Coronavirus Aid, Relief, and Economic Security (CARES) Act
The Senate and House of Representatives have passed the CARES Act and it was signed into law by President Trump on March 27, 2020. While we are still waiting on guidance, we wanted to send out a brief overview of the programs included in the Act which include Paycheck Protection Program (PPP) Loans, Small Business Debt Relief, Economic Injury Disaster Loans (EIDL), Emergency Economic Injury Grants, Employee Retention Credit, Delay of Payment of Employer Payroll Taxes and some modifications to income tax provisions.
Paycheck Protection Program (PPP) Loans
PPP Loans will provide 100% federally guaranteed loans to employers who maintain their payroll during the Coronavirus pandemic, with a portion of the loan eligible to be forgiven at a maximum interest rate of 4%. PPP loans are available to any business, non-profit, veterans organization or Tribal business with under 500 employees (including restaurants with not more than 500 employees per physical location) and also includes the self-employed and independent contractors. The loans cover payroll from February 15, 2020 through June 30, 2020 and can be used to pay for payroll costs, group healthcare benefits, employee salaries/wages/commissions, payment of interest on mortgage obligations, rent, utilities and interest on any debt obligations incurred before the covered period. Payroll costs for purpose of the loan include salary/wages/commissions, tips, paid leave, healthcare payments, retirement benefit payments and some independent contractors but do not include any compensation of an individual employee in excess of an annual salary of $100,000 as prorated for the covered period, qualified sick leave wages for which a credit was allowed under section 7001 of the Families First Coronavirus Response Act or qualified family leave wages for which a credit was allowed under section 7003 of the Families First Coronavirus Response Act. The loans require a “Good Faith Certification” which states that the current uncertainty makes the loan necessary to support ongoing operations, the funds will be used to retain workers and maintain payroll or make mortgage payments, lease payments and utility payments, and that there are no duplicative amounts. The main benefit of these loans is any principal used for the covered costs during the eight weeks after the loan is originated can be forgiven. However, the loan forgiveness is reduced if your average full time employees per month during the covered period is less than your average full time employees per month during either February 15, 2019 through June 30, 2019 or January 1, 2020 through February 29, 2020 (at the business’s election). The amount of the loan forgiven will not be included in gross income for tax purposes and any remaining balance exceeding the forgiven amount has a maximum maturity of 10 years from when loan forgiveness is applied for. PPPs can be applied for through banks and the interest is not forgiven.
Small Business Debt Relief
Non-disaster SBA loans, in particular7(a), 504 and microloans, will have all loan payments including principal, interest and fees covered by the SBA for six months. The SBA will be paying this to the lenders and such payments do not need to be paid back. This relief will also be available to new borrowers who take out loans within six months of March 27, 2020.
Economic Injury Disaster Loans (EIDL)
As the entire country has been declared a disaster zone, from January 31, 2020 through December 31, 2020 all businesses and non-profit entities with not more than 500 employees, sole proprietors, independent contractors, or Cooperative, ESOP and tribal small business concerns with not more than 500 employees can apply for EIDLs with lower interest rates (3.75% for small businesses and 2.75% for non-profits) and principal balances up to $2 million. Principal and interest deferment is available for up to four years and proceeds can be used to pay for expenses that could have been met had the disaster not occurred.
Within the changes to EIDLs there is also the addition of Emergency Economic Injury Grants. Any business, non-profit, veterans organization or tribal business with not more than 500 employees can request an advance of $10,000 to be provided within three days of applying for an EIDL to provide paid sick leave, maintain payroll to retain employees, meeting increased material costs, making mortgage or rent payments and to repay obligations which cannot be met due to revenue losses. The advance does not need to be repaid, even if the loan is subsequently denied. The advance will reduce how much PPP loan forgiveness you will be provided. EIDLs can be applied for directly through the SBA at https://www.sba.gov/funding-programs/disaster-assistance
Employee Retention Credit
The Employee Retention Credit is a credit for 50% of qualified wages up to $10,000 per eligible employee against employment taxes for employer’s and non-profits whose operations have been fully or partially suspended as a result of a government order limiting commerce, travel or group meetings, or for employers who have experienced a greater than 50% reduction in quarterly receipts measured on a year-over-year basis. Wages do not include those taken into account for purposes of the payroll credits for required paid sick leave or required family leave, nor for wages taken into account for the employer credit for paid family and medical leave. This credit is also not available to employers who are receiving assistance through the PPP.
Delay of Payment of Employer Payroll Taxes
For employers who did not take advantage of the PPP Loans, the employer portion of FICA, Railroad Retirement taxes, and half of the SECA tax liability can be deferred through the end of 2020 with half of the deferred amount due by December 31, 2021 and half by December 31, 2022.
Modification to Business Income Tax Provisions
Other modifications to income tax provisions include once again allowing for the carryback of net operating losses and temporary repeal of taxable income limitation, allowing excess business losses for 2020, deductibility of interest expense limits increased, and technical corrections to the Qualified Improvement Property “glitch” that did not allow for taking bonus depreciation on Qualified Improvement Property as intended in the Tax Cuts and Jobs Act of 2017.
Individual Recovery Rebates
The Internal Revenue Service will begin sending out 2020 Recovery Rebates for Individuals shortly. The rebates will be for $1,200 ($2,400 if married filing jointly) and for taxpayers with children will also include $500 additional per child. The rebates begin phasing out at $75,000 adjusted gross income for single taxpayers, $112,500 for head of household taxpayers and $150,000 for married filing joint taxpayers. The rebates will phase out entirely at $99,000 for single taxpayers and $198,000 for married filing joint taxpayers. The advanced rebate payments will be based on 2019 individual income tax returns (2018 if 2019 has not been filed yet) and will be reconciled on 2020 tax returns. If a taxpayer would not qualify based on the tax return that was used for the advanced rebate but would qualify based on their 2020 tax return then they will receive the rebate when filing their 2020 tax return. However, if a taxpayer would qualify based on their tax return used for the advanced rebate but would not qualify based on their 2020 tax return the rebate is not required to be repaid. The IRS is calculating the advance recovery rebates on the taxpayers behalf and no action is required to be taken by the taxpayer at this time. Rebates will be directly deposited in the account last used on an individual tax return or mailed to the last address used by the taxpayer.
RMDs and IRA Distributions
The IRS has temporarily waived the requirement to take a 2020 Required Minimum Distribution (RMD), including those who would begin taking RMDs in 2020. If a taxpayer is subject to the five year rule regarding inherited IRAs can also “skip” 2020. Additionally, if a taxpayer is diagnosed with COVID-19, their spouse is diagnosed with COVID-19, or they experience an adverse financial consequence as a result of being quarantined, furloughed, laid off or having work hours reduced, being unable to work due to lack of child care, closing or reducing hours of a business owned or operated by them or other factors determined by the secretary, they can withdraw up to $100,000 from their IRA penalty free. The distribution must be taken in 2020 and the taxpayer will still be required to pay income tax on the distribution, but can recognize the income ratably over a three year period. Additionally, the amount distributed can be repaid over a three year period.
We will continue to keep you updated as more guidance is provided on the new CARES Act as well as any other additional acts that are subsequently passed due to the Coronavirus pandemic. As always, if you have any questions or concerns please do not hesitate to reach out to us. While we are mostly working from home, we are continuing to work our hardest for you and are here for you if you require any assistance during these challenging times.