CARES Act Summary

********UPDATED AT BOTTOM WITH INFO ON SBA LOANS 4/1/2020********

Quick summary of call BDO held yesterday afternoon (3/30) on the $2.2T CARES Act passed let last week. Lots of confusion around this since it moved so quickly thru Congress.

I tried to distill down the most relevant points to to the widest possible audience:

Individual Tax

• Eligible individuals will receive a refundable tax credit against their 2020 taxable income equal to $1,200 ($2,400 for joint filers) plus $500 per qualifying child.
• The credit begins to phase out if the individual’s adjusted gross income (AGI) exceeds $75,000 ($150,000 for joint filers and $112,500 for head of household filers)
• Individuals who have not filed a tax return in 2018 or 2019 may still receive an automatic advance based on their social security benefit statements (Form SSA-1099) or social security equivalent benefit statement (Form RRB-1099)

Other CARES Act Provisions for Employers and Employees

• Paycheck Protection Program – SBA Loans for Employers with 500 or fewer employees
• Up to 2.5 times payroll costs with maximum loan of $10 million
• Loan is forgivable to the extent employees are still employed at June 30, 2020 and compensation is not reduced more than 25%
• Unemployment Insurance - Many different provisions that provide increased benefits, etc.

Special Rules for Use of Retirement Funds

• Waives the 10% early withdrawal penalty for distributions up to $100,000 from tax-qualified retirement plan accounts for coronavirus-related purposes during 2020
• Taxable amounts from such distributions can be included in income ratably over 3 years
• Taxpayers may recontribute the funds to an eligible retirement plan within 3 years without regard to that year’s cap on contributions
• Check applicable state rules on withdrawal penalties

Payroll Taxes

• this only applies to companies paying federal income tax, not S Corps or LLC with income/losses passed through to owners
• Equal to 50% of qualified wages paid to employees between March 12, 2020 and December 31, 2020
• Capped at $10,000 of wages per employee
• The maximum available credit is $5,000 per employee (50% of $10,000)
• Employers qualify for the credit if:
• Their operations were fully or partially suspended due to a COVID-19 related shutdown order, OR
• Their gross receipts for the quarter were less than 50% of the gross receipts for the same quarter in the prior year
• Employers with more than 100 full-time employees (on average in 2019) would only receive the credit for wages paid to employees who are not working. Employers with 100 or fewer employees would receive the credit for all wages paid to employees
• Sick pay and FMLA wages paid as a result of the Families First Coronavirus Response Act are specifically excluded
• Any employer who takes out loan from SBA due to this Act is ineligible to receive this credit. This may get relaxed later on

Delay of Payroll Tax Payment

• Permits employers to defer payment of the employer portion of Social Security tax (6.2%) that would otherwise be due and payable through December 31, 2020
• Employers would be required to pay 50% of the deferred amount on or before December 31, 2021, with any remaining amount paid on or before December 31, 2022

Net Operating Loss (NOL) Carryforward

• 5-year carryback for NOLs in taxable years beginning after December 31, 2017, and before January 1, 2021.
• For years beginning after December 31, 2020, NOL deduction limited to 80% of taxable income following the deduction of any pre-2018 NOLs, before any deduction.

NOL – 80% Limitation For taxable years beginning after December 31, 2020, the NOL deduction is limited to the sum of:

• NOLs generated in taxable years beginning before January 1, 2018, plus The lesser of
• 1. NOLs generated in taxable years beginning after December 31, 2017, or
• 2. 80 percent of taxable income computed after the reduction for any pre2018 NOLs but before any deduction pursuant to §§ 199A and 250
• NOLs generated in 2018 through 2020 are subject to the limitation, but the limitation only comes into effect in 2021
• 80 percent application after the reduction for pre-2018 NOLs 
• The $ value of applying these in prior periods is cumbersome as you are moving from 21% back to 35% tax environment
• Many states do not permit NOL carrybacks
• Applying this may adversely impact tax liability, has to be closely evaluated. 

Corporate Tax Charitable Contributions

• The former 10% of taxable income limit on deductions for charitable contributions is increased to 25%
• Excess contributions can be carried forward to the next five tax years
• To qualify, the contribution must be paid in cash during calendar year 2020
• The limit on deductions for contributions of food inventory is increased from 15% to 25% of taxable income

S-Corp/LLC (Passthrough Entities) Limitation on Business Losses

• Annual maximum of $500,000 for married filing jointly and $250,000 for all other taxpayers is now deferred until 2021. Doesn’t apply for 2018-2020. Will likely have to amend prior tax returns. 
• Still subject to other loss limitation provisions. 
• Thinly capitalized corporations (i.e. debt-toequity ratio greater than 1.5 to 1) had to limitations on deducting certain disqualified interests. Those are now relaxed. 

Real Estate Businesses

• Any businesses that made an election to be exempted from section 163(j) are bound to use longer depreciation lives.
• Had bonus depreciation been allowed for these companies, they may not have made this election.
• In the absence of relief, the section 163(j) election is irrevocable. It’s not clear whether Treasury will promulgate regulations allowing taxpayers to revoke this election.

