Coronavirus, Aid, Relief and Economic Security (CARES) Act
Congress and the President designed provisions of the CARES Act to provide approximately $877 billion of relief to businesses. Since this is the largest relief package in the history of the United States, we wanted to provide a CARES Act translation for business owners. You’ll find the most relevant provisions summarized below to assist in determining applicability to your circumstances.
Key CARES Act provisions for business owners could be instrumental for recovery during our country’s current crisis. There will likely be a combination of relief options for consideration.
Refundable Employee Retention Credit
The CARES Act provides a refundable payroll tax credit to impacted employers who continue to pay employees their wages. The refundable tax credit is equal to 50 percent of the qualified wages paid by an eligible employer to an employee from March 13, 2020 to December 31, 2020. The maximum amount of wages eligible to be considered for the credit is $10,000 per employee.
Eligibility: The employer must have either:
- Suspended or reduced business operations due to a government order regarding COVID-19; or
- Sustain a 50% or more decline in gross receipts for the comparable calendar quarter from 2020 to 2019. Once eligible, the employer remains eligible for succeeding quarters until gross receipts during a calendar quarter are 80% or more of the gross receipts in the comparable calendar quarter in the preceding year. The credit is also available to certain tax-exempt organizations.
The credit must be reduced by any credits claimed under the Families First Coronavirus Response Act which provides paid sick leave and paid family and medical leave.
Delay of Employer Payroll Tax Payments
The CARES Act allows employers (and self-employed individuals) to defer payment of the 6.2 percent employer-side Social Security payroll tax, effective for wages paid between the March 13, 2020 and December 31, 2020. Payment ultimately would be due in equal parts on December 31, 2021, and December 31, 2022.
Net Operating Loss Carryback Allowed
The CARES Act allows taxpayers to carry back net operating losses (NOLs) arising in 2018, 2019, and 2020 to the five prior tax years. NOLs incurred in these years can fully offset prior-year taxable income or be carried forward. These provisions change the Tax Cut and Jobs Act (TCJA), which generally eliminated all carrybacks and provided that the NOLs arising in years beginning after December 31, 2017 are only carried forward and deductible against only 80 percent of taxable income.
Enhanced Refundability of Previously Generated AMT Credits
The TCJA repealed the corporate alternative minimum tax (AMT) but continued to allow corporations to recover previously generated AMT credits against regular tax before 2022. The CARES Act generally enables corporations to accelerate any remaining AMT credits they have not yet utilized into 2019.
Enhanced Interest Deductibility
The TCJA generally limited the deduction for business interest expense to business interest income plus a threshold amount of 30 percent of “adjusted taxable income” (a defined term). The CARES Act provides that, for 2019 and 2020, the percentage of adjusted taxable income threshold would be increased from 30 percent to 50 percent. The CARES Act also provides special rules for deductibility of interest expense for partnerships. This provision also allows businesses to use their adjusted taxable income from 2019 in tax year 2020 in order to deduct more interest.
TCJA Technical Correction for Qualified Improvement Property
The TCJA inadvertently failed to define qualified improvement property (i.e. leasehold improvements) as 15-year property for MACRS depreciation purposes resulting in a 39-year depreciation period. The CARES Act corrects this mistake and classifies qualified improvement property as 15-year property and eligible for current law 100 percent bonus depreciation. This correction is retroactive to the effective date of the TCJA, so a refund could be claimed for property placed in service dating back to 2018.
Modification of Charitable Limitations
The CARES Act increases a corporation’s limitation on charitable deductions for 2020 from 10 percent to 25 percent of the corporation’s taxable income. This provision applies only to cash donations and is not applicable to donations to a donor-advised fund.
Extension of Plan Funding Deadlines
Employer sponsors of qualified defined benefit plans can postpone the funding of any plan contributions with a due date in 2020 until January 1, 2021.
Small Business Loans Through the Paycheck Protection Program
The CARES Act, utilizing the Small Business Administration (SBA), creates a loan program to assist small businesses and nonprofits with payroll support (including paid sick and medical leave), mortgage payments, lease payments, insurance premiums, interest payments and utility payments.
Eligibility: To be eligible, the business must:
- have less than 500 employees;
- have been operational on February 15, 2020;
- have employees (or independent contractors) to whom it paid wages;
- have been substantially impacted by COVID-19 (not defined).
Loan Amounts and Terms: The loan amounts are 2.5 times the business’s average monthly payroll costs (including medical and retirement benefits) for the trailing 12 months. The maximum loan amount is limited to $10 million. However, it seems that these payroll costs do not include the compensation paid to an employee (or an independent contractor) who made in excess of $100,000 during the 12-month period.
The terms of the loan are very favorable and include:
- Interest not to exceed 4%;
- Term up to 10 years;
- Deferred interest and principal of up to 6-12 months;
- No personal guarantee;
- No collateral;
- Origination fees reimbursed by SBA;
- No prepayment penalty.
Potential Forgiveness: Principal can be forgiven in an amount equal to the payroll costs, mortgage payments, lease payments and utilities incurred from February 15, 2020 through June 30, 2020 for. Any amounts forgiven will be reduced proportionately by any reduction in the number of employees retained compared to the prior year and reduced by the reduction in pay of any employee beyond 25 percent of their prior year compensation. Employers that re-hire previously laid off employees will not be penalized for having a reduced payroll at the beginning of the period. Most importantly, any forgiven indebtedness will not be taxable income to the employer.
The Paycheck Protection Program has a lot of uncertainties and many provisions require greater clarity. This program looks to get cash into the hands of businesses quickly, so clarifications should be available soon. It’s also being administered by retail banks, so they also may have different interpretation of how to implement this program.
We hope this CARES Act translation for business owners will be beneficial to your company. If you need further clarification about any of these provisions, please don’t hesitate to reach the wealth managers of Budros, Ruhlin & Roe.