Significant Tax Provisions & Relief Efforts Affecting Businesses in the Coronavirus Aid, Relief, and Economic Security Act (CARES Act)

The largest economic stimulus measure in history, The $2 trillion “phase 3” coronavirus relief package, provides billions of dollars of relief to large and small businesses through enormous loan and tax credit programs. Under the CARES Act, the Department of Treasury can provide $454 billion in loans, loan guarantees, and investments to a wide range of businesses. Here is what you need to know to take advantage of the stimulus.

Here is how the key provisions will affect your business:

"Paycheck Protection Loans"

The loans, which are referred to as “Paycheck Protection Loans” and are fully guaranteed by the federal government through December 31, 2020 (returning to an 85% guarantee for loans greater than $150,000 after that date), are generally limited to the LESSER OF

1) the sum of average monthly “payroll costs” for the 1 year period ending on the date the loan was made (an alternative calculation is available for seasonal employers) multiplied by 2.5, and

2) any disaster loan (discussed below) taken out after January 31, 2020, that has been refinanced into a paycheck protection loan, and $10 million.

Payroll costs, as noted above, are the sum of the following:

• wages, commissions, salary, or similar compensation to an employee or independent contractor,
• payment of a cash tip or equivalent,
• payment for vacation, parental, family, medical or sick leave,
• allowance for dismissal or separation,
• payment for group health care benefits, including premiums,
• payment of any retirement benefits, and
• payment of state or local tax assessed on the compensation of employees,

Payroll costs do NOT include, however:

• the compensation of any individual employee in excess of an annual salary of $100,000,
• payroll taxes,
• any compensation of an employee whose principal place of residence is outside the U.S., or
• any qualified sick leave or family medical leave for which a credit is allowed under the new Coronavirus Relief Act passed last week.

Interest rates are not to exceed 4% and the maximum maturity of the loan is 10 years.

Unlike most SBA loans, owners do not have to put up collateral or personal guarantees. The standard fees imposed under Section 7 of the Small Business Act are waived. They can also search for a loan elsewhere before applying for the SBA loan.

Loan Forgiveness of Paycheck Protection Loans

A portion of the loan can be forgiven on a tax-free basis. To seek forgiveness, a borrower must submit to the lender an application that includes documentation verifying costs related to payroll (defined above), including health care, mortgage or rent and certain utility payments incurred in the 8-week period after you receive the loan can be deducted from the loan amount and not repaid. There is a provision, however, that reduces the amount that may be forgiven if the employer either:

• Reduces its workforce during the 8-week covered period when compared to other periods in either 2019 or 2020, or
• Reduces the salary or wages paid to an employee who had earned less than $100,000 in annualized salary by more than 25% during the covered period.

This reduction can be avoided, however, if the employer rehires or increases the employee’s pay within an allotted time period.

SBA Emergency Government Disaster Loan and Grant

The CARES Act expands access to Economic Injury Disaster Loans (EIDL) under Section 7(b)(2) of the Small Business Act to include not only businesses with fewer than 500 employees, but also sole proprietors and ESOPs. Under the EIDL program, eligible businesses, which are those businesses located in a federally declared disaster area that are experiencing economic injury and a shortfall in revenue, can obtain up to $2 million in emergency Section 7(b)(2) loans. Such loan funds may be used to make payroll and associated costs, including health insurance premiums, facilities costs, and debt service, so long as the funds are not being used for the same purpose as, or commingled with, an already acquired federal loan. The CARES Act eliminated creditworthiness requirements and appropriated an additional $10 billion to the EIDL program so that applicants may receive expedited relief in the form of a $10,000 advance within three (3) days of their application. The emergency $10,000 grant serves as an advance on the loan for the applicant, which the applicant is not required to repay, even if subsequently denied the EIDL program loan. For any loan made under the EIDL program before December 31, 2020, no personal guarantee will be required on loans amounting to less than $200,000. 

Subsidy for Certain Loan Payments

The CARES Act requires the SBA to pay the principal, the interest, and any associated fees that are owed on existing section 7(a) loans for a six-month period starting on the next payment due date. This subsidy and deferment applies to loans already existing under section 7(a) and does NOT apply to the "paycheck protection loans" established under the CARES Act. Any loans that are already on deferment would include an additional six (6) months of payment by the SBA beginning with the next payment. Further, loans that are made during this period until six (6) months after the enactment of the CARES Act would also qualify for the six (6) months of deferral payments by the SBA.

Distressed Business Lending

The CARES Act also established a roughly $500 billion government lending program for distressed companies. This lending program includes $425 billion for the Federal Reserve to leverage for loans to help a broad group of distressed companies. Distressed companies that accept money through this fund are prevented from engaging in any stock buybacks for as long they are receiving government assistance, plus an additional year-long moratorium.

