On March 27th, Congress passed and President Trump signed the Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”), which contains numerous provisions to help stimulate the economy as a result of the COVID-19 pandemic.
What is the Payroll Protection Program?
The CARES Act adds a provision that expands loan programs administered by the Small Business Administration (“SBA”) by adding a new “Payroll Protection Program.” Businesses (including sole proprietors, self-employed persons and individuals that operate as independent contractors) and nonprofits that have 500 employees or less can apply for a loan to cover certain types of expenses.
What’s the maximum amount that a business can borrow?
The maximum amount that a business can borrow under the program is the lesser of (1) the business’s average total monthly payroll costs (with certain limitations on compensation over $100,000), during the one-year period before the loan is made multiplied by 2.5 or (2) $10 million. A borrower can use the loan proceeds to cover payroll costs, employee salaries (with certain limitations on salaries over $100,000), costs of providing employees’ health care benefits, interest payments of interest on mortgage obligations, rent, utilities and interest on debt obligations incurred prior to February 15, 2020.
What about loan forgiveness?
The government will forgive the portion of the loan that the borrower uses to pay payroll costs, mortgage interest, rent and utility payments during the eight-week period following the loan’s origination. The amount of loan forgiveness is reduced if the borrower reduces its full-time equivalent employees over the eight-week period after receiving the loan, or if it reduces the salary or wages of any employee who makes less than $100,000 annually by more than 25 percent. The forgiven amounts will not be considered income to the borrower.
Stay tuned for a more detailed overview of the Payroll Protection Loan Program and other SBA loan programs.
What if my business is too large to qualify for the Payroll Protection Program?
The bill also provides $500 billion in funds to the Treasury’s Exchange Stabilization Fund to provide loans, loan guarantees, and other investments to businesses that employ between 500 and 10,000 employees to help mitigate extraordinary pressure in financial markets that would otherwise have severe adverse consequences for the U.S. economy. The funds received must be used to retain at least 90 percent of the borrower’s workforce, with full compensation and benefits, through September 30, 2020; and the borrower must agree to not outsource or offshore jobs for the term of the loan plus an additional two years.
What changes were made regarding unemployment benefits?
The bill includes several provisions regarding unemployment insurance. The bill establishes a temporary Pandemic Unemployment Assistance Program through December 31, 2020 to provide payment for those individuals who are traditionally ineligible for unemployment benefits (e.g., self-employed, independent contractors, etc.) that are unable to work because of the COVID-19 outbreak. A recipient’s weekly unemployment benefits is increased by $600 for up to four months. Benefits are also available for 13 weeks of unemployment through December 31, 2020 for those who remain unemployed after exhausting their weeks of state unemployment benefits.
What about the economic stimulus checks that individuals will receive?
U.S. residents with adjusted gross incomes up to $75,000 ($150,000 if married filing jointly) are eligible for a rebate of $1,200 ($2,400 if married filing jointly). Taxpayers will receive an additional $500 per child. The IRS will use the taxpayer’s 2019 tax return if filed or alternatively the taxpayer’s 2018 return to determine eligibility. The rebate amount is reduced by $5 for each $100 that a taxpayer’s income exceeds the phase-out threshold ($75,000 or $150,000 if married filing jointly). The rebate is completely phased out for single filers with income exceeding $99,000, $146,500 for head of household filers with one child and $198,000 for joint filers with no children.
Can I take money out from my retirement plan to help with expenses because of the COVID-19 pandemic?
Taxpayers can take coronavirus-related distributions up to $100,000 from qualified retirement plans without incurring the 10 percent early withdrawal penalty. Any income attributable to the distributions would be subject to tax over three years. Additionally, the taxpayer may recontribute the funds to an eligible retirement plan within three years without regard to that year’s cap on contributions. A coronavirus-related distribution is one made to an individual who is diagnosed with COVID-19, whose spouse or dependent is diagnosed with COVID-19 or who experiences financial hardship as a result of the COVID-19 outbreak. Additionally, the bill waives required minimum distribution rules for certain defined contribution plans and IRAs for 2020.
