THE “CARES” ACT PASSES – WHAT THIS MEANS FOR YOU

The administration passed the massive Coronavirus Aid, Relief and Economic Security Act (CARES Act) late on March 27, 2020. The stimulus bill — by far the largest ever passed— comes with a price tag equivalent to 9% of the nation’s gross domestic product and is meant to provide direct financial aid to help individuals, hospitals and businesses.

Top 5 Key Items Provided by the CARES Act:

1. The government will send direct payments to taxpayers.
2. Unemployment benefits will grow substantially and go to many more Americans.
3. Small businesses will receive emergency loans if they keep their workers.
4. Distressed companies can receive government bailouts — but with strings attached.
5. Hospitals staggering under the burden of the coronavirus would receive aid.

 

What this Means for You:

The $2 trillion dollar package contains many significant tax-saving provisions that impact both individuals and businesses and which may affect prior tax years and while hopefully creating needed cash-flow.

Business

Break Down of Distribution Spend and Criteria:

• $377 billion in loans for small businesses
• $500 billion in loans for larger industries, including airlines
• $340 billion for state and local governments
• $153 billion for public health, including hospitals
• Creation of an oversight board and inspector general to oversee loans to large companies
• The measure prohibits companies owned by the president, vice president, and other federal officeholders from receiving aid

The Provisions to Consider For Your Business:

• Expansion of SBA 7(a) loan program. The CARES Act provides additional funding to the SBA for its 7(a) loan program. The law, increases the maximum Small Business Administration’s 7(a) loan amount to $10 million and would expand allowable uses of 7(a) loans to include payroll support (including paid sick or medical leave), employee salaries, mortgage payments, insurance premiums and any other debt obligations. The Act also expands the availability of these loans to businesses which would not normally qualify. Additionally, all or a portion of the loan may effectively be converted to a grant through a special loan forgiveness provision. The new provision provides for expansion of the SBA 7(a) loan program between February 15, 2020 and June 30, 2020.

• Tax Credit for Retaining Payroll. Businesses will get a tax credit for keeping idled workers on their payrolls during the coronavirus pandemic, so long as the businesses meet certain criteria. They would get a refund for half of what they spend on wages, up to $5,000 per worker.

• Deferred Payroll Tax Period. Employers and self-employed individuals get to defer the 6.2 percent tax they pay on wages that is used to fund Social Security. Basically, Employers and self-employed individuals can defer the payment of the employer portion of employment taxes or self-employment taxes due during the “payroll tax deferral period” to December 31, 2021, and December 31, 2022. 50% of the deferred taxes will be required to be paid on these dates. Penalties will not apply for failure to make timely deposits for withholding these amounts. The Payroll Tax Deferral Period is defined as the period beginning on date of enactment to January 1, 2021. This does not appear to be retroactive to January 1, 2020.

• Net Operating Loss (NOL) Rules Relaxed. The legislation temporarily repeals the 80% income limitation for net operating loss deductions for years beginning before 2021. For losses arising in 2018, 2019, and 2020, a five-year carryback is allowed (taxpayers can elect to forgo the carryback).

• Excess Loss Limitations Repealed. The provision repeals the Sec. 461(l) excess loss limitation. Sec. 461(l) was added to the Code by the law known as the Tax Cuts and Jobs Act, P.L. 115-97, and it disallows excess business losses of noncorporate taxpayers if the amount of the loss exceeds $250,000 ($500,000 for married taxpayers filing jointly). This provision will permit use of net business losses without limit for the 2018 tax year through 2020. If you were limited in the use of carryover used in 2018, this can produce a refund opportunity.

• Corporate Alternative Minimum Tax (AMT) Refund Credit. The legislation modifies the AMT credit for corporations to make it a refundable credit for 2018 tax years. Under the TCJA, a C corporation with alternative minimum tax credits was entitled to a refund of these credits over a four-year period — 2018, 2019, 2020 and 2021. Under the Stimulus Package, the corporation can receive the refund over a two-year period 2018 and 2019. Furthermore, if there will be any delay in filing the 2019 C corporation return, an election can be made to include the entire refundable amount in 2018.

