On March 27, 2020, the President signed the Coronavirus Aid, Relief, and Economic Security (CARES) Act (the “Stimulus Act”) into law, providing over two trillion dollars in relief in response to the 2019 novel coronavirus (COVID-19) pandemic. The relief available under the Stimulus Act includes individual cash rebates, expanded unemployment benefits, small business loans, and multiple tax breaks.
The complexity of the Stimulus Act, which is over 800 pages long, means that myriad issues may arise, and regulations and guidance is expected to be issued by various responsible agencies, regarding its implementation. Nonetheless, the Stimulus Act provides several major areas of stimulus for individuals and businesses.
While large amounts of the Stimulus Act have been earmarked for severely distressed sectors of the economy which the legislation deems “absolutely essential,” such as the airline industry, a significant portion of the Stimulus Act benefits individuals and small and medium-sized businesses.
Below is a summary of some important provisions of the Stimulus Act that apply to individuals and certain eligible businesses. This is not an exhaustive summary of all of the provisions of the Stimulus Act, nor an in-depth analysis of each individual section. If you have any questions regarding the Stimulus Act’s applicability to you or your business, please reach out to your FOS attorneys.
PROVISIONS APPLICABLE TO INDIVIDUALS
Individual Tax Rebates
The Stimulus Act provides tax rebates of up to $1,200 per individual and $2,400 to couples, plus $500 for every minor child. Payment calculations will be based on a person’s most recently-filed tax returns or, if no returns were recently filed, the person’s Social Security statement. Payments will be made by mail or by direct deposit to those whose account information was previously provided to the IRS via tax return filings. The tax rebates will begin to phase out, at the rate of $5 per every $100 of adjusted gross income, when adjusted gross income exceeds $75,000 for individuals and $150,000 for married couples. Payments are completely phased out for individuals with adjusted gross income exceeding $99,000 or, for joint filers, adjusted gross income exceeding $198,000. The Treasury Department has indicated its intent to begin issuing rebates in approximately three weeks.
The rebates will be recalculated on individuals’ 2020 tax returns based on their actual circumstances in 2020 versus 2019, such as an increase or decrease in income, the birth of a child, or a child turning 18. The Stimulus Act provides for a 2020 tax credit for any additional rebate to which an individual is entitled. The Stimulus Act does not require repayment of the rebate if it should have been a lower amount.
Expanded Unemployment Compensation
FOS’s Coronavirus Update- Workplace Issues describes the expansion of unemployment benefits provided by the Families First Coronavirus Response Act. The Stimulus Act provides additional relief, increasing unemployment benefits by up to $600 per week, depending on one’s income, for four months.
Using Retirement Funds for COVID-19-Related Purposes
Generally, distributions taken from qualified retirement plans before age 59 ½ are subject to income tax and a 10% penalty. The Stimulus Act adds a new exception to the penalty, for a “coronavirus-related distribution” of up to $100,000 taken in the year 2020. This waiver is only for 2020.
A “coronavirus-related distribution” is a distribution made during 2020 to an individual:
- Who is diagnosed with COVID-19 by a CDC approved test;
- Whose spouse or dependent is diagnosed with COVID-19: or
- Who experiences 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 income tax on the distribution must still be paid, the Stimulus Act allows the taxpayer to spread the income over three years beginning with 2020, and the taxpayer may avoid any income recognition by repaying the distribution within three years of receiving it.
An individual may also borrow $100,000 from a qualified retirement plan, (up from $50,000) for 180 days after the Stimulus Act’s enactment.
Required Minimum Distributions
The Stimulus Act waives the 2020 requirement to take a required minimum distribution (“RMD”) from a defined contribution plan (profit sharing plan, 401(k) plan, etc.), a Sec. 457(b) plan (tax sheltered annuity) or an IRA. It also waives the 2020 RMD requirement if a taxpayer attained age 70-1/2 during 2019 but did not take a RMD during 2019.
The Stimulus Act allows an individual who makes a cash contribution of up to $300 to qualifying charities to deduct the contribution, in addition to the standard deduction, “above-the-line” in computing adjusted gross income. This above-the-line deduction is currently not limited to 2020, but applies only to taxpayers who do not itemize deductions.
