On Friday, March 26, 2020, history was made. In one fell swoop, Congress dropped $2.2 trillion to keep the United States’ economy going during the COVID-19 epidemic with the passage of the Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”).1 With such a lengthy bill, many are wondering what all is contained in the CARES Act?
Overview of the CARES Act
Among the voluminous text of the bill, the following is a shortlist of some provisions of note:
- Payroll Protection Program (PPP Loans) with Forgivable Loans;
- Individual Stimulus Advances;
- Economic Injury Disaster Loan (Advances of up to$10,000 with No Repayment;
- Refundable Employee Retention Credits (up to $5,000 per employee);
- Relief for Existing Loans (Subsidies/Deferrals);
- Penalty Waivers for Early Withdrawals from Retirement Accounts;
- Modifications for Charitable Deductions;
- Increase of Section 163(j) Limitation of Interest Expense Deductions; and
- Mortgage Forbearances up to 360 Days for Federally Backed Loans.
Note that the list above is a non-exhaustive list and the CARES Act contains many more provisions and programs not listed above or discussed in this article.
Payroll Protection Loans
Under the “Payroll Protection Program” certain employers, self-employed individuals, charitable organizations, and Tribal businesses are going to be eligible for some very advantageous loans based on their payroll expenses. To the extent the loan is spent on certain qualifying items as listed in the CARES Act, these loans can be forgiven.
Who Qualifies to Borrow?
A non-exhaustive list of certain eligible borrowers are as follows:
- Small businesses with less than 500 employees;
- 501(c)(3)’s with fewer than 500 employees;
- Independent contractors; and
- Self-employed individuals.
How Much Can You Borrow?
Generally speaking, eligible borrowers can borrow up to 2.5 times their average monthly payroll expenses, averaged over the prior 12 months plus that amount of any EIDL refinanced into the loan, up to $10 million. There are certain exceptions for seasonal employees. Also, any individual’s payroll over $100,000 annually is excluded from this calculation.
Payroll expenses include the following:
- Salary, wages, tips, commission, or similar compensation;
- Paid time off;
- Allowance for separation or dismissal;
- Payments required for the provisions of group health care benefits, including insurance premiums;
- Payment of any retirement benefit; and
- Payment of state or local tax on the compensation of the employee.
How Must the Money Be Used to be Forgivable?
For the payroll protection loan to be forgivable, the borrower must use the borrowed funds during an 8-week period following loan disbursement on the following expenses:
- Utilities; and
- Interest on Mortgage Obligations.
Aside from being forgivable, these loans, once forgiven, will not be considered cancelation of indebtedness income and thus will not result in taxable income to the borrower upon forgiveness. It seems that the forgiven amounts, as used, will also be deductible further magnifying the benefits of these provisions.
Individual Provision (Recovery Rebate Checks)
Individual taxpayers will receive rebate checks of up to $1,200 each, doubled for married couples filing jointly. For each child, taxpayers will receive an additional $500. To the extent an individual taxpayer has more than $75,000 of adjusted gross income (“AGI”) ($150,000 for married filing jointly), the payments will be reduced by 5% of the excess amount. These payments are treated as an advance of the taxpayers 2020 tax refund which will be paid to a taxpayer and is not considered taxable income.
EIDL Advances of Up to $10,000
The CARES Act expands eligibility for SBA economic injury disaster loans (EIDL) and provides immediate relief in the form of emergency advances of up to $10,000 to small businesses and private non-profits affected by COVID-19. These advances are to be made within 3 days of the loan application. Applicants need to first apply, then request the advance. The advance does not need to be repaid. To qualify, applicants must have been in business as of January 31, 2020. This advance amount, which does not require repayment, will be subtracted from any loan forgiveness under the payroll protection program discussed above.
Following the advance, the EIDL loans, whose terms have been substantially loosened under the CARES Act, will provide very preferential terms (up to 30 years and 3.75% for small businesses).
Refundable Employee Retention Credits
The CARES Act provides for employment tax credits of up to $5,000 for retained employees. This amount is based on 50 percent of the qualified wages paid eligible employees, up to $10,000. The credit is available for businesses (i) whose operations were fully or partially suspended by a COVID-19 governmental order limiting commerce, travel, or group meetings, or (ii) which suffer a 50 percent loss in gross receipts in a fiscal quarter in 2020, relative to the same quarter in 2019, until the business recovers up to 80 percent of gross receipts relative to the same quarter of 2019.
The provisions apply differently depending on the number of employees. For employers with greater than 100 employees, qualified wages are only for employees not performing services for the business due to COVID-19. For employers with 100 employees or less, all employee wages for the period count towards the credit, regardless of whether the employee is performing services.
The credit will be effective for wages paid after March 12, 2020 and before January 1, 2021.
Relief for Existing Loans/Subsidies
Businesses operating before February 15, 2020 that have a pending or approved loan application under the EIDL program are presumed to qualify for complete payment deferment relief (for principal, interest, and fees for six months to one year).
Penalty Waivers for Early Withdrawals from Retirement Accounts
The CARES Act provides for withdrawals up to $100,000 from retirement plans without application of the 10% early withdrawal penalty. Furthermore, a taxpayer may recontribute those funds within three years without regard to that year’s cap on contributions and the income attributable to the distribution will be taxed ratably over 3 years.
Modifications for Charitable Deductions
For taxpayers who do not itemize their deductions, a charitable deduction of up to $300 is allowed as an “above the line” deduction. Additionally, cash contributions usually subject to 60% AGI limitations are temporarily allowed up to 100% of AGI for 2020.
Increase of the 163(j) Interest Expense Limitation
Generally, business interest expenses are limited under 163(j) to 30% of a taxpayer’s adjusted taxable income. The CARES Act provides that for tax years beginning in 2019 and 2020, this amount is increased from 30% to 50%.
Mortgage Forbearance for 360 Days for Federally Backed Loans – Single Family Homes
Borrowers with certain federally backed loans for single family homes (whether personally used or used as a rental) may, upon request, receive forbearance without any penalty for 180 days. The borrower can request an additional 180 days and the lenders shall be required to grant the forbearance.
Our firm is actively reviewing opportunities to mitigate losses for our clients under the CARES Act. The above is only a list of highlights from the CARES Act and many more provisions are contained within the lengthy text of the bill. If you are experiencing difficulties in your business or expect difficulties in your business due to COVID-19, please call our firm to discuss opportunities that may exist for you and your business.