The Coronavirus Aid, Relief, and Economic Security (CARES) Act, H.R. 748, contains a host of tax measures as part of a $2 trillion aid package designed to help the economy as it suffers from the effects of the coronavirus pandemic. While the focus of the legislation is not tax, a large number of tax provisions are included in the over-600-page massive bill. Please take your time reviewing this as there is something for everyone in this Act. If you are a business owner pay particular attention to the last two areas – The Paycheck Protection Program and updated tax estimate due dates.
Recovery rebates: The Act provides for payments to taxpayers — “recovery rebates” — which are being treated as advance refunds of a 2020 tax credit. Under this provision, individuals will receive a tax credit of $1,200 ($2,400 for joint filers) plus $500 for each qualifying child. The credit begins phasing out for taxpayers with adjusted gross income (AGI) above $150,000 for joint filers, $112,500 for heads of household, and $75,000 for other individuals and completely phases out at $198,000 for joint filers, $146,500 for HOH filers and $99,000 for single filers. The credit is not available to nonresident aliens, individuals who can be claimed as a dependent by another taxpayer, and estates and trusts. Taxpayers will reduce the amount of the credit available on their 2020 tax return by the amount of the advance refund payment they receive.
Employee retention credit: The Act creates an employee retention credit for employers that close due to the coronavirus pandemic. Eligible employers are allowed a credit against employment taxes equal to 50% of qualified wages (up to $10,000 in wages) for each employee. Eligible employers are those who were carrying on a trade or business during 2020 and for which the operation of that business is fully or partially suspended due to orders from an appropriate governmental authority limiting commerce, travel, or group meetings due to the COVID-19 outbreak. Employers that have gross receipts that are less than 50% of their gross receipts for the same quarter in the prior year are also eligible, until their gross receipts exceed 80% of their gross receipts for the same calendar quarter in the prior year. For employers with more than 100 employees, eligible wages include those that the employer pays employees who are not providing services due to the suspension of the business or a drop in gross receipts. For employers with 100 or fewer employees, all wages paid qualify for the credit. Wages do not include amounts taken into account for purposes of the payroll credits for required sick leave or required family leave included in the first Acts.
Retirement plans: Taxpayers can take up to $100,000 in coronavirus-related retirement distributions without being subject to the 10% additional tax for early distributions. Eligible distributions can be taken up to Dec. 31, 2020. Coronavirus-related distributions may be repaid within three years. For these purposes, an eligible taxpayer is one who has been diagnosed with SARS-CoV-2 virus or COVID-19 disease or whose spouse or dependent has been diagnosed with SARS-CoV-2 virus or COVID-19 disease or who experiences adverse financial consequences from being quarantined, furloughed, or laid off, or who has had his or her work hours reduced, or who is unable to work due to lack of child care. The tax on these distributions can be spread over three years. The bill also allows loans of up to $100,000 from qualified plans, and repayment can be delayed.
The bill temporarily suspends the required minimum distribution rules for IRA’s and other retirement plans for 2020. The bill also delays 2020 minimum required contributions for single-employer plans until 2021.
Charitable deductions: The Act creates an above-the-line charitable deduction for 2020 (not to exceed $300). The bill also modifies the AGI limitations on charitable contributions for 2020, to 100% of AGI for individuals and 25% of taxable income for corporations. The bill also increases the food contribution limits to 25%.
Payroll tax delay: The Act delays payment of 50% of 2020 federal payroll taxes (employer portion only) until Dec. 31, 2021; the other 50% will be due Dec. 31, 2022. For self-employment taxes, 50% will not be due until those same dates.
Net operating losses: The Act temporarily repeals the 80% income limitation for net operating loss deductions for years beginning before 2021. For losses arising in 2018, 2019, and 2020, a five-year carryback is allowed (taxpayers can elect to forgo the carryback).
Excess loss limitations: The Act temporarily modifies the loss limitation for non-corporate taxpayers so they can deduct excess business losses arising in 2018, 2019 and 2020.
Interest expense limitation: For tax years beginning in 2019 and 2020, Sec. 163(j) is amended to increase the adjusted taxable income percentage from 30% to 50%. Also, taxpayers can elect to use 2019 income in place of 2020 for the computation.
Qualified improvement property: The Act also makes technical corrections regarding qualified improvement property under Sec. 168 by making it 15-year property and allowing Bonus Depreciation.
Paycheck Protection Program Highlights:
- You can obtain these forgivable loans through existing lenders for the Small Business Administration’s 7(a) program: This legislation creates a Paycheck Protection Program with loans originated through existing SBA 7(a) lenders. This includes numerous major lenders/banks. The loans are 100% guaranteed by the government through Dec 31st, 2020; no personal guarantee or collateral is required for the loan. We would advise consulting your own preferred lender now to confirm that they originate 7(a) loans and to let the lender know you plan to apply for one under the Paycheck Protection Program.
- These loans are available to most multi-unit restaurants and hotels: As written, the loans are generally available to businesses with not more than 500 employees, but the language includes an important exception for industries classified by NAICS code 72 (restaurants and hotels). For businesses in this industry category, they’re eligible so long as they don’t have “more than 500 employees per physical location.“
- The maximum loan amount is $10 million: The Act defines the maximum loan amount as the lesser of $10 million or the average total monthly payments for payroll costs (salaries, insurance, state/local tax, payments to certain contractors — excluding compensation per employee of more than $100k) multiplied by 2.5. We would advise estimating your relevant loan amount now so you’re able to provide the necessary paperwork to your bank.
- The loan process is designed to be simple and doesn’t require you to extensively prove specific hardship. The Act requires only a “good faith” certification that the economic conditions make the loan necessary, and that you will use the funds to “retain workers and maintain payroll or make mortgage payments, lease payments and utility payments;”
- The loans can be used broadly for business expenses. The loan can be used for payroll costs, benefit costs, salaries and commissions, mortgage interest (but not principal), rent, utilities, and interest on debt incurred before reference period (beginning Feb 15th).
- Forgiveness clause – subject to certain limitations, payments made under the loan during the 8-week period after origination are forgivable. Forgivable costs include money spent on eligible payroll costs (not including comp above $100k in wages), mortgage interest only, rent, or utilities. The amount forgiven cannot exceed the principal of the loan.
- The amount of loan forgiveness is reduced based on reductions in staffing or employee compensation. Employers have the option of comparing full-time equivalent staffing to a reference period (Feb 15- Jun 30, 2019), or the period (Jan 1-Feb 29, 2020), as a comparison point for any staffing reduction. A reduction in total salary/wages of more than 25 percent (amount those earning $100,000 or less) would be subtracted from the forgiveness amount.
- There is an exemption in the ‘forgiveness” section for re-hiring employees you recently laid off. The legislation includes a provision such that employers are not penalized for compensation or staffing reductions that occurred between February 1st, 2020, and 30 days from the bill’s enactment, so long as these reductions are reversed by June 30th, 2020.
Update on tax payments:
June 15 – 2nd quarter federal estimates are due.
July 15 – 1st quarter federal and 1st and 2nd quarter PA and local estimates are due.
Final 2019 federal, PA and local payments are due.
Balance of the year is as usual.
The IRS is officially suspending installment agreements on payments due between April 1 and July 15.
As always, please contact your CPA with any questions or help needed with any of this. We are working and are here to help. We will get through this difficult time together.