On Friday, March 27, the President signed and enacted into law the Coronavirus Aid, Relief and Economic Security (CARES) Act.
The Act builds upon earlier versions of the CARES Act and is intended to be the third round of federal government support in the wake of the coronavirus public health crisis and associated economic fallout, succeeding the $8.3 billion in public health support passed previously and the Families First Coronavirus Response Act.
The CARES Act provides more robust support to both individuals and businesses, including changes to tax policy. Here is a summary of what is included in the Act for both individuals and businesses.
Relief for Individuals
Advanced Relief Payments
The Coronavirus Aid, Relief and Economic Security (CARES) Act includes extensive provisions for providing massive fiscal relief to not just businesses, but individual Americans. One of the most immediate forms of relief comes in the form of cutting direct checks to many Americans. These funds can be received either via mail or direct deposit (the latter method can significantly increase the speed in which money gets into the hands of American citizens). The following are the stipulations and details of relief checks:
- $1,200 check for individuals and $2,400 if married filing jointly.
- A flat $500 increase in the check per child.
- The value of the relief check begins to phase-out over adjusted gross income (AGI) of $75,000 for individuals, $112,500 for heads of household, and $150,000 for joint taxpayers by $50 for every $1,000 earned above these amounts (5% per dollar of income above each threshold).
- Single taxpayers with over $99,000 AGI and married taxpayers with over $198,000 AGI will not receive a relief check (completely phased-out).
- Either the taxpayer’s 2018 or 2019 tax returns are used to calculate the advance given to taxpayers.
- If a taxpayer does not receive a relief check due to phase-out (e.g. single taxpayer that has over $99,000 in 2019 income), but their 2020 income falls below the threshold, they will receive a credit on their 2020 tax return in the amount of the check that would have been received based on 2020 income.
- This is meant to be a one-time payment or credit to taxpayers, but Congress has expressed willingness to consider additional payments if the effect of the COVID-19 (coronavirus) pandemic is prolonged.
Unemployment Insurance Expansion
Millions of Americans who suddenly found themselves without employment will now be eligible for enhanced unemployment benefits via the federal government. In addition to state-based unemployment compensation, the CARES Act also provides benefits for up to four months. These benefits include:
- Up to $600 per week increase in benefits through “Federal Pandemic Unemployment Compensation”
- Unemployment insurance benefits have been expanded to those who wouldn’t otherwise be eligible, including sole proprietorships (“Schedule C businesses”), with or without employees, and independent contractors, amongst other entity types.
- The federal government is promoting the repeal of waiting periods, wherein typically there is a one week waiting period before unemployment benefits begin to accrue & be paid.
- After workers run out of state unemployment benefits, the federal government will cover an additional 13 weeks of unemployment compensation.
Typically, charitable contributions are itemized deductions, which only become relevant if, in total, they exceed the standard deduction for the taxpayer’s filing status. That is to say, in combination, itemized deductions exceed $12,400 if single, $18,650 heads of household, and $24,800 if married filing jointly for the 2020 tax year. If itemized deductions fall below these levels, they are effectively tossed out and the standard deduction is taken instead.
The CARES Act amends the rules for charitable contributions, allowing taxpayers to get a $300 adjustment (or “above-the-line deduction”) which reduces their adjusted gross income. The contribution must be to certain qualifying charities, for example, churches, educational organizations, hospital care, and medical research amongst others. The contribution must be made specifically in cash and becomes available for tax years beginning after December 31, 2019.
Retirement Early Withdrawal Waiver
Retirement account distributions usually have a 10% early withdrawal penalty if taken out before the taxpayer reaches 59 and a half years old. The CARES Act now waives this penalty if the withdrawals relate to financial hardship caused by the COVID-19 pandemic or either the taxpayer, their spouse or their dependents have been diagnosed with the virus. Also note:
- Distributions for these purposes may be withdrawn up to $100,000 during 2020.
- Amounts withdrawn for these purposes are taxable over a three-year period.
- Taxpayers may re-contribute funds into their retirement account over the same three-year period without affecting the cap on contributions.
The CARES Act waives required minimum distributions for qualified retirement plans for 2020. Qualified retirement plans include individual retirement accounts (IRAs), 401(k) plans, qualified annuities, as well as some deferred compensation plans and qualified trusts.
Relief for Businesses
Small Business Loans
The CARES Act makes available $350 billion in “paycheck protection loans” through the Small Business Administration’s (SBA) 7(a) loan program for businesses with 500 or fewer employees during the covered period of February 15, 2020, through June 30, 2020. Borrower and lender fees will be waived, and the government guarantee of 7(a) loans will be increased to 100% through the end of 2020. The amount of loans available under this program would generally be limited to the lesser of 1) average monthly payroll costs multiplied by 2.5 or 2) $10 million. Loans are to be used to retain workers and maintain payroll or make mortgage, rent, and certain utility payments.
