President Trump signed the Coronavirus Aid, Relief, and Economic Security Act (the ‘‘CARES Act”). This is the 3rd piece of legislation addressing the economic impact of the COVID19 pandemic. The first was the $8.3 billion spending bill on March 6 and the second was the Families First Coronavirus Response Act on March 18. The CARES Act includes lending facilities to large and small businesses (including targeted distressed businesses), expanded unemployment benefits and individual and business tax changes.
Eligible taxpayers will receive up to $1,200 ($2,400 for married filing jointly), plus $500 for each qualifying child even if the taxpayer has no income. Nonresident aliens and individuals that are claimed as a dependent on another person’s tax return are not eligible for this rebate.
The rebate begins to phase-out at $75,000 of AGI or $150,000 for married filing joint. The rebate is fully phased out $99,000 or $198,000 for married filing joint. This rebate is a 2020 benefit to be based on 2020 income. However, to expedite the payment, the IRS will base their decision on the most recent filed tax return. For those who have not filed their 2019 tax return this might be a reason to delay. The opposite could also be true.
Tax-Favored Withdrawals from Retirement Plans
Withdrawals up to $100,000 (in the aggregate) from qualified plans, including IRAs, during 2020 for coronavirus-related purposes receive several favorable tax treatments. If you are under 59½ you can withdraw qualified plan and IRA funds without a 10% early withdrawal penalty, if the withdrawal is for coronavirus-related purposes (and subject to the $100,000 limit.
The withdrawn amounts may be repaid (to the plan or to an IRA) in one or more payments at any time during the following three (3) years and those repayments will be treated as a tax-free rollover, without regard to any contribution cap.
Finally, any distributions not repaid with the three (3) year period, those will be taxable income, but the amount can be included in income and taxed ratably over three (3) years.
Withdrawals are for coronavirus purposes if you, your spouse or dependent is diagnosed with COVID-19 (or SARS-CoV-2) or experiences certain adverse financial consequences as a result of (i) being quarantined, furloughed or laid off or having to work reduced hours because of the virus, (ii) being unable to work due to lack of child care because of the virus, (iii) closing or reducing hours of a business owned or operated by you due to the virus, or (iv) other factors as determined by the Treasury.
Loans from Qualified Retirement Plans
The limit is increased to $100,000 (but no more than the plan balance) from qualified plans will be permitted during the 180-day effective immediately. In addition, for any loans from qualified retirement plans that are outstanding on or after March 27 and which have a payment due in 2020, the due date for the payment will be delayed one (1) year.
Waiver of Required Minimum Distributions
Required minimum distributions (“RMDs”) for certain defined contribution plans (e.g., 401(k)s and IRAs) are waived for calendar year 2020. This applies to both of the following:
- Those who are taking annual RMDs do not have to withdraw an RMD for 2020.
- Those who turned 70 ½ in 2019 but deferred the first RMD to April 1, 2020. You do not have to withdraw an RMD for 2020.
For those who have already taken an RMD for 2020, it’s now not considered to be an RMD, which means it can be rolled over within sixty (60) days of withdrawal. For those who took their RMD more than sixty (60) days ago, you might be able to rollover the RMD taken in 2020.
Charitable Contribution Deductions
Up to $300 of charitable contributions can be deducted by taxpayers who do not itemize (i.e., an “above the line” deduction). This is not a temporary provision; it applies to any tax year beginning after 2019. However, not all contributions are eligible. Contributions must be made in cash and cannot be made to a donor advised fund, certain supporting organizations or certain private foundations.
For those who do itemize, the deduction limitation for certain charitable contributions can be increased to 100% of AGI at the election of the taxpayer. Again, not all contributions are eligible. Contributions must be made in cash and cannot be made to a donor advised fund, certain supporting organizations or certain private foundations. Partners of partnerships and shareholders of S-corporations could also qualify for this treatment if they individually elect to do so. This provision is limited to charitable contributions made in 2020.
PROVISIONS AFFECTING BUSINESSES
Employee Retention Tax Credit
For employers with more than 100 full-time employees, qualified wages are wages paid to employees who are not working due to the COVID-19. For businesses with 100 or fewer 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 December 31, 2020.
