Congress has approved the Coronavirus Aid, Relief and Economic Security Act (CARES), a $2 trillion stimulus package to help combat the coronavirus pandemic and send economic relief to workers and businesses. The bill has been signed by President Trump. Below are some highlights of the bill.
- The $1,200 ($2,400 if married filing jointly) “recovery rebate” is a refund of a credit toward your 2020 tax return.
- There is an additional $500 credit for each child.
- To be eligible you must have filed either a 2018 or 2019 federal income tax return.
- For those individuals who may not have filed a 2018 or 2019 return, the government will also be issuing recovery rebates to individuals who received SSA-1099’s or RRB-1099’s.
- If you provided direct deposit information on your 2018 or 2019 income tax return, the check will be directly deposited into your bank account. Otherwise, your check will be mailed to your address.
- The credit will be limited to the lesser of $1,200, or your 2020 tax liability (or $2,400 for a joint return).
- The phase-out begins at the adjusted gross income of $75,000 for single filers, $112,500 for the head of household, and $150,000 for married filing jointly.
- The credit is totally phased out for single filers with adjusted gross income over $99,000, head of household over $136,500 and married filing jointly over $198,000
- To be eligible for the recovery rebate, you cannot be a non-resident alien, be claimed as a dependent on another taxpayer’s return, a trust or estate, and you must have a Social Security number for each individual.
RETIREMENT PLAN CHANGES
- The 10% penalty on withdrawals, up to $100,000 from qualified retirement plans, has been waived for distributions on or after the date this law is enacted, but before December 31, 2020.
- To be eligible for this penalty waiver, you or a member of your family must either be diagnosed with COVID-19, been furloughed from your job, had your hours reduced, be unable to work due to no child care, or had negative financial consequences due to the above.
- The taxability of these distributions will be spread over a 3-year period unless you elect to report it all in 2020.
- If you chose to re-pay an amount withdrawn, you will have three years from the day after the distribution, to repay it, and the distribution will be treated as a qualified rollover within the 60-day period.
- Loans from a qualified plan have been increased from $50,000 to $100,000, and repayment can be delayed by one year.
- Waives all required minimum distributions (RMD) for 2020.
- On your 2020 tax return, you will be allowed to take up to a $300 above the line deduction for cash contributions to qualified charities. This is even for those that do not itemize.
- For tax year 2020, individuals will not be subject to the limitations on 2020 charitable contributions. For corporations, the 10% limit has been increased to 25%. Contributions of food inventory have been increased to 25%, up from 15%.
PAYCHECK PROTECTION PROGRAM
- Qualifying small businesses will be able to obtain an SBA loan, a portion of which may be forgiven if used for certain payroll and operating costs during the current pandemic
- Amount Available to any eligible business will be the lesser of:
- 2.5 x average total monthly “payroll costs” for the 1-year period (prior to the loan) PLUS the outstanding balance of any disaster loan through the SBA that was made between January 31, 2020, through the date that the PPP loan is eligible to be refinanced OR
- What the loan can be used for:
- Payroll Costs (See definition below)
- Group Healthcare Benefits
- Salaries and Commissions
- Interest Payments on Mortgage Obligations
- Interest paid on any other debt incurred prior to February 15, 2020
- Payroll costs are defined as follows for this type of loan request:
- All compensation of employees (salaries and benefits), excluding the following:
- The Small Business Administration may allow for a greater number of employees and may calculate the number per physical location for certain industries. The PPP also includes certain business affiliations that may not otherwise qualify for SBA loans.
- Compensation of an employee in excess of a $100,000.00 annual salary, prorated for the period between February 15, 2020, and June 30, 2020
- Taxes imposed or withheld under chapters 21, 22, or 24 of the Internal Revenue Code between February 15, 2020, and June 30, 2020
- Compensation to employees residing outside of the United States
- Sick and family leave wages for which credit is allowed under the Families First Coronavirus Response Act
COMMENTARY: Seasonal businesses and those not in operation between February 15, 2019, and June 30, 2019, are subject to different calculations.
SBA LOAN FORGIVENESS
- Available for expenditures made during the 8-week period, beginning the date of loan origination, for the following expenses:
- Payroll costs
- Mortgage Interest: Interest payments on mortgages secured by real or personal property arising in the regular course of business before February 15, 2020.
- Rent: For leases agreements in force before February 15, 2020.
