On March 27, the House unanimously passed and President signed into law the Coronavirus Aid, Relief, and Economic Security (CARES) Act, a $2 trillion economic stimulus law intended to provide immediate relief for individuals, nonprofits, businesses, and state and local governments. The CARES Act is the third law enacted in response to the COVID-19 pandemic.
PROVISIONS AFFECTING INDIVIDUALS
Rebates for individuals: Rebates are a significant centerpiece of the stimulus bill. Eligible taxpayers will receive up to $1,200 ($2,400 for married filing jointly), plus $500 for each qualifying child. This applies whether or not the taxpayer has any income. Nonresident aliens and individuals that can be claimed as a dependent on another person’s tax return are not eligible for this rebate. In addition, each individual and qualifying child must have a Social Security number. (For a qualifying child who is adopted or placed for adoption, the child’s adoption taxpayer identification number will suffice.)
Payments will generally be made by direct deposit to a taxpayer’s bank account if that information is on file with the IRS, otherwise by check. In either case, rebates are expected to be made as “rapidly as possible” and possibly as early as April 6 for electronic payments and two weeks later for paper checks. Either way, the IRS will notify taxpayers within 15 days of payments.
A full rebate will be available only for individuals whose income is below certain thresholds. The amount of rebate begins to phase-out at adjusted gross income (AGI) of $75,000 ($150,000 for married filing jointly). Above those amounts, the rebate is reduced by $5 for each $100 over these limits. The rebate is fully phased out when AGI reaches $99,000 ($198,000 for married filing jointly). This rebate is a 2020 benefit to be based on 2020 income. However, to have this benefit distributed soon, there is an advance funding mechanism. The IRS will make an initial calculation of your rebate based on your 2019 federal tax return. If that return has not yet been filed, the initial calculation will be based on your 2018 federal tax return. If there is no 2018 return, the IRS can use information from 2019 social security benefit statements. Based on this information, the IRS will calculate and distribute the rebate without any action required by the recipients. If this advance funding mechanism results in the maximum rebate, then that will be the result. For example, if your 2018 tax return is the proper reference (because you haven’t yet filed your 2019 return), and if your income levels during 2018 were low enough to merit a full rebate but 2019 income levels were not, you would receive the full rebate and would not have to pay any excess back. For those who have not yet filed 2019 tax returns (the due date for which has been extended to July 15), this might be a reason to delay that filing. The opposite could also be true. That is, if 2018 income was high enough to reduce a full rebate but 2019 income would indeed result in a full rebate, that could be a reason to file your 2019 return soon so that 2019 is the reference year when the IRS calculates the advance funding rebate. If you receive less than the full rebate based on these initial calculations by the IRS, you will be able to use the difference as a refundable credit on your 2020 return, assuming you qualify for tax year 2020 under the rules described above.
Tax-Favored Withdrawals from Retirement Plans (coronavirus-related distributions)
Withdrawals up to $100,000 (in the aggregate) from qualified plans, including IRAs, during 2020 for coronavirus-related purposes receive several favorable tax treatments.
First, those under age 59½ can withdraw from qualified plans and IRAs during 2020 without a 10% early withdrawal penalty, if the withdrawal is for coronavirus-related purposes (and subject to the $100,000 limit).
Second, the withdrawn amounts may be repaid (to the plan or to an IRA) in one or more payments at any time during the 3-year period beginning on the day after the distribution was received, and those repayments will be treated as a tax-free rollover, without regard to any contribution cap.
Third, for distributions not repaid with the 3-year period, those would be taxable income, but the amount can be included in income and taxed ratably over 3 years.
Your withdrawal is considered for coronavirus purposes if you, your spouse or dependent is diagnosed with COVID-19 (or SARS-CoV-2) or experiences certain adverse financial consequences as a result of (i) being quarantined, furloughed or laid off or having to work reduced hours because of the virus, (ii) being unable to work due to lack of child care because of the virus, (iii) closing or reducing hours of a business owned or operated by you due to the virus, or (iv) other factors as determined by the Treasury.
If you withdraw from your own IRA under this provision, you need to be sure the withdrawal is coronavirus-related. If you want to withdraw from a company-sponsored retirement plan under this provision, the administrator may rely on an employee’s certification that a withdrawal is coronavirus-related.
Loans from Qualified Retirement Plans (coronavirus-related distributions)
Currently the limit for loans from a qualified plan is $50,000. Loans up to $100,000 (but no more than the plan balance) from qualified plans will be permitted during the 180-day period beginning on the date of enactment, which is March 27. In addition, for any loans from qualified retirement plans that are outstanding on or after March 27 and which have a payment due in 2020, the due date for the payment will be delayed for 1 year.
Waiver of Required Minimum Distributions
Required minimum distributions (“RMDs”) for certain defined contribution plans (e.g., 401(k)s) and IRAs) are waived for calendar year 2020. This applies to both of the following:
1. Those who have been taking annual RMDs. You do not have to withdraw an RMD for 2020.
2. Those who turned 70 ½ in 2019 but deferred the first RMD to April 1, 2020. You do not have to withdraw an RMD for 2020.
