The Coronavirus Aid, Relief, and Economic Security Act (the CARES Act or the Act), a federal $2.2 trillion emergency relief package signed into law on Friday, March 27, 2020, was designed to provide financial relief in response to the economic downturn caused by the COVID-19 pandemic. The Act includes a range of tax assistance for individuals, families and businesses.
• Individual Tax Rebates
• Business Interest Expense Deductions
• Expanded Ability to Use Losses
• Acceleration of AMT Credits
• Increased Charitable Deductions
• Retirement Plan Contributions and Plan Loan Rules
• Bonus Depreciation
• Paycheck Protection Program- covered in other articles
Individual Tax Rebates
The CARES Act gives advance rebates for tax credits of up to $1200 per individual (or $2400 for joint return filers), plus a $500 per child. The rebates phase out ($5 reduction for each $100 the taxpayer’s adjusted gross income exceeds the threshold) for those individual filers with adjusted gross incomes above $75,000 and joint filers with adjusted gross incomes exceeding $150,000; the threshold is $198,000 for joint filers with children. The rebates are not available for single individuals with no children who have incomes over $99,000 and joint return filers with incomes exceeding $198,000. To qualify, the taxpayer must have a work-eligible social security number and cannot be a dependent of another taxpayer. Taxpayers with no income or whose incomes come from non-taxable, means-based benefit programs are nevertheless eligible for the rebates.
Because 2020 incomes are as-yet unknown, the IRS will determine the rebate based on information provided in the taxpayer’s 2019 return (or 2018 return). Subsequently, if the taxpayer qualifies for a larger amount based on the 2020 tax return, the amount may be adjusted.
Most Americans do not have to take any action to receive the rebate.
Business Interest Expense Deductions
The CARES Act expands the allowable business interest expense deduction by easing the percentage limitations for tax years beginning in 2019 and 2020, by permitting businesses to elect to use their 2019 calculations to determine their 2020 business interest deduction, and allowing any excess to be carried forward to future tax years. The limitation is modified in that it now allows deductions of up to 50 % of Earnings Before Interest Expenses, Taxes, Depreciation and Amortization (EBITDA) (a proxy for a company’s current operating profitability) in place of the prior 30 %. This will allow business that were more profitable in 2019 than in 2020 (likely most businesses) to have a higher limit on deductible business interest.
For businesses taxed as partnerships, including LLCs, the new 50 % limitation will apply to income earned in 2020 (but NOT 2019). However, the partnership may elect that, for 2019, 50 % of the excess business interest allocated from the partnership to each partner be treated as business interest paid in 2020 (and not subject to the business interest deduction limitation). The remaining 50 % excess business interest allocated to the partner will continue to be subject to the 30 % limitation, but can be carried forward. The change is designed to allow partnerships to reduce their outlays of cash for tax distributions to their partners.
Expanded Ability to Use Losses
In 2017, the Tax Cuts and Jobs Act (TCJA), in a move subsequently criticized, pared back the ability of businesses to harvest Net Operating Losses (NOLs), a tool used by businesses to mitigate taxes. The CARES Act substantially assists businesses by modifying the limitations on excess losses of certain taxpayers for tax years 2016 through 2021 and thereafter.
The Act repeals the 80 % income limitation on losses for tax years beginning before 2021, and allows 100 % of loss carryforwards and carrybacks for tax years after 2021. Taxpayers (other than REITs) may carry back their NOLs for up to five years where they were incurred in tax years 2018, 2019 or 2020.
The chart below helps demonstrate the changes:
|TAX YEAR||EXISTING UNDER TCJA||CARES ACT|
|2015||Generally cannot amend returns||Generally cannot amend returns|
|2016||3-year carryback; 20-year carryforward||3-year carryback; indefinite carryforward; NO 80 % cap|
|2018||No carryback of current losses; Indefinite carryforward of current losses; 80 % of taxable income cap for currently claimed losses||5-year carryback for current losses; indefinite carryforward; NO 80 % cap|
|2020||20-year carryforward NOLs before 1/1/18; PLUS the lesser of: (1) all NOLs after 12/31/17, or (2) 80 % of taxable income.|
For corporations, NOLs carried back to tax years prior to 2018 will be particularly valuable because the corporate income rate was 35 %.
A taxpayer must file the application for their carrybacks within 120 days of the enactment of the CARES Act.
VERY SIGNIFICANT: Businesses with NOL carrybacks will be able to obtain tax refunds for taxes paid within the five-year carryback period, thus permitting immediate refunds for prior tax years.
For non-corporate taxpayers, individuals’ ability to use business losses arising to offset non-business income has been limited to $250,000 for individuals and $500,000 for joint return filers. Such losses that were disallowed could be carried forward and treated as NOLs in future tax years. CARES suspends the limitations for tax years beginning in 2018, 2019 and 2020. Taxpayers should consider filing amended returns for 2018 to take advantage of any permitted deductions for 2019 and 2020.
