UPDATE: As of March 27, the CARES ACT has been signed into law.
A third stimulus package to combat the COVID-19 public health emergency, the Coronavirus Aid, Relief, and Economic Security (CARES) Act builds tremendously on two previously enacted pieces of legislation and provides enhanced financial support for both individuals and businesses suffering from the continuing COVID-19 pandemic. Tax policy is front and center, with a focus on getting money directly into the hands of millions of individuals and providing liquidity for small businesses. A summary of the Act’s business tax and other significant provisions follows, with more specific details to come.
Business Tax Relief Provisions
The tax relief for businesses includes the following:
- A dollar-for-dollar employee retention credit against payroll tax liability equal to 50% of the first $10,000 in wages per employee paid after March 12, 2020 and before January 1, 2021. Eligible employers must have carried on a trade or business during 2020 and must either (1) have business operations fully or partially suspended due to orders from a governmental entity limiting commerce, travel, or group meetings due to COVID-19 or (2) experience a significant year over year reduction in profits (looking at calendar quarters) within a certain time period.
- Employer-side Social Security payroll tax payments attributable to wages paid in 2020 may be delayed and paid back over the next two years, with half of the amount required to be paid by December 31, 2021 and the other half by December 31, 2022. A general fund transfer will replace these employer payments to make the Social Security Trust Fund whole. This provision also covers self-employed individuals.
- Net operating losses (NOLs) earned in 2018, 2019, or 2020 can be carried back five (5) years. The NOL limit of 80 percent of taxable income is also temporarily suspended, so businesses may use any NOLs they have to fully offset their taxable income. Corporations, pass-through business, and sole proprietors will be able to take NOLs in accordance with these provisions.
- Suspends the limitations on excess farm losses as well as excess business losses of pass-through businesses and sole proprietors for 2018, 2019, and 2020 tax years.
- An increase in the net interest deduction amount from 30% to 50% of taxable income for 2019 and 2020. There are special rules that apply to partnerships’ 2019 tax year.
- Current deduction for qualified improvement property costs instead of being depreciated over many years; prior year’s returns may be amended to take advantage of this provision.
- The acceleration of corporate AMT credits available through 2021 for current use, allowing businesses the chance to claim a current refund.
- A waiver of the federal excise tax on any distilled spirits for or contained in hand sanitizer for 2020. The hand sanitizer must be produced and distributed according to guidance issued by the FDA in order to be qualify under this provision of the Act.
Small Business Loan Program Provisions
The CARES Act also amends the Small Business Act (SBA) to create a new business loan program category that will provide 100% federally-backed loans to eligible small businesses to help cover costs of operation such as payroll, rent, health benefits, and insurance premiums. Key aspects of these provisions include the following:
- Eligible entities include certain nonprofit organizations employing no more than 500 employees.
- Certain loan forgiveness allowed for business loans will be excluded from gross income. Loan forgiveness will be allowed in an amount equal to the cost of maintaining payroll continuity and costs related to debt obligations during period of March 1, 2020 through June 30, 2020, and is reduced for employee cuts or reductions. Employers with tipped employees may receive loan forgiveness for additional wages paid to those employees.
- The CARES Act also expands on the SBA’s Disaster Loan Program for a period from January 31, 2020 to December 31, 2020. If a business that receives an emergency advance transfers into the main business loan program, the advanced amount will be reduced from any payroll cost forgiveness amounts.
Individual Tax Provisions
The individual tax provisions of the CARES Act range from individual rebates to expanded charitable deduction limits. The Act specifically provides for:
- Advanced refundable tax credits (rebate checks) of up to $1,200 for eligible individuals, $2,400 for eligible joint filers, and an additional $500 per child. These numbers begin to phase out for individuals earning $75,000 and joint filers earning $150,000, with the IRS using taxpayers’ 2019 returns if filed, or 2018 returns in the alternative, to determine these amounts. There is a complete phaseout for incomes exceeding $99,000 for individuals and $198,000 for joint filers, but there is no minimum income requirement. The CARES Act exempts the rebates from offset to pay debts owed to other federal agencies, state income tax obligations, and unemployment compensation debts (except for support that is past due).
- Retirement account distributions up to $100,000 will not be subject to the 10% early withdrawal penalty for any “coronavirus-related distribution,” meaning a distribution by a person who has been diagnosed with COVID-19, whose spouse or dependent has been diagnosed with COVID-19, or who experiences financial hardship as a result of being quarantined, furloughed, laid off, caring for children, or working reduced hours due to such virus. This provision covers retirement plans and IRAs. Taxpayers can recontribute the withdrawn funds into their retirement accounts at any time for three years from the date of distribution without affecting retirement account caps. To the extent these amounts are not repaid the income inclusion with respect to any COVID-19 distribution can be included ratably over the same three-year period.
