2-Apr-20
CARES Act Overview
Take-Away: The Coronavirus Aid, Relief and Economic Security Act (CARES) is mountainous piece of legislation, hastily put together in an attempt to address the economic and human suffering caused by the pandemic. Due to its breadth there is, and there will continue to be, considerable confusion over its scope and entitlements. Only with the passage of time will implementing Regulations help to clarify its numerous provisions.
Background: The CARES Act has two divisions: (A) which deals with providing emergency assistance for individualls, families, and businesses affected by COVID-19; and (B) which provides supplemental appropriations to help the government respond to the COVID-19. We will stick with Division A in this missive.
Division A: Division (A) has five (5) separate titles (or Acts:)
Title I: Keeping American Workers Paid and Employed Act, which covers: (i) the Paycheck Protection Program Act; (ii) Disaster Loan Program; (iii) SBA Express Loan Program; (iv) Entreprenerial Development Program; and (iii) State Trade Expansion Program;
Title II: Assistance for American Workers, Families and Businesses Act which: (i) expands unemployment benefits; (ii) creates or changes income tax rebates; (iii) alters employee benefit plan rules; and (iv) provides tax credits, deductions and exemptions for businesses;
Title III: Supporting America’s Health Care System in the Fight Against the Coronavirus, Act, which deals with (i) device shortages; (ii) supply shortages; and (iii) contains provisions intended to support healthcare workers;
Title IV: The Economic Stabilizaton and Assistance to Severly Distressed Sectors of the U.S. Economy Act, which: (i) gives the Secretary of Treasury the authority to make loans, loan guarantees to states, and municipalities and what it calls ‘eligible businesses; and (ii) implements changes to existing regulations to the Dodd-Frank Wall Street Reform Act and the Consumer Protection Act; and
Title V: The Coronavirus Relief Fund Act, which provides $150 billion to states and local governments.
Obviously there is a lot there under each of these 5 separate Acts. Only some of these provisions will be summarized. This is intended as an overview of only some of the Acts’ provisions.
Income Assistance for Workers: This provides a check to individuals tied to their 2018 or 2019 reported income. For a single person, if their adjusted gross income (AGI) is $75,000 or less, their rebate is $1,200. For married individuals, if their income was $150,000 their rebate is $1,200 per spouse ($2,400 combined.) Each child is entitled to a $500 rebate amount. Trusts and estates are excluded from receiving a rebate. This amount is then phased out if the taxpayer’s reported taxable income is greater than either the $75,000 or $150,000 amounts. The ‘phase out’ is $5.00 for each $100 a taxpayer’s income exceeds the phase-out threshold, i.e. there will be no assistance check if the single individual’s income was $99,000, or $198,000 for a married couple. These checks are treated as “advanced refunds of a 2020 tax credit, so that the credit on the 2020 tax return will be reduced by the amount that is actually received.”
Retirement Plan Changes: Since these were summarized in a prior missive, the key points restated are that: (i)required minimum distributions are suspended for 2020, including those individuals who turned 70 1/2 in 2019 and who were facing an RMD on April 1, 2020; (ii) the 10% penalty associated with an early distribution from an IRA or qualifed plan account prior to age 59 1/2 is waived this year, and the income tax due on the taxable distribution can be spread and paid ratable over the following three (3) years; (iii) loans from qualified plan accounts (if permitted under the plan document) have been expanded to the lesser of $100,000 or 100% of the participant’s vested account balance; (iv) any outstanding loan installment payments for 2020 are suspended for one year, even if that delay pushes the loan’s repayment beyond the statute’s 5 year maximum repayment period; (v) defined benefit pension plans have their required plan contributions suspended until January 1, 2021; and (vi) ‘target- date’ retirement plans can use their percentage funding target from 2019 for plan year 2020.
