$2 Trillion Rescue Package to Combat Coronavirus – Coronavirus Aid, Relief, and Economic Security (CARES) Act
By Gina Brymer, CPA – Senior Manager, John Hsiao, CPA – Partner, and Laurie Kaplan, CPA – Partner
March 29, 2020
On March 27, 2020, President Trump signed into law the CARES Act worth more than $2 Trillion to stimulate the economy from the effects of the Coronavirus.
To provide tax relief to individuals and businesses, the Act:
- Makes available checks for individuals of up to $1,200 per adult and $500 per child (subject to a phase out based on prior year tax returns). The credit starts to phase out at $75,000 adjusted gross income for single taxpayers and $150,000 for married filing joint taxpayers.
- Waives the 10% penalty tax on early retirement account withdrawals up to $100,000 for coronavirus‐related distributions. Income from the distribution could be recognized over three years beginning with taxable year 2020. To avoid income recognition, taxpayers could repay the distribution back to an eligible retirement plan within three years without being subject to the annual contribution cap. Retirement loan limits have also increased from $50,000 to $100,000 for the next 180 days. The repayment deadline has also been delayed for a year for loans that were due in 2020.
- Temporarily waives the 2020 Required Minimum Distribution (RMD) rules for certain qualified retirement plans and IRAs.
- Provides a $300 above‐the‐line deduction for 2020 cash contributions for taxpayers who do not itemize. In addition, the 60% adjusted gross income limitation for cash contributions has been removed. Any cash contribution is allowed as long as it does not exceed a taxpayer’s adjusted gross income. The increased limit does not apply to contributions to donor advised funds.
- Excludes from income certain employer payments of student loans. Up to $5,250 per employee could be paid by the employer and excluded from employee wages to assist in repayment of qualified student loans. This applies to employer payments made before January 1, 2021.
- Creates a new employee retention credit in a form of a refundable payroll tax credit. The credit is computed at 50% of wages up to $10,000 of wages per employee for eligible employers ($5,000 credit). Eligible employers are those who were required to partially or fully suspend operations due to COVID-19 or who have gross receipts of 50% or less this quarter compared to the same quarter in the previous year. Qualified wages depend on the number of employees the employer had in 2019. For employers with 100 or fewer full-time employees, all employee wages would qualify. For employers with more than 100 full-time employees, qualifying wages are wages paid when employee services are not provided, limited to 30 days per employee. The credit is provided for wages paid or incurred through December 31, 2020. This credit is not available for wages related to the new sick and family leave payments under the Families First Coronavirus Response Act. Nor is this available for businesses who participate in the Paycheck Protection Program (see below for details).
- Delays payment of employer payroll taxes (6.2% of social security) through the end of 2020. The deferred tax liability would be paid in two installments – half by December 31, 2021 and the remaining half by December 31, 2022. There’s an exception for taxpayers who had loans forgiven through the Paycheck Protection Program (see below for details).
- Modifies the Net Operating Loss (NOL) carryback and carryforward rules for businesses. NOLs created in 2018 and 2019 could be carried back for five years. The provision also temporarily removes the 80% limitation for carryforwards to tax years beginning before January 1, 2021. This would allow companies to utilize losses and amend prior year returns for refunds.
- Retroactively suspends the Section 461(l) excess business loss limitation rule for 2018, 2019, and 2020 for individuals. Prior to this, single taxpayers were limited to $250,000 and joint taxpayers were limited to $500,000 of business losses.
- Temporarily increases the deductibility of Section 163(j) business interest expense. For 2019 and 2020, the business interest limitation has gone up from 30% to 50% of adjusted taxable income.
- Decreases the period for deducting the cost of qualified improvement property from 39 years to 15 years from 2018 through 2020. This classification would make the property eligible for “bonus depreciation” which would allow for immediate expensing.
- Allows the taxable income limit on corporate charitable deductions to go up from 10% to 25%.
The CARES Act also provided additional relief to small businesses with the Paycheck Protection Program. Under this provision, employers with not more than 500 employees can apply for a loan, a portion of which can potentially be forgiven by the government. Forgiveness or cancellation of the loan would not be treated as income for tax purposes.
Some of the details include the following:
- Receive loans for as much as $10 Million or 250% of average monthly payroll costs (special rules for seasonal employees).
- Interest rate during the covered period would be capped at 4%.
- Payroll costs include salary, wages, commissions, tips, paid leave, healthcare, and retirement payments.
- Compensation of an individual employee is limited to $100,000 as prorated for the covered period. The covered period is from February 15, 2020 to June 30, 2020.
- The payroll costs also have to be reduced for any qualified sick leave or family leave wages for which a credit was allowed under the Families First Coronavirus Response Act.
- Allowable uses of the covered loans include payroll costs, group health care benefits, including insurance premiums, payments of interest on mortgage loans, rent, utilities, and interest on debt incurred before the covered period.
- These loans will be nonrecourse, unless used for an unauthorized purpose.
- No personal guarantee or collateral required.
- A “good faith certification” that businesses will use the funds to retain workers, maintain payroll, and pay for rent and similar expenses.
- Calculation of potential loan forgiveness (incentive is included for the retention of employees). As much as 100% of the loan may be forgiven.
- Any remaining balance after the forgiveness will have a maximum maturity of 10 years and will be guaranteed by the SBA.
In addition, small businesses with less than 500 employees may request an advance of $10,000 through an Economic Injury Disaster Loan ( EIDL) to be used for providing sick leave, maintaining payroll to retain employees, meeting increased material costs, making rent or mortgage payments, and repaying obligations which cannot be met due to revenue losses. This $10,000 advance is provided within three days of applying for the loan and does not need to be repaid if the loan is subsequently denied. EIDLs are loans of up to $2 Million with an interest rate of 3.75%. Principal and interest can be deferred for up to four years. A business that receives an EIDL between January 31, 2020 and June 30, 2020 as a result of the COVID-19 disaster is eligible to apply for a Payroll Protection Program (PPP) loan or may refinance their EIDL into a PPP loan. This advance would reduce the loan forgiveness under the PPP loan.
Other recent tax developments include the following:
The IRS provided additional guidance surrounding the due date for retirement plan/IRA and health savings account (HSA) contributions for 2019. The due date has been postponed from April 15th until July 15th.
Furthermore, the U.S. Treasury has also extended the filing and payment deadline for gift tax returns (Form 709) from April 15th until July 15th without being subject to interest and penalties. Taxpayers do not need to file any additional forms to postpone the return or payment until July 15th. This extension is automatic. However, if additional time is needed to file a return beyond July 15th, an extension form can be filed to extend the deadline until October 15th. This extends the filing deadline, but does not extend the July 15th payment deadline.
Separately, Governor Pritzker announced that the Illinois Department of Revenue will follow the IRS deadline by extending the filing and payment date of 2019 returns from April 15th until July 15th. This extension applies to individuals, trusts and corporations. Note that relief was not provided to partnerships. In addition, unlike the federal postponement of the 2020 1st quarter estimated tax payment until July 15th, Illinois’ 2020 1st quarter estimated tax payment remains due on April 15, 2020.
We will closely monitor any new developments and keep you informed. If you have any questions, please contact your MichaelSilver tax professionals at 847.982.0333.