Moreover, by technically correcting the TCJA, the Act clarifies that losses from the sale of capital assets are not included in calculating excess business losses. The computation of taxable income for purposes of determining the limitation includes only the lesser of: (1) capital gains from a trade or business; or (2) aggregate capital gain net income.
Acceleration of AMT Credits
The CARES Act provides that a corporation, in order to increase cash flow, can claim a full refund of its AMT credits that have been carried forward from the 2018 and 2019 tax years. The corporation must apply by the end of 2020 and the IRS is required to process the application within 90 days.
Increased Charitable Deductions
The Act increases the charitable deduction limitation for corporations from 10 % to 25 % for cash contributions made to charities in 2020, as long as the donees are not donor advised funds (DAFs) or supporting organizations under Internal Revenue Code (IRC) Section 509(a)(3). Qualified charities are those described in IRC Section 170 (b)(1)(A). For individuals who itemize, 100 % of the contribution is deductible, increased from the previous 50 %. For taxpayers that claim the standard deduction, the Act provides a deduction “above the line” for up to $300 of cash contributions.
Retirement Plan Contributions and Plan Loan Rules
Pension Plan Funding
ERISA’s minimum funding requirements for Defined Benefit Pension Plans are temporarily suspended until January 1, 2021. Even if an employer has not funded its plan for 2020, the employer may continue to rely on its 2019 “adjusted funding attainment percentage” (AFTAP) for the 2020 plan year.
Required Minimum Distributions (“RMDs”) for retirement accounts, including inherited accounts, are suspended for 2020 until April of next year. For inherited IRAs, if the first RMD was required to be taken by April 1, 2020, this RMD is also suspended. The goal is to help seniors avoid being forced to sell positions at “fire sale” prices in order to withdraw RMDs, with the stock market down. Any amounts distributed under this exception will be eligible for rollover.
The CARES Act allows tax-qualified retirement plans and IRAs to permit an early withdrawal of up to $100,000 as a “corona-virus-related distribution” during the 2020 calendar year. The 10 % penalty tax on distributions before age 59 ½ will not apply to a qualifying distribution of up to $100,000. However, regular income taxes will apply to this distribution, but the tax can be paid over the course of three tax years, beginning in the year of the distributions. A “corona-virus-related distribution” is defined as a distribution to an individual who is: (1) diagnosed with COVID; (2) who has a spouse or dependent diagnosed with the virus; or (3) who experiences adverse financial consequences as a result of being quarantined, furloughed, laid off, having hours reduced, being unable to work to care for a child or the closing or reduced hours of operation of a business due to the virus.
Contributions can be made to a taxpayer’s IRA for a particular year at any time during the year or by the due date for filing of the taxpayer’s return. Because the due date for filing returns has been extended to July 15, the deadline for retirement plan contributions is likewise postponed.
For the 180-day period beginning on March 27, 2020 and ending December 31,2020, loan limits from retirement plans have been increased from $50,000 to $100,000. The rule that loans may not exceed half the vested account balance has been removed. In addition, new and existing loan payments may be delayed for one year.
Changes to Plan Rules
Revisions to plan rules made to accommodate the above relief must be made by December 31, 2022 for calendar-year plans.
The TCJA permitted up to 100 % accelerated depreciation deductions for certain property. The bonus depreciation applied to property placed in service between September 17, 2017 and January 1, 2023. The property had to have a depreciable life of 15 years or less. However, it was unclear whether improvements to the interior of a non-residential building was considered to have a 20-year depreciable life. The CARES Act included a technical correction retroactively permitting such expensing.
The Paycheck Protection Program
With many small businesses sustaining economic injury as a result of the emergency, and measures attempting to minimize public exposure to the virus, the CARES Act included the Paycheck Protection Program (PPP) to provide economic relief. The Act, which is now effective, temporarily permits the U. S. Small Business Administration (SBA) to guarantee 100 % of certain loans and further provides for forgiveness of up to the full principal amount of qualifying loans. The intent is to incentivize small businesses to continue to maintain payroll for employees. The SBA is authorized to guarantee loans under the PPP through June 30, 2020. Lenders are given delegated authority to permit streamlining of requirements of the regular loan program under Section 7(a). SBA will allow lenders to rely on certifications of the borrower in order to determine eligibility of the borrower and use of loan proceeds, and to rely on specified documents furnished by the borrower to determine qualifying loan amount and eligibility for loan forgiveness. Lenders, if they comply with the interim final rule released earlier this week, will be held harmless for borrowers’ failure to comply with program criteria.
