The CARES Act: Emergency Relief for Businesses and Individuals
Late on Wednesday, March 25, 2020, the U.S. Senate voted unanimously (96-0) to pass the Coronavirus Aid, Relief, and Economic Security Act (CARES Act) to provide relief to individuals, businesses and entire sectors of the economy such as healthcare impacted by COVID-19. The House passed the bill, and it was signed into law on Friday, March 27, 2020.
The CARES Act builds on the first two major pieces of legislation (Coronavirus Preparedness and Response Supplemental Appropriations Act and Family First Coronavirus Response Act) passed by Congress to provide greater assistance to both individuals and businesses in the wake of the coronavirus public health crisis. The CARES Act has been referred to as “Phase 3.” This new law provides for over $2 trillion in aid, the largest rescue package in American history, and contains many different yet related programs, including:
- Loans for small businesses
- Loan-to-grant opportunities
- Direct payments to Americans
- An expansion of unemployment insurance
- Funding for state and local governments to help combat the virus
- Deferrals of employer payroll tax liabilities
- An employee retention tax credit
The CARES Act further rolls back Tax Cuts and Jobs Act limitations on net operating losses (NOLs) and the business interest limitation under Section 163(j) of the Internal Revenue Code as well as a TCJA fix on qualified improvement property (QIP).
Small Business Administration Loan Forgiveness
The stimulus includes nearly $350 billion in funding for a provision to create a Paycheck Protection Program (PPP) that will provide zero-fee loans of up to $10 million to small businesses and other entities, including nonprofits, tribal businesses, or veteran’s organizations with 500 employees (or the applicable size standard for the industry as provided by SBA, if higher is eligible to participate), sole proprietors, independent contractors, and eligible self-employed individuals. The loans can be used for “payroll support,” including employee salaries (up to $100,000), paid sick or medical leave, employee group health benefits, insurance premiums, retirement contributions, and mortgage interest, rent, and utility payments.
Up to 8 weeks of average payroll and other costs will be forgiven if the business retains its employees and their salary levels. Principal and interest are deferred for up to a year, and all borrower fees are waived. Any loan amounts not forgiven at the end of one year will be carried forward as an ongoing loan with terms of a max of 2 years, at max 1% interest.
This temporary emergency assistance through the U.S. Small Business Administration (SBA) and the Department of the Treasury can be used in coordination with other COVID-financing assistance established in the CARES Act or any other existing SBA loan program. Loans would be available immediately through more than 800 existing SBA-certified lenders, including banks, credit unions, and other financial institutions, and SBA would be required to streamline the process to bring additional lenders into the program. Covered loans will require lenders provide a payment deferral of 6 months to 1 year.
The bill requires the SBA Administrator to set a cap on how much a bank can earn to process loan applications and prioritize underserved borrowers, including those in rural communities, minorities, women, and veterans.
Direct Appropriations Emergency Economic Injury Grants
The stimulus includes $10 billion in funding for a provision to provide an advance of $10,000 to small businesses and nonprofits that apply for an SBA Economic Injury Disaster Loan (EIDL) within three days of applying for the loan. EIDLs are loans of up to $2 million that carry interest rates up to 3.75% for companies and up to 2.75% for nonprofits, as well as principal and interest deferment for up to 4 years. The loans may be used to pay for expenses including payroll, paid sick leave, and other debt obligations, that could have been met had the disaster not occurred, including payroll and other operating expenses.
The EIDL grant does not need to be repaid, even if the grantee is subsequently denied an EIDL, and may be used to provide paid sick leave to employees, maintaining payroll, meet increased production costs due to supply chain disruptions, or pay business obligations, including debts, rent, and mortgage payments. Eligible grant recipients must have been in operation on January 31, 2020. The grant is available to small businesses, private nonprofits, sole proprietors, independent contractors, and tribal businesses, as well as cooperatives and employee-owned businesses.
A business that receives an EIDL between January 31, 2020, and June 30, 2020, as a result of a COVID-19 disaster declaration is eligible to apply for a PPP loan, or the business may refinance their EIDL into a PPP loan. In either case, the emergency EIDL grant award of up to $10,000 would be subtracted from the amount forgiven in the Paycheck Protection Program.
The language in the existing law allows for the conversion of the EIDL into a PPP; however, it is currently unclear whether the EIDL must be in place before which of the following events occur:
- The PPP program becomes available
- The PPP application process is available
- The PPP is funded
We are currently attempting to get official clarification on this issue. If you are hoping to get the debt forgiveness you should consider applying for the PPP initially rather than applying for the EIDL.
The act provides $562 million to ensure that SBA has the resources to provide Economic Injury Disaster Loans to businesses that need financial support.
Unemployment assistance is extended under the CARES Act in the following ways:
- Waiting periods for those wanting to collect unemployment benefits have been waived. Traditionally there is a 7-day waiting period. That has been waived, and unemployment becomes collectible immediately.
