The Coronavirus Aid, Relief, and Economic Security Act (CARES Act) is Congress’s initial economic stimulus plan in response to the coronavirus pandemic. Additional economic stimulus packages are expected. The CARES Act was signed into law by the President today. The $2 trillion package provides relief to businesses, individuals, families, the healthcare system, states, and more. We are continuing to review the legislation. In the meantime, below is a summary of the relief efforts for small businesses and individuals.
Support for Small Businesses
Up to $350 billion will be provided to small businesses
(less than 500 employees[1])
Paycheck Protection Loans
- Funds must be used for payroll support, such as employee salaries, paid sick or medical leave, insurance premiums, and mortgage, rent and utility payments.
- Principal limited to the lesser of: (a) average total monthly payments for “payroll costs” for the one-year period ending on the date the loan was made multiplied by 2.5[2] or (b) $10,000,000. The term “payroll costs” is defined by the CARES Act. The following are excluded from the calculation of “payroll costs”: (i) compensation to individual employees or contractors in excess of $100,000, (ii) compensation to any employee whose principal place of residence is outside of the United States, and (iii) credits for sick leave wages and qualified family leave wages under the Families First Coronavirus Response Act.
- May be tax-free[3] and forgiven for payments of payroll costs, mortgage interest, rent and certain utility payments during the eight-week period beginning on the date of the loan; provided, that the business maintains payroll (based on headcount) during such 8-week period (ends at the latest June 30, 2020).[4]
- All borrower and lender fees are waived, along with personal guaranties and other requirements.
- Automatic deferral of principal, interest and fees for six months.
- Available to some nonprofit organizations.
- Not available for businesses that receive an SBA Economic Injury Disaster Loan.
- Loans not forgiven are payable over a maximum period of 10 years, with a maximum interest rate of 4%.
Employee Retention Credit
- Credit to cover 50% of qualified wages paid during the shutdown up to $10,000 per employee.
- Eligible employers are businesses who:
- were subject to full or partial closure due to COVID-19; or
- have seen their gross receipts decline by more than 50% compared with the same quarter last year.
- Qualified wages are wages paid or incurred from March 13, 2020, through December 31, 2020, provided that:
- For employers with 100 or fewer full-time employees, all employee wages qualify for the credit, whether the employer is open for business or subject to a shutdown order, and
- For employers with more than 100 full-time employees, only for wages paid to employees when they are not providing services due to the COVID-19-related circumstances described above will qualify for the credit.
- Credit will be applied against the employer’s share of Social Security taxes.
- Not available for businesses that receive a special SBA Loan.
- Tax-exempt organizations may qualify.
Tax Relief
- Revised Net Operating Losses (NOL) Rules:
- Losses from 2018 through 2020 may be carried back for up to five years.
- Temporarily removes taxable income limitation to allow NOLs to fully offset income.
- Modifies the loss limitation for pass-through entities and sole proprietors (to allow for the same NOL benefits).
- Eliminates the limitation for losses carried to 2019 and 2020.[5]
- Delayed Payments for Employers and Self-Employed Individuals:
- Employer-side Social Security payroll tax delayed until January 1, 2021, with 50% due by December 31, 2021 and the balance due by December 31, 2022.
- 50% of self-employment tax delayed until January 1, 2021, with 25% due by December 31, 2021 and the remaining 25% due by December 31, 2022.
- Charitable Contribution Deductions:
- Increases the limitation for charitable contributions deduction for businesses to 25% of taxable income.
- Increases the limitation for contributions of food inventory to 25% of taxable income.
- Other Changes:
- Increases the limitation for business interest expenses for 2019 and 2020 to 50% of adjusted taxable income based on EBITDA.
- Allows retailers, restaurateurs and hotels to immediately deduct property improvement expenses.
- Provides a technical correction for qualified improvement property created under tax reform that will allow 100% bonus depreciation for these assets.[6]
Support for Individuals
Unemployment Assistance
- Unemployment benefits are extended to cover furloughed employees, gig-economy workers, independent contractors, and self-employment.
- Recipients will receive $600 per week in addition to the amount usually paid by states for unemployment for four months.
- Provides temporary full funding for the first week of regular unemployment for states with no waiting period.
- Extends benefits for an additional 13 weeks through December 31, 2020, after state benefits end.
Direct Payments
- One-time payments of $1,200 provided to individuals whose income is $75,000 or less, phased out for income between $75,000 and $99,000.
- One-time payments worth $2,400 provided to married couples whose income is $150,000 or less, phased out for income between $150,000 and $198,000.
- One-time payments of $500 per child.
Tax Relief
- Allows a partial above-the-line deduction for charitable contributions up to $300 for those who do not itemized their deductions.
- Suspends the limitations on deductions for charitable contributions for 2020.
Student Loans
- Student loan payments will be suspended without penalty through September 30, 2020.
- Student loan repayment contributions made by an employer prior to January 1, 2021, are not taxable to the employee (up to an annual cap of $5,250 for contributions).
Retirement Plans
- Waives the early withdrawal penalty for certain coronavirus-related withdrawals from qualified retirement plans up to $100,000.[7]
- Waives the required minimum distribution rules for certain retirement plans and accounts for the 2020 calendar year.
Foreclosure and Eviction Support
- Anyone facing a financial hardship from coronavirus is given a forbearance on a federally-backed mortgage loan of up to 180 days, which can be extended for an additional 180 days. Servicers of federally-backed mortgage loans may not begin foreclosure process until May 18, 2020.
- Prohibits fees, penalties, and additional interest to be charged as a result of delayed payments by renters.
- Tenants of federally backed mortgage loans cannot be evicted solely for failure to pay rent for a 120-day period beginning on the date of the enactment of the CARES Act and may not be charged fees or penalties for failing to pay rent.
[1] Note: Employees from entities affiliated with the borrower will apply, except for employers assigned a North American Industry Classification System code beginning with 72, SBA-approved franchises and businesses that receive financial assistance from SBIC funds. For employers assigned a North American Industry Classification System code beginning with 72, the threshold is 500 employees per location.
[2] Note: For seasonal employers, the average total monthly payments for payroll shall be, at the election of the employer, either: (1) the 12-week period beginning on February 15, 2019, or (2) March 1, 2019, through June 30, 2019, unless the employer was not in business at that time, in which case it will be January 1, 2020, through February 29, 2020.
[3] Note: Forgiven loans are not included in the borrower’s income for Federal tax purposes. States have not issued guidance on whether they will also adopt a holiday from cancellation of indebtedness related to these loans.
[4] Note: The amount of the forgiveness may be limited for employers that reduce their workforce during the eight-week period or reduce salary/wages for certain employees. It is expected that businesses that re-hire previously laid off workers will not be penalized for having a reduced payroll at the beginning of the period. For workforces that are reduced (based on headcount), the amount forgiven will be reduced proportionately to the workforce reduction. For reductions to salary or wages for specific employees, the reduction would apply to the extent the reduction exceeds 25% of that employee’s salary or wages during the most recent full quarter before February 15, 2020.
[5] Note: The current limit is 80% of taxable income.
[6] Note: This will include those placed in service in 2018 and 2019.
[7] Note: Income attributable to those distributions would be subject to tax over three years and the taxpayer can recontribute those funds within the three period without regard to the annual contribution cap.
Please reach out to your HMB team member with questions about the CARES Act.