Additionally, in order for an eligible borrower to participate in this funding program, the borrower must agree to cap all employee compensation for a period of time ending one (1) year after the loan is repaid.

How to Obtain an SBA Loan

The U.S. Small Business Administration (SBA) is offering loans for qualifying small businesses. These are low-interest (3.75% for small businesses and 2.75% for nonprofits) loans with terms potentially as long as 30 years. You can apply for an SBA loan through SBA.gov.

Be prepared to provide the following information:

1. Tax Information Authorization (IRS Form 4506T), completed and signed by each principal or owner
2. Recent federal income tax returns
3. Personal Financial Statement (SBA Form 413)
4. Schedule of Liabilities listing all fixed debts (SBA Form 2202)

You may also need to provide profit and loss statements, recent tax returns and balance sheets. After you apply, the SBA will review your credit before conducting its own inspection to verify your losses. The SBA says its goal is to arrive at a decision on any disaster loans within2-3 weeks. If it determines you are eligible; it will send you a loan closing document for your signature.

Tax Provisions

Employee Retention Credit for Employers Subject to Closure due to COVID-19

The CARES Act provides for a one-year only employee retention tax credit against the employer’s 6.2% share of Social Security payroll taxes for any business that is forced to suspend or close operations due to COVID-19, but continues to pay its employees while shut down.

For wages paid after March 12, 2020, and before January 1, 2021, eligible employers (including tax-exempt organizations) would be allowed a new refundable payroll tax credit equal to 50% of the qualified wages paid. The total eligible wages per employee are $10,000, resulting in a maximum credit of $5,000 per employee. To qualify for the credit, an employer must meet all of the following criteria:

1. The employer must have carried on a trade or business during calendar-year 2020
2. The operation of that trade or business is either:

• Fully or partially suspended due to orders from an appropriate governmental authority limiting commerce, travel or group meetings due to COVID-19; or
• Receiving gross receipts, for at least one calendar quarter, that are less than 50 percent of the gross receipts received during the same calendar quarter(s) in the prior year. This period of significant decline in gross receipts is recognized until the gross receipts for a calendar quarter are greater than 80% of gross receipts for the same calendar quarter in the prior year

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 2a or 2b 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 one of the circumstances outlined in #2 above is met.

The CARES 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) Section 51 or the Employer Credit for Paid Family and Medical Leave under IRC §45S. In addition, employers receiving small business interruption loans (covered below) are not eligible for the employee retention credit.

Employer Payroll Tax and Self-Employment Tax Payment Delay

Employers can defer the 6.2% tax they pay on wages used to fund Social Security that would otherwise be due from the date of enactment through December 31, 2020, to be paid on December 31, 2021 (50%) and December 31, 2022 (50%). This deferral is NOT available to any business that takes out a "Paycheck Protection Loan."

Self-employed taxpayers can defer paying 50% of his or her self-employment tax that would be due from the date of enactment through the end of 2020 until the end of 2021 (25%) and 2022 (25%).

This means an employer that incurs its 6.2% share of Social Security tax in 2020 may defer payment of that tax until 2021 and 2020, but receive an immediate credit against those yet-to-be paid payroll taxes via the sum of the emergency medical leave credit, sick leave credit, and new employee retention credit.

Modifications for Net Operating Loss Rules

Before 2018, Net Operating Losses (NLO) of a business or individual could be carried back two years and forward 20 years, and when carried forward, they could offset 100% of taxable income. The Tax Cuts and Jobs Act (TCJA) changed these rules, disallowing all carrybacks related to post-2017 losses, providing for an indefinite carryforward period, and limiting the use of post-2017 losses when carried forward to 80% of taxable income.

This, obviously, was bad timing given the pandemic. Most business will expect to run at a loss in 2020; thus, Congress temporarily reversed the TCJA changes:

• Losses from 2018, 2019 and 2020, will be permitted to be carried back for up to five years. As was previously the case, a taxpayer will be permitted to forgo the carryback, and instead carry the loss forward.
• Losses carried to 2019 and 2020 will be permitted to offset 100% of taxable income, as opposed to 80% under the TCJA.

Temporary (and Retroactive) Removal of Section 461(l):

As part of The Tax Cuts and Jobs Act TCJA, Congress added a 4th limitation on an individual’s ability to use losses from a business. New Section 461(l) provides that the amount of “net business loss” an individual may use in a year to offset other sources of income is capped at $250,000 (if single; $500,000 if married filing jointly). Any excess loss is converted into a net operating loss, which is subject to more stringent utilization rules than prior to the TCJA.

