The CARES Act: Part Three of the COVID-19 Relief Effort
What this emergency $2 trillion package means for individuals and businesses.
On March 27, President Trump signed the $2 trillion CARES (Coronavirus Aid, Relief, and Economic Security) Act (H.R. 748). This is the third in a series of monumental COVID-19 relief packages, and it provides for numerous tax, grant, and loan provisions designed to provide financial aid to individuals, businesses, nonprofits, and state and local governments in an effort to address the economic fallout from the pandemic and the steps taken to contain it.
This article provides a high-level overview of those provisions most relevant to businesses and individuals contained in the Act as well as the requirements that must be met to qualify. Expect that a taxpayer receiving loans, grants, or credits under these programs will be required to document their compliance with the specified requirements.
Relief for Individual Taxpayers
While the majority of the CARES Act is aimed at supporting employers, there are a number of significant financial benefits directed to individuals and employees.
Direct Payment to Many Americans
The Act includes relief in the form of immediate cash payments of as much as $1,200 for single taxpayers, $2,400 for married joint filers, plus $500 for each dependent child under the age of 17.The actual amount paid is based on the taxpayer’s 2019 federal tax return if filed, or 2018 return if 2019 has not been filed yet. They are reduced for higher income taxpayers, with phase-outs beginning at $75,000 for single taxpayers and $150,000 for married joint filers, and ending for single taxpayers with incomes exceeding $99,000 and married joint filers with no children and incomes exceeding $198,000.
Taxpayers with little or no income-tax liability, but at least $2,500 of qualifying income, would be able to receive $600 as single taxpayers or $1,200 as married joint filers. Qualifying income includes earned income, Social Security retirement benefits, and certain compensation and pension benefits paid to veterans. For individuals who did not file a return in either 2018 or 2019, the IRS will use the individual’s 2019 Social Security income.
Within 15 days of payment, the IRS will send each eligible taxpayer a letter to a last known address with details of the amount, date and method of payment, along with a number to contact if the taxpayer did not receive the payment.
Relaxed Retirement Account Rules
Required Minimum Distributions Waived. The CARES Act also temporarily waives the required minimum distribution requirement from the plan for 2020. This permits those who do not need immediate funds to avoid cashing out investments at depressed values.
Early Withdrawal Penalty Waived. For individuals qualifying for coronavirus-related distributions as defined below, the 10 percent early withdrawal penalty is waived for distributions up to $100,000 in 2020. In addition, income from such distributions would be subject to tax over three years and the taxpayer may recontribute to an eligible retirement plan within three years without regard to the annual cap.
Borrowing Limits Increased. Individuals qualifying for coronavirus-related distributions as defined below also have increased borrowing capabilities against their retirement assets. The maximum amount of loans (when combined with existing loans) which can be taken from retirement accounts is the lesser of $100,000 (up from $50,000) or 100% of the participant’s accrued benefit (up from 50%). Repayment of these loans may be delayed for up to one year. This change will be in effect through 2020.
To qualify for the coronavirus-related distribution benefits described above, the affected participant or IRA owner (including a spouse or dependent) would need to either:
- Be diagnosed with SARS-COV-2 or COVID-19, or
- Experience adverse financial consequences as a result of being quarantined, furloughed, laid off, 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 the individual due to the coronavirus pandemic, or other factors as determined by the Treasury Secretary.
Expanded Unemployment Insurance
Unemployment Benefits Increased. For individuals covered by unemployment insurance, the CARES Act expands coverage to include those unemployed, underemployed or unable to work as a result of COVID-19. Specifically, the Act adds $600 for four months to the unemployment benefit determined under existing state laws. It will be made available without any waiting period. If state benefits run out and an individual is still unemployed, the federal government will provide 13 additional weeks of unemployment insurance through December 31, 2020. The increased benefits will not count toward any income limits under Medicaid or the Children’s Health Insurance Program.
In addition, the Act provides funding to states to pay the cost of the first week of unemployment benefits for states that currently wait one week before the individual is eligible to receive benefits instead of as soon as they become unemployed.