The loans are first-come, first-served. The SBA guarantees 100% of the loan. No collateral or personal guarantees will be required. Electronic signatures are acceptable. PPP loans can be sold on the secondary market.
Eligible borrowers have 500 or fewer employees whose principal place of residence is in the U.S.; are small business concerns or tax-exempt nonprofit organizations under Section 501(c)(3) of the Internal Revenue Code; were in operation on February 15, 2020; and had either employees to whom the business paid salaries and payroll taxes or paid independent contractors; or, if the business is a sole proprietorship, independent contractor, or eligible self-employed individual, the business was in operation on 2/15/2020.
Maximum Loan Amount
Applicants must submit documentation necessary to establish eligibility such as payroll records, payroll tax filings, form 1099-MISCs, or income and expenses from a sole proprietorship. You are ineligible if you are engaged in any illegal activity, or if you are a household employer (e.g. you employ a nanny or housekeeper), or if their is prior misconduct described in the Interim Rule. The applicant may borrow a maximum of the lesser of $10 million, or an amount calculated using the methodology described below. First, aggregate payroll costs form the last 12 months for employees residing in the U.S.; then subtract any compensation paid to an employee in excess of an annual salary of $100,000 (or any amounts paid to an independent contractor or sole proprietor in excess of $100,0000 per year). Divide by 12, to get the average monthly payroll costs. Multiply that average by 2.5. Add the outstanding amount of any Economic Injury Disaster Loan (EIDL) made between 1/31/2020 and 4/3/2020, less any advance not required to be repaid from the EIDL. The idea is to forgive an amount equal to the sums paid by the borrower during an 8 week period after the loan origination date for payroll costs (75% of use of proceeds) and for interest payments on any mortgage, rent, utilities or other interest (25% of use of proceeds—less likely to be forgiven).
Interest Rate, Maturity and Loan Payment Obligations
The interest rate will be 1%. The maturity is two years. Payments on the loan will not be due for six months following the date of disbursement of the loan. However, interest will accrue during the six-month deferment.
Forgiveness in Whole or Part
The amount of loan forgiveness can be up to the full principal amount of the loan and any accrued interest. The borrower must use all of the loan proceeds for forgivable purposes, and employee and compensation levels must be maintained. The amount of loan forgiveness will depend on the total amount of payroll costs, payments on non-payroll eligible payments, and the percentage of the loan used for non-payroll costs. The idea is to use 75% of the loan for payroll. Not more than 25% of the loan forgiveness amount may be attributable to non-payroll costs. Note also that any decreases in the forgiveness amount will not apply if the employer rescinds any reduction in full-time employees or any salary reduction made between 2/15/2020 and thirty days after the enactment of the CARES Act, so employees are rehired and salary reduction is stopped no later than June 30, 2020.
Definition of “Payroll”
The Interim Rule says payroll costs consist of compensation to employees in the form of salary, wages, commissions, or similar compensation; cash tips or the equivalent (based on employer records of past tips or, in the absence of such records, a reasonable, good-faith employer estimate of such tips; payment for vacation, parental, family, medical or sick leave, ; allowance for separation or dismissal; payment for employee benefits (health care and retirement); payment of state and local taxes on compensation; and, for independent contractor or sole proprietor, wage, commissions, income or net earnings from self-employment or similar compensation. “Payroll” does NOT include compensation in excess of an annual salary of $100,000 as prorated.
The Interim Rule provides contradictory answers as to whether in calculating payroll for purposes of determining the maximum loan amount, compensation paid to independent contractors should be included. (See pages 8, 11, and 15.) For forgiveness, the borrower must document use of the proceeds.
How to Apply
The process depends on the type of relief sought.
For PPP Loans under the new SBA 7(a) loan program, apply directly though lenders. All current SBA lenders are now considered eligible lenders.
For the Economic Injury Disaster Loan (EIDL), a low-interest, fixed-rate loan that can provide up to $2million in assistance for small businesses that can be used to pay immediate expenses during the COVID crisis, applicants may apply at https://www.sba.gov/funding-programs/disaster-assistance . EIDL Grant recipients may not apply for a PPP Loan for the same purposes, although an existing EIDL Loan can be refinanced into a PPP Loan.
For EIDL Grant Program assistance, the SBA may provide small businesses with quick capital in the form of a $10,000 grant. The funds can be used for any allowable purpose. EIDL Grant recipients may apply for a PPP Loan, but when forgiveness is determined, the $10,000 EIDL Grant is taken into consideration.
*THIS FAQ IS PROVIDED FOR INFORMATIONAL PURPOSES ONLY AND SHOULD NOT BE CONSIDERED LEGAL ADVICE OR TAX ADVICE. NEITHER LEGAL NOR TAX ADVICE CANNOT BE GIVEN WITHOUT INFORMATION ABOUT YOUR SPECIFIC SITUATION.