- A waiver of the required minimum distributions for certain contribution plans and IRAs for calendar year 2020. The delay applies to both 2019 required minimum distributions that need to be taken by April 1, 2020, and the 2020 required minimum distributions. There is a special rollover rule allowing amounts subject to required minimum distribution in 2020 to be rolled over. The CARES Act also delays the due date for certain amendments to plans, as well as delays the minimum funding contributions for qualified plans, including quarterly contributions until January 1, 2021.
- A charitable contribution deduction of up to $300 in cash contributions in addition to the standard deduction. For those who itemize, the CARES Act also expands the limit on charitable contributions by suspending the 50% limitation on individuals, increasing the 10% limit on corporations to 25%, and increasing the 15% limitation on food inventory to 25%.
- An expanded definition of employer-provided educational assistance that is excluded from gross income to include up to $5,250 in student loan payments made by an employer between the date of the CARES Act and the end of 2020. The CARES Act also suspends involuntary collections on student loans.
Assistance for Severely Distressed Economic Sectors Provisions
This portion of the CARES Act focuses on airlines and other businesses determined to have received inadequate economic relief through other provisions of the CARES Act. More specifically:
- It authorizes the Treasury Secretary to make loans, loan guarantees, and other investments in support of these sectors of up to $500 billion.
- $25 billion will be available for air carriers, $4 billion will be available for air cargo carriers, $17 billion will be available for businesses critical to maintaining national security, and $454 billion will be available in support of facilities established by the Federal Reserve to support lending to eligible businesses, states, and municipalities.
- In order to participate in these funding programs, borrowers must agree to cap all employee compensation for a period ending one year after their loan is repaid. This provision is aimed at excessive executive compensation.
- It provides that a borrower with a federally-back mortgage loan may request forbearance, regardless of delinquency status and without penalties, fees, or interest for those affirming financial hardship due to COVID-19.
- It prevents landlords from bringing legal causes of action to recover possession from a tenant for nonpayment of rent or other fees or charges for 120 days if the dwelling is insured, guaranteed, supplemented, etc. by the U.S. government.
- It provides credit-reporting relief for accounts impacted by COVID-19.
- It provides an excise tax holiday for aviation ticket taxes to both passengers and freight from the date of enactment through the end of 2020, as well as for taxes on kerosene used in commercial aviation.
Support for U.S. Healthcare System Provisions
The healthcare provisions of the CARES Act address everything from supply shortages and access to health care, to specific aid for our healthcare providers. They also provide a few clarifications and small changes to the family and sick leave provisions of the previous Families First relief package. Certain key provisions include:
- Increased funding for various healthcare agencies and programs.
- Expanded coverage for certain testing and expedited coverage for any service, treatment, or immunization that is intended to prevent or treat COVID-19.
- Clarification that for health savings account (HSA) plan years beginning on or before December 31, 2021, a plan will not fail to be a high deductible health plan by failing to have a deductible for telehealth and other remote care services. The CARES Act also repeals the rule enacted in the Affordable Care Act that prohibited the use of HSA funds for over-the-counter medicines.
- Clarification that paid leave dollar limits in the Families First Act is applied per employee.
Individual Unemployment Insurance Provisions
Beyond individual tax relief provisions, the other major form of relief for individuals is unemployment compensation. More specifically, the CARES Act provides for:
- Expanded unemployment assistance (Pandemic Unemployment Assistance) through December 31, 2020, to provide payments to those who are traditionally ineligible for unemployment benefits (self-employed individuals and independent contractors) and are unable to work as a direct result of COVID-19. This expansion largely covers gig-economy workers.
- Payments of an additional $600 per week will be given to recipients of unemployment insurance or Pandemic Unemployment Assistance for up to four months.
- Emergency unemployment relief payments to states, which allow them to reimburse nonprofits, government agencies, and Indian tribes for half of the costs they incur to pay unemployment benefits from December 31, 2020.
Other provisions in the CARES Act include:
- $150 billion appropriated to states, territories, Indian tribes, and local governments to help these bodies respond to the COVID-19 public health emergency.
- Emergency appropriations for various federal programs that may be available to companies during this financial downturn.
There is already talk of a fourth stimulus bill. Certain provisions that were cut from the CARES Act during negotiations are expected to resurface in proposals for the fourth bill.