For those who have already taken an RMD for 2020, it’s now not considered to be an RMD, which means it can be rolled over within 60 days of withdrawal.
For those for whom the 60 days has already passed, you might still be able to rollover the RMD previously taken in 2020. In 2008 Congress passed a similar law, waiving the RMD requirement for 2009. At that time, the IRS also issued a formal Notice stating that the 60day rollover deadline would be satisfied if done by a certain date later in the year. We would expect the IRS to issue similar guidance in the near future, which would allow someone who withdrew a 2020 RMD more than 60 days ago to nevertheless be able to roll it over. However, CARES does not change the rule that limits rollovers to once every 12 months.
In a related provision, if a retirement plan owner died and the beneficiaries who inherit the plan are required to satisfy the 5-year rule for distributions, that 5-year deadline can ignore 2020, which effectively makes it a 6-year rule.
Charitable Contribution Deductions
Up to $300 of charitable contributions can be deducted by taxpayers who do not itemize (i.e., an “above the line” deduction). This is not a temporary provision; it applies to any tax year beginning after 2019. However, not all contributions are eligible. Contributions must be made in cash and cannot be made to a donor advised fund, certain supporting organizations or certain private foundations.
For those who do itemize, the deduction limitation for certain charitable contributions can be increased to 100% of AGI at the election of the taxpayer. Again, not all contributions are eligible. Contributions must be made in cash and cannot be made to a donor advised fund, certain supporting organizations or certain private foundations. Partners of partnerships and shareholders of S-corporations could also qualify for this treatment if they individually elect to do so. This provision is limited to charitable contributions made in 2020.
Temporary Relief for Federal Student Loan Borrowers
All federal student loan payments (principal and associated interest) are suspended for 6 months, through September 30, 2020, without penalty. This applies only for federally owned loans, which covers 95% of all student loan borrowers.
Employers can pay employees’ student loans
In general, an employee’s gross income does not include up to $5,250 per year of employer payments for the employee’s education, as long as that is done under an educational assistance program. The CARES Act adds to the types of payments that can be made under this provision, adding student loan repayments made after the date of enactment (March 27) and before January 1, 2021. Such payments can be made to the student or the lender and will still be subject to the overall $5,250 limitation for all educational payments.
PROVISIONS AFFECTING BUSINESSES
Employee Retention Tax Credit
Certain employers are eligible for a tax credit against their employment tax equal to 50% of qualified wages (up to $10,000) paid to each employee. For employers with more than 100 full-time employees, qualified wages are wages paid to employees when they are not working due to the COVID-19-related circumstances. For businesses with 100 or fewer employees, all employee wages qualify for the credit, whether the employer is open for business or subject to a shut-down order. The credit is provided for the first $10,000 of compensation, including health benefits, paid to an eligible employee. The credit is provided for wages paid or incurred from March 13, 2020 through December 31, 2020.
An employer is eligible for this credit only if they were carrying on a trade or business in 2020 and (i) the operation of that business is fully or partially suspended (for specified reasons) by the government (Federal, state or local) due to COVID-19, or (2) the business has seen a significant decline in gross revenue (50% less than in the calendar quarter of the prior year) and for so long until the business recovers to 80% of prior year’s revenue. A business can elect not to have this provision apply. If the business receives a loan under the new Paycheck Protection Program (described below), the business is not eligible for an Employee Retention Tax Credit.
Delay of Payment of Payroll Taxes
Employers (for profit and not-for-profit) and selfemployed individuals can defer the employer portion of payroll taxes with respect to their employees. This is the 6.2% portion of Social Security taxes. This applies to payroll taxes for the period from enactment of the CARES Act (March 27) to December 31, 2020. 50% of the deferred payroll taxes will be payable on December 31, 2021; the remaining 50% will be payable on December 31, 2022. If the business receives a loan forgiveness under the new Paycheck Protection Program, the business is not eligible to defer payment of payroll taxes.
Net Operating Losses Modification
The CARES Act relaxes the limitations on a company’s use of losses. Losses from 2018, 2019 and 2020 can be carried back for 5 years, without regard to a taxable income limitation, and so the losses can fully offset income. It is expected that many companies could suffer losses in 2020 due to mandatory closure and other economic hardships. Those losses may not be known until the company files its 2020 taxes in early 2021. Once determined, those losses could be carried back to offset income (and thus lower taxes) from profitable years. Some of those losses would be carried back to tax years when the business was subject to a 35% tax rate (the current corporate rate is 21%). This will provide relief, but not immediate relief, to struggling businesses.
Increase in Limit on Business Interest Expense
For 2019 and 2020, businesses can deduct business interest up to a limit of 50% of taxable income, an increase from the usual limit of 30%. Special rules apply to pass-through businesses.
Charitable Deduction Limitation Increased
The deduction limitation for corporations for certain charitable cash contributions made in 2020 is increased to 25% of taxable income (up from 10% of income under prior rules) as long as the contribution is made to a public charity. Corporations can also deduct charitable contributions of food inventory made during 2020 to public charities up to 25% of taxable income (up from 15% prior to the change).