There is also a provision for a portion of these loans to be forgiven, based on eligible payments made by the borrower during the eight-week period beginning on the date of the loan.
The CARES Act expands access to Economic Injury Disaster Loans under Section 7(b) to sole proprietor and ESOPs, in addition to small businesses. For any loan under this program, the government will pay the principal and interest for the first six months for which payments are due. There is also a new emergency grant, which allows a business that has applied for a disaster loan to get an immediate advance of up to $10,000. The advance can be used for payroll and does not have to be repaid, even if the request for a 7(b) loan is denied.
Finally, the government subsidy for the first six months of payments is also available to businesses with loans under 7(a) of the Small Business Act that are not paycheck protection loans.
Small Business Grants
The CARES Act provides for financial assistance in the form of grants to eligible small businesses to provide certain types of education, training, and advising to their employees.
Employee Retention Credit
A one-year refundable credit will be available against the employer’s share of the 6.2% Social Security payroll taxes for qualifying businesses that are forced to suspend or shut down their operations due to COVID-19. The credit for each quarter will generally be 50% of the qualified wages paid to each employee for that quarter. A business’ qualified wages depends on the size of the business. For those with more than 100 employees during 2019, wages are limited to only those wages that were paid during the quarter in which the business was shut down. For businesses with less than 100 employees in 2019, qualified wages include not only those paid during a shut-down, but also wages paid in each quarter that the business suffers a significant decline in gross receipts. A significant decline in receipts occurs when the business is open but gross receipts for the quarter are less than 50% of receipts in the same quarter of 2019. Under either scenario, the qualified wages for each employee for all quarters cannot exceed $10,000. There are provisions to determine eligibility for the credit so that taxpayers cannot “double-dip” in conjunction with other benefits, such as the paycheck protection loans.
Delay Payment of Employer Payroll Tax and Self-Employment Tax
For businesses, payment of the employer’s share of 6.2% Social Security tax that would otherwise be due will be suspended for the remainder of 2020. Half (50%) of the unpaid tax will be due by December 31, 2021, and the remaining half due on December 31, 2022.
For self-employed taxpayers, 50% of the self-employment tax that would be due through the end of 2020 can similarly be deferred until the end of 2021 and 2022.
Assistance to Distressed Sectors of the U.S. Economy
Finally, CARES Act provides for economic assistance to businesses in sectors of the economy that have been impacted particularly hard by the COVID-19 epidemic. This includes funding for hospitals up to a total of $100 billion, $500 billion in assistance (consisting of loans, loan guarantees, and other investments) for large businesses in the airline and hospitality industries, as well as about $150 billion for state and local stimulus funds.
The funding for eligible health care providers may be made through grants or other mechanisms to reimburse for expenses or lost revenues attributable to coronavirus. Eligible health care providers include public entities, Medicare or Medicaid enrolled suppliers and provides, as well as for-profit and not-for-profit entities that provide diagnosis, testing, or care for individuals with possible or actual cases of COVID-19. Funds will be available for building temporary structures, leasing property, medical supplies and equipment, increased workforce, emergency operation centers, retrofitting facilities and surge capacity. Eligible health care providers will need to submit applications to the Secretary of Health and Human Services which include a statement justifying the need for the funding.
Any large company receiving a portion of the $500 billion in government assistance described above will be subject to certain limitations on such things as stock buybacks and large executive bonuses. To ensure transparency, the Treasury Department will also disclose the terms of loans or other aid to companies.
Net Operating Loss Rules
Under the Tax Cuts and Jobs Act (TCJA), Congress had previously changed the rules with respect to net operating losses (NOLs) beginning with the 2018 tax year. Under those rules, NOLs sustained in a tax year could only be carried forward and could only reduce 80% of the taxable income recognized in the later period. The CARES Act will allow losses sustained in 2018, 2019, and 2020 to be carried back for up to five years. Any NOLs carried into 2019 and 2020 can be used to offset 100% of taxable income, rather than only 80%.
The interest expense limitation created under TCJA will also be altered under the CARES Act. Internal Revenue Code Section 163(j) limits the deduction of interest expense for certain businesses to 30% of adjusted taxable income. The CARES Act will increase that limitation to 50% for 2019 and 2020. Businesses will also be permitted to elect to use its 2019 adjusted taxable income to compute its 2020 limitation.
Qualified Improvement Property
The CARES Act provides a long-awaited technical correction needed from TCJA for Qualified Improvement Property, which is generally any improvement made to the interior of a nonresidential building after it is placed in service. Without this fix, the depreciable life of Qualified Improvement Property remained at 39 years and was not eligible for bonus depreciation. The Senate bill will change the depreciable life of Qualified Improvement Property to 15 years (making it eligible for 100% bonus depreciation) and, importantly, will make the change retroactive to 2018, providing opportunity to recover costs from 2018 and 2019 on amended tax returns.
We will continue to monitor and provide additional updates. However, if you have any questions, please contact your local Blue & Co. advisor.