The CARES Act provides $2 trillion in emergency relief for individuals, families, and businesses affected by the 2020 coronavirus pandemic caused by the outbreak of the coronavirus disease 2019 (COVID-19). For ease of use, principal sections of the CARES Act are summarized herein and presented in a question and answer format.
SMALL BUSINESS INTERRUPTION LOANS AND OTHER NON-TAX RELATED BUSINESS RELIEF
The CARES Act includes $349 billion for the creation of a new U.S. Small Business Administration (“SBA”) loan product, the Paycheck Protection Program, an emergency lending facility.
What is the covered period for the loan program contained in the Act?
February 15, 2020 through June 30, 2020.
Where do I apply for a loan?
The loans will be made by existing SBA lenders and new lenders through the new Paycheck Protection Program.
What is the maximum loan amount?
The maximum loan amount is the lesser of (i) $10 million or (ii) 2.5 times the average total monthly payments for payroll costs.
What is included in “payroll costs”?
Payroll costs are salary, wages, commission, cash tips (capped per employee at $100,000 per year); vacation, parental, family, medical, or sick leave; allowances for dismissal or separation; group health care benefits, including insurance premiums; retirement benefits; and state or local taxes on employee compensation. With respect to seasonal businesses, the calculation is based on the average total monthly payments for these payroll costs for the twelve weeks beginning on February 15, 2019 or for the period from March 1, 2019 through June 30, 2019.
What are the allowable uses for the loan?
The loan funds can be used for payroll costs, costs related to the continuation of group health care benefits, employee salaries, and interest payments for mortgage obligations, rent, utilities, and any interest on debt obligations incurred before February 15, 2020.
Who is an eligible borrower?
A small business concern, or a public or private non-profit with fewer than 500 employees, except that non-profits receiving Medicaid expenditures are excluded. Sole proprietors, independent contractors, and eligible self-employed individuals are also eligible to receive loans.
Who is an impacted borrower?
An impacted borrower is an eligible borrower in operation on March 1, 2020 who has applied for a loan under the SBA’s 7(a) lending program. An impacted borrower is presumed to have been adversely impacted by COVID-19.
How much in payroll costs per employee are covered under loan forgiveness?
The loan is applicable up to an annual salary of $100,000.
Are the loans forgivable?
An eligible recipient shall be eligible for forgiveness of indebtedness or a covered 7(a) loan in an amount equal to the cost of maintaining payroll continuity during the covered period.
Is there a reduction of forgiveness if there is a reduction in the number of employees?
The amount of loan forgiveness is proportionally reduced by the percentage reduction of full-time employees (with an exemption for rehires), as well as by an amount equal to any reduction in compensation of any employee in excess of 25% (with certain exceptions for tipped employees).
What are the terms of the loan?
The loans will have a 4% interest rate and maximum maturity date of 10 years for any remaining balance after application of loan forgiveness.
Is the cancelled indebtedness taxable income?
Does the CARES Act create relief for businesses (other than SBA loans)?
Yes, currently, the CARES Act sets aside $208 billion for the Secretary of Treasury to make or guarantee loans to eligible businesses.
Is my business eligible for one of the (Non-SBA) loans under the CARES Act?
In its present form, the CARES Act does not provide specific requirements for qualifying for a loan. Instead, the CARES Act provides that “no later than 10 days after the date of enactment of this Act, the Secretary shall publish procedures for application and minimum requirements.” So, at this time, it is difficult to determine which businesses may be eligible.
Are there any other provisions that are of interest?
- While borrowers may only receive funds under either the COVID-19 Disaster Loan Program or the Paycheck Protection Program, borrowers who received funds under the Disaster Loan Program starting from January 31, 2020 are eligible to refinance.
- Loan fees will be waived.
- Each eligible borrower will be allowed complete payment deferment relief for 6 months and up to 1 year.
- There is no prepayment penalty for any payment on loans.
- The Emergency Economic Injury Disaster Loan and Grant program is expanded to allow companies suffering economic harm due to COVID-19 to access the SBA’s Economic Injury Disaster Loans and give the SBA more flexibility to process and disperse small dollar loans. Businesses that apply for an Economic Injury Disaster Loans can have expedited access to capital through an emergency grant, which would permit them to receive an advance of $10,000 within three days to maintain payroll, provide paid sick leave, and to service other debt obligations.
