Coronavirus News

The Coronavirus Aid, Relief, and Economic Security (CARES) Act – Paycheck Protection Program and tax provisions for businesses and individuals

The Coronavirus Aid, Relief, and Economic Security (CARES) Act was signed into law on March 27, 2020 in response to the economic impact caused by the COVID-19 pandemic.

Below is a summary on one of the key provisions in the Act, the Payroll Protection Program. These funds will be administered by the banks, who are eligible lenders under the program to provide PPP Loans to customers.  If you are interested in one of these loans the window to apply starts on Friday and may not last long as the demand for these loans is predicted to be very high. We recommend you contact your bank as soon as possible to work directly with them in preparing a loan application package.

The information below is subject to modification as the Small Business Administration (SBA) issues additional guidance.

Both can be used to start preparing for your loan application!

Paycheck Protection Program (PPP)

Loans are available for small businesses with less than 500 employees, regardless of revenue size, including:

    • Sole proprietors
    • Self-employed individuals
    • Nonprofit organizations
  • Traditional SBA lenders have been delegated authority to approve and make loans under the program.
  • Access to loans under the PPP will be available through June 30, 2020.
  • Borrower requirements:
    • Must have been in operation on February 15, 2020 and had employees which they have paid salaries or have made payment to independent contractors
    • Make a good-faith certification that the current economic uncertainty makes the loan necessary and that the proceeds would be used for retaining workers, maintaining payroll, or covering existing overhead costs, including:
      • Payroll costs (defined below)
      • Mortgage interest payments
      • Rent
      • Utilities
      • Interest on debt incurred prior to February 15, 2020.
  • Loans are available up to 2.5 times average monthly payroll costs over the one-year period prior preceding the date of the loan, capped at $10,000,000.
    • Payroll costs include:
      • Salaries
      • Health insurance benefits
      • Retirement benefits
    • Compensation for employees making over $100,000 on an annualized basis will be capped at $100,000, pro-rated for the period from February 15 to June 30, 2020.
  • Loan terms:
    • Maximum maturity of 10 years
    • Interest rate not to exceed 4%
    • First six months of payments are deferred (principal, interest, and fees).
    • No personal guarantee by owners are required.
    • No collateral is required.
    • No prepayment penalties.
  • Businesses taking a Payroll Protection Loan are not eligible to claim the Employee Retention Credit or defer payroll taxes authorized under the CARES Act.

Payroll Protection Program – Loan Forgiveness

  • The portion of the loan proceeds under the Payroll Protection Program that are used to cover the following costs for the eight-week period beginning on the date of the origination of the loan:
    • Payroll costs (defined above))
    • Mortgage interest
    • Rent
    • Utility payments
  • The amount eligible for forgiveness will be reduced if the employer:
    • Has a reduction in the average number of monthly full-time equivalent (FTE) employees employed by the employer during the eight weeks following disbursement of the loan when compared to the average number of monthly FTE employees employed either:
      • Between February 15 and June 30, 2019 OR
      • Between January 1 and February 29, 2020.
      • Employer can election which period to use.
    • Has a reduction in total wages of any employee during the eight-week period that is in excess of 25% of the total wages of the employee during the most recent full quarter that the employee was employed.
  • For example: If the employer had an average of 200 FTE employees during the period January 1 through February 29, 2020 but during the eight week period beginning on the date the loan originated employed 180 FTE employees, the portion of the loan eligible for forgiveness would be reduced to 90% of the total (180/200).

CARES ACT Key Tax Provisions

Below is a summary of some of the key tax provisions in the Act. The provisions below are subject to modification as the IRS issues additional guidance in the coming weeks.

Individual Provisions:

