CARES Act – Focus on Tax Provisions for Businesses & Individuals
On March 27, 2020, President Trump signed into law the Coronavirus Aid, Relief and Economic Security Act (the CARES Act or Act), with its reported $2.3 trillion in spending or stimulus. The Act, while primarily targeting economic stabilization and stimulus, also contains a host of provisions intended to provide tax relief for businesses and individuals affected by the novel coronavirus (COVID-19).
A more detailed analysis of the tax provisions follows. At a summary level, the key tax provisions include:
- Cash payments to individuals in 2020 of $1,200 ($2,400 for joint filers) subject to phaseouts based on adjusted gross income (plus $500 per qualifying child under age 17.)
- Relaxation of charitable contribution limits in 2020 for individuals and corporations.
- Employer payroll tax credits relating to employee retention costs (as well as SBA payroll protection loans, which will be forgiven, tax-free, if multiple requirements are met.)
- Deferral of eligible employer payroll tax deposits for 2020 into 2021 & 2022.
- Elimination of the individual excess business loss limitation for 2018 to 2020.
- The section 163(j) interest expense limit is generally increased to 50% of adjusted taxable income (prior law 30%) for 2019 & 2020 (2020 only for partnerships)
- An elective 5-year NOL carryback for tax years beginning in 2018 & before 2021.
- Delay of the 80% NOL utilization limitation to tax years beginning after 12/31/2020.
- Retroactive correction to 2018 allowing qualified improvement property to be depreciated over 15 years (versus 39 under prior law) and be eligible for 100% bonus depreciation.
These tax provisions are discussed in more detail below, followed by a high-level summary of other provisions contained in the Act that may also be of interest to readers, including items such as the SBA Payment Protection loan provisions.
2020 Recovery Refund Checks for Individuals
The CARES Act provides eligible individuals with a refund check equal to $1,200 ($2,400 for joint filers) plus $500 per qualifying child under age 17. The refund begins to phase out if the individual’s adjusted gross income (AGI) exceeds $75,000 ($150,000 for joint filers and $112,500 for head of household filers.) The payment is completely phased out for individuals with no qualifying children if their AGI exceeds $99,000 ($198,000 for joint filers and $136,500 for head of household filers.) The rebate payment is not taxable.
Payments are expected to start being issued within three weeks of the enactment date. The CARES Act provides that the IRS will make automatic payments to individuals who have previously filed their income tax returns electronically, using direct deposit banking information provided on a return any time after January 1, 2018. The rebates are available even if the taxpayer has no income, and no action is generally required to claim the rebates.
Eligible individuals do not include nonresident aliens, individuals who may be claimed as a dependent on another person’s return, estates, or trusts. Eligible individuals and qualifying children must all have a valid social security number. For married taxpayers who filed jointly with their most recent tax filings (2018 or 2019) but will file separately in 2020, each spouse will be deemed to have received one half of the credit.
A qualifying child (i) is a child, stepchild, eligible foster child, brother, sister, stepbrother, or stepsister, or a descendent of any of them, (ii) under age 17, (iii) who has not provided more than half of their own support, (iv) who has lived with the taxpayer for more than half of the year, and (v) who has not filed a joint return (other than only for a claim for refund) with the individual’s spouse for the taxable year beginning in the calendar year in which the taxable year of the taxpayer begins.
The refund is determined based on the taxpayer’s 2020 income tax return but is advanced to taxpayers based on their 2018 or 2019 tax return, as appropriate. If an eligible individual’s 2020 income is higher than the 2018 or 2019 income used to determine the rebate payment, the eligible individual will not be required to pay back any excess rebate. However, if the eligible individual’s 2020 income is lower than the 2018 or 2019 income used to determine the rebate payment such that the individual should have received a larger rebate, the eligible individual will be able to claim an additional credit generally equal to the difference of what was refunded and any additional eligible amount when they file their 2020 income tax return.
Individuals who have not filed a tax return in 2018 or 2019 may still receive an automatic advance based on their social security benefit statements (Form SSA-1099) or social security equivalent benefit statement (Form RRB-1099.) Other individuals may be required to file a return to receive any benefits.
Above-the-line deductions: The Act allows an eligible individual to take a qualified charitable contribution deduction of up to $300 against their AGI in 2020. An eligible individual is any individual taxpayer who does not elect to itemize deductions. A qualified charitable contribution is a charitable contribution (i) made in cash, (ii) for which a charitable contribution deduction is otherwise allowed, and (iii) that is made to certain publicly supported charities.
This above-the-line charitable deduction may not be used to make contributions to a non-operating private foundation or to a donor-advised fund.
Modification of limitations on cash contributions: Under pre-Act law, individuals who make cash contributions to publicly supported charities are permitted a charitable contribution deduction of up to 60% of their AGI. Contributions in excess of the 60% AGI limitation are carried forward as a charitable contribution in each of the five succeeding years.
The CARES Act temporarily suspends the 60% of AGI limitation for qualifying cash contributions, permitting individual taxpayers to take a charitable contribution deduction for qualifying cash contributions made in 2020 of up to 100% of their AGI. Any excess is carried forward as a charitable contribution in each of the succeeding five years. Taxpayers wishing to take advantage of this provision must make an affirmative election on their 2020 income tax return.
This provision is useful to taxpayers who elect to itemize their deductions in 2020 and make cash contributions to certain public charities. As with the $300 above-the-line deduction, contributions to non-operating private foundations or donor-advised funds are not eligible for this Act benefit.
For corporations, the CARES Act temporarily increases the limitation on the deductibility of cash charitable contributions during 2020 from 10% to 25% of the taxpayer’s taxable income. The CARES Act also increases the limitation on deductions for contributions of food inventory from 15% to 25% of taxable income.
