The Coronavirus Aid, Relief, and Economic Security Act (CARES Act) represents the third phase of Congress’s legislative efforts to address the financial and health care crisis resulting from the coronavirus (COVID-19) pandemic. In addition to providing relief to individuals and mustering forces to shore up the medical response, the CARES Act includes numerous provisions intended to help affected businesses, including eligible self-employed individuals, weather the crisis.
Expanded SBA assistance for small businesses through Paycheck Protection Program: The CARES Act expands the ways the Small Business Administration (SBA) can help small businesses remain open and meet payroll. Section 7(a) of the Small Business Act was amended to provide for a new Paycheck Protection Program (PPP).
The PPP provides for loans to small businesses during the “covered period” beginning February 15, 2020, and running through June 30, 2020. These paycheck protection loans are generally available to any small business that employs less than 500 employees, including nonprofits, veterans organizations, tribal concerns, self-employed individuals, sole proprietorships, and independent contractors. The borrower must have been in operation on February 15, 2020 and had employees or paid independent contractors as reported on Form 1099-MISC. The maximum loan amount available is the lesser of the average monthly payroll multiplied by 2.5 or $10 million.
The allowable uses of the paycheck protection loans include payroll costs, group health care benefits, payments of interest on any mortgage obligation, rent, utilities, and interest on any other debt obligations incurred before the covered period. Moreover, if employers maintain their payrolls for eight weeks after the loan origination, the portion of the loan applied to payroll, mortgage interest, rent, and utilities will be forgiven (only 25% may be used for non-payroll expenses).
Borrowers should apply for the loan through any existing SBA Lender or through any participating FDIC Institution. All fees are waived for the paycheck protection loans and no personal guarantee or collateral is necessary. The maturity of the loan is 2 years and the interest rate is 1%. Paycheck protection loans come with payment deferment relief of 6 months and no prepayment penalties shall apply at any time.
Employee Retention Credit: To encourage employers to keep their workforces intact, the CARES Act creates a new refundable credit against payroll tax. The credit is generally available to employers whose:
• Operations have been fully or partially suspended due to a COVID-19-related governmental shutdown order, or
• Gross receipts have dropped more than 50% compared to the same quarter in the previous year (until gross receipts exceed 80% of gross receipts in the same calendar quarter in the previous year).
Employers with more than 100 employees can receive the credit for employees who’ve been furloughed or who’ve had their hours reduced due to one of the reasons above. Those with 100 or fewer employees can receive the credit regardless of whether employees have been furloughed.
The credit equals 50% of up to $10,000 in compensation — including health care benefits — paid to an eligible employee from March 13, 2020, through December 31, 2020. This results in a maximum $5,000 credit per employee. Employers who receive a paycheck protection loan under section 7(a) of the Small Business Act are not eligible for the Employee Retention Credit. This credit is not available for any employment taxes previously reduced by credits allowed under the Families First Coronavirus Response Act. Additional rules and limits apply.
Payroll Tax Deferral: The new law allows employers to delay their payment of the employer share (6.2% of wages) of the Social Security payroll tax incurred between March 27, 2020, and December 31, 2020. Taxpayers can pay the tax over the next two years, with the first half due by December 31, 2021, and the second half due by December 31, 2022. Self-employed individuals receive similar relief under the law, however, those taxpayers must still pay 50% of the Social Security tax (i.e. the employee’s share) as usual. The payroll tax deferral is not available to employers who receive loan forgiveness under the SBA loan programs described above.
Modifications for Net Operating Losses: Before the Tax Cuts and Jobs Act (TCJA), taxpayers could carry back net operating losses (NOLs) for two years, and carry forward the losses 20 years, to offset taxable income. The TCJA limited the NOL deduction to 80% of taxable income for the year, eliminated the carryback of NOLs, and removed the time limit on carryforwards.
The CARES Act loosens the TCJA restrictions. It allows NOLs arising in 2018, 2019, or 2020 to be carried back five years and temporarily removes the taxable income limitation for years beginning before 2021, so that NOLs can fully offset income. Taxpayers may need to file amended tax returns to obtain the full benefits of these changes.
Modifications to Excess Business Loss Limitation: The Tax Cuts and Jobs Act (TCJA) introduced a new business loss limitation referred to as the excess business loss. This provision of the TCJA disallows excess business losses of noncorporate taxpayers if the amount of the loss is in excess of $250,000 ($500,000 in the case of a joint return). The high-quality replica watches are hot sale online.
The new law amends the TCJA to temporarily eliminate the limitation on excess business losses for pass-through entities and sole proprietors. These taxpayers can now deduct excess business losses arising in 2018, 2019, and 2020. Taxpayers may need to file amended tax returns to obtain the full benefits of these changes.
Expedited depreciation of qualified improvement property: Prior to the TCJA, qualified retail improvement property, restaurant property, and leasehold improvement property was depreciated over 15 years under the modified accelerated cost recovery system (MACRS). The TCJA classifies all of these property types as qualified improvement property (QIP).
The legislative history of the TCJA is clear that Congress intended QIP placed in service after 2017 to have a 15-year MACRS recovery period and, in turn, qualify for 100% bonus depreciation through 2023 when the allowable deduction will begin to phase out. But, in what’s been called “the retail glitch,” the statutory language didn’t define QIP as 15-year property, so QIP defaulted to a 39-year recovery period, making it ineligible for bonus depreciation.
The CARES Act includes a technical correction to fix this drafting error. Hotels, restaurants, and retailers that have made qualified improvements during the past two years can claim an immediate tax refund for the bonus depreciation they missed. They also can claim bonus depreciation going forward, according to the phaseout schedule.
Modified limitation on business interest deductions: For tax years beginning after 2017, the TCJA amended the Internal Revenue Code to limit the deduction for business interest incurred by both corporate and noncorporate taxpayers. It generally limits the deduction to 30% of the taxpayer’s adjusted taxable income (ATI) for the year.
The CARES Act allows businesses to deduct up to 50% of their ATI for the 2019 and 2020 tax years. (Special partnership rules apply for 2019.) It also permits businesses to elect to use 2019 ATI, rather than ATI in 2020, for the calculation, which will increase the amount of the deduction for many businesses.
More to come?
Several members of Congress have suggested that the CARES Act won’t be the end of the federal legislative relief in response to the COVID-19 pandemic. We’ll keep you informed of new developments that could affect your bottom line and help you navigate the best financial course forward during these uncertain times.
The information contained herein is general in nature and is not intended, and should not be construed, as legal, accounting or tax advice. Please contact Henry & Peters P.C. or other tax professionals prior to taking any action based upon this information.