borrower ineligible for the Employee Retention Tax Credit made available under the CARES Act. This only applies to the Employee Retention Tax Credit in the CARES Act and does not apply to any credits available under the FFCRA (such as the paid sick leave tax credit) or other credits available under the CARES Act.
Loan Forgiveness for Paycheck Protection Loans
The CARES Act allows for a portion of the aforementioned paycheck protection loans to be forgiven.
The amount eligible to be forgiven is the sum of payments made during the 8-week period beginning on the date of the origination of the loan for:
- Payroll costs
- Interest payments on mortgage obligations
- Certain utility payments
To obtain forgiveness, the borrower must submit an application to the lender verifying the number of employees, pay rates, and canceled checks for mortgage interest, rents, or utility payments.
The amount of loan forgiveness is reduced by:
- Reductions in the workforce during the 8-week period, or
- Reductions in salary or wages paid to employees who earned less than $100,000 in annualized salary by more than 25% during the 8-week period.
- The reduction can be avoided if the employer rehires or increases the employee’s pay within the 8-week period.
Forgiven amounts will not be treated as taxable income.
Employee Retention Credit
Employers are eligible for a one-year only 50% refundable payroll tax credit on wages paid up to $10,000 per employee for wages paid between March 12, 2020 and before January 1, 2021. Employers are eligible by one of two ways:
- The operation of the business was fully or partially suspended during any calendar quarter during 2020 due to orders from an appropriate government authority resulting from COVID-19, or
- The business remained open but gross receipts for any calendar quarter during 2020 fell below 50% of gross receipts for the same calendar quarter in the prior year. The business would be eligible for the credit until gross receipts in any calendar quarter exceeded 80% of the same calendar quarter in the previous year.
For employers with 100 or fewer full-time employees, all employees’ wages up to $10,000 for each employee are eligible for credit.
For employers with more than 100 full-time employees, qualified wages are limited to wages paid to employees who are unable to provide services due to the COVID-19 pandemic.
Employers who take out a small business interruption loan (paycheck protection loans mentioned in the section above) are not eligible for this credit.
No credit is available with respect to an employee for any period for which the employer is allowed a Work Opportunity Credit with respect to the employee.
Delay of Payment of Employer Payroll Tax and Self Employment Tax
50% of employer payroll taxes that would be due from 3/27/2020 through 12/31/2020 may be deferred with half of the deferral paid by 12/31/2021 and the other half paid by 12/31/2022.
Employers who take out a small business interruption loan (paycheck protection loans mentioned in the section above) are not eligible for this deferral.
Net Operating Losses (NOLs)
Provides a five-year carryback for NOLs arising in tax years beginning in 2018, 2019 or 2020.
Temporarily removes the 80% of taxable income limitation on utilization of NOLs.
Allows NOLs arising in a tax year beginning in 2017 and ending in 2018 to be carried back two years.
Eases the excess business loss rules under IRC Section 461(l).
IRC Section 163(j) Interest Deduction Limitations
Increases the 30% adjusted taxable income limitation to 50% for tax years beginning in 2019 and 2020.
For partnerships, the 30% limitation still applies for 2019 but partners may deduct 50% of their distributive share of the partnership’s 2019 excess business interest in 2020 without regard to IRC Section 163(j).
Allows the use of 2019 adjusted taxable income in computing the 2020 limitation amount.
Qualified Improvement Property (QIP)
QIP may now be depreciated as 15 year property and is eligible for bonus deprecation as a result of this “fix”. The change is made as if it had been included in the TCJA and applies to property acquired and placed in service after September 27, 2017.
Key Personal Provisions
Key Personal Provisions
Personal Tax Rebates
Based on your 2019 tax return, or your 2018 tax return if 2019 has not been filed, the IRS is going to be cutting a check of $1,200 if single, $2,400 if married filing jointly, plus $500 for each child under the age of 17. The current version of the bill is not limited to your tax liability nor to a minimum income requirement. Furthermore, if you have not filed a 2018 or 2019 tax return, but you did receive Social Security benefits, you will also be receiving a payment.
Individuals with higher incomes in 2018 or 2019 will have their payments phased out based on their reported Adjusted Gross Income (AGI). The phase-out begins at $75,000 for single filers and $150,000 for joint filers. Once an individual exceeds these thresholds, the payment is reduced $5 for every $100 your AGI is over the threshold.
If you are single with no kids, your $1,200 would be eliminated if your AGI exceeded $99,000 (($99,000 – $75,000) * 5% = $1,200).
If you are married with no kids, your $2,400 would be eliminated if your AGI exceeded $198,000 (($198,000 – $150,000) * 5% = $2,400). Obviously, if you have kids and are receiving an additional $500 per qualifying child, then it would take more income to fully eliminate your payment.
The IRS is tasked with issuing these payments as quickly as possible between the passage of this bill and December 31, 2020. The payments will be delivered via direct deposit if the IRS has that authorization on file or by check in the mail.
When you file your 2020 tax return, you will reconcile the advanced payment you received against what you would be allowed using your 2020 AGI. If you were due more than what you received, you will receive a credit on your 2020 tax return to offset your tax liability. At this time, it does not appear that you would be required to pay back any excess amount that you received based on your 2018 or 2019 AGI. For example, if your AGI was higher in 2020 or you have a child who turned 18 during 2020, it does not appear you would be required to pay back any excess advanced payment received.
Special Relief from Retirement Plan Rules
Distributions to an individual of up to $100,000, deemed to be a coronavirus related distribution, will not be penalized as a premature distribution if the taxpayer is under age 59 ½. Typically premature distributions are subject to a 10% penalty.
A coronavirus related distribution is a distribution made during 2020 to an individual:
- Diagnosed with COVID-19 or SRS-COV-2, by a test approved by the CDC,
- Whose spouse or dependent is diagnosed with one of the two diseases, or
- Who experiences adverse financial consequences as a result of being quarantined, being furloughed or laid off or having work hours reduced due to the virus, closing or reducing hours of a business owned or operated by an individual due to the virus, or other factors as determined by the Secretary of the Treasury.
- This distribution does not escape income tax. The Act does allow a taxpayer to take the distribution into income over three years beginning with 2020, or the taxpayer can repay the withdrawal within three years to avoid the income tax on the withdrawal.
- The amount a taxpayer can borrow from their eligible retirement plan is increased from $50,000 to $100,000 for the 180-day period beginning when this Act is signed.
- Required Minimum Distribution (RMD) requirements are waived for 2020. This includes RMDs due 4/1/2020 for taxpayers who turned 70 ½ during 2019.
Beginning in 2020, the Act allows for an “above-the-line” deduction of up to $300 to qualified charitable organizations. An “above-the-line” deduction is a deduction allowed in computing AGI. The majority of taxpayers were no longer receiving a benefit for charitable contributions as the standard deduction was increased with the Tax Cuts & Jobs Act of 2017 to $12,000 for single taxpayers ($24,000 for married filing jointly) which exceeded itemized deductions of most taxpayers. Charitable contributions are itemized deductions. To claim the $300 “above-the-line” deduction, the taxpayer must be taking the standard deduction.
For taxpayers who do take itemized deductions, the Act temporarily lifts the limit on charitable giving for 2020. Cash contributions to public charities are generally limited to 60% of AGI. The CARES Act allows a deduction of up to 100% of AGI for cash contributions. This does not include contributions of property or contributions made to a donor-advised fund.