The long‐awaited Stimulus Bill known as The Coronavirus Aid, Relief, and Economic Security (CARES) Act was signed into law today by President Trump. This new law not only sends rebate checks to taxpayers but also rolls back several provisions of the Tax Cuts and Jobs Act.
Below is a summary of the law that was signed into law March 27, 2020. The law was designed to infuse immediate cash into the hands of business and individual taxpayers, here’s how:
Individuals and Families
Individual Tax Credit/Rebate
The CARES Act provides payments to taxpayers (subject to income limits) in the way of a credit under §6428 of $1,200 per individual ($2,400 for married couples filing a joint return) plus $500 per qualifying child who is under age 17 (as defined under §24(c)).
The payment is reduced by 5% of the taxpayer’s adjusted gross income in excess of $75,000 ($112,500 for head of household; $150,000 for joint filers). The payment will fully phase out when income reaches $99,000 for single filers, $146,500 for head of households with one child
and $198,000 for joint filers.
Joint filers are each treated as having received one‐half of the advanced payment. The eligibility for the payment is based on the taxpayers 2019 tax return, or if the taxpayer has not filed a 2019 return, eligibility is based on the 2018 return. If no returns were filed in 2018 or 2019,
information from 2019 Forms 1099‐SSA and 1099‐RRB will be used.
The payment acts as a rebate/advanced tax credit and will be reconciled on the 2020 tax return.
Retirement Account Changes
Certain taxpayers are permitted to withdraw up to $100,000 from a retirement plan or IRA for “coronavirusrelated distributions” without incurring the 10% premature distribution penalty under §72(t).
A coronavirus‐related distribution includes a distribution:
- Made after Jan. 1, 2020 and before Dec. 31, 2020.
- To an individual who is diagnosed the with virus SARS‐CoV‐2 or COVID‐19 by a test approved by the Centers for Disease Control and Prevention.
- To a spouse or dependent of a person diagnosed with such virus by such a test.
- To persons who experience adverse financial consequences as a result of being quarantined, furloughed or laid off or having work hours reduced due to such virus or disease, being unable to work due to lack of child care due to such virus or disease, closing or reducing hours of a business owned or operated by the individual due to such virus or disease, or other factors as determined by the Secretary of the Treasury.
If the taxpayer chooses, they may, at any time during the 3‐year period beginning on the day after the date such distribution from a qualified retirement plan was received, make one or more contributions in an aggregate amount not to exceed the amount of the distribution to an
eligible retirement plan and treat the contribution as a rollover contribution. Distributions from an IRA are treated similarly.
Coronavirus‐related distributions are included in the taxpayer’s income, beginning with the year of distribution, ratably over a three‐year period unless the taxpayer elects not to do so.
Loans from Qualified Plans
Loans from qualified plans made within 180 days beginning on the day of enactment, will not be treated as a distribution if the amount distributed does not exceed $100,000.
Taxpayers who have a current outstanding plan loan with a payment requirement on the date of enactment and ending on Dec. 31, 2020 will be granted an automatic 1‐year delay for making that repayment. Any subsequent repayments with respect to any such loan shall be
appropriately adjusted to reflect the 1‐year delay in the due date.
Temporary Waiver of Required Minimum Distributions (RMDs)
RMDs required to be made or that begin in 2020 are waived. Calendar year 2020 is disregarded for distributions that are being made under the 5‐year rule.
Enhanced Charitable Contribution Deductions
A charitable contribution of up to $300 made in taxable years beginning in 2020 is allowed as a special deduction to taxpayers who take the standard deduction. The contribution must be made in cash to a qualified charitable organization or a new or existing donor advised fund.
This is a permanent change.
Temporary Suspension of Contribution Limitations
The 50% limitation (60% in years 2018‐2025) under §170(b) and (d) is suspended for cash contributions made in 2020.
For corporations, the 10% limitation is increased to 25% of taxable income. This provision also increases the limitation on deductions for contributions of food inventory from 15% percent to 25%.
Excludable education assistance under §127 includes payments made by an employer, for the benefit of an employee, whether paid to the employee or to a lender, of principal or interest on any qualified education loan (as defined in §221(d)(1)) incurred by the employee for education of the employee.
Employee Retention Tax Credit
Employers are provided a refundable payroll tax credit for 50% of wages paid to employees during the COVID‐19 crisis.
The credit is available to employers whose:
- Operations were fully or partially suspended due to a COVID‐19‐related shutdown order, or
- 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 eligible employers with 100 or fewer full‐time employees, all employee wages qualify for the credit, whether the employer is open for business or subject to a shut‐down order.
The credit is provided for the first $10,000 of compensation, including health benefits, paid to an eligible employee. The credit is provided for wages paid or incurred from March 13, 2020 through Dec. 31, 2020.
Deferment of Employer Payroll Taxes
Employers and self‐employed individuals can defer payment of the employer share of the Social Security tax they otherwise are responsible for paying to the federal government with respect to their employees. Employers generally are responsible for paying a 6.2% Social Security tax on employee wages.
