Senate Passes CARES Act; Bill Goes to House

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The US Senate passed a $2.2 trillion economic stimulus package late on March 25 and sent it to the US House of Representatives. The Coronavirus Aid, Relief, and Economic Security (CARES) Act, the most expensive bill in history, will not become law until it also passes the House and is signed by the president. It remains to be seen whether the House takes up the Senate bill and approves it quickly or makes changes which would delay the legislation.


Paycheck Protection Small Business Loanspaycheck


Businesses and nonprofits with fewer than 500 employees, including sole proprietors, may access nearly $350 billion in federally guaranteed "paycheck protection loans" from lenders through June 30, 2020. The loans are limited to 250% of the business's average monthly payroll costs for the preceding year. A loan may not exceed $10 million. Once a loan is obtained, the refundable employer payroll tax credit and the payroll tax deferral (discussed below) becomes unavailable.


Payroll costs included in the 250% calculation includes a wide variety of compensation, including wages, salary, commissions, paid time off, group benefits, retirement benefits, and severance pay. However, the calculation does not include costs of more than $100,000 relating to any one individual during the year. Payroll costs do not include payroll taxes, costs for employees who work primarily overseas, and costs for COVID-19 sick leave pay for which a federal credit is claimed.


The interest rate cannot exceed 4%, and the term is limited to ten years. Proceeds must be used to pay for payroll, mortgage payments, rent, utilities, and other debt service. No personal guarantee is required by the business owner. A separate provision of the Act permits a possible deferral of loan repayments for 6 months to 1 year.


The federal guarantee will cover 100% of all loans through December 31, 2020, after which the federal guarantee is reduced to 85% for loans over $150,000. Standard SBA loan fees are waived.


Loan Forgiveness


A portion of these loans may be forgiven with no taxable cancellation of debt income. The amount forgiven is the payment for payroll costs, mortgage interest, rent, and some utilities for the first 8 weeks after the date of the loans. Full documentation must be provided to the lender.


This forgiveness is reduced if, during those first 8 weeks, the employer reduces its workforce below comparable periods in 2019 or 2020 or if it reduces the salary or wages of an employee earning under $100,000 per year more than 25%. The reduction may be avoided if the workforce or salary reduction is restored within a certain time period.


Refundable Employer Payroll Tax Credit


Businesses forced to suspend or close operations due to COVID-19 that continue to pay employees during the shutdown are eligible for a 1-year credit against the employer's share of Social Security payroll taxes for wages paid between March 12 and December 31, 2020.


The credit is claimed on a quarterly basis but is limited to a total of $10,000 per employee for all quarters. If the credit exceeds the employer's payroll tax liability for a quarter, the excess is refundable. The credit is not available to employers that borrow one of the paycheck protection loans discussed above.


The credit is available to businesses under two circumstances: (1) when operations are fully or partially suspended in 2020 as a result of a government order; and (2) when a business remains open but quarter-to-quarter gross receipts are down more than 50% compared to the same quarter in 2019. If the credit is claimed for the second reason, it will continue to apply in subsequent quarters if the quarter-to-quarter receipts remains under 80% of that quarter in 2019.


For each eligible quarter, the business will receive a credit against the 6.2% employer share of Social Security payroll taxes equal to 50% of the qualified wages paid to each employee during that quarter. The definition of qualified wages depends on the number of employees on payroll during 2019. If that number is 100 or more, qualified wages are limited to wages that were paid by the employer during the quarter for the period the business was shut down. Businesses with fewer than 100 employees in 2019 may also include wages paid for each quarter that the business has suffered a sharp decline in year-over-year receipts (number (2) above).


Qualified wages include group health plan expenses and similar expenses allocable to the wages. It does not include costs for COVID-19 sick leave pay for which a federal credit is claimed.


Payroll Tax Deferral 


In order to provide employers' liquidity and incentivize retention of employees during the period of quarantine or shutdown, the Act defers the payment of the employer's share of Federal Social Security taxes (FICA 6.2%) beginning with the date the bill is signed into law and ending on December 31, 2020. This includes 50% of payroll taxes incurred by self-employed persons. One-half of the deferral is due on December 31, 2021, and the remaining fifty percent is due on December 31, 2022. The deferral is not available to employers that borrow one of the paycheck protection loans discussed above.


Expanded Unemployment


The Act enables any state to participate in an agreement with the Secretary of Labor which would increase the allowable unemployment compensation by $600 per week. The Act also allows states to waive the waiting requirement (typically one week) before receiving benefits. Additionally, the Act enables those whose unemployment benefits expired prior to July 1, 2019 and are not currently receiving compensation and are able to work to receive benefits under the Pandemic Emergency Unemployment Compensation provision.