- Utilities: Electric, Water, Gas, Transport, Telephone and Internet if service began before February 15, 2020.
- There may be potential reductions in forgiveness based on criteria related to the number of employees who are retained or rehired during the pandemic timeframe.
- SBA Loan Forgiveness Documentation:
- Businesses seeking to take advantage of the loan forgiveness provisions will have to make an application to their lender and should ensure that they have at least the following documentation:
- Verification of employees and pay rates by way of payroll tax filings, unemployment insurance filings, and other documentation; and
- Evidence of mortgage interest, lease and utility payments.
- The appropriate business representative will also be required to certify that the above documentation is true and correct and that the amount sought to be forgiven was used for the outlined purposes.
EMPLOYEE RETENTION CREDIT FOR EMPLOYER SUBJECT TO CLOSURE DUE TO COVID-19
- Applies to businesses that experience a full or partial cessation of operations in 2020.
- SAFE HARBOR TEST: A business will qualify if, in any given quarter in 2020, gross receipts were less than 50% of the corresponding quarter in 2019.
- Credit is equal to 50% of qualified wages paid to qualified employees who are unable to work between 3/13/2020 and 12/31/2020 due to a full or partial cessation of business operation.
- The maximum credit is $10,000 per qualified employee.
- This credit is refundable to the extent it exceeds payroll tax liability.
- Entities that receive an SBA Section 7(a) payroll protection loan are not eligible.
DELAY OF PAYMENT OF EMPLOYER PAYROLL TAXES
- The employer portion of social security taxes (6.2%) that would otherwise be due between the date of enactment of the CARES Act and 12/31/2020 are deferred as follows:
- 50% will be due 12/31/2021
- 50% will be due 12/31/2022
- Entities granted debt forgiveness from an SBA Section 7(a) loan are not eligible.
- 50% of the self-employment tax is not subject to late payment penalties.
- The employee portion of social security taxes, Medicare taxes, and federal income tax withholding is not affected by this provision.
MODIFICATION FOR NET OPERATING LOSSES
- This section applies specifically to corporate entities.
- Net operating losses created in 2018, 2019, and 2020 may be carried back up to five years.
- The limitation of NOLS to 80% of taxable income has been removed through tax year 2020. NOLs will be able to offset 100% of taxable income.
- REITs are excluded from these changes.
COMMENTARY: Tax returns filed for tax years 2018 and 2019 that included NOLs should be reviewed to determine if amending such returns would be beneficial to the taxpayer.
MODIFICATIONS OF LIMITATION ON LOSSES FOR TAXPAYERS OTHER THAN CORPORATIONS
- The excess business loss limitation (Sec 461) is suspended until 2021.
- The amounts of capital gains included in the calculation cannot exceed the lesser of:
- Net capital gains attributable to a trade or business OR
- Total net capital gains.
- This change is effective for tax years beginning after 12/31/17.
MODIFICATION OF CREDIT FOR PRIOR YEAR MINIMUM TAX LIABILITY OF CORPORATIONS
- Corporations carryforward credits generated by paying Alternative Minimum Tax.
- Corporations can claim refunds for all remaining AMT credits in 2018 and 2019.
MODIFICATION OF LIMITATION ON BUSINESS INTEREST
- This is a modification of the interest limitation provisions of Section 163(j).
- Under current law, the deduction of interest is limited to 30% of Adjusted Taxable Income (ATI).
- For 2019 and 2020 the limitation will be increased to 50% of ATI.
- For 2020, businesses can elect to use 2019 income as ATI for purposes of the limitation calculation. Entities filing 2020 short years returns are excluded from this election.
COMMENTARY: Tax returns filed for tax year 2019 that included a limitation of interest should be reviewed to determine if amending such returns would be beneficial to the taxpayer.
TECHNICAL AMENDMENTS REGARDING QUALIFIED IMPROVEMENT PROPERTY
- This section provides the long-awaited technical correction to the TCJA regarding the depreciable life of Qualified Improvement Property (QIP).
- The depreciable life of QIP has been reduced to 15 years.
- Bonus depreciation (100% and 50%) is now available to QIP.
- These changes are effective for qualifying property placed into service after 09/27/2017.
COMMENTARY: Tax returns filed for tax years 2017, 2018, and 2019 should be reviewed to determine if qualifying property was placed into service, and if amending those returns would be beneficial to the taxpayer.
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