An employer is eligible for this credit only if they were carrying on a trade or business in 2020 and (1) the operation of that business is fully or partially suspended (for specified reasons) by the government (Federal, state or local) due to COVID-19, or (2) the business has a significant decline in gross revenue (50% less than in the calendar quarter of the prior year) until the business recovers to 80% of prior year’s revenue. A business can elect out of this provision. If the business receives a loan under the Paycheck Protection Program (described below), the business is in eligible for an Employee Retention Tax Credit.
Delay of Payment of Payroll Taxes
Employers (both for profit and not-for-profit) and self-employed individuals can defer the employer portion of payroll taxes with respect to their employees. This applies to payroll taxes for the period from enactment (March 27) to December 31, 2020. 50% of the deferred payroll taxes will be payable on December 31, 2021; the remaining 50% will be payable on December 31, 2022. If the business receives a loan forgiveness under the new Paycheck Protection Program, the business is not eligible to defer payment of payroll taxes.
Net Operating Losses Modification
Losses for tax years 2018, 2019 and 2020 can now be carried back five (5) years, without regard to taxable income. It is expected that many companies could suffer losses in 2020 due to mandatory closure and other economic hardships. Those losses may not be known until the company files its 2020 taxes in early 2021. Once determined, those losses can be carried back to offset income from the five (5) prior years. Some of those losses will be carried back to tax years when the business was subject to a 35% tax rate. This will provide relief, but not immediate relief, to struggling businesses.
Increase in Limit on Business Interest Expense
For 2019 and 2020 businesses can deduct business interest up to a limit of 50% of taxable income. Special rules apply to pass-through businesses.
Paycheck Protection Program (“PPP”) (Small Business Loans)
To help with near-term liquidity and to encourage the retention of employees, the CARES Act includes a complicated set of rules for government guaranteed loans and grants to eligible businesses, without personal guaranties or collateral. Certain businesses may be eligible to have all or a portion of the loan forgiven.
Loans to Small Businesses. $350 billion is allocated for helping small businesses through a Paycheck Protection Program (“PPP”) loan. Small businesses are generally those with 500 or fewer employees. Individual sole-proprietors, independent contractors and other self-employed individuals are eligible for loans. The primary forms of assistance are loans fully guaranteed by the government and grants facilitated by the U.S. Small Business Administration (the “SBA”), although additional lenders can be authorized by the Department of the Treasury.
PPP loans cannot have a maturity beyond ten (10) years and cannot have an interest rate above 4%. These loans will have a 100% government guarantee if made on or before December 31, 2020. Principal and interest payments will generally be deferred for at least six (6) months.
Loan Amount. The maximum amount of the loan is $10 million, but the actual amount of the loan is tied to payroll, mortgage, rent and utility payments of the business during the one (1) year period before the loan, which could result in a lower loan amount. The loan amount is generally the lesser of:
- The average monthly payroll (over the past 12 months before the loan is made) x 2.5, plus the outstanding amount of any economic injury disaster loan (EIDL) from the SBA from January 31, 2020 to the time the loan is refinanced into a PPP loan; or
Loan Proceeds. Loan proceeds can be used for payroll (salaries, sick leave, medical leave, insurance premiums) and certain administration expenses (mortgage interest, rent and utility payments), in addition to existing allowable uses under SBA rules. A borrower must make a good faith certification as to the necessity of the loan and that the borrower will use the loan for appropriate purposes.
Loan Forgiveness. A PPP borrower may be eligible to apply for loan forgiveness equal to an amount spent during an eight (8) week period after the loan origination date (capped at the loan amount) for:
- payroll costs (excluding compensation above $100,000);
- interest payments on any mortgage incurred prior to February 15, 2020;
- rental lease payments (in force before February 15, 2020); and
- utility payments (for services which began before February 15, 2020).
There are additional rules reducing the amount that can be forgiven based on a reduction of the businesses’ employees and the reduction of the employees’ wages. Businesses that have already reduced their payrolls can get loan forgiveness if they restore their payrolls after obtaining the loan.
Any amount of the loan that is forgiven will not be considered taxable income to the business.