Individual Stimulus Paymentsstim


One of the most prominent provisions of this legislation is the recovery rebates of $1,200 for individuals and $2,400 for joint taxpayers, plus $500 for each child under age 17. These amounts are advance refunds of credits against 2020 taxes and will begin to be distributed as soon as the legislation becomes law. The stimulus payments are phased out based on 2018 adjusted gross income (unless a 2019 return has been filed) beginning at $75,000 for singles, $112,500 for heads of household and $150,000 for joint filers. The rebates are completely phased out if adjusted gross income is over $99,000, $136,500 and $198,000 respectively.


In order to be eligible, the individual must not be a nonresident alien, able to be claimed as a dependent, or an estate or trust, and must have included a Social Security number for the taxpayer, spouse, and children.


Qualified Improvement Property Fixfix


When the TCJA was enacted, one of the most glaring drafting errors was the failure by Congress to categorize qualified improvement property (such as leasehold improvements) as 15-year property eligible for 100% bonus depreciation, instead leaving taxpayers in the position of having to depreciate this property over 39 years.


The legislation rectifies this drafting error, by allowing these improvements to be classified as 15-year property eligible for bonus depreciation retroactive to September 27, 2017, as if it was included in the original TCJA. As a result, amended returns may be filed to claim the accelerated depreciation for prior year returns.


Use of Retirement Funds For COVID-19 Costsretirement


The 10% penalty on early withdrawals up to $100,000 from qualified retirement plans is waived during tax year 2020 to an individual or spouse diagnosed with COVID-19 or someone who experiences adverse financial consequences as a result of quarantine, business closure, layoff, or reduced hours. The income is still taxable but may be taken into income over a 3-year period. Alternatively, taxpayers may recontribute the withdrawn amount back into the plan without regard to annual caps on contributions during the 3-year period.


All minimum required distributions for 2020 have been waived regardless of whether the taxpayer has been impacted by the pandemic.


Charitable Contributions


For taxpayers taking the standard deduction, an above-the-line $300 deduction for charitable contributions has been added for the 2020 tax year. In addition, the limitation of 50% of adjusted gross income has been replaced with 100% for 2020 and the limitation for corporations, previously limited to 10%, has been increased to 25% for this year.


Net Operating Lossesnet


The Tax Cuts and Jobs Act (TCJA) made major changes to the net operating loss (NOL) rules for businesses, starting in 2018. After TCJA, losses could no longer be carried back for a refund of tax paid in a prior year and could be carried forward for unlimited years until used. TCJA limited the ability to use an NOL against the taxable income of a year to only offset 80% of that income.


The CARES Act allows the carryback of losses generated in tax years 2018, 2019, and 2020 for up to 5 years, allowing the recovery of tax paid for years as early as 2013. As with pre-TCJA rules, taxpayers may elect to forgo the carryback and carry the NOL forward only. Also, the 80% income limitation does not apply to losses carried to tax years 2019 and 2020. NOLs carried to those years may be used to offset 100% of that year's income.


Net Business Loss Limitationnetb


TCJA put a new roadblock on the ability of noncorporate taxpayers to use business losses against other income, such as interest, dividends, and capital gains. Business losses could no longer offset other income without restriction. Instead, only the first $500,000 of business losses generated in a tax year (on joint returns, $250,000 on all others) could be used against other income. Any loss above that became an NOL and was carried forward subject to the NOL rules.


The CARES Act removes the TCJA business loss limitations for tax years 2018, 2019, and 2020, allowing a loss in those years to be used fully against other income. If a loss was limited on a 2018 or 2019 return already submitted, an amended return may be filed. However, a taxpayer-friendly provision that treated W-2 wages as business income for this purpose (and thus allowed it to be offset with no limit by business losses) has been repealed once the limitation returns.


Business Interest Expense Limitationbi


TCJA limited the ability of a business to fully deduct its interest expense. The deduction was limited to 30% of taxable income, after certain adjustments, with any excess carrying forward. The CARES Act raises that limit to 50% for tax years 2019 and 2019.


Congress recognized that because many businesses will have losses in 2020, even the 50% limit will not provide benefit. To address this, the Act lets a business choose to use its 2019 income to compute the 50% limitation in 2020. Another rule benefits passthrough partners in partnerships subject to the interest limitation, allowing them to use a portion of suspended interest that would not have been available to them otherwise.


Employee Forgiveness of Debt Exclusionforgive


Under the CARES Act, an employer can pay up to $5,250 of an employee's student loan debt in 2020 without it being treated as taxable income to the employee. This is combined with the existing $5,250 employee income exclusion for employer payments of education expenses such as graduate tuition. In other words, the most an employee can exclude for either or both purposes is $5,250.


During this crisis, your LMC professional is available if you have questions related to the latest updates on this topic.   All our prior Alerts are available on the Updates page of our website.


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