The President has signed into law an unprecedented $2 trillion relief package designed to prop up U.S. citizens, hospitals and businesses during the coronavirus crisis.
The 800+ page “Coronavirus Aid, Relief, and Economic Security Act” (CARES Act)” includes:
- various tax relief measures
- stimulus funds for affected industries
- money for state hospitals and health providers
- Small Business Administration (SBA) loans, and
- increased unemployment compensation subsidized by the federal government
For companies with less than 500 employees, two of the most important relief programs to understand are the Paycheck Protection Program and the Emergency Grants.
SBA Loans/Paycheck Protection Program. Businesses with less than 500 employees can take out loans up to $10 million to retain their employees between February 15 and June 30. Covered employees include those making up to $100,000 per year. The loans are limited based on a formula tied to payroll costs.
The loans may be forgiven later if the funds are used for payroll, mortgage interest, rent and utilities. However, the forgiveness amount may be reduced if the number of employees retained drops below a certain level. Understanding and retaining the documentation necessary to pursue loan forgiveness after June 30th will be a critical aspect of this program.
Emergency Grants for Small Business. The Act provides $10 billion for economic injury disaster loans in the form of emergency grants to small businesses with 500 or fewer employees. The grants are intended to cover operating costs and are limited to $10,000.
The other major provisions of the Act are described below.
Business Tax Relief
Refundable Payroll Tax Credit. Employers get a refundable payroll tax credit for 50% of the first $10,000 in wages paid to employees during the COVID-19 crisis. The credit is available to employers whose (1) operations are fully or partially suspended due to COVID-19, or (2) gross receipts declined by more than 50% compared to the same quarter last year.
For companies with more than 100 employees, the credit can be claimed for employees who are retained but not currently working. Companies with up to 100 employees can claim the credit for all employees whether they are shut down or not. The credit is allowed for wages paid or incurred from March 13, 2020, through December 31, 2020.
Deferral of Payroll Taxes. Allows employers and self-employed individuals to defer payment of the 6.2% employer share of Social Security taxes for the rest of the year. The deferred tax may be paid over two years, with half required to be paid by December 31, 2021, and the other half by December 31, 2022.
AMT Credit Refunds. Accelerates corporate alternative minimum tax credit refunds.
Increased Interest Limitation. Increases the interest expense limitation from 30% of taxable income to 50% of taxable income for 2019 and 2020.
Net Operating Loss Limitations Relaxed. Allows losses arising in 2018, 2019, or 2020 to be carried back five years. The Act also temporarily removes the 80% of taxable income limitation to allow an NOL to fully offset income. These changes allow companies to use losses and amend prior year returns.
Charitable Contribution Limits for Corporations. The 10% limitation is increased to 25% of taxable income. Also, the limitation on deductions for contributions of food inventory is increased from 15% to 25% of taxable income.
Excess Business Loss Limits Delayed. Delays until 2021 the excess business loss limitations for noncorporate taxpayers, sole proprietors, partnerships, S Corporations, limited liability companies and estates and trusts. For 2020, the limitations are $259,000 for single taxpayers and $518,000 for joint filers, but these limits have been suspended for 2020.
Qualified Improvement Property Write-offs. Enables businesses to write off immediately the cost of improving the interior of a building instead of having to depreciate those improvements over 39 years. The provision corrects the “retail glitch” in the Tax Cuts and Jobs Act (TCJA).
Alcohol Excise Tax Relief. Waives the federal excise tax on any distilled spirits used for, or contained in, hand sanitizer for the calendar year 2020.
Individual Tax Relief
Relief money for taxpayers. Rebates of up to $1,200 per individual, $2,400 per married couple and $500 per child will be paid to taxpayers by the Treasury Department by direct deposit or by mail. Payments will be based on income as calculated in 2019 taxes, or 2018 tax filings if the 2019 returns have not yet been filed. Taxpayers must have a social security number and cannot be claimed as a dependent to be eligible to get the payment.
These amounts begin to phase out for singles with Adjusted Gross Income (AGI) of $75,000, couples filing jointly with AGI of $150,000, and heads of households with AGI of $112,500. The rebate is reduced by $5 per $100 above the threshold and is completely phased-out for single filers with incomes exceeding $99,000, head of household filers with income over $146,500, and joint filers with AGI over $198,000 with no children.
The Treasury Department wants to get the payments out to taxpayers within three weeks. The payments are technically an advanced, refundable tax credit against 2020 taxes. Taxpayers will not have to pay Treasury back if, based on 2020 income, they received too large a payment.
Retirement Plan Withdrawals. The 10% early withdrawal penalty will be waived for “coronavirus-related” distributions from retirement plans. Withdrawn amounts are taxable over three years and taxpayers can recontribute the withdrawn funds within three years. Eligible plans include IRAs, 401(k)s, other deferred compensation plans and qualified annuities. Also, the required minimum distribution for defined contribution plans and IRAs for the calendar year 2020 has been waived and 401k loan limits have been increased to $100,000 from $50,000.
Employer Student Loan Payments. Employer payments of up to $5,250 toward employee’s student loans are excluded from an employee’s income until January 1, 2021.
Other Relief Provisions
Relief for Existing SBA Loans. Includes $17 billion to pay the principal, interest and fees owed for six months for businesses that already have an SBA loan.
Expanded Unemployment Insurance. The Act provides $250 billion in federal funding for pandemic unemployment assistance, including a $600 increase per week for up to four months. Self-employed workers, independent contractors, gig workers and those with a limited work history are now eligible for unemployment benefits. The Act also extends state-level unemployment insurance by an additional 13 weeks, through December 31, 2020.
Emergency Lending for Industry. The Act provides $500 billion for loans and loan guarantees for large businesses, including the airline industry. Companies taking the loans are banned from engaging in stock buybacks during the loan period plus one year after the loan is paid back. Also, the Act imposes limits on executive compensation and severance pay. The loans must be publicly disclosed, and a new Office of the Special Inspector General for Pandemic Recovery has been created in the Treasury Department to oversee the program. A Congressional Oversight Commission also has been created to oversee the corporate stimulus provisions.
The Act specifically bans the president, vice president, members of the Cabinet and members of Congress from benefiting from the loan money set aside for corporations. Family members, including spouses, children, sons-in-law and daughters-in-law, of these government officials are also prohibited from receiving benefits under this program.
Funds for Hospitals and Care Providers. The Act provides $100 billion for hospitals. Also included are funds for community health centers, development of new drugs, veterans’ health, telehealth services, medicine and supplies.
Coronavirus Treatment, Testing. Requires all private health insurance plans to cover COVID-19 treatments and any vaccine and makes all coronavirus tests free.
State and City Governments. The Act provides a $150 billion Coronavirus Relief Fund for state and city governments that will be allocated based on population.
Student Loan Relief. Federal student loan payments are delayed through September 30 with no penalty or interest accruing.
As with any newly minted law, there are areas that will need to be clarified by the various agencies who are tasked with carrying out the directives in the law. This long and complicated law provides much-needed funds for workers and businesses who have seen income vastly reduced virtually overnight. The grants and Paycheck Protection Program are especially attractive tools for smaller businesses to use to ride out a difficult time of reduced revenues that should be temporary in nature.
This is likely not the last piece of legislation tied to the COVID-19 pandemic. Frazier & Deeter will continue to provide updates to help you understand the changing landscape.