March 27, 2020
United States President Donald Trump has signed into law the $2 trillion stimulus package known as the Coronavirus Aid, Relief, and Economic Security Act (or the ‘‘CARES Act”), H.R. 748. The Bill was approved early Friday by the House and, on Wednesday, by the Senate. The Bill passed both the Senate and House following several days of intense negotiations between Congressional leaders and Treasury Secretary Steven Mnuchin. The unprecedented Bill in the midst of the Coronavirus pandemic expands unemployment benefits, business tax breaks and aid to states and hospitals.
Under the Bill, the Internal Revenue Service will send maximum amounts of $1,200 to individuals and $2,400 to couples filing joint tax returns. The payments will be reduced for those with incomes above $75,000, or $150,000 for couples, and will be eliminated for those with incomes of more than $99,000, or $198,000 for couples. For businesses, the Bill provides a refundable payroll tax credit for 50 percent of employer wages for companies that were fully or partly prohibited from operating during the crisis. It also waives the 10 percent early withdrawal penalty for retirement fund distributions up to $100,000 made on or after Jan. 1, 2020, and before Dec. 31, 2020. The Bill provides that businesses can carry back losses from 2018, 2019 and 2020 for up to five years. In addition, net operating losses temporarily would not be subject to a taxable income limit, meaning they could fully offset income.
Below is further summary of the CARES Act.
Small Business Loan Provisions of the CARES Act
Qualified SBA lenders will be able to loan money directly to eligible customers, who can apply for loans directly through those lenders rather than through the Small Business Administration and its on-site portal. The program applies to loans made to employers of 500 or fewer employees during the “covered period” beginning on February 15, 2020 and ending on June 30, 2020. Individuals who operate under a sole proprietorship or as an independent contractor, and eligible self-employed individuals can receive a covered loan.
The maximum amount of a loan is $10 million. The general formula for calculating loan proceeds is the lesser of i) the average total monthly payments by the applicant for payroll costs incurred during the 1-year period before the date on which the loan is made multiplied by 2.5, or ii) $10,000,000. “Payroll costs” include payment for vacation, parental, family, medical, or sick leave; payment required for the provision of group health care benefits, including insurance premiums; payment of any retirement benefit; payment of state or local tax assessed on the compensation of employees; and the sum of payments of any compensation to a sole proprietor or independent contractor that is a wage, commission, or similar compensation and that is in an amount that is not more than $100,000 in 1 year.
Proceeds of a covered loan may be used for: i) payroll costs; ii) costs related to the continuation of group health care benefits during periods of paid sick, medical, or family leave, and insurance premiums; iii) employee salaries, commissions, or similar compensations; iv) mortgage payments; v) rent (including rent under a lease agreement); vi) utilities; and vii) interest on any other debt obligations that were incurred before the covered period beginning on February 15, 2020.
No collateral is required for the covered loan, and no personal guarantee is required for the covered loan. During the covered period, the requirement that a small business is unable to obtain credit elsewhere shall not apply to a covered loan.
An eligible recipient may be forgiven indebtedness on a covered loan in an amount equal to the sum of the following costs incurred and payments made during the covered period: i) payroll costs; ii) any payment of interest on any covered mortgage obligation; iii) any payment on any covered rent obligation; iv) any covered utility payment. The term ‘‘covered period’’ for this purpose means the 8-week period beginning on the date of the origination of a loan. The amount of loan forgiveness will be reduced if there is a reduction in the number of full-time equivalent employees during the covered period. Canceled indebtedness shall be excluded from gross income for purposes of the Internal Revenue Code of 1986 (the amount of canceled indebtedness will not be taxable).
During the covered period beginning on February 15, 2020 and ending on June 30, 2020, the amount authorized for commitments for general business loans authorized under the Small Business Act shall be $349,000,000,000.
Additional Assistance for Businesses and Individuals
For 2020, employers may provide a student loan repayment benefit to employees on a tax-free basis. An employer may contribute up to $5,250 toward an employee’s student loans (and such payment would not be taxable income to the employee).