• Business Interest Limitation Amended. For tax years beginning in 2019 and 2020, Sec. 163(j) is amended to increase the adjusted taxable income percentage from 30% to 50%. Additionally, since it is likely that 2020 income will be lower than 2019 due to the current economic circumstance, an election can be made to use the 2019 Adjusted Taxable Income for the 2020 tax year.

• Bonus Depreciation Allowed on Qualified Improvement Property (QIP). The bill makes technical corrections regarding qualified improvement property under Sec. 168 by making it 15-year property. The Tax Cuts and Jobs Act intended to permit immediate write-off of costs related to Qualified Improvement Property. Due to a drafting error, this provision was not put into that legislation and caused QIP only to be eligible for depreciation over 39 years. The Stimulus Bill fixes this drafting error and specifically permits bonus depreciation to be taken on qualified costs retroactively. This allows amendment of 2018 and 2019 filed returns and provide a source of cash, particularly for those in the hospitality industry.

 

The Provisions to Consider As An Individual:

• Checks For Those Impacted The Most. All U.S. residents with adjusted gross income up to $75,000 ($150,000 for married couples) would get a $1,200 ($2,400 for couples) “rebate” payment. They are also eligible for an additional $500 per child. The payments would start phasing out for earners above those income thresholds and would not go to single filers earning more than $99,000; head-of-household filers with one child, more than $146,500; and more than $198,000 for joint filers with no children.

Nonresident alien individuals, individuals who are dependents of another, and estates or trusts are ineligible for the payment.

The cash payments are based on either your 2018 or 2019 tax filings. For the stimulus checks going out to individuals, they will be based on 2019 income if 2019 returns have been filed; otherwise they will be based on 2018 income. However, like the advanced tax premium credit under the Affordable Care Act, there is a true-up for the amount for which one is eligible on the filing of the 2020 tax return.

• Expanded Unemployment Benefits. The new legislation boosts the maximum benefit by $600 per week and provides laid-off workers their full pay for four months.

• Retirement Plans Not Subject to the 10% Additional Tax for Early Distributions. Taxpayers can take up to $100,000 in coronavirus-related distributions from retirement plans without being subject to the Sec. 72(t) 10% additional tax for early distributions. Eligible distributions can be taken up to Dec. 31, 2020. Coronavirus-related distributions may be repaid within three years. For these purposes, an eligible taxpayer is one who has been diagnosed with SARS-CoV-2 virus or COVID-19 disease or whose spouse or dependent has been diagnosed with SARS-CoV-2 virus or COVID-19 disease or who experiences adverse financial consequences from being quarantined, furloughed, or laid off, or who has had his or her work hours reduced, or who is unable to work due to lack of child care. Any resulting income inclusion can be taken over three years.

The provision also allows the following for retirement plans:

– Loans of up to $100,000 from qualified plans and repayment can be delayed.
– Temporarily suspends the required minimum distribution rules in Sec. 401 for 2020.
– Delays 2020 minimum required contributions for single-employer plans until 2021.

• Delay on Federal Student Loans. The provision suspends federal student loan payments through Sept. 30 with no accrual of interest on those loans.

 

General Provisions to Consider (Business and Individuals):

• Charitable deductions: The law creates an above-the-line charitable deduction for 2020 (not to exceed $300 whether the taxpayer itemizes or not). The provision also modifies the Adjusted Gross Income (AGI) limitations on charitable contributions for 2020, to 100% of AGI for individuals and 25% of taxable income for corporations. The provision also increases the food contribution limits to 25%.

• Health plans: The rules for high-deductible health plans (HDHPs) are amended to allow them to cover telehealth and other remote care services without charging a deductible.

 

This is a general overview of some of the key items that may impact you. We will continue to provide additional in-depth updates around them. If you have questions or concerns on how these new provisions may impact your situation, please contact your KatzAbosch representative, or contact us. 

Have more questions about the impact of the coronavirus on your business? Visit KatzAbosch’s COVID-19 Resource Center for up-to-date information.