There is a temporary halt on Section 461(l) given the latest legislation; not only for 2020, but retroactive to January 1, 2018. Taxpayers who found a loss limited by the provision in 2018 or 2019 can file an amended return to claim a refund. The CARES Act clarifies that when the provision kicks back in for 2021 and beyond, wages will NOT be considered business income which may result in significantly more loss being limited.

Qualified Improvement Property Fix

The CARES Act includes a correction to the TCJA (referred to as "the retail glitch") that allows taxpayers to apply the accelerated bonus depreciation rules to qualified improvement property. The effective date of this amendment would be retroactive to the TCJA’s enactment, thus creating refund opportunities for taxpayers. Refunds could be achieved by filing either an amended 2018 return or possibly an accounting method change with the taxpayer’s 2019 return, depending on whether the IRS considers this an automatic change.

Special Rules for Using Retirement Funds for Coronavirus Costs

If you take money out of a qualified retirement plan before age 59 1/2, you not only pay income tax on the distribution, but Section 72(t) generally imposes a 10% penalty as well. There are several exceptions to the penalty, of course, and the CARES Act adds a new one, allowing a taxpayer to take a “coronavirus-related distribution” of up to $100,000 in the year 2020 free from penalty.

A “coronavirus-related distribution” is a distribution made during 2020:

• To an individual who is diagnosed with SRS-COV-2 or COVID-19 by a test approved by the CDC,
• whose spouse or dependent is diagnosed with one of the two diseases, or
• who experience adverse financial consequences as a result of being quarantined, furloughed or laid off or having work hours reduced, or being unable to work due to lack of child care.

While the distribution eliminates the 10% penalty, the income tax remains. However, the CARES Act allows the taxpayer to spread the income over a 3-year period beginning with 2020. The taxpayer also has the choice to avoid any income recognition by repaying the distribution to the retirement plan within three years of receiving it.

In addition, the amount an individual may borrow from his or her retirement plan is increased from $50,000 to $100,000 for the 180-day period beginning after the enactment of the Act.

For those required to withdraw a “required minimum distribution” from their retirement plan in 2020, the CARES Act temporarily waives the requirement for this year only.

Changes to Charitable Contributions

For corporations, the CARES Act temporarily increases the 10% limitation on charitable contribution deductions to 25% of taxable income. Excess contributions may be carried forward to future years, subject to the general charitable contribution carryforward rules.

Modifications of Limitation on Business Interest Expense

The TCJA created a new limitation on business interest expense deductions for tax years beginning after December 31, 2017. The CARES Act temporarily modifies the 30% of adjusted taxable income (ATI) limitation—as originally provided in the TCJA—to 50% of ATI. While taxpayers may elect to use the 30% limitation instead, this provision would affect taxable years beginning in 2019 or 2020 and allow businesses to increase liquidity with a reduced cost of capital. In addition, businesses may elect to use their 2019 ATI to calculate their 50% of ATI limitation for 2020.

Unless they elect not to, partners of partnerships subject to the business interest expense limitation rules would be able to treat 50% of any allocated excess business interest expense (EBIE) from the partnership during 2019 as fully deductible in tax year 2020. The remaining 50% of EBIE is subject to the normal rules under IRC §163(j) and is only deductible by the partner in a future year if that same partnership passes through excess taxable income or excess business interest income.

Exclusion from Income of Employer Payment of Employee Student Loan Debt

Employers can provide up to $5,250 in tax-free student loan repayment benefits. That means an employer could contribute to loan payments and workers wouldn't have to include that money as income.

Expansion of Unemployment Benefits for Individuals

The stimulus package includes a significant expansion of unemployment benefits that will extend unemployment insurance by 13 weeks and include a four-month enhancement of benefits (for reference, many states already provide 26 weeks of unemployment benefits, and thus participants in such states would be eligible for a total of 39 weeks when adding the 13 weeks of federal relief). The enhanced benefits will provide an additional $600 per week on top of what state unemployment programs pay.

Note that many individuals who typically do not qualify for unemployment insurance will qualify under the package, including independent contractors and self-employed individuals. In sum, those who are unemployed, partially unemployed or who cannot work for a wide variety of coronavirus-related reasons will be more likely to receive benefits.

Other Notable Corporate Provisions:

• Corporations will be able to accelerate the recovery of refundable AMT credits, originally intended to be made available over several years. Instead, those refunds would be fully recoverable in 2019 versus 2021.
• The CARES Act also includes a provision waiving the federal excise tax on distilled spirits used for or contained in hand sanitizer that’s produced and distributed in accordance with U.S. Food & Drug Administration guidance during calendar-year 2020.

The CARES Act also provides additional relief for individuals in the form of individual cash payments, additional unemployment payments noted above, insurance coverage, and tax returns. Please see the compliance portal for more detail https://ptdrv.linkedin.com/hm2yix6

For any questions, please reach out to me at [email protected] or message me on LinkedIn.