  • Retirement Distributions:
    • Any taxpayer, regardless of age, can take a “coronavirus-related distribution” in 2020 without being subject to the 10% early distribution penalty if the distribution is made:
      • To an individual who is diagnosed with SRS-COV-2 or COVID-19 by a test approved by the CDC,
      • To an individual whose spouse or dependent is diagnosed with one of the two diseases, or
      • To an individual 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 childcare.
    • The distribution is subject to regular income tax, however a taxpayer can:
      • Elect to spread the income from the eligible distributions over a three-year period beginning with 2020; OR
      • Eliminate the income tax on the distributions if the amounts are deposited back into the retirement account within three years of receiving it.
    • Maximum loans that can be taken from a retirement account has been increased from a maximum of $50,000 to $100,000 if taken within 180 days of the enactment of the CARES Act.
    • The Act provides a temporary waiver of the required minimum distribution rules for 2020 for IRAs and most employer provided defined contribution plans.
  • Charitable Contributions
    • Creates a new $300 above-the-line deduction for taxpayers who do not itemize. This applies for all tax years going forward, beginning with 2020.
    • For those who do itemize their deductions, the adjusted gross income (AGI) limitation for qualified charitable contributions has been temporarily increased to 100% of AGI (up from 60%). The corporate taxable income limitation is also increased to 25% of taxable income (up from 10%). These increases only apply to the 2020 tax year.

Business Provisions

  • Qualified Improvement property (QIP)
    • When Congress passed the Tax Cuts and Jobs Act (TCJA) in late 2017, it intended to allow for taxpayers to be able to depreciate Qualified Improvement Property over 15 years, also making it eligible for 100% bonus depreciation.
    • Due to a drafting error, all QIP instead was required to be depreciated over 39 years, making it ineligible for 100% bonus depreciation.
    • The CARES Act provides a technical correction retroactive to January 1, 2018 making QIP 15-year property and eligible for 100% bonus depreciation.
    • Taxpayers who had QIP placed in service during 2018 or 2019 and who have already filed tax returns for those years are now eligible to file amended returns to utilize this benefit.
  • Employee Retention Credit:
    • The Act creates a refundable credit equal to the employer’s 6.2% share of Social Security payroll taxes for all businesses that have been forced to suspend or close operations due to COVID-19 but that continue to pay its employees during the shutdown.
    • The credit is equal to 50% of eligible wages and health plan expenses paid by the employer from March 13, 2020 to December 31, 2020, capped at a maximum of $10,000 of eligible wages per employee.
    • Eligible businesses include:
      • Businesses that have had operations fully or partially suspended during any calendar quarter during 2020 due to orders from an appropriate government authority resulting from COVID-19; OR
      • Businesses that have remained open, but during any quarter in 2020, gross receipts for that quarter were less than 50% of what they were for the same quarter in 2019. The business will then be entitled to a credit for each quarter, until the business has a quarter where it’s recovered sufficiently that its receipts exceed 80% of what they were for the same quarter in the previous year.
    • Employers with more than 100 full-time employees in 2019, the credit will only apply if the business is partially or fully suspended during 2020.
    • Employers with less than 100 full-time employees in 2019 can utilize the credit if they meet the gross receipts test discussed above.
    • Employers who receive a Paycheck Protection Loan under the CARES Act are not eligible for this credit.
    • Eligible wages do not include wages paid under the COVID-19 sick and family medical leave provisions of the Families First Coronavirus Response Act.
  • Delay of employer payroll tax:
    • Payment of the employer share of the 6.2% Social Security tax otherwise due from March 27 through December 31, 2020 can be deferred and paid on the following dates:
      • December 31, 2021 (50%)
      • December 31, 2022 (50%)
    • Self-employed individuals are also eligible for deferral of 50% of self-employment tax.
    • Employers who receive a Paycheck Protection Loan and have any portion of that loan forgiven are not eligible for this benefit.
  • Expansion of Net Operating Losses (NOLs)
    • C Corporations (and the owners of pass-through entities) can now carryback NOLs incurred in 2018, 2019, and 2020 up to five years.
    • Losses that are carried TO 2019 and 2020 from a year prior to 2019 can now offset 100% of taxable income. This temporarily repeals the provisions under the TCJA that only allow NOLs to be carryforward and are limited to 80% of taxable income.
  • Business Loss Limitation
    • Under the TCJA, net business loss of an individual can only offset other sources of income up to $500,000 ($250,000 for single taxpayers).
    • The CARES Act temporarily repeals this limitation for 2020 AND is retroactive to 2019 and 2018.
  • Interest Expense Limitation:
    • The act increases the adjusted taxable income limit to 50% (as opposed to 30% under the TCJA) for 2019 and 2020.
    • Businesses can also elect to use 2019’s adjusted taxable income when computing the 2020 limitation.
    • The small business rules under the TCJA that exempt most taxpayers with average annual gross receipts under $26,000,000 from applying these rules still apply.
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