On March 25, the Senate passed a $2 trillion emergency aid proposal, described by Majority Leader Mitch McConnell as “a wartime level of investment into our nation.” It passed by a vote of 96-0. The House is scheduled to vote Friday, then the package goes to President Donald Trump, who is expected to sign it. This legislation, H. R. 748, ‘‘Coronavirus Aid, Relief, and Economic Security (CARES) Act,” aka the “Phase 3” bill, provides significant tax and non-tax stimulus to individuals and businesses. Below is a brief summary of key provisions.
Impact to Businesses
Tax Measures for Businesses
- Changes to the rules governing net operating losses (NOLs), including a five-year carryback of certain 2018, 2019 and 2020 losses and, temporarily, the ability to fully offset income.
- Changes to the limitation on loss rules for partnerships and sole proprietors (some temporary).
- Acceleration of refundability of corporate alternative minimum tax (AMT) credits.
- The business interest limitation under IRC Section 163(j), currently set at 30% of adjusted taxable income based on EBITDA, would be set at 50% for 2019 and 2020.
- Limitations for charitable contributions deduction for businesses have been increased from 10% to 25% of taxable income. This provision also increases the limitation on deductions for contributions of food inventory from 15% to 25%.
- Technical corrections to provisions in the 2017 tax law (Tax Cuts and Jobs Act) to treat qualified improvement property as 15-year property under MACRS, and eligible for bonus depreciation. These corrections are retroactive to the effective date of the Tax Cuts and Jobs Act.
- A temporary exception from excise taxes for alcohol used to produce hand sanitizer through December 31, 2020.
- A suspension of certain aviation excise taxes through the creation of an “excise tax holiday” through December 31, 2020.
- Employers and self-employed individuals are allowed to defer payment of the employer share of the Social Security tax they otherwise are responsible for paying to the federal government with respect to their employees. Employers generally are responsible for paying a 6.2-percent Social Security tax on employee wages. The provision requires that the deferred employment tax be paid over the following two years, with half of the amount required to be paid by December 31, 2021 and the other half by December 31, 2022. The Social Security Trust Funds will be held harmless under this provision.
- Establishment of the Employee Retention Credit:
- A fully refundable tax credit is available, tied to the payment of employee wages, against the employer’s share of Social Security taxes.
- All eligible employers would be permitted to claim a 50 percent credit of wages paid up to $10,000 per employee.
- The credit is available to employers whose (1) operations were fully or partially suspended, due to a COVID-19-related shutdown order, or (2) gross receipts declined by more than 50 percent when compared to the same quarter in the prior year.
- For employers with more than 100 full-time employees, qualified wages are wages paid to employees when they are not providing services due to the COVID-19-related circumstances described above.
- For eligible 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. 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.
Business Loan Programs
SBA 7(a) Loan Program Expansion
The loan programs below all fall under the Federal 7(a) loan program administered by the SBA. PPP, SBA Express, and EIDL Loans would give private banking institutions the ability to loan directly to businesses, thus side-stepping the current process to more quickly provide funding to businesses.
The Act provides delegated authority, which is the ability for lenders to make determinations on borrower eligibility and creditworthiness without going through all of SBA’s channels, to all current 7(a) lenders who make these loans to small businesses and provides that same authority to lenders who join the program and make these loans. For eligibility purposes, the Act requires lenders to, instead of determining repayment ability, which is not possible during this crisis, to determine whether a business was operational on February 15, 2020, and had employees for whom it paid salaries and payroll taxes, or a paid independent contractor.
- Paycheck Protection Program (PPP) – Forgivable Loan
The Program provides forgivable Small Business Administration loans to businesses with 500 or fewer employees (generally), including sole proprietors and other self-employed individuals. Total authorization level of $349 billion for the 7(a) program through December 31, 2020. The Act defines eligibility for loans as a small business, 501(c)(3) nonprofit, a 501(c)(19) veteran’s organization, or Tribal business concern described in section 31(b)(2)(C) of the Small Business Act with not more than 500 employees, or the applicable size standard for the industry as provided by SBA, if higher. Businesses in the hospitality and restaurant industry and certain other businesses are excused from the employee limitation. Loan amounts are determined by a formula tied to the business’s payroll costs. The maximum loan amount is $10 million. Allowable loan uses include payroll, insurance premiums, mortgage, rent and utility payments.
- Applicable Loan Period
- The covered loan period is defined as beginning on February 15, 2020 and ending on June 30, 2020. Establishes the maximum 7(a) loan amount to $10 million through December 31, 2020 and provides a formula by which the loan amount is tied to payroll costs incurred by the business to determine the size of the loan.
- Allowable Use of Funds
- Specifies allowable uses of the loan include payroll support, such as employee salaries, paid sick or medical leave, insurance premiums, and mortgage, rent and utility payments.
- Loan Forgiveness
- Forgiveness on the loan is equal to the amount spent by the borrower during an 8-week period after the origination date of the loan on payroll costs, interest payment on any mortgage existing prior to February 15, 2020, payment of rent on any lease in force prior to February 15, 2020, and payment on any utility for which service began before February 15, 2020. Total loan forgiveness potential for the period shall include the following: Payroll costs plus any payment of interest on any covered mortgage obligation (which shall not include any prepayment of or payment of principal on a covered mortgage obligation) plus any payment on any covered rent obligation + and any covered utility payment.