Paycheck Protection Loans, (aka ‘free-money:’) This is part of the accelerated Small Business Administration (SBA’s) loan program. The loans carry a 100% SBA guaranty. The loan has up to a 10 year payback. The interest rate is 4%. There are no personal guarantees, and no collateral required, nor can any prepayment penalties be imposed as conditions to the loan. The first six (6) months of the loan require no payment of principal, interest or fees. Businesses with fewer than 500 employees and 501(c)(3) tax exempt organizations are eligible. Loan proceeds must be spent within 8 weeks of the loan approval. Bank lenders can process the loan applications without having to first obtain the SBA’s approval. Use of the loan proceeds are for: (i) payroll costs; (ii) group health benefits; (iii) employee salaries; (iv) interest on mortgages; (v) rent; (vi) utilities; and (vii) existing debts incurred before February 15, 2020. The limits to the loan amount are tied to the applicant’s payroll from March 1, 2019 to June 30, 2019, called the applicant’s average monthly payroll. The applicant’s average monthly payroll is then multiplied by 2.5 to derive the maximum loan amount. The loan, which is non-recourse to the applicant, can be forgiven if the loan proceeds are used to cover payroll, mortgages, interest, rent, or utilities- but only 8 weeks worth of these expenses can be forgiven. Sole proprietors, self-employed, and independent contractors are all eligible to apply for these expedited SBA loans.
Charitable Contributions: A qualified contribution to a charity in 2020 is authorized. It is an election made on the individual’s 2020 Form 1040. If the taxpayer is a non-itemizer, then the taxpayer can deduct up to $300 as a cash contribution to a charity. If the taxpayer is an itemizer, then the taxpayer can make a cash contribution to a charity up to 100% of their adjusted gross income (AGI)[up from 60%.] A business can make a charitable contribution of up to 25% of its taxable income [up from 10%]. Most charities are covered except for those under IRC 501(c)(9) and donor advised funds which will not qualify.
Student Loan Waivers: The obligation to repay federal student loans, both principal and interest, is suspended through September 30, 2020. Interest on the loan’s unpaid balance will be suspended for that period as well. No penalty will be assessed for the non-payment of loan installments before that date.
Employers are encouraged to assist employees with their student repayments, too. An employer can now pay up to $5,250 a year to assist employees with their student loans, through January 1, 2021. The payment made by the employer will not be treated as taxable income to the employee. This provision applies to both existing student loans and ‘new’ student loan. It also applies to employer educational assistance payments to employees for tuition, fees and books.
Delayed Payroll Taxes: Normally an employer pays 6.2% of social security tax on employee wages. The Act authorizes the employer to defer the payment of these payroll taxes for two years. 50% of the deferred payroll tax will be due on December 31, 2021 and the other 50% will be due on December 31, 2022. This deferral opportunity is extended to self-employed individuals.
Bankruptcy Protection: The Act creates a new subchapter 5 of Chapter 11 of the Bankruptcy Code. In order to be eligible to file of a Chapter 11 reorganization under this subsection, a business had to have debts of no more than $2,725,625. That eligibility condition was increased to $7,500,000 of debt.
Unemployment Assistance: The Act expands unemployment benefits, while making these benefits available to self-employed individuals or those individual who work part time or who seek part-time employment. The unemployment benefits available to covered individuals (close to same definition used for other COVID-19 sick pay eligibility) up to 39 weeks. An individual is not a covered individual, who is able to telework or who receives sick pay or other paid leave benefits. An additional $600 a week may be available to unemployment recipients for up to four (4) months. An additional 13 weeks of unemployement benefits may be made available after state unemployment benefits are no longer available through December 31, 2020.
Employee Retention Credit: The Act creates a refundable payroll tax credit for 50% of the wages paid by employers to employees during the CROVID-19 crisis. The credit is available to an employer whose (i) business operation was fully or partially suspended due to a COVID-19 related shut-down order, or (ii) whose gross receipts declined by more than 50% when compared to the same calendar quarter in the prior year. 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 3/13/2020 through December 31, 2020. However, the availability of the credit turns on the number of employees. If the employer has more than 100 full-time employees, qualified wages are wages paid to employees only when they are not providing services due to the COVID -19 related circumstances. If the employer has 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.
Business Interest Deduction: The Act temporarily increases the amount of interest expenses that businesses are allow to deduct on their income tax returns. It increased the limitation to 50% of taxable income [up from 30%] for 2019 and 2020.
Net Operating Losses: In something of a reverse of the 2017 Tax Act, the Act changes the 2017 elimination of the two year net operating loss carryback. The Act now permits a 5-year carryback for current business losses and and indefinite carry forward period for such losses [previously limited to 80% of the taxpayer’s taxable income.]
Conclusion: Clearly there is a lot to digest under the Act(s) and the many different ways Congress intend to address the economic crisis and human toll caused by the pandemic. Many questions will surface as individuals and businesses seek some of the various forms of financial relief now available. If you have questions, shoot me an email and I will try to find an answer to your question. We are all in this together.