Are there any tax credits available for paying employees during the COVID-19 pandemic?
Employers can claim a refundable payroll tax credit for 50 percent of the qualified wages (up to $10,000 per employee) it pays to employees during March 13, 2020 through December 31, 2020. This credit is available to employers (1) whose operations were fully or partially suspended due to a government related shutdown order or (2) whose gross receipts in a 2020 calendar quarter are less than 50 percent of the gross receipts of the same quarter in 2019. For employers with more than 100 employees, qualified wages are wages paid to employees while they are not working due to COVID-19 related shutdowns. For employers with 100 or less employees, all wages qualify, whether the employer is open for business or is shut down. However, an employer cannot claim this payroll credit if it receives a loan under the Payroll Protection Program.
Additionally, employers subject to the Families First Coronavirus Response Act are entitled to dollar-for-dollar tax credit for EPSL and E-FMLA paid to employees. See our post on the FFCRA for more details.
Is there any additional time for paying payroll taxes?
Employers can defer paying the employer share of Social Security taxes for wages paid from March 27, 2020 through December 31, 2020. Employers must pay 50 percent of the deferred taxes by December 31, 2021 and the remaining 50 percent by December 31, 2022. Self-employed individuals can defer paying half of their self-employment tax under similar terms. An employer is not eligible for the payroll tax deferral if it has any loans forgiven by the CARES Act (e.g., the Payroll Protection Program).
Are there other miscellaneous tax provisions added by the CARES Act?
Individuals can deduct up to $300 of charitable cash contributions as an above the line deduction whether they itemize deductions or not. Additionally, for individuals that do itemize deductions, the individual can deduct charitable contributions up to the taxpayer’s taxable income. Corporations may claim a deduction of up to 25 percent of taxable income.
Employer Payments of Student Loans
An employer may contribute up to $5,250 in 2020 toward the repayment of an employee’s student loans. This payment would be excluded from the employee’s income.
Modification of Net Operating Loss Limitations
If a taxpayer generates a net operating loss in 2018, 2019 or 2020, the taxpayer can carry back the loss to each of the five tax years preceding the loss; prior to this change taxpayers were not allowed to carry back net operating losses. Additionally, for 2018, 2019 and 2020, a taxpayer can use a net operating loss (and any carryback) to fully offset taxable income. Starting in 2021, a taxpayer can use a net operating loss to offset up to 80 percent of taxable income.
Modification of Excess Business Loss Limitation
The CARES Act suspends the excess business loss limitation rules for 2018, 2019 and 2020. Beginning in 2021, if a taxpayer has losses from trades or businesses exceeding a certain threshold ($250,000 for single filers and $500,000 for married filing joint), those excess losses will be suspended, and the taxpayer cannot use those losses to offset other categories of income. If a taxpayer’s deductible business losses were limited because of these rules in 2018 and/or 2019, the taxpayer can amend its return and take advantage of those losses.
Increase on Limitation for Business Interest Expense Deduction
For 2019 and 2020, a taxpayer can deduct business interest expense equal to the taxpayer’s business interest income and 50 percent of the taxpayer’s adjusted taxable income (i.e., the taxpayer’s earnings before interest, taxes, depreciation and amortization). Additionally, corporations may use their adjusted taxable income in 2019 to calculate the interest deduction in 2020; this is beneficial for corporations whose earnings substantially decrease in 2020 due to the COVID-19 outbreak.
Qualified Improvement Property Eligible for Bonus Depreciation
The CARES Act fixes a “glitch” in the Tax Cuts and Jobs Act and allows taxpayers to claim bonus depreciation (i.e., immediate expensing) for qualified improvement property. Qualified improvement property is an improvement a taxpayer makes to an interior portion of a building, which is nonresidential real property (e.g., restaurants, retail shops, etc.) after the building has been constructed and placed into service.
Here are links to various resources to help you navigate your analysis of whether to apply for a PPP loan and how they will work:
For more resources and LP's response to COVID-19, visit this webpage.