- Eligible payroll costs are the amount incurred during the covered 8-week period (after origination date of the loan) compared to the previous year or time period. If wages are reduced, year over year, the loan forgiveness will be reduced proportionately. Eligible payroll costs do not include compensation above $100,000 in wages.
- To encourage employers to rehire any employees who have already been laid off due to the COVID-19 crisis, borrowers that re-hire workers previously laid off will not be penalized for having a reduced payroll at the beginning of the period.
- Portions of loans not forgiven are payable over a maximum of 10 years at a maximum of 4% interest.
- Coordination with EIDL Loans
- Provides a limitation on a borrower from receiving this assistance and an economic injury disaster loan through SBA for the same purpose. However, it allows a borrower who has an EIDL loan unrelated to COVID-19 to apply for a PPP loan, with an option to refinance that loan into the PPP loan. The emergency EIDL grant award of up to $10,000 would be subtracted from the amount forgiven under the Paycheck Protection Program.
- SBA Express Loan – Repayable Loan
The SBA Express Loan Program provides an accelerated turnaround time for SBA review the Act increases the maximum loan for a SBA Express loan from $350,000 to $1 million through December 31, 2020. SBA Express loans are a simple way to receive expedited, amortized government-guaranteed financing for your small business. Entrepreneurs can be granted up to $350,000 of capital in the form of either a term loan or line of credit. Once received, this capital may be used for various business purposes. The true value of an SBA Express loan lies not only in the remarkably fast turnaround time for an approval, but also in the willingness of lenders to advance funds. The interest rate is negotiated but cannot exceed the SBA maximum.
- Emergency Economic Injury Disaster Loans (EIDL) – Repayable Loan
The Act expands eligibility for access to Economic Injury Disaster Loans (EIDL) to include Tribal businesses, cooperatives, and ESOPs with fewer than 500 employees or any individual operating as a sole proprietor or an independent contractor during the covered period (January 31, 2020 to December 31, 2020). Private nonprofits are also eligible for both grants and EIDLs.
- Waiver of Personal Guarantees & Other Eligibility Requirements
- The Act requires that for any SBA EIDL loans made in response to COVID-19 before December 31, 2020, the SBA shall waive any personal guarantee on advances and loans below $200,000, the requirement that an applicant needs to have been in business for the 1-year period before the disaster, and the credit elsewhere requirement.
- During the covered period, allows SBA to approve and offer EIDL loans based solely on an applicant’s credit score, or use an alternative appropriate alternative method for determining applicant’s ability to repay.
- Emergency Grant Payment Distributions
- Establishes an Emergency Grant to allow an eligible entity who has applied for an EIDL loan due to COVID-19 to request an advance on that loan, of not more than $10,000, which the SBA must distribute within three days.
- Applicants shall not be required to repay advance payments, even if subsequently denied for an EIDL loan. In advance of disbursing the advance payment, the SBA must verify that the entity is an eligible applicant for an EIDL loan. This approval shall take the form of a certification under penalty of perjury by the applicant that they are eligible. Advance payment may be used for providing paid sick leave to employees, maintaining payroll, meeting increased costs to obtain materials, making rent or mortgage payments, and repaying obligations that cannot be met due to revenue losses. Further, the Act requires that an advance payment be considered when determining loan forgiveness, if the applicant transfers into a loan made under SBA’s Paycheck Protection Program.
Impact to Individuals
Cash and Retirement Plans
- Rebates of up to $1,200 for single filers and $2,400 for joint filers (with amounts increased by $500 per child). These payments are subject to phase-outs beginning at $75,000 / $150,000 adjusted gross income (AGI) for single filers / joint filers. Individuals who have no income or those who income comes from entirely non-taxable means-tested benefit programs are eligible to receive.
- A waiver of the early withdrawal penalty for certain coronavirus-related withdrawals from qualified retirement plans up to $100,000. In addition, 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.
- A wavier of the required minimum distribution rules for certain defined contribution plans and IRAs for calendar year 2020.
- Establish a temporary Pandemic Unemployment Assistance program through December 31, 2020, to provide payment to those not traditionally eligible for unemployment benefits (self-employed, independent contractors, those with limited work history and others) who are unable to work as a direct result of the coronavirus public health emergency.
- Provide an additional $600 per week payment to each recipient of unemployment insurance or Pandemic Unemployment Assistance for up to four months.
- Provide an additional 13 weeks of unemployment benefits through December 31, 2020, to help those who remain unemployed after weeks of state unemployment benefits are no longer available.
- Allowance of up to $300 of charitable deductions for non-itemizing taxpayers for tax years beginning in 2020 and relaxation of the limitations for those taxpayers who itemize.
- The 50% of adjusted gross income limitations on deductions for charitable contributions is suspended for 2020.
- Student loan repayment contribution by the employer for an employee is not taxable to the employee up to $5,250 annual cap for contributions made prior to January 1, 2021.
Looking for more information about the impact of coronavirus on businesses? Visit our COVID-19 Resource Center to read more.