For those itemizing deductions, the Stimulus Act – only for 2020 – increases the allowable deductions for cash contributions to public charities to 100% of a taxpayer’s adjusted gross income, from 60%. Any excess contributions may be carried over to the next five years.
For corporate donors, the limit increases from 10% of adjusted taxable income to 25%.
PROVISIONS APPLICABLE TO BUSINESSES
Employee Retention Credit
A major employer-related provision of the Stimulus Act is a one-year credit, against applicable payroll taxes, for any business forced to suspend or close its operations due to COVID-19, but that continues to pay its employees during the shut-down. A business is eligible for the credit if:
- The operation of the business was fully or partially suspended during any calendar quarter of 2020 due to orders from an appropriate government authority resulting from COVID-19; or
- The business remains open but, during any quarter in 2020, gross receipts for that quarter were less than 50% of receipts for the same quarter in 2019. Once that occurs, the business will be entitled to a credit for each quarter, until the business’ receipts in one quarter exceed 80% of receipts for the same quarter in 2019.
For each eligible quarter, the business will receive a credit against applicable payroll taxes equal to 50% of the “qualified wages” paid to each employee for that quarter, ending on December 31, 2020.
“Qualified wages” depend on a business’ size. If a business had more than 100 employees during 2019, qualified wages are only those wages paid during a quarter for the period the business was shut down. If a business had less than 100 employees during 2019, qualified wages include those paid to employees during a shut-down, plus wages paid for each quarter that business suffers a sharp decline in year-over-year receipts, as described in the second bullet point above.
All qualified wages include “qualified health plan expenses” allocable to the wages, including amounts paid to maintain a group health plan.
The amount of qualified wages for each employee for all 2020 quarters may not exceed $10,000.
The wages taken into account for purposes of the payroll tax credits for family medical or sick leave (referred to in FOS’ The Families First Coronavirus Response Act (H.R. 6201), and IRS Releases Guidance Regarding Tax Credit) may not also be taken into account in determining qualified wages for the employee retention credit. If an employer receives a paycheck protection loan, the employer is not eligible for the employee retention credit.
The credit is refundable if it exceeds a business’s payroll tax liability for payroll taxes.
Delay in Payment of Employer Payroll and Self-Employment Taxes
The Stimulus Act seeks to lessen the burden on employers having difficulties making payroll by allowing the employer’s entire share of the applicable payroll tax, which would otherwise be due from the date of the Act’s enactment through December 31, 2020, to be paid on December 31, 2021 (50%) and December 31, 2022 (50%). Self-employed taxpayers can similarly defer paying 50% of their self-employment taxes that would be due from the date of the Act’s enactment through December 31, 2020, until the December 31, 2021 (25%) and December 31, 2022 (25%).
This deferral is not available to any business which obtains forgiveness of a payroll protection loan as described below.
It is uncertain how this provision will interact with the payroll tax credits described above.
Paycheck Protection Loans
To protect businesses’ operating costs, businesses with fewer than 500 employees, including sole proprietors and nonprofits, may have access to almost $350 billion in “paycheck protection loans.” These loans cover the period from February 15, 2020 through June 30, 2020 (the “covered period”) and expands general SBA loan eligibility requirements. Loan proceeds may be used for payroll, mortgage interest payments, rent, covered utilities, and interest on debt incurred before February 15, 2020. No personal guaranty or collateral is required.
Paycheck protection loans are generally limited to the lesser of:
- the average monthly “payroll costs” for the one-year period before the date the loan was made (an alternative calculation is available for seasonal employers), multiplied by 2.5; or
- $10 million.
Payroll costs include:
- compensation (salary, wages, commissions, tips);
- payment for vacation, parental, family, medical or sick leave;
- allowance for dismissal or separation;
- payment for group health care benefits, including insurance premiums;
- payment of retirement benefits; and
- payment of state or local taxes assessed on employee compensation of employees.