The provision requires that the deferred employment tax be paid over the following two years, with half of the amount required to be paid by Dec. 31, 2021 and the other half by Dec. 31, 2022. The Social Security Trust Funds will be held harmless under this provision.
Expanded Net Operating Loss Deduction (NOLs)
A Net Operating Loss (NOL) arising in a tax year beginning in 2018, 2019, or 2020 can now be carried back five years to reduce taxable income creating a refund for those years to be paid to a taxpayer, either and individual or corporation. The provision also temporarily removes the 80% taxable income limitation to allow an NOL to fully offset income. These changes will allow companies to utilize losses and amend prior year returns.
Repeal of Excess Business Loss Rules
Pass‐through businesses and sole proprietorships can deduct excess business losses arising in 2018, 2019, and 2020. Previously, the deduction of excess business losses by noncorporate taxpayers for tax years beginning after Dec. 31, 2017 and ending before Jan. 1, 2026 were disallowed.
Modification of Minimum Tax Credit for Corporations
The corporate alternative minimum tax (AMT) was repealed as part of the TCJA, but corporate AMT credits were made available as refundable credits over several years, ending in 2021. This modification accelerates the ability of companies to recover those AMT credits, permitting companies to claim a refund now. This Act allows corporations to claim 100% of AMT credits in 2019.
Bonus Depreciation for Qualified Tenant Improvements
100% bonus depreciation rules now apply to qualified improvement property (QIP)
QIP is any improvement to the interior of a non‐residential building after the building was placed in service, other than elevators, escalators, building enlargements or changes to the building’s internal structural framework. It has a recovery period of 15 years. The change is made as if it was originally included in the TCJA and, thus, is effective for property acquired and placed in service after Sept. 27, 2017.
General Business Resources
Expansion of Unemployment Benefits
Changes in the law provide payments to “Covered Individuals” who would not normally be eligible for or who have exhausted regular unemployment compensation and who are unemployed, partially unemployed, or unable to work as a direct result of the COVID-19 public health emergency. This includes self-employed taxpayers
Covered Individuals, as well as all those who have qualified for regular unemployment compensation are entitled to receive an additional $600 payment per week, above what state unemployment compensation law already provides. The additional $600 weekly payment is available from the date that the applicable state enters into an agreement with the federal government until July 31, 2020 (i.e.,
four months maximum).
Up to 39 weeks of unemployment compensation, including any week for which the Covered Individual received regular compensation or extended benefits is available. An additional 13 weeks of pandemic emergency unemployment compensation through December 31, 2020 is available.
Paid Leave for Rehired Employees
The CARES Act amends the expanded paid leave requirements for employers in the Families First Coronavirus Response Act to include employees who are laid off and then rehired by an employer.
Specifically, an employee who was laid off by their employer on March 1, 2020 or later, had worked for the employer for at least 30 of the previous 60 days before being laid off, and was then rehired by the employer will be eligible for the paid family and sick leave benefits.
Small Business Loans
Paycheck Protection Program (PPP)
For businesses with 500 or less employees and in operation on 2/15/2020 new modified loans are made available through the SBA. The amount of the loan is limited to the lesser of $10 million or 2.5 times the borrower’s average total monthly payroll costs. These loans carry an interest rate of 3.75% for small businesses and 2.75% for nonprofits. Loan repayment terms vary by applicant, up to a maximum of 30 years. The application period ends June 30, 2020.
The loan proceeds may be used for payroll costs (as defined), employee benefits and commissions, interest payments on mortgages, rent, utilities, and interest on debt incurred before 2/15/2020.
No collateral is required with a maximum interest rate of 4% and a maximum term of 10 years. While interest will accrue from the day the loan is made, not interest or principal payments are required for a 6‐12 month period of time. The loan may be paid off at anytime without prepayment penalties.
The PPP loan has a forgiveness provision allowing the borrower to apply for loan forgiveness in an amount equal to the payroll costs, rent, utilities, and interest paid on mortgages during the 8 weeks after the loan is made. The amount of forgiveness will not be taxable to the borrower, but the taxpayer may not use both the loan and the employee retention tax credit as described above.
Economic Injury Disaster Loan (EIDL)
The program currently allows for emergency loans of up to $2M to assist companies affected by COVID‐19. The new law waives the requirement for personal guarantees on loans under $200K, it also waives the requirement that the borrower not be able to obtain credit elsewhere, and provide emergency grants of up to $10K within 3 days of the borrower filing an application, though the amount of the grant would reduce any loan forgiveness under the PPP. The law also streamlines the loan application process.
Eligible small business owners can apply online and select “Economic Injury” as the reason for seeking assistance. Call the SBA Disaster Assistance Customer Service Center at 800.659.2955 for assistance. You can also click this link to go directly to their website: https://www.sba.gov/funding‐programs/disaster‐assistance. We recommend all business that have any of the above apply for this program.
We also have a relationship with a local banker who specializes in SBA lending. Please contact us for more information and if you would like an introduction.