Unemployment Benefit Eligibility Expanded. In addition, the Act creates a temporary Pandemic Unemployment Assistance program for those not traditionally eligible for unemployment benefits (self-employed, independent contractors, those with limited work history, and others) who are unable to work as a direct result of the coronavirus public health emergency.
Short-time Compensation Programs Bolstered. In addition, the Act provides states with funding to support “short-time compensation” programs, where employers reduce employee hours instead of laying off workers and the employees with reduced hours receive a pro-rated unemployment benefit. This provision would pay 100 percent of the expense states incur in providing this short-time compensation.
The Act further provides funding to support states that begin “short-time compensation” programs. This provision would pay 50 percent of the costs that a state incurs in providing short-time compensation.
Student Loan Relief
The CARES Act suspends payments on federal student loans for six months. The act waives any interest on the loans for six months as well. The missed months of payments will be recorded as if the borrower had made a payment for the purposes of loan forgiveness programs.
The Act further makes emergency financial aid available to some students, up to the amount of the maximum Federal Pell Grant for the year. Federal work-study payments can be made to qualifying students who have been unable to complete their work under the program due to COVID-19.
Students who are forced to withdraw from school due to the outbreak may have the portion of their loan covering that semester canceled. Requirements to return portions of grants or loan assistance will be waived for students who had to withdraw from school as well.
This provision does not apply to private loans. Loan borrowers should contact their lender or student loan administrator to verify eligibility.
Finally, a provision in the CARES Act provides a temporary income tax exclusion for individuals who get student loan repayment assistance from their employer. Through December 31, 2020, an employer may contribute up to $5,250 annually toward an employee’s student loans, and such payment would be excluded from the employee’s income. The $5,250 cap applies to both the new student loan repayment benefit as well as other educational assistance, e.g., tuition, fees and books, provided by the employer under current law.
Expanded Healthcare Coverage and Funding
In what is a permanent change to the law, the CARES Act will now allow taxpayers to use health savings accounts and flexible spending arrangements to purchase over-the-counter medicine.
The Act mandates that testing for COVID-19 must be covered by private health insurance without cost sharing. Any vaccines for COVID-19 must be covered as well without cost sharing. Accordingly, it provides funding for health care providers and suppliers, including extra Medicare payments to hospitals to cover COVID-19 treatment and extra funding to community health centers.
Lastly, the Act expands coverage of telehealth services under Medicare. It also allows high-deductible health plans with health savings accounts to cover telehealth services even if patients have not met their annual deductible.
Relaxed Charitable Deduction Limits
Above-the-Line Charitable Deduction Introduced. Taxpayers who do not otherwise elect to itemize deductions are allowed an above-the-line deduction of up to $300 for charitable contributions made in cash (not stock), excluding donor-advised funds.
Limits on Charitable Deductions Increased. In addition, for individuals who itemize, as well as corporations, the CARES Act temporarily increases limitations on deductions for charitable contributions made in 2020. For individuals, the 60 percent of AGI limitation is suspended for 2020. For contributions of food inventory, the limitation is increased from 15 percent to 25 percent. Excess contributions may be carried forward to future years based on the existing charitable contribution carryforward rules.
Relief for Businesses
The CARES Act also provides for five distinct credit and tax-relief programs intended to help businesses including two small business credit programs, a subsidy for existing small business loans, two tax relief packages focused on mitigating employee expense, and a collection of more general tax relief efforts.
Payroll Assistance for Small Businesses
The SBA will administer a $349 billion loan program – the Payroll Protection Program – intended to help cover the cost of payroll and other expenses arising from retaining pre-COVID-19 employees and maintaining their compensation levels for the eight-week period after the funding of each loan.
