CARE Act Provisions
Mitchell & Nemitz, PA
March 30, 2020
We hope that you and your family are staying safe and healthy during this crazy and unprecedented time in the history of our country. Our goal is to help guide you through this process to help you champion the next month or so personally and in your business.
The following is a summary of the provisions of the Coronavirus Aid, Relief, and Economic Security Act (CARES Act) that was signed by President Trump on March 27, 2020. This is what we know at this point in time, but please keep in mind that this can change some as more details emerge and interpretations of the law are made. We are going to detail out certain provisions of the CARES Act that we feel have a direct benefit to the majority of our clients—so this is not meant to constitute a full detail of the entire CARES Act.
For EIDL and PPP loans, we will assist you as much as possible, but we suggest that you contact your bank to see if they are able to assist with the EIDL or PPP loan applications. If your bank does not, we have a list of eligible lenders who can assist you with those applications. You can also apply for the EIDLs directly on the SBA website at https://covid19relief.sba.gov/.
- $1,200 for Single filers (this would include head of household); $2,400 for Joint filers; $500 per qualifying child (likely a child who you claimed as a dependent)
- For Single filers with adjusted gross income (AGI) of $75,000 or less; Joint filers with AGI of $150,000 or less; head of household with AGI of $112,500 or less.
- Phases out $5 for every $100 over the adjusted gross income limit. Top phaseout for Single filers $99,000; Top phase out for Joint filers $198,000; Top phase out for head of household filers $146,500. These phaseout ranges are without children. Phaseout ranges for those with qualifying children will be higher.
- Stimulus checks will be based on 2018 return or 2019 return (if filed already).
- Individuals will not be required to repay any over-payment when filing their 2020 taxes.
- For individuals and families with low or zero net tax liabilities, the full benefit is refundable. This means that taxpayers with no income or income tax liability are eligible to receive the credit.
Unemployment Benefits on Steroids
- Expands coverage for workers to those who are unemployed or who cannot work for a variety of COVID-19 reasons.
- Also applies to self-employed workers.
- Eligible workers will receive an extra $600 per week on top of normal unemployment benefits.
- Employees who are able to work from home and those receiving paid sick leave or paid family leave will not be covered.
Withdrawals and loans from retirement savings
- Permits early withdrawals of up to $100,000 from IRAs and eligible employer plans without penalty for those individuals diagnosed with COVID-19, who have a spouse or dependent so diagnosed, or who suffer adverse financial consequences from quarantine, job loss or reduced work hours due to COVID-19 made on or after 1/1/20.
- Any such withdrawal may be recontributed to an IRA or eligible employer plan within three (3) years without regard to otherwise applicable annual limitations.
- If you do not re-contribute the funds, the income tax can be spread over a three-year period.
- Also permits an individual to obtain, within six (6) months of enactment of the bill, a loan up to $100,000 from an eligible employer plan.
- Any plan loans outstanding on or after enactment of the bill, any repayments of such loans that otherwise would be due by 12/31/20 may have an extended due date for one year.
- Certain minimum distributions rules for IRAs and eligible defined contribution plans are waived for 2020.
- Bill provides individuals, whether they itemize deductions or not, with a $300 deduction for donations to charitable organizations.
- The 60% adjusted gross income charitable contribution limitation for individuals has been suspended for 2020. C-Corporation charitable contribution limit has been increased from 10% to 25% of taxable income.
- Any payment made by an employer before January 1, 2021 (up to $5,250) to an employee (or the employee’s student loan lender) for purposes of paying principal and interest on any qualified student loans is excluded from income.
- Payments for student loans under the Federal Family Education Loan and Direct Loan programs are suspended, without interest, through 9/30/20.
Paycheck Protection Program (PPP)
- Small businesses and other eligible entities can receive up to $10 million with payments deferred for up to a year.
- Loan amounts are calculated based on average monthly payroll costs during the prior year x 2.5, no to exceed $10 million.
- Applies to any business that already qualifies as a “small business concern” plus businesses, 501(c)(3) organizations, veterans organizations and tribal business concerns that employ not more than either: 500 employees or if the business has not more than one physical locations and is assigned a NAICS code beginning with 72.
- Applies to sole proprietors, independent contractors and self-employed individuals as well.
- Loan proceeds may be used for payroll costs; employee salaries; interest payments on mortgages entered into before 2/15/20; rent for a lease entered into before 2/15/20; utilities (electricity, gas, water, transportation, telephone or internet); and interest on any debt incurred before 2/15/20. Loans will be backed by a 100% federal guarantee thru 12/31/20.
- A business cannot apply for both an Economic Injury Disaster Loan (EIDL) from the SBA and a PPP loan if used for the same purpose. A business can apply for a PPP loan if there is an existing EIDL loan, as long as the EIDL is used for a different purpose. In other words, the EIDL cannot be used to cover the same costs noted in the PPP.
