ALERT: CARES Act to provide relief for individuals, businesses and other employers

After extensive negotiations between the U.S. House of Representatives, the U.S. Senate and the White House, an agreement has been reached on a massive stimulus bill to address the financial and health care crisis resulting from the COVID-19 pandemic.

The nearly $2 trillion Coronavirus Aid, Relief, and Economic Security Act (CARES Act) has been passed by the Senate and House and is expected to be signed into law quickly by President Trump.

The CARES Act, known as Phase 3, includes a “Marshall Plan” for the health care system to provide needed treatment during the pandemic and financial assistance to state, local, tribal and territorial governments, as well as to private nonprofits providing critical and essential services.

It also provides significant relief to individuals, businesses and other employers to help them weather the pandemic. The following is a preliminary summary of the key provisions of the bill for individuals, businesses and other employers.

Businesses and other employers

The CARES Act contains many tax provisions that will assist businesses in maintaining liquidity during this unprecedented time.

Refundable payroll tax credit for retaining employees.

• Available if business operations are fully or partially suspended due to orders from governmental entity limiting commerce, travel or group meetings OR business experiences year-over-year reduction in gross receipts of at least 50% – until gross receipts exceed 80% year-over-year
• Employers are eligible for a 50% refundable payroll tax credit through the end of 2020
• Equal to 50% of the first $10,000 in wages per employee
• Effective for wages paid after March 12, 2020, and before Jan. 1, 2021
• Credit can be claimed for employees who are retained but not currently working due to the crisis for firms with more than 100 employees
• For businesses with 100 or fewer employees, all employee wages qualify for the credit regardless of whether the business is shut down or not

Deferral of the employer portion of payments of certain payroll taxes.

• Allows businesses to delay depositing the 6.2% employer-side Social Security payroll tax on wages paid in 2020
• Deferred amounts would be payable half on Dec. 31, 2021, and the other half on Dec. 31, 2022

Modification of net operating loss (NOL) and excess loss limitation rules.

• Changes are retroactive so amended tax returns may be beneficial
• Net operating loss (NOL):
  • Allows NOLs arising in 2018, 2019 and 2020 to be carried back five years
  • The 80% of taxable income limit on use of NOLs is suspended for tax years 2018, 2019 and 2020; this allows NOLs to fully offset taxable income
• Excess loss limitation:
  • Suspends the $500,000 cap on amount of pass-through business losses that can offset non-business income
  • Applies for tax years beginning in 2018, 2019 and 2020

Modification of the deduction limitation on business interest.

• Increases deduction limit to 50% (increased from current rate of 30%) of adjusted taxable income for 2019 and 2020
• Can elect to use 2019 adjusted taxable income to calculate limitation for 2020

Qualified improvement property technical correction:

• Allows qualifying interior improvements of buildings to be immediately expensed rather than depreciated over a period of years
• Effective for qualified property placed in service after Sept. 27, 2017

Expanding ways for the Small Business Administration (SBA) to help businesses.

• New Paycheck Protection Program would receive $349 billion to provide loans to help employers retain workers and maintain payroll, lease and utility payments
• Any business with no more than 500 employees that was operational on Feb. 15, 2020, paying salaries and payroll taxes will be eligible
• Small businesses may take out loans up to $10 million (limited to a formula tied to payroll costs)
• The maximum interest rate will be 4%, and the first six months' payments (principal and interest) will be automatically deferred
• Lenders, which will be expanded by the Treasury Department and SBA to expedite the funding of new loans, will not require application fees, closing costs, collateral or personal guarantees
• The loan can be used for any of the following:
  • payroll costs – salary, commission or similar compensation (up to an annual rate of pay of $100,000 per employee)
  • employee group health care benefits, including insurance premiums
  • retirement contributions
  • covered leave from Feb. 15 to June 30, 2020
  • payments of interest on mortgages, rent, utilities and interest on any other debt obligations that were incurred before Feb. 15
• Loans may be forgiven if a borrower uses the loan for payroll, interest payments on mortgages, rent and utilities and would be reduced proportionally by any reduction in employees retained compared to the prior year and a 25% or greater reduction in employee compensation
• Canceled indebtedness will not be included in the borrower’s taxable income

Individuals

• Recovery rebates of up to $1,200 for singles, $1,200 for heads of households and $2,400 for married couples filing jointly – plus $500 per qualifying child – subject to income-based phaseouts starting at $75,000, $122,500 and $150,000, respectively
• Expansion of unemployment benefits, including for self-employed and gig-economy workers
• Waiver of the 10% penalty on COVID-19-related early distributions from IRAs, 401(k)s and certain other retirement plans
• Waiver of required minimum distribution rules for IRAs, 401(k)s and certain other retirement plans
• Expansion of charitable contribution tax deductions
• Exclusion for certain employer payments of student loans

More details to come

This is just a brief overview of the CARES Act. We will share additional details on the provisions that are likely most relevant to you or your business in the coming days. To discuss your situation or employer-related questions, contact your AGH tax advisor, Shawn Sullivan, Carrie Cox or Cindy McSwain using their information below.

NOTE: Any advice contained in this material is not intended or written to be tax advice, and cannot be relied upon as such, nor can it be used for the purpose of avoiding tax penalties that may be imposed by the IRS or states, or promoting, marketing or recommending to another party any transaction or matter addressed herein.