Other: Technical Correction of Tax Reform 2017
This allows a deduction (write off) of certain costs associated with improving facilities. This is a long sought technical fix arising from the 2017 tax legislation, which has prevented retailers and restaurants from writing-off the cost of certain improvements. The change is retroactive back to the original legislation, and therefore businesses could amend their returns to seek the benefit of this change.
Paycheck Protection Program (“PPP”) (Small Business Loans)
To help small businesses with near-term liquidity concerns and to encourage the retention of employees, the CARES Act includes a complicated set of rules for government guaranteed loans and grants to eligible businesses, without personal guaranties or collateral. To then shift the burden and cost to the federal government, those businesses may be eligible to have all or a portion of the loan forgiven.
Loans to Small Businesses. Nearly $350 billion is allocated for helping small businesses through a Paycheck Protection Program (“PPP”) loan. Small businesses are generally those with 500 or fewer employees, whether they are for profit or non-profit. Individual sole-proprietors, independent contractors and other self-employed individuals are eligible for loans. The primary forms of assistance are loans fully guaranteed by the government and grants facilitated by the U.S. Small Business Administration (the “SBA”), although additional lenders can be authorized by the Department of the Treasury.
PPP loans cannot have a maturity beyond 10 years and cannot have an interest rate above 4%. These loans will have a 100% government guarantee if made on or before December 31, 2020. Principal and interest payments will generally be deferred for at least six months (and perhaps up to one year).
Loan Amount. Loans can be made up to a maximum of $10 million, but the amount of the loan is generally a formula tied to payroll, mortgage, rent and utility payments of the business during the one-year period before the loan, which could result in a lower loan amount. More specifically, the loan amount is generally the lesser of:
• The average monthly payroll (over the past 12 months before the loan is made) x 2.5, plus the outstanding amount of any economic injury disaster loan (EIDL) from the SBA from January 31, 2020 to the time the loan is refinanced into a PPP loan, or
Loan Proceeds. Loan proceeds can be used for payroll (salaries, sick leave, medical leave, insurance premiums) and certain administration expenses (mortgage interest, rent and utility payments), in addition to existing allowable uses under SBA rules. A borrower must make a good faith certification as to the necessity of the loan and that the borrower will use the loan for appropriate purposes.
Loan Forgiveness. A PPP borrower may be eligible to apply for loan forgiveness equal to an amount spent during an 8-week period after the loan origination date (capped at the loan amount) for:
• payroll costs (excluding compensation above $100,000),
• interest payments on any mortgage incurred prior to February 15, 2020,
• rental lease payments (in force before February 15, 2020), and
• utility payments (for services which began before February 15, 2020).
There are further complicated rules reducing the amount that could be forgiven based on a reduction of the businesses’ employees and the reduction of the employees’ wages compared with the prior year. Businesses that have already reduced their payrolls can get loan forgiveness if they restore their payrolls after obtaining the loan. Any amount of the loan that is forgiven will not be considered taxable income to the business.
What’s in the Law for Nonprofits
The CARES Act provides significant funding for governments, businesses, hospitals, schools, and social support programs, among many other things.
Economic Injury Disaster Loans (EIDL): Creates emergency grants for eligible nonprofits and other applicants with 500 or fewer employees enabling them to receive checks for $10,000 within three days.
Self-Funded Nonprofits and Unemployment: Only reimburses self-funded nonprofits for half of the costs of benefits provided to their laid-off employees.
Economic Stabilization Fund: Creates a loan and loan guarantee program for industries like airlines to keep them solvent through the crisis. It sets aside $454 billion for “eligible business” which is defined as “a United States business that has not otherwise received economic relief in the form of loans or loan guarantees provided under” the legislation. It is expected, but unclear, whether charitable nonprofits qualify under that definition for stabilization loans. Mid-sized nonprofits and businesses that have between 500 and 10,000 employees are expressly eligible for loans under this provision. Although there is no loan forgiveness provision in this section, the mid-size business loans would be charged an interest rate of no higher than two percent and would not accrue interest or require repayments for the first six months. Nonprofits accepting the mid-size business loans must retain at least 90 percent of their staff at full compensation and benefits until September 30. Section 4003.
Other Significant Provisions
Expanded Unemployment Insurance: Includes coverage for workers who are furloughed, gig workers, and freelancers. Increases payments by $600 per week for four months on top of what state unemployment programs pay.
Amendments to the New Paid Leave Mandates: Lowers the amounts that employers must pay for paid sick and family leave under the Families First Coronavirus Response Act* (enacted March 19) to the amounts covered by the refundable payroll tax credit – i.e., $511 per day for employee sick leave or $200 per day for family leave.
Significant Spending: The law also calls for large infusions of cash to the following sectors:
• $150 billion for a state, tribal, and local Coronavirus Relief fund
• $130 billion for hospitals
• $30 billion for education
• $25 billion for transit systems
Stay Safe and Healthy!