The bill provides a refundable payroll tax credit for 50% of wages paid during the coronavirus crisis. The credit is available to employers whose operations were fully or partially suspended due to a coronavirus-related shutdown order, or whose gross receipts declined by more than 50% when compared to the same quarter in the prior year. For employers with 100 or fewer full-time employees, all wages qualify for the credit. For employers with greater than 100 full-time employees, wages qualify if paid to employees when they are not providing services to the employer due to coronavirus-related circumstances. The credit is provided for the first $10,000 of compensation, including health benefits, paid to an eligible employee from March 13, 2020 through December 31, 2020.
Employers and self-employed individuals may defer payment of the employer’s share of Social Security payroll tax they otherwise are responsible for paying to the federal government with respect to their employees. Deferred employment taxes may be paid over two years, with half of the amount required to be paid by December 31, 2021 and half by December 31, 2022.
The bill relaxes the limitations on companies’ use of net operating losses. Net operating losses arising in a tax year beginning in 2018, 2019, or 2020 can be carried back five years (currently, net operating losses cannot be carried back to reduce income in a prior tax year). The provision also temporarily removes the taxable income limitation to allow a net operating loss to fully offset income. This change would allow companies with recent operating losses to offset taxable income in prior years by amending prior years’ tax returns, providing current cash flow. Loss limitation rules are relaxed for sole-proprietors, corporations, and flow-through entities including entities taxed as partnerships and S corporations.
The bill temporarily increases the amount of interest expense businesses may deduct on their income tax returns.
The CARES Act creates a temporary Pandemic Unemployment Assistance program through December 31, 2020, providing payment to people not traditionally eligible for unemployment benefits (such as self-employed individuals and independent contractors) who are unable to work as a direct result of the coronavirus pandemic.
Unemployment insurance expands to provide an additional $600 per week for up to four months to each recipient of unemployment insurance or Pandemic Unemployment Assistance.
The Act also provides an additional 13 weeks of unemployment benefits through December 31, 2020 to help those who remain unemployed after weeks of state unemployment benefits are no longer available.
U.S. residents with adjusted gross income up to $75,000 ($150,000 married filing jointly) are eligible for a federal income tax credit of $1,200 ($2,400 married filing jointly), plus an additional $500 per child. Credits will be paid in the form of a rebate check. The IRS will use a taxpayer’s 2019 tax return if filed (or in the alternative their 2018 return). The rebate amount is reduced by $5 for each $100 that a taxpayer’s income exceeds the phase-out threshold ($99,000 for single filers; $146,500 for head of household filers with one child; and $198,000 for joint filers with no children).
The bill waives the 10% early withdrawal penalty for distributions from retirement accounts (up to $100,000) made on or after January 1, 2020 for coronavirus-related purposes. Income attributable to such distributions would be subject to tax over three years and taxpayers may recontribute the funds to eligible retirement plans within three years (without regard to the yearly cap on contributions). A coronavirus-related distribution is a one made to an individual: (1) who is diagnosed with COVID-19, (2) whose spouse or dependent is diagnosed with COVID-19, or (3) who experiences adverse financial consequences as a result of being quarantined, furloughed, laid off, having work hours reduced, being unable to work due to lack of child care due to COVID-19, closing or reducing hours of a business owned or operated by the individual due to COVID-19, or other factors as determined by the Treasury Secretary.
The bill encourages charitable giving for tax year 2020. The limitations on deductions for charitable contributions are relaxed for individuals and corporations. For individuals, the limitation of 50% of adjusted gross income is suspended for tax year 2020. For corporations, the limitation of 10% of taxable income is increased to 25%. Additionally, all taxpayers are able to deduct up to $300 of cash contributions whether or not a taxpayer itemizes deductions.
Taylor Porter will continue to monitor legislation, news, and legal developments pertaining to COVID-19 in our Coronavirus Legal Blog and Resources section of our website.