- A business who has an existing EIDL loan can refinance the EIDL loan into the PPP loan which would then allow for the PPP debt forgives. An EIDL loan does not offer a debt forgiveness provision.
- The bill seeks to streamline the processing by delegating authority to make and approve loans to qualified lenders, waiving fees for both borrowers and lenders and limiting a lender’s consideration only to whether the borrower was in operation on 2/15/20 and had employees whom the borrower paid salaries and payroll taxes or paid independent contractors.
Loan Forgiveness for PPP loans
- Loans will be eligible for payment deferment for at least six (6) months and no more than one (1) year.
- Loan forgiveness available for the total amount borrowers spent on payroll costs, mortgage/debt interest, rent and utility payments between 2/15/20 thru 6/30/20 for the following eight (8) weeks after the PPP loan is obtained. Note: wages above $100,000 per employee are not eligible for loan forgiveness.
- Any canceled debt will not be included in the borrower’s taxable income.
- A borrower who PPP debt is forgiven is not eligible for the deferral of the payroll taxes outlined below.
- Restrictions on debt forgiveness: 1) Forgiven debt cannot exceed the loan principal and 2) amount forgiven will be reduced proportionally if the employer reduces its workforce during the eight-week period compared to prior periods or reduces the salary or wages paid to an employee by more than 25% during the eight (8) week period (compared to the most recent quarter).
- To encourage employers to rehire employees who may already have been laid off due to COVID-19, the Act provides an exception to the reduction if the business re-hires employees and/or eliminates the reduction in salaries by 6/30/20.
Employer Injury Disaster Loans (EIDLs)
- The CARES Act appropriated an additional $562 million for EIDL loans. The EIDL loans are administered by the SBA.
- EIDLs can provide up to $2 million for working capital and have a 3.75% rate for small businesses and a 2.75% rate for non-profits.
- Until 12/31/20, the SBA can approve EIDLs based solely on an applicant’s credit score or an alternative appropriate method for determining an applicant’s ability to repay.
- For EIDLs made before 12/31/20, SBA will waive the requirement for a personal guarantee on advances and for EIDLs below $200,000, the requirement that an applicant needs to have been in business for one year before the disaster is waived.
- The requirement that a business not have credit available elsewhere is waived.
Emergency Economic Injury Grants
- The CARES Act includes $10 billion for SBA to provide emergency EIDL grants until 12/31/20.
- The grant is an advance of $10,000 to small businesses and nonprofits that apply for the SBA’s EIDL program.
- The advance will be provided within three (3) days of applying for the loan and the business will not be required to repay the advance, even if they are denied for an EIDL.
Employee Retention Credit for Employers
- Offers employers a refundable payroll tax credit of 50% of wages paid by employers to employees during the period of 3/13/20 thru 12/31/20.
- Employers who apply for the Paycheck Protection Program are not eligible for the Employee Retention Credit for Employers.
- Available to employers whose (1) operations were fully or partially suspended due to COVID-19 related shut-down order or (2) gross receipts declined by more than 50%when compared to the same quarter in the prior year.
- For employers with 100 or fewer full-time employees, all employee wages qualify for the credit, whether the employer is open for business or subject to a shut-down order.
- For employers with more than 100 full-time employees, qualified wages are wages paid to employees when they are not providing services due to the COVID-19 related circumstances.
- Credit is provided for the first $10,000 of compensation, including health benefits, paid for an eligible employee.
Delay certain payroll tax payments
- Employers and self-employed individuals may delay payment of the employer’s share of Social Security/Medicare taxes (or half of self-employment taxes), with 50% of such taxes due by 12/31/21 and the other 50% due by 12/31/22.
Net operating loss deductions
- Previously, the Tax Cuts and Jobs Act (TCJA) which became effective in 2018, removed the ability of taxpayers to carryback net operating losses to prior years. The CARES Act would allow taxpayers to amended returns to claim losses from 2018, 2019, and 2020 carried back five (5) years.
- The bill temporarily removes the 80% taxable income limitation for any net operating loss (NOL) arising before 1/1/21 to ensure the NOL could be used to fully offset taxable income.
- The bill modifies the rules applicable to pass-through entities (S-Corporations & Partnerships) and Sole Proprietors to allow them to utilize active business losses.
- The election to carry back an NOL must be made by the due date, including extensions, of the taxpayer’s 2020 tax return.
Modification for Qualified improvement Property
- The TCJA previously modified the definition of qualified improvement property and made it eligible for Section 179 but not 100% bonus depreciation.
- The CARES Act now allows qualified improvement property to be eligible for 100% bonus depreciation also.