Compensation, Benefits, and Payroll Relief
The Act temporarily increases the amount of and expands eligibility for unemployment benefits, and it provides relief for self-employed workers. Several Act provisions assist certain employers who keep employees on payroll even though the employees are not able or needed to work. The cornerstone of the payroll protection aid is a streamlined application process for SBA loans that can be forgiven if an eligible employer maintains its workforce at certain levels (see further discussion below), but several provisions go beyond the loan provisions of the Act.
Employee Retention Credit: Certain “eligible employers” affected by the pandemic, who retain their employees, will receive a credit against the employer share of social security taxes up to a maximum of 50% of the first $10,000 in “qualified wages” paid to each eligible employee after March 12, 2020, through December 31, 2020. Eligible employers who receive a small business interruption loan under the Act are not eligible for this credit.
- An “eligible employer” carried on a trade or business in 2020, and with respect to any calendar quarter in 2020, either:
- The operation of the trade or business was fully or partially suspended during the quarter based on a COVID-19 related order from an appropriate governmental authority, or
- The quarter falls within a period starting with the first calendar quarter beginning in 2020 reflecting a decrease of more than 50% in gross receipts (compared to the same prior-year quarter) and ending with the quarter in which the gross receipts are at least 80% of receipts in the same prior-year quarter.
- “Qualified wages” for these purposes include:
- For employers with 100 or fewer full-time equivalent employees (FTEs) in 2019, any wages paid to such employee, or
- For employers with more than 100 FTEs in 2019, only wages paid to employees not able to provide services due to COVID-19 effects.
- For both 1 & 2, qualified wages do include the employer’s health plan expenses allocable to such wages, and do not include paid sick leave and paid family and medical leave under the Families First Coronavirus Response.
Deferral of Employer Social Security Tax Deposits: Eligible employers may defer remitting the employer share of social security tax payments that remain due for 2020 (after the above credits are deducted), with half being due by December 31, 2021, and the balance due by December 31, 2022. Social security taxes for the period March 27, 2020, to December 31, 2020, are eligible for this treatment. Self-employed individuals are eligible for a deferral of 50% of the social security portion of their self-employment tax. If the employer was also eligible for the Families First employment tax credit, that credit would reduce the tax subject to deferral. In addition, employers who receive an SBA payroll protection loan forgiveness may not be eligible for the deferral. Employers with fewer than 500 employees are also allowed to give terminated employees access to the mandated paid federal sick and child care leave benefits for which the employer is 100% reimbursed by the government through payroll tax credits if the employer rehires the qualifying employees.
“Partner” Note: Any benefit that is driven off the definition of “employee” raises the issue of partner versus employee. The profits interest member that is receiving a W-2 may not be eligible for inclusion in the various benefit computations.
Retirement Plan Changes
Eligible individuals (based on COVID-19 related factors) can withdraw vested retirement plan and IRA balances in amounts up to $100,000 during 2020, without a 10% early distribution penalty, and income inclusion can be spread over three years (if not repaid), or treated as tax-free rollovers if repaid within three years of taking the distribution. Distributions will satisfy the hardship distribution provisions of the code, and they will be exempt from tax withholding.
This enhanced distribution provision applies only to people who are directly affected, either through their own illness, the illness of a family member, a quarantine order, furlough or reduced hours, or inability to work because childcare is unavailable. A salary reduction alone is not enough to trigger this early IRA distribution relief. However, the Act does give Treasury the ability to expand the list of affected individuals. Plan participants self-certify their eligibility for these provisions.
The bill also makes it easier to borrow money from 401(k) accounts, raising the limit to $100,000 from $50,000 for the first 180 days after enactment, and the payment dates for any loans due the rest of 2020 would be extended for a year. The individuals to whom this provision applies are the same as those covered by the provision permitting penalty-free distributions.
Individuals do not have to take their 2020 required minimum distributions from their retirement accounts. This avoids lost earnings power on the taxes due on distributions and maximizes the potential gain as the market recovers.
Two long-awaited provisions allow employers to assist employees with college loan debt through tax-free payments up to $5,250 and restores over-the-counter medical supplies as permissible expenses that can be reimbursed through health care flexible spending accounts and health care savings accounts.
Deferral of Excess Business Loss Limitation for Three Years (Noncorporate Taxpayers)
Pre-Act law summary- Pre-Act Section 461(l) limits non-corporate taxpayers in their use of business losses to offset other sources of income. As enacted in 2017, this limitation was effective for taxable years beginning after 2017 and before 2026 and applied after the other basis, at-risk, and passive activity loss limitations. The amount of deductible overall business loss was limited to $500,000 for married taxpayers filing a joint return and $250,000 for all other taxpayers. These amounts were indexed for inflation after 2018 (to $518,000 and $259,000, respectively, in 2020). Excess business losses were carried forward to the next succeeding taxable year and treated as a net operating loss in that year.
The CARES Act defers the effective date of Section 461(l) for three years but also makes important technical corrections that will become effective when the limitation on excess business losses becomes applicable in the future. Accordingly, excess business losses from 2018, 2019, or 2020 may offset other sources of income, provided they are not otherwise limited by other provisions that remain in the Code (e.g. basis, at-risk, and passive limitations remain.)
Section 163(j) (Business interest expense limitation) Amended for Taxable Years Beginning in 2019 and 2020
The CARES Act amends Section 163(j) for taxable years beginning in 2019 and 2020. With the exception of partnerships, and only for taxable years beginning in 2019 and 2020, taxpayers may deduct business interest expense up to 50% of their adjusted taxable income (ATI), an increase from 30% of ATI under prior law established by the 2017 Tax