3.27.20 | Client Alert – COVID-19 Update
In what is the largest financial rescue in U.S. history, Congress passed, and the President signed into law, a $2 trillion-dollar aid package called The Coronavirus Aid, Relief, and Economic Security Act (CARES Act).
The CARES Act addresses the COVID-19 health crisis and injects massive stimulus into the American economy. In appropriations, the bill allocates approximately $500 billion for large corporations, $350 billion for small businesses, $340 billion to combat the COVID-19 outbreak, $150 billion for state and local governments, $30 billion for emergency education funding, and $25 billion for emergency transit funding. In addition, the bill allocates millions of dollars for various provisions, including cash recovery rebates and assistance to organizations that have been hardest hit by the pandemic.
We are in the process of reviewing the 883-page CARES Act and will provide you with a detailed analysis of the important provisions in the days to come. In the meantime, below are highlights that may be of interest to businesses and individuals.
- Small Business Loans: The CARES Act amends the Small Business Administration (SBA) Section 7(a) loan program to expand eligibility and loan amounts. For the period beginning from February 15, 2020 to June 30, 2020, the new law would generally allow eligible companies, with no more than the greater of (i) 500 employees or (ii) their applicable industry size standard as prescribed by the SBA, to qualify for 100% federally-backed loans.
For companies that have been in business for the preceding year, the amendment allows for a maximum loan amount that is the lesser of (i) $10 million or (ii) the average monthly payroll (limited to $100,000 annual compensation per employee) for the preceding 12 months multiplied by 2.5 times plus any pre-existing emergency loan. To qualify, the borrower must submit a good-faith certification that the loan is needed to continue operations during the COVID-19 emergency; the funds will be used to retain workers and maintain payroll or make mortgage interest, lease, and utility payments; and maintain that the applicant does not have any other application pending for the same purpose, and that the applicant has not received duplicative amounts under the program.
Allowable uses for loan proceeds include payroll expenses, paid leave, group health benefits, salary and employee commissions, rent, mortgage interest payments, utilities, and interest on indebtedness, subject to certain requirements. Loans can have a maximum maturity of 10 years, with a maximum interest rate of 4%, and payments may be deferred at the outset for at least 6 months (and not more than a year). There is an extremely generous loan forgiveness for amounts expended on allowable uses in the first eight weeks of the loan, under certain conditions.
Following the enactment of the Act, regulations will be issued on forgiveness provisions, but the statute provides that that any cancelled debt resulting from this section will not be included in the borrower’s taxable income to the extent of the principal amount. Moreover, many of the traditional SBA requirements will be waived, such as the traditional collateral and personal guarantee requirements, and the requirement that credit is not available elsewhere.
- Employer Payroll Tax Credit Relief for Employee Retention: Under the Act, an employer will be permitted a refundable tax credit against applicable employment taxes (social security and railroad retirement) for each calendar quarter in an amount equal to 50% of qualified wages paid by the employer during the COVID-19 crisis. The amount of qualified wages with respect to any employee that may be taken into account cannot exceed $10,000 for wages paid from March 13, 2020 through December 31, 2020. The credit is generally available for companies where operations were fully or partially suspended because of a COVID-19 related shutdown order or where gross receipts declined by more than 50% when compared to the same quarter in the prior year. Note this credit may not be claimed for employers taking the SBA loan mentioned above.
- Delayed Payments of Employer Payroll Taxes: Employers can postpone payments of the employer’s share of the Social Security tax with respect to their employees beginning on the date of the enactment and ending before January 1, 2021. Instead of quarterly payments, employers would be permitted to remit employment tax over the following two years with half of the amount paid by December 31, 2021 and the other half by December 31, 2022 (the applicable dates). An employer will be treated as having timely made all deposits of employment taxes that are required to be made during the payroll tax deferral period so long as such deposits are made by those applicable dates. However, this relief is not available for taxpayers with indebtedness forgiven under the SBA loan provisions.
- Modifications for Net Operating Losses (NOLs): Under present law, after changes made by the Tax Cuts and Jobs Act (TCJA), NOLs were limited to 80% of taxable income and could not be carried back to reduce income in a prior year. The CARES Act allows NOLs to be carried back five years for NOLs arising in a tax year beginning in 2018, 2019 and 2020. In addition, the CARES Act temporarily removes the taxable income limitation to allow NOLs to fully offset income for a tax year beginning in 2018, 2019 and 2020.
- Modification of Limitation on Losses for Non-Corporate Taxpayers: Similarly, the CARES Act temporarily suspends the excess business loss limitation rules applicable to pass-through business owners and sole proprietors, such that those taxpayers can utilize excess business losses against non-business income. This temporary suspension of the loss limitation applies to tax years beginning in 2018, 2019 and 2020.
- Modification of Credit for Prior Year Minimum Tax Liability of Corporations: While the corporate Alternative Minimum Tax (AMT) was repealed as part of the TCJA, the CARES Act makes available corporate AMT credits as refundable credits until 2021. Accordingly, companies will be permitted to recover AMT credits to claim a refund.
- Modification of Limitation on Business Interest Expense: The CARES Act temporarily increases the 30% percent limitation for business interest expense (imposed by TCJA) to 50% of Adjusted Taxable Income (ATI) for tax years 2019 and 2020 (although partnership business interest deductions would still be limited to 30% of ATI for 2019 under the language of the current bill) unless an election is made to opt out. On 2020 tax returns, taxpayers will have the opportunity to use 2019 ATI to calculate their interest limitation, which will allow taxpayers with 2020 losses to deduct interest expense they otherwise would not be able to.
- Technical Amendment on Qualified Improvement Property (QIP): The CARES Act fixes a glitch contained in TCJA and designates QIP, generally non-structural internal building improvements, as 15-year MACRS property (or 20-year life property if the alternative depreciation system method is elected or required). The technical correction is made retroactive to 2018 as if originally included in TCJA. Accordingly, QIP can depreciate over a shorter life and will qualify for the 100% bonus depreciation unless an election is made to opt out. By qualifying for bonus depreciation, the amendment enables businesses to immediately write-off the full costs of QIP when placed in service instead of depreciating the improvements over the 39-year life of a building.
- Expanded Unemployment Assistance: Traditionally, self-employed independent contractors were not eligible for unemployment benefits. The CARES Act creates a temporary unemployment assistance program beginning in January 27, 2020 through December 31, 2020 to provide payment to those who are not traditionally covered. To qualify, the covered individual must not be eligible for regular compensation or extended benefits under state or federal law, and he or she must self-certify that the individual is otherwise able to work, but is unable to do so for reasons related to the impact of COVID-19. The CARES Act also expands unemployment insurance by providing workers an additional $600 per week to each recipient of unemployment insurance for up to four months even if the worker is currently making less. It also provides an additional 13 weeks of unemployment benefits through participating States to help those who remain unemployed after state unemployment ends.
- Cash Rebates: The Act will provide cash payments to individuals and families up to $1,200 for each qualifying adult ($2,400 married) and $500 for each qualifying child. Eligibility for cash payments would start to phase out for individuals with incomes above $75,000 for a single taxpayer and $150,000 for a married couple filing jointly ($112,500 in the case of a head of household). The rebate amounts are reduced by $5 for each $100 that a taxpayer’s income exceeds the phase-out threshold, and there is a complete phase out for those making more than $99,000 for a single taxpayer and $198,000 for a married couple filing jointly ($136,500 in the case of a head of household). For most taxpayers, no action will be required to receive the rebate and the IRS will use the taxpayer’s 2019 tax return or the 2018 tax return if the individual has not yet filed a tax return for 2019.
- Temporary Waiver of 10% Penalty for Early Retirement Withdrawals: The Act temporarily waives the existing 10% penalty for early withdrawals made on or after January 1, 2020 and before December 31, 2020 for a COVID-19 related distribution. A COVID-19 related distribution is one made to an individual (i) who is diagnosed with the virus SARS-CoV-2 or with COVID-19 by a test approved by the Centers for Disease Control and Prevention, (ii) whose spouse or dependent is diagnosed with such virus or disease by such a test, or (iii) who experiences adverse financial consequences as a result of being quarantined, being furloughed or laid off or having work hours reduced due to such virus or disease, or due to being unable to work because of lack of child care, closing or reduced hours of a business owned or operated by the individual, or any other factors as determined by the Secretary of Treasury. The penalty is waived for such distributions of up to $100,000 from an eligible retirement plan and, income attributable to such distributions will be subject to tax spread over three years unless the taxpayer elects otherwise.
- Temporary Waiver of Required Minimum Distribution Rules: The minimum distribution requirements for defined contribution plans and IRAs are waived for the entire calendar year 2020 to allow retirements accounts to recover from the economic slowdown.
- Allowance of Above the Line Deduction for Charitable Contributions and Modification of Limitations: To encourage charitable donations, taxpayers will be permitted to deduct up to $300 of cash contributions, whether they itemize deductions or not, beginning in tax year 2020. In addition, the Act suspends the 50% limitation on individuals for 2020 and increases the limitation to 25% of taxable income for corporations.
- Exclusion for Certain Employer Payments of Student Loans: Under the Act, individuals will be able to exclude from gross income up to $5,250 annually of student loan payments made by an employer, whether paid to the employee or to the lender. This exclusion is available for payments made after the enactment of the CARES Act and before January 1, 2021.
As mentioned, there are many wide-ranging provisions that affect taxpayers. The new legislation will likely have far reaching impact and affect not only 2020 and 2019 tax years, but also earlier years. Taxpayers will likely want to amend prior year returns to make use of losses generated by the pandemic as well as consider other retroactive changes available under the CARES Act to address liquidity concerns. We will keep you informed of the latest developments and update you with our in-depth analysis in the next few weeks.
If you have any questions regarding the notice or any other challenges you are facing as a result of the COVID-19 pandemic, please reach out to your Berdon Advisor and review Berdon’s COVID-19 Information Center.
Berdon LLP, New York Accountants