On March 27 the President signed the CARES Act, or coronavirus stimulus bill. The key aspects of the bill are summarized below.
Paycheck Protection Program
- Small businesses with 500 or fewer employees during the “covered period” – February 15 through June 30, 2020 are eligible. Some industries may qualify with more employees, depending on the Small Business Administration’s applicable industry size standards, accessible here.
- Offers a loan of up to $10 million based on a formula, which is essentially 2 ½ times the monthly payroll, plus certain other costs, up to $100,000 per employee.
- Employee count is calculated per location for businesses in the hospitality and restaurant industries and certain others.
- No personal guarantees are required.
- Also available for self-employed individuals.
- Loan may be used for salaries, paid sick or medical leave, insurance premiums, and mortgage, rent and utility payments.
- Loans will be made through eligible FDIC lenders.
- Loans will be forgiven if employment and wage levels are maintained. There is a cure period for reductions that occurs between February 15, 2020 and 30 days after date of enactment as long as released employees are rehired or salary reductions are reversed by June 30, 2020.
- Loan forgiveness is not taxable.
- • Loan forgiveness may not be combined with the Employee Retention Credit or the Payroll Tax Deferral (see below).
2020 Recovery Rebates for Individuals
- All US residents with Adjusted Gross Income (AGI) up to $75,000 ($150,000 married filing joint) are eligible for a full stimulus payment of $1,200 ($2,400 for joint filers).
- Recipients cannot be a dependent of another taxpayer or a non-resident alien.
- Qualified taxpayers will receive an additional $500 per child.
- There is a phase-out to AGI of $198,000 for joint returns.
- Will be based on 2019 return or, if not filed, 2018. Non-filers such as certain Social Security or Disability recipients are also eligible.
- Taxpayers do not need to apply. They will receive a rebate check.
Special Rules for Use of Retirement Funds
- The 10% early withdrawal penalty is waived for up to $100,000 of distributions from retirement plans for coronavirus related purposes made on or after January 1, 2020. Coronavirus related distributions are distributions made to an individual:
• Who is diagnosed with COVID-19;
• Whose spouse or dependent is diagnosed with COVID-19; or,
• Who experiences adverse financial conditions as a result of:
• Being quarantined, furloughed, or laid off;
• Having work hours reduced;
• Being unable to work due to lack of child care due to COVID-19;
• Closing or reducing hours of a business owned or operated by the individual due to the virus; or
• Other factors determined by Treasury.
- The amount withdrawn may either be repaid over a three year period or included in taxable income with the recognition spread over three taxable years.
Temporary Waiver of Required Minimum Distribution Rules
- The required minimum distribution rules for certain defined benefit plans and IRAs are waived for the calendar year 2020.
- Applies to taxpayers who are required to take a distribution from their accounts during the economic slowdown caused by COVID-19.
Modification of Limitations on Charitable Contributions During 2020:
• May deduct $300 of qualified contributions “above the line”
• The 50% AGI limitation for individuals will be suspended for 2020. This allows for an unlimited charitable contribution deduction in 2020.
- For corporations: the 10% limitation is increased to 25% of taxable income allowing for a larger charitable contribution deduction.
Employee Retention Credit for Employers Subject to Closure Due to COVID-19
- The bill provides a refundable payroll tax credit equal to 50% of wages paid by employers to employees during the COVID-19 crisis.
- Eligible employers are those:
• Whose operations were fully or partially suspended due to COVID-19 related shutdown orders, or
• Who had gross receipts decline by more than 50% as compared to the same quarter in the prior year.
• Qualifying based on credit amount and qualified wages criteria:
• For employers with more than 100 employees, qualified wages are wages paid to employees not providing services due to the COVID-19 related circumstances.
• For employers with 100 employees or less, all wages qualify for the credit.
• The credit is provided for first $10,000 of compensation, including health benefits.
• Credit applies to wages paid between March 13, 2020 and December 31, 2020.
• May not be combined with loan forgiveness under the Paycheck Protection Program (see above).
Delay of Payment – Employer Payroll Tax:
- Applies to employers and self-employed individuals.
- Effective for payments as of the date of enactment of the legislation (3/27/2020). Includes payments through December 31, 2020.
- Defer the payment of the 6.2% employer portion of Social Security Tax for two years.
- Half will be due December 31, 2021 with the other half due December 31, 2022.
- May not be combined with loan forgiveness under the Paycheck Protection Program (see above).
Modification of Net Operating Losses (NOL) and Excess Business Loss Limitation
- 5 year carryback period for NOLS for the 2018, 2019, and 2020 tax years.
- The provision also temporarily removes the 80% taxable limitation for net operating losses.
- The excess business loss limitation for pass-through businesses and sole proprietors is suspended.
Modification of Limitation on Business Interest
- The amount of interest expense businesses are allowed to deduct on their tax returns is increased, from 30% to 50% of taxable income (with adjustments) for 2019 and 2020
- The 2019 Adjusted Taxable Income may be used for the 2020 calculation, if more beneficial.
Technical Amendment Regarding Qualified Improvement Property
- The act corrects the error in the 2017 tax reform with respect to Qualified Improvement Property which is any improvement to an interior portion of nonresidential real property, if such improvement is placed in service after the date the building was first placed in service and isn’t an enlargement of the building, an elevator or escalator or work on the internal structural framework of the building.
- The depreciable life is changed from 39 years to 15 years retroactive to the beginning of 2018.
- Taxpayers will now also be able to take bonus depreciation on qualified improvement property.
- No guidance yet on whether amended returns will be required.
While this is a limited description of what is complex legislation – described by one commentator as having fine print on fine print – we hope these takeaways bring some peace of mind to your circumstances. We continue to keep track of the progress of this legislation and will issue further updates as necessary. As always, please contact your Friedman LLP advisor for questions or clarifications.
And we hope you and those close to you stay well and safe.