- Eligibility for unemployment benefits includes:
- A person diagnosed with COVID-19 or a family member diagnosed with COVID-19
- Situations where a child doesn’t have daycare due to COVID-19 concerns may also qualify a person for unemployment benefits
- Situations where an employee can’t get to work due to a COVID-19 stay-at-home order
- Unemployment benefits can be pro-rated weekly to supplement wages for employees who are partially employed or had their hours reduced due to COVID-19. Unemployment insurance can set in and help cover the gap.
- The timeframe that unemployment is available to individuals has been expanded. There is now a 39-week limit, including extensions, for benefits to be paid.
- There has now been added an additional $600 per week to unemployment benefits due to COVID-19.
- Benefits of this act are available retroactively to January 27, 2020
Recovery Rebates for Individuals
The stimulus will also provide direct payments to many Americans. Here is more information about the Cares Act’s Recovery Rebates for individuals:
- The base rebate amount is $1,200 per individual and $2,400 per couple
- An additional $500 is allowed for each qualifying child under the age of 17
- If taxpayers exceed the income threshold, their rebate is phased out after $75,000 in adjusted gross income for a single taxpayer, $112,500 for a head of household filer, and $150,000 for married couples who file a joint return. The amount is completely phased-out for single taxpayers with incomes exceeding $99,000, $146,500 for head of household filers with one child, and $198,000 for joint filers.
- The IRS will base the payments on a taxpayer’s most recently filed income tax return to calculate the rebate. If 2019 is not filed, the IRS will look to 2018.
- The credit will be recalculated on taxpayers’ 2020 returns. If more money should have been given to the taxpayer, the taxpayer will get more money next year.
- If the government overpaid taxpayers when they sent the rebates, no claw back will be enforced.
- These direct payments do not count as taxable income.
Retirement Plan Withdrawals
The CARES Act contains the following relief related to retirement funds:
- Traditionally 10% penalties have applied for those needing to take distributions from retirement accounts before age 59 ½. Under the new act, the 10% penalty is lifted if withdrawals are taken to cope with the financial effects of COVID-19 on an individual or their family.
- These type of withdrawals have a $100,000 limit.
- There are two options with the $100,000 withdrawal:
- If the intent is to keep the money and truly take a distribution, a taxpayer may include the full withdrawal in taxable income in the year the withdrawal is taken. The taxpayer may also elect to have the income inclusion spread ratably over 3 years.
- If it is determined that all or part of the withdrawal can be repaid, the taxpayer has 3 years to restore the funds to their retirement account, and it may be classified as a loan with no portion of it taxable.
- In the past, if taxpayers wanted to take loans from 401k accounts, those loans have had limits of $50,000. The most recent modification to that provision increases the 401k loan limit from $50,000 to $100,000.
- The act waives the required minimum distribution rules for certain defined contribution plans and IRAs for calendar year 2020.
- Single employer defined benefit pension plans could delay contributions otherwise due during 2020 until January 1, 2021. At that time, the delayed contributions would be due with interest. The plan’s funded status for purposes of calculating benefit restrictions would be determined as of December 31, 2019 throughout 2020.
Student Loan Repayment by Employers
The CARES Act makes employer-paid student loan repayment assistance tax free through the rest of 2020:
- Employees may exclude up to $5,250 from income for payments of an employee’s education loans.
- The loans must have been incurred for the education of the employee (For example, the loans cannot have been incurred for their children’s education)
- The payment can be made directly to the employee or to the lender.
- This exclusion applies for payments made by an employer after the date of the enactment and before January 1, 2021.
Employee Retention Credit
An employee retention credit is available to eligible employers if the business was forced to suspend or close due to COVID-19. An employer is eligible for the credit if:
- The business suspended operations due to governmental orders in response to COVID-19, or
- The business experienced a 50% decrease in gross receipts for the same quarter in 2019.
Eligible employers will receive a 50% credit on qualified wages against their employment taxes for each quarter. The credit will be available beginning with the quarter in which gross receipts declined by more than 50% from the same quarter in the prior year and ending with the quarter in which gross receipts have recovered to more than 80% of the corresponding period in the prior year.
Qualified wages depend on the size of the business:
- If, on average, the employer has more than 100 full-time employees in 2019, qualified wages are all wages paid to employees not performing services during the time the business was shut down.
- If the employer has less than 101 full-time employees in 2019, qualified wages are all wages paid to employees during either of the above described events regardless whether the employee performed services.
The credit is available for up to $10,000 in wages for each employee and may be taken against employment taxes only. The credit is reduced by any credits taken under the Families First Coronavirus Response Act. Credit in excess of the employer liability is eligible for refunds.