Real Estate QIP (Qualified Improvement Property aka CapEx or Leasehold Improvements)

• Can now use bonus depreciation on assets put in service in 2018 and 2019 vs using the 39 year depreciation previously required under the 2017 tax bill
• If placed in service in 2019, can claim bonus depreciation on the 2019 return or file form 4466 for potential refund
• QIP includes improvements a taxpayer makes to an interior portion of an existing building that is nonresidential real property (residential rental property is excluded);
• Examples of such qualifying improvements include installation or replacement of drywall, ceilings, interior doors, fire protection, mechanical, electrical and plumbing.

Deferred Tax Assets/Liabilities Impact

• IRS requires an entity to adjust current and deferred tax assets and liabilities for the effects of changes in tax laws or rates
• The adjustment should be included in income from Continuing Operations in the interim period that includes the enactment date. This a Q1 event for calendar year companies due to 3/27 enactment date. 
• If you have international operations, other jurisdictions are introducing measures that impact income taxes and non-income based taxes so impact analysis is needed. 
• There could be reclasses between current and non-current deferred taxes worth evaluating

Tax Compliance and Reporting

• IRS Notice 2020-18, postpones by 90 days income tax filings and income tax payments that would be due April 15, 2020.
• This July 15, 2020, income tax filing and income tax payment date applies to “Affected Taxpayers,” who are any persons with a federal income tax return or federal income tax payment due April 15, 2020
• There is no limitation on the amount of payment that may be postponed to July 15, 2020
• The relief is provided to individuals, trusts, estates, partnerships, associations, companies, and corporations
• Any interest or penalty that is postponed by the Notice will once again begin to accrue on July 16, 2020
• No extension is provided for the payment or deposit of any other type of federal tax – or for the filing of any federal information return

There's lots in this bill and my summary only scratches the surface but I hope it helps a few people out there make sense of it. There will be other changes I'm sure as some of the ripple effects require clarification and likely downstream modification in next stimulus. I don't really consider it a stimulus vs a demand replacement package but regardless of naming, we all hope it will provide a floor while we get pandemic under control and then can start re-building our economy.

If anyone needs help making sense of bill, please reach out and I can traffic cop some introductions to various service firms to help you analyze what this might mean for your own business. Stay safe!

*********SBA LOAN APPLICATION UPDATE********

SBA Economic Disaster Loan & Emergency Grant

Overview

The Coronavirus Aid, Relief, and Economic Security (CARES) Act temporarily expands eligibility for SBA economic injury disaster loans (EIDL) and provides an emergency advance of up to $10,000 to small businesses and private non-profits harmed by COVID-19 within 3 days of applying for an SBA Economic Injury Disaster Loan (EIDL). To access the advance, you first apply for an EIDL and then request the advance. The advance does not need to be repaid under any circumstance, and may be used to keep employees on payroll, to pay for sick leave, meet increased production costs due to supply chain disruptions, or pay business obligations, including debts, rent, and mortgage payments. 

Eligibility

In addition to the entities that are already eligible for SBA disaster loans (small businesses, private non-profits, and small agriculture cooperatives), eligibility is temporarily expanded to include:

• Business entities with 500 or fewer employees:
• Sole proprietorships, with or without employees
• Independent contractors
• Cooperatives and employee owned businesses
• Tribal small businesses
• Private non-profits of any size.

Additionally, you must have been in business as of January 31, 2020. Expanded eligibility criteria and the emergency grants are only available between January 31, 2020 and December 31, 2020.

How to Apply

• You can apply for an EIDL online with the SBA. https://covid19relief.sba.gov/#/
• When you apply, you can request an emergency grant of $10,000.
• The SBA will provide the grant within 3 days of receiving your application.
• You will not have to repay the grant, even if your application for a loan is denied. 

 Can I apply for other SBA loan programs?

If you apply for an EIDL and the grant, you can still apply for a Paycheck Protection loan. However the amount forgiven under a Paycheck Protection loan will be decreased by the $10,000 grant.

More Information

For more information about SBA loan programs, please visit the Small Business Administration. More information about small business programs in the CARES Act can be found on the U.S. Senate Committee on Small Business and Entrepreneurship website.

https://www.sba.gov/

https://www.sbc.senate.gov/public/index.cfm/guide-to-the-cares-act

James ("Jim") Morales has over 20 years of experience working for well-known companies such as PricewaterhouseCoopers, Deloitte, Volvo, Sony, Sysco and Burger King as well as consulting for several early stage companies. His unique combination of Strategy, Finance, IT, Project Management and Organizational Design experience gives Jim the ability to look at an organization holistically and turn vision into action. Jim built three FP&A departments from ground up providing strategic and financial leadership to the C suite and has implemented strategic management systems using the Balanced Scorecard framework. He is a Chartered Financial Analyst (CFA?), Certified Management Accountant (CMA?), Certified in Financial Planning & Analysis (FP&A?) and Certified in Strategy & Competitive Analysis (CSCA?). Jim entertains opportunities to collaborate with others to support their growth or transformation process and help them build sustainable platforms for success.