Payroll costs do not include:
- compensation of any individual employee over an annual salary of $100,000 as prorated for the period of February 15, 2020- June 30, 2020;
- payroll taxes;
- compensation of an employee whose principal place of residence is outside the U.S.; or
- qualified sick or family medical leave for which a credit is allowed under the Families First Coronavirus Response Act (H.R. 6201) see http://foslaw.com/news-views/client-alert-the-families-first-coronavirus-response-act-h-r-6201/ and IRS Releases Guidance Regarding Tax Credit…http://foslaw.com/news-views/irs-releases-guidance-regarding-tax-credit-and-related-issues-under-the-families-first-coronavirus-response-act/
The loans’ maximum maturity is 10 years, with interest rates not to exceed 4%. The Act waives Small Business Act standard fees on these loans.
Paycheck Protection Loan Forgiveness
The Act provides for the tax-free forgiveness of part of paycheck protection loans described above under certain circumstances.
The amount to be forgiven is the sum of the following payments made by the borrower during the 8-week period beginning on the date of the loan:
- payroll costs (as defined above);
- mortgage interest;
- rent; and
- covered utility payments.
The amounts which may be forgiven, however, may be reduced if the employer:
- Reduces its workforce during the covered period (February 15, 2020 through June 30, 2020), when compared to other periods in 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 if the employer rehires or increases the employee’s pay within a certain time period.
To seek forgiveness, a borrower must submit to the lender an application verifying (with documentation) the number of employees and pay rates, and providing cancelled checks showing mortgage, rent and/or utility payments.
Net Operating Loss Rules Changes
The 2018 tax relief legislation disallowed net operating loss carrybacks related to post-2017 losses, provided an indefinite carryforward period, and limited the use of post-2017 losses, carried forward, to 80% of taxable income. The Stimulus Act temporarily reverses these provisions:
- Losses from 2018, 2019 and 2020, may be carried back for up to five years. As was previously the case, a taxpayer may forgo the carryback, instead carrying the loss forward.
- Losses carried to 2019 and 2020 will be permitted to offset 100% of taxable income.
Interest Limitation Rule Changes
The 2018 tax relief legislation limited a business’s ability to deduct its interest expense to 30% of “adjusted taxable income,” with any excess interest expense carried forward. The Stimulus Act increases that limit to 50% of adjusted taxable income for 2019 and 2020. In addition, businesses may elect to use their 2019 adjusted taxable income in computing their 2020 interest expense limitations.
This provision does not apply to partnerships. Instead, any interest disallowed at the partnership level is passed out to the partners, and is suspended at the partner level under the preexisting rules. However, in 2020, 50% of the suspended interest will be fully deductible. The other 50% will remain suspended until the partnership allocates excess taxable or interest income to a partner.
Emergency Government Disaster Loans
The Stimulus Act also expands access to the Small Business Act Economic Injury Disaster Loan program to include sole proprietors and ESOPs, in addition to businesses with less than 500 employees. Note that this is a separate and distinct loan program from the Paycheck Protection Loans authorized under the Stimulus Act. No personal guaranty is required on these loans under $200,000 which are made before December 31, 2020.
The Stimulus Act also creates a new emergency advance which may enable a business, which has applied for a disaster loan, to obtain an immediate “advance” of up to $10,000, which may be used for payroll. The term “advance” appears to be a misnomer, since it is not required to be repaid, even if the loan application is denied.
Exclusion from Income of Employer’s Payment of Employee Student Debt. The Stimulus Act provides that, in 2020, an employer can pay up to $5,250 of an employee’s student loan obligation tax-free to the employee. The $5,250 limit is part of, and does not increase, the existing $5,250 limit on an employer’s payment of an employee’s qualified educational expenses, with the payment being tax-free to the employee.
To the extent an employee’s student loan is paid on a tax-free basis, the interest is not deductible by the employee.
The Stimulus Act is new, lengthy, detailed and uncertain in its application until further guidance is issued. Nonetheless, it will provide substantial economic benefits to individuals and businesses. If you have any questions regarding the Stimulus Act, any other COVID-19-related legislation or governmental guidance, other COVID-19 issues or any legal issue, contact FOS. We are here for you and your business.