Delay of Payment of Employer Payroll Taxes
Employers and self-employed individuals will be able to:
- Defer payments of the employer share (6.2% of employee wages) of Social Security payroll taxes that would have otherwise been owed from the date of enactment of the legislation through December 31, 2020.
- The deferred taxes must be paid over a two-year period, with half the amount required to be paid by December 31, 2021, and the other half by December 31, 2022.
The Social Security trust funds are held harmless for the deferral of employer payroll tax deposits by requiring deposits into the trust funds from general appropriated funds
Modification of Limitation on Losses for Taxpayers other than Corporations
Under the TCJA, a new limitation was introduced under code section 461(l) limiting the amount of business losses allowed to offset nonbusiness income to $250,000 single and $500,000 married filing joint. Any amounts in excess of those limits became NOLs, with the new TCJA limits.
This provision has been removed retroactively for periods beginning January 1, 2018, through 2020. To take advantage of this change for 2018 or 2019, a taxpayer should file an amended return. The provision returns in 2021.
Modifications for Net Operating Losses
Corporate and noncorporate business use of NOLs will be expanded with two amendments to section 172(a):
- NOLs may be used to offset income without the 80% taxable income limitation enacted as part of the TCJA and
- Carry back NOLs to offset prior year income for 5 years
These are temporary provisions that apply only to NOLs incurred in the 2018, 2019, or 2020 tax years. For tax years after 2020, the 80% taxable income limitation is reinstated with modifications that increase taxable income by a taxpayer’s deductions under sections 199A. Taxpayers that carryback NOLs to a year in which the transition tax (under section 965) applies will be treated as making an election under section 965(n) that allows taxpayers to preserve their NOLs. Coordinating rules will extend the 5-year carryback period to nonlife insurance companies that under current law are allowed a 2-year carryback after revisions enacted by the TCJA. Technical corrections to conform effective dates that were mismatched in the statutory language enacted by the TCJA are also included.
Modification of limitation on losses for taxpayers other than corporations:
- NOL relief is extended to passthroughs and sole proprietors by allowing excess business losses under section 461 for taxable years before 2021 and will allow carryover losses into subsequent taxable years as a technical correction to section 461(l)(2) enacted by the TCJA.
Emergency Paid Sick Leave Act Limitation
The CARES Act establishes a limitation on amounts that an employer is required to pay under the Emergency Paid Sick Leave Act.
An employer is not required to pay more than $511 a day and $5110 in total when employees are taking leave for:
- A federal, state, or local quarantine or isolation order
- Quarantine related to COVID-19 recommended by a healthcare provider
- Experiencing symptoms of COVID-19 and is seeking medical treatment
An employer is not required to pay more than $200 per day and $2,000 in total when employees are taking leave in order to:
- Care for an individual who is subject to a quarantine or isolation order
- Care for a son or daughter if school or childcare is closed due to COVID-19 concerns
Foreclosure Moratorium and Consumer Right to Request Forbearance
Borrowers with federally backed mortgage loans experiencing financial hardships due to COVID-19 are protected from foreclosure for a 60-day period beginning March 18, 2020. The CARES Act further provides forbearance of up to 180 days on such loans. This includes mortgages held by Fannie Mae and Freddie Mac or insured by HUD, the Veterans Administration, or the USDA. The relief expires December 31, 2020, or the date the national emergency is terminated, whichever is earlier.
For multifamily borrowers with federally backed multifamily mortgages, section 4023 provides an initial 30-day forbearance, with two additional 30-day extensions available. Mortgages that qualify include loans for real property designed for five or more families that are purchased, insured, or assisted by Fannie Mae, Freddie Mac, or HUD. The relief expires December 31, 2020, or the date the national emergency is terminated, whichever is earlier.
Borrowers are required to make a request in writing to their lenders and state the financial hardship caused by COVID-19. Forbearance may be granted for up to 180 days and can be extended for an additional 180 days at the request of the borrower. No additional fees, penalties, or interest will apply during this forbearance if the borrower makes all contractual payments on time and in full under the mortgage terms. Foreclosure is not permitted unless there is a vacant or abandoned property. Additional restrictions apply, see details of the law if wanting to know more.
Additional Interest Expense Deductions
The interest expense limitation, under section 163(j), on the interest deductions based on 30% of adjusted taxable income under the TCJA, will be increased, temporarily for 2019 and 2020, to 50% of a taxpayers’ ATI. Taxpayers may take the benefit on their 2019 income tax returns.
Qualified Improvement Property
The CARES Act provides a technical correction to the TCJA that will allow taxpayers that make and have made improvements to their facilities to deduct those costs immediately instead of depreciating those costs over time. This is a technical correction to the statutory language enacted by the TCJA and is effective as of the enactment of the TCJA, which was effective for taxable years beginning after December 31, 2017. Taxpayers can amend returns to claim refunds for costs that were being depreciated for taxable years beginning in 2018.