Eligible candidates include small businesses, self-employed individuals, nonprofits, and tribal business concerns provided that the candidate does not have more than 500 employees. For businesses assigned NAICS Code 72 (accommodations and food service), the 500-employee limit applies to each physical location. Employees include full-time and part-time individuals. In addition, eligibility requires candidates to certify that:
- The uncertainty
of current economic conditions makes the loan necessary to support ongoing
- Funds will be used to retain workers, maintain payroll, or make mortgage, lease, or utility payments; and
- No application is pending and no amount has been received for the same purpose and duplicative of amounts received
Similar to the existing SBA 7(a) loan program, borrowers will obtain loans directly from existing banks and lenders enrolled in the SBA 7(a) program (or other lenders approved by the SBA), and the loans will be guaranteed by the SBA.
The loan amount will be 2.5 times the average monthly payroll costs for the one-year period before the date the loan is made, up to a maximum of $10 million. Special rules apply to calculate the loan amount for seasonal employers and businesses less than a year old. The amount necessary to refinance any outstanding Economic Injury Disaster Loans (EIDL) may be included in the amount of the loan.
The term of the loan may be up to 10 years with an interest rate of no more than four percent. Fees for the program will be waived and payment of principal and interest will be deferred from between six months to one year if the loan is not otherwise forgiven as described below. There will be no prepayment penalties.
Allowable uses include payroll, rent, mortgage payments, and utility costs. Borrowers are eligible for loan forgiveness on amounts spent during an eight-week period after the origination date of the loan on qualifying payroll costs, interest payments on mortgages, rent, and utilities. If the loan forgiveness option is exercised, the loan is then deemed a grant. Importantly, any amount forgiven under the CARES Act that would ordinarily be considered gross income to the borrower for federal tax purposes is excluded from gross income.
The amount forgiven is a function of number of employees retained. Any reduction in the average number of full-time-equivalent employees employed by the borrower during the eight-week period beginning from the origination of the loan, as compared to one of the following, will result in a reduction in the amount of loan forgiven:
- The average number of full-time employee equivalents per month from February 15, 2019 to June 30, 2019 or,
- The average number of full-time employee equivalents per month between January 1, 2020 and February 29, 2020.
In addition, a reduction in pay per-employee greater than 25 percent relative to the amount of pay during the most recent full quarter for which the employee was employed before the eight-week period will also result in a reduction in the amount of loan forgiven. Note that employees who receive pay of more than $100,000 are excluded for this calculation. Starting April 3, 2020 small businesses and sole proprietorships can apply for and receive loans to cover their payroll and other certain expenses. Beginning April 10, 2020 independent contractors and self-employed individuals can also apply. All applications will be submitted via a portal on the internet and complete records for those expenses that can be covered by the program will be required. Required information can include 2019 payroll information, copies of 2019 utility bills, copies of business property lease and/or mortgage statements, as well as other financial information.
Further clarity on the determination of loan forgiveness amount and requirements are expected from the SBA. The latest from the SBA on this program can be seen here.
Emergency Economic Injury Disaster Loans
In addition to the Payroll Protection Program, the CARES Act establishes a $10 billion grant fund for SBA Economic Injury Disaster Loans (EIDL) to provide disaster loan assistance to businesses, sole proprietorships, independent contractors, cooperatives, ESOPs and Tribal small business concerns. Business that have elected to participate in the Payroll Protection Program described above are allowed to apply for support from the EIDL program, however the proceeds from the two programs must be used to pay distinctly different expenses (e.g. one loan could be for payroll and the other for rent).
Eligible candidates are those with no more than 500 employees and that qualify for an SBA disaster loan (a section 7(b)(2) loan), but with the following usual requirements waived:
- For loans $200,000 or less, business owners are not
required to personally guarantee the loan;
- Applicants are not required to have been in business for at least one year, except businesses must have been in operation on January 31, 2020; and
- The applicant need not be unable to obtain credit elsewhere.
The EIDL program includes an option for a $10,000 cash advance within three days of application that does not have to be paid back—even if the borrower’s application is subsequently rejected.
Subsidies for Certain SBA Loan Payments
The SBA will administer a $17 billion grant fund for SBA to cover six months of payments for small businesses with certain existing SBA loans. Generally, these include:
- Small business concern SBA loans, including those made
under the Community Advantage Pilot Program;
- SBA loans to state and local development companies; and
- Microloans made by an intermediary Small Business Development Center out of SBA funds to a small business.
Employee Retention Tax Credits
The CARES Act provides a refundable payroll tax credit for 50 percent of wages paid by employers to employees during the COVID-19 crisis. The credit is available to employers of any size that has not received a loan through the Small Business Act as extended by the CARES Act and whose (1) operations were fully or partially suspended, due to a COVID-19-related shut-down order, or (2) gross receipts declined by more than 50 percent when compared to the same quarter in the prior year.
The credit is generally provided for the first $10,000 of compensation, including health benefits, paid to an eligible employee. This results in a maximum credit of $5,000 per employee. The credit is provided for wages paid or incurred from March 13, 2020 through December 31, 2020.
The rules governing whether employers qualify for the credit depend on the number of employees who work for the employer. For employers with more than 100 full-time employees during 2019, an employee must be unable to provide services due to the circumstances outlined in (1) or (2) above. For employers with 100 or fewer full-time employees, the credit is allowed regardless of whether an employee is able to provide services, as long as the circumstances outlined in (1) or (2) above are met.
The Act includes anti-abuse measures that prevent employers from double-counting wages used to determine the employee retention credit in the calculation of other credits such as the Work Opportunity Tax Credit under Internal Revenue Code (IRC) §51 or the Employer Credit for Paid Family and Medical Leave under IRC §45S.
Deferral of Payroll Tax Payments
Employers (other than those with indebtedness forgiven through the Payroll Protection Program described earlier) and self-employed individuals can defer the employer portion of Social Security and Medicare taxes due from the Act’s enactment through the end of 2020 until the following future dates:
- 50% deferred until December 31, 2021; and
- 50% deferred until December 31, 2022.
Additional Tax Breaks
Finally, the CARES Act introduces a number of more general forms of tax relief for businesses.
Interest Expense Deduction Limits Raised. The CARES Act temporarily increases the limit on deductions of interest expenses from 30 percent to 50 percent of taxable income for 2019 and 2020.In calculating this limit for 2020, businesses have the option of using their adjusted taxable income from 2019. Taxpayers can elect out of the increased limitation if it adversely impact them with respect to other loss limitation provisions.
Facility Improvement Expense Treatment Improved. The CARES Act corrects a provision in the Tax Cuts and Jobs Act (TCJA) to enable businesses to immediately write off costs associated with improving facilities instead of depreciating them over the life of the building. This change will also allow an amending of a prior year return to take advantage of this provision.
Net Operating Loss Rules Relaxed. Under the CARES Act, the current net operating loss (NOL) rules enacted in the TCJA are temporarily revised to allow losses from 2018, 2019 or 2020 to be carried back five years, and temporarily removes the taxable income limitation to allow a NOL to fully offset income.
For taxpayers other than corporations, loss limitation rules have similarly been relaxed. Under the TCJA, taxpayers (other than C corporations) were limited in utilizing net business losses (i.e., business losses in excess of business income). These taxpayers were limited to using only $250,000 ($500,000 on a married joint return) of net business losses against non-business income. The CARES Act suspends this rule so that net business losses for 2018, 2019, and 2020 can be used without limit.
Limits on Charitable Deductions Increased. For corporations, the charitable deduction limit is increased for qualifying cash contributions made in 2020 from 10% to 25% of taxable income (less the amount of other charitable contributions allowed). In addition, the percentage used to calculate limitations on deductions for food inventory contributions made in 2020 is increased from 15% to 25%.
Next Steps: More Coronavirus Stimulus
Congress has already started working on a Phase 4 COVID-19 response bill, which is likely to include provisions addressing both continuing immediate needs, as well as more stimulus provisions to go beyond the short term economic needs. Many of these measures will focus on medium and longer-term economic recovery issues.
The Senate plans to be on recess until April 20, and the House will take an extended break as well, though members say they could return sooner depending on how the economy reacts in the next few weeks.
This information may answer some questions, but is not intended to be a comprehensive analysis of the topic. In addition, such information should not be relied upon as the only source of information; professional tax and legal advice should always be obtained.
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