RELIEF FOR INDIVIDUALS, FAMILIES, AND BUSINESSES
Individuals and Families
Does the CARES Act provide for direct payments (i.e., checks) to be sent to individuals and families?
Yes, the CARES Act provides for advance payments against an individual’s 2020 tax liability, which will be remitted by the Treasury directly to eligible individuals in 2020.
How much money will I receive?
The amount of the direct payment is $1,200 for a single eligible individual, $2,400 for married persons filing joint returns, plus $500 for each dependent child under the age of 17.
Are there income limitations that will affect the amount of my direct payment?
Individuals making $75,000 or less, married persons filing jointly making $150,000 or less, and persons who filed as a head of household making $112,000 will receive the full direct payment.
The amount of the direct payment decreases by $5 for each $100 by which you exceed those thresholds. Individuals making over $99,000, married persons filing jointly making more than $198,000, and persons who filed as a head of household making more than $146,500 will not receive any direct payments.
Do I have to file my 2020 income tax return to receive a direct payment?
No, the Treasury will use an eligible taxpayer’s 2019 tax return, if already filed, or the 2018 tax return if neither a 2020 nor 2019 return was filed, or Social Security statements if the eligible individual has not filed a 2020, 2019, or 2018 return.
Are there any specific types of taxpayers who are ineligible for the direct payment?
Nonresident aliens, individuals claimed as a dependent on another taxpayer’s return, trusts, and estates do not qualify for the direct payment.
When will I receive my direct payment?
It is unclear when the direct payment will be issued. However, the Department of the Treasury may make advance payments to individuals via direct deposit and is required to notify a recipient of a direct payment within 15 days.
Will the direct payment affect any refund I would otherwise be owed on my 2020 tax return?
Yes, direct payments will reduce any tax credit claimed when the recipient taxpayer files his or her 2020 tax return.
Can I withdraw money from my retirement plan to help my financial circumstances?
The CARES Act has several features that make it easier to withdraw money from a retirement plan. The CARES Act provides (i) new types of hardship withdrawals related to COVID-19; (ii) enhanced loan procedures that permit the withdrawal of the lesser of $100,000 or 100% of the account balance; and (iii) suspends required minimum distributions.
I do not itemize my deductions when I file my tax return, may I deduct anything I give to charity?
Yes, the CARES Act gives an “above-the-line” charitable contribution deduction of up to $300 for cash contributions to public charities and churches for tax years 2020 forward. However, contributions to a supporting organization or a donor-advised-fund do not qualify for this “above-the-line” charitable contribution deduction.
What about the charitable contribution deduction for individuals who itemize their deductions, or deductions for charitable contributions by businesses?
For individual taxpayers who itemize their deductions, the limitation on charitable contribution deductions is generally increased to 50% of the individual’s adjusted gross income with respect to cash contributions made to public charities (including churches) in 2020. Previously, the deduction was limited generally to 50% of the individual’s adjusted gross income for deductions to public charities and 30% of the individual’s adjusted gross income for donations to private foundations.
For corporations, the limitation for charitable contribution deductions generally is increased to 25% of the corporation’s taxable income with respect to cash contributions made to public charities (including churches) in 2020.
However, contributions to a supporting organization or a donor-advised-fund do not qualify for these increased limitations on the charitable contribution deduction.
Further, the limitation on donations of food inventory by a taxpayer in a trade or business is increased from 15% to 25% of the taxpayer’s net income from the trade or business.
Business Tax Related Provisions
Are there tax credits available if my business retains its employees but either has had to suspend operations due to a government order related to COVID-19, or continued to operate but suffered a significant financial decline?
If your business falls into either of the above two situations your business may be eligible to claim a credit against Federal Insurance Contributions Act (“FICA”) taxes. The FICA credit is available for any calendar quarter during which your business’s gross receipts are less than 50% of the gross receipts in the same calendar quarter in the preceding calendar year, continuing until the calendar quarter in which gross receipts exceed 80% of receipts in the same calendar quarter of the prior calendar year. The credit is calculated quarterly and is claimed against your business’s FICA tax liability.
The amount of the FICA credit is limited to 50% of wages plus premiums for group medical plan coverage, with eligible wages and premiums not to exceed $10,000 for all calendar quarters. The maximum credit for 2020 cannot exceed $5,000 per employee, and it is reduced by any credit granted to the same business under the Families First Coronavirus Relief Act during any quarter in which the retention tax credit is claimed as to a given employee.
Tax-exempt entities are eligible for the FICA credit. However, governmental employers and businesses that accept SBA loans under the CARES Act are not eligible to claim the FICA credit.
The FICA credit is available only for wages paid after March 12, 2020, and it expires on January 1, 2021.
Is it possible for my business to defer its obligation to pay payroll taxes?
Employers (including self-employed taxpayers) may defer the payment of the employer portion (or 50% of the self-employed portion) of the Social Security payroll tax for liabilities arising after enactment of the CARES Act. Fifty percent of the deferred payroll tax will be due on or before December 31, 2021, and the remainder will be due on or before December 31, 2022. However, employers that have certain SBA loans forgiven are not eligible for this deferral.
My net operating losses have increased, how can I deduct those losses?
The CARES Act temporarily restores the full use, including carrybacks and carryforwards, of net operating losses for taxable years beginning before January 1, 2021. These losses were previously limited under the Tax Cuts and Jobs Act.
I’m an individual with large net business losses, are those limited?
The effective date of the limitation on excess business losses ($250,000 for individuals, and $500,000 for joint filers) is retroactively deferred, and the limitation will apply only to taxable years beginning after December 31, 2020, and before January 1, 2026. Taxpayers who were subject to the limitation on excess business losses in 2018 or 2019 may file amended tax returns to reflect this deferred effective date.
What other changes should I be aware of concerning my business?
The CARES Act also made changes to the Internal Revenue Code that were amended under the Tax Cuts and Jobs Act. These changes include:
- Easing restrictions on corporations to claim in full any unused refundable credits under the Alternative Minimum Tax for minimum taxes in 2019.
- Increasing the deduction of net business interest from 30% of the taxpayer’s adjusted gross income to 50% for taxable years beginning in 2019 and 2020. However, with respect to partnerships for tax year 2019, partnerships shall continue to use the 30% limit, but 50% of any interest over the limit that is allocated to a partner will be currently deductible by the partner. The other 50% of the excess interest will be carried over. Partners can elect out of using this rule.
- Fixing 100% bonus depreciation for tenant improvements, retroactive to taxable years beginning after December 31, 2017.
- Enacting a temporary exemption from excise tax for distilled spirits used after December 31, 2019, and before January 1, 2021, to produce hand sanitizer.
HEALTH CARE PROVISIONS AND MISCELLANEOUS RELIEF
Does the CARES Act provide for the mitigation of future pandemics?
The CARES Act orders the investigation of the strength and security of the Unites States medical product supply chain to assess potential for shortages of critical drugs, personal protective equipment, and other medical devices. Further, the CARES Act orders the stockpiling of certain drugs, vaccines, and personal protective equipment.
Does the CARES Act address the current shortage of drugs and personal protective equipment like masks?
The CARES Act provides that the Food and Drug Administration shall prioritize and expedite the review of potential treatments for COVID-19.
Does the CARES Act address the shortage of ventilators?
Yes and no. The CARES Act imposes certain requirements on ventilator manufacturers to lessen a future shortage. However, the Act provides for the prioritized and expedited review of these devices.
Does the CARES Act address the availability of COVID-19 diagnostic testing?
The CARES Act establishes emergency guidelines for bringing COVID-19 tests to market.
Does the CARES Act address insurance coverage for diagnostic testing for COVID-19?
The CARES Act provides that insurers must provide coverage for diagnostic testing and that no cost-sharing requirements may be imposed (deductibles, copayments, and/or coinsurance).
Does the CARES Act provide relief to citizens who may be struggling to put food on the table?
The CARES Act provides for nutrition services, including home delivery, for elderly, infants, and other vulnerable classes of citizens.
Does the CARES Act affect student loans?
The CARES Act suspends all payments due for federal (not private) student loans through September 30, 2020.
Does the CARES Act affect paid leave?
The CARES Act increases the maximum amount of paid leave that an employer may be required to pay and makes a few other technical changes to the paid leave provided by the Families First Coronavirus Response Act.
Does the CARES ACT affect money market mutual funds?
The CARES Act exempts money market mutual funds from certain restrictions imposed by the Emergency Economic Stabilization Act of 2008.
These materials are for informational purposes only and should not be construed as legal advice. Individuals should contact their attorneys to obtain advice regarding any particular issue or problem. Use of and access to this information or any of the links contained herein does not create an attorney-client relationship between Lugenbuhl and the reader. The opinions expressed above are the opinions of the author and may not reflect the opinions of the firm or any individual attorney.