Summary of the CARES Act

March 30, 2020

The government has passed a massive bill in response to the COVID-19 situation.  This bill has a number of tax and non-tax components, some of which have been well-publicized leading up to the actual passage.  Interestingly, some of these lessen the impact or even completely reverse parts of the still-new Tax Cuts & Jobs Act of 2017 (TCJA).  We have fielded numerous questions and wanted to get some information out ASAP to our clients and friends about the provisions we think will most impact you.  We are still gaining an understanding of many of the details, and there are lots of unanswered questions.  Regulations and other guidance should be forthcoming for both the CARES Act and the Families First Coronavirus Response Act passed last week.  Please look for future communications related to any changes or clarifications.

Information Highlights for Small Businesses and Sole Proprietorships

Providing relief for small business cash flow was a primary focus of the Act. Below are several provisions on various types of loans, payroll tax breaks, and other programs designed to help employers keep employees on the payroll through the economic downturn accompanying the pandemic. For any employer under cash flow pressure right now, it is highly advised to first contact you preferred lender(s) and secure your place in line as these loan programs roll out. Second, and at the same time, begin gathering all the data you can.

This is an expansion of the Small Business Administration (SBA)’s 7(a) loan program and will be accessed directly through bank lenders.  The purpose is to allow businesses with 500 or fewer employees to continue to cover payroll and other important overhead items.  Such other items include rent, utilities, healthcare premiums and benefits, and interest on debt incurred before February 15, 2020.

No collateral or guarantees are required, there are no fees applied, and the first payment will be deferred at least 6 months and up to a year.  The maximum loan amount is 2.5 times the average monthly payroll costs.  Payroll costs for this purpose does not include compensation to employees in excess of $100,000 on an annualized basis and payments for employees located outside the United States.

This new loan can be forgiven to the extent the proceeds are spent on payroll, rent, utilities, and prior debt interest during the first 8 weeks of closing.  Loan forgiveness is normally treated as taxable income, but that will not be the case with the PPP forgiveness.  The amount of loan forgiveness will be reduced due to reduction in headcount compared to the prior year, or reduction of at least 25% of any employee’s pay compared to the prior year.

Click here for an FAQ about the program produced by the US Senate Committee on Small Business

The Act waives certain existing rules related to the EIDL program, namely no guarantee is required on amounts less than $200,000, and the business must only have been in operation already by January 31, 2020 rather than having to have been in business for 1 year.

A new grant program is tied to this expansion, allowing for an immediate (within 3 days of applying) emergency advance of up to $10,000.  Unlike the PPP discussed above, it appears the grant can be used for the paid sick leave required under the Families First Act. Other qualified uses include payroll, increased supply costs, rent or mortgage payments, and other debt payments.  This advance will not have to be repaid, even if the EIDL application is ultimately denied.

Click here for the SBA’s application site.

Unlike the payroll credit in the Families First Act, this payroll credit applies to businesses who have been ordered to close or have had a 50% reduction in gross receipts.  It covers 50% of the first $10,000 in wages per employee.  For businesses with fewer than 100 employees, the credit applies to all wages, whether the particular employee is unable to work or not.

NOTE:  This benefit is exclusive of any forgiveness under the Paycheck Protection Program, above.  Taxpayers receiving a PPP loan are ineligible for this credit.

An impactful provision that has not received as much publicity is the delayed payment of the employer’s share of FICA taxes for the remainder of 2020.  The deferred amounts will be paid in 2 equal installments on December 31, 2021 and 2022.

This could potentially result in a very large tax liability on those dates that businesses will need to remain aware of and have available funding to cover.

NOTE:  This benefit is exclusive of any forgiveness under the Paycheck Protection Program, above.  Taxpayers receiving a PPP loan are ineligible for this credit.

Tax Law Change Opportunities

When amended returns related to the Qualified Improvement Property and Pass-Through Business Loss Limitations provisions described above generate larger NOLs, which can then be carried back 5 years, the synergy of these combined provisions can create large refunds for affected taxpayers.

The Act makes a technical correction to TCJA, by allowing 100% bonus depreciation for qualified improvement property (most interior building improvements).  This will allow amended returns to be filed for those that missed out on this opportunity.  This technical correction had been popularized as the “retail glitch” by the business media and has been the topic of many articles since passage of TCJA.

TCJA limited the amount of business losses that could offset non-business income on individual tax returns.  The Act removes this limitation for years 2018-2020, which will also allow for amended returns to be filed.

The TCJA eliminated the carryback of NOLs to prior years, allowing only carry forwards.  Additionally, those carry forwards could only offset up to 80% of the future years’ taxable income.  This greatly diminished the future tax benefit of current NOLs.  The Act eliminates the 80% income limitation rule and allows 5-year NOL carrybacks for losses incurred in years 2018-2020.  This provision will also allow for amended returns and carryback claims to be filed, increasing cash flow for businesses.

Information Highlights for Individuals

For individuals who are wage earners or contractors who are negatively affected by COVID-19 closures, work stoppages, and economic downturn, the CARES Act includes provisions designed to allow access to cash quickly that do not require involvement with an employer directly.

Direct payments of up to $1,200 per individual taxpayer and $500 per child under 17 will be paid via direct deposit if the IRS has your bank account on file.  Otherwise, payments will be via check.  The payments are phased out with Adjusted Gross Income between $75,000 and $99,000 for single filers and $150,000 and $198,000 for joint filers.  These figures will be based off your 2019 or 2018 tax return, whichever has been filed most recently.  Individuals receiving Social Security that do not normally file a tax return will not have to file to receive the stimulus payment.

Technically, this is an advance payment of your 2020 tax refund and there may be a mechanism to reconcile this on your tax return next year.

Treasury Secretary Steven Mnuchin has stated the refunds will go out within 2-3 weeks.  However, many commentators doubt the IRS’ ability to make that happen so quickly.

Individuals can make 10%-penalty-free distributions from their retirement plans, whether an IRA or a qualified employee plan such as a 401(k), of up to $100,000.  The withdrawals can be repaid over a 3-year period, and withdrawals not repaid will be taxed over a 3-year period.  To qualify for this provision, an individual must have been affected directly (such as themselves or a family member diagnosed) or indirectly (such as financial hardship due to reduced hours, layoffs, etc.) by COVID-19.

The Act also liberalizes the 401(k) loan rules, allowing a maximum loan of up to $100,000.  Since a 401(k) loan does not become taxable unless defaulted upon, the loan option should be carefully weighed against the distribution option for those contemplating accessing their retirement funds.

The Act makes several changes to unemployment benefits.

  • It expands coverage to self-employed people, gig economy workers, and others who haven’t traditionally been eligible for unemployment benefits.
  • It eliminates the 1-week waiting period.
  • An additional $600/week will be added to existing state payments for 4 months.  This is the case even if it gives the particular individual an increase in pay.

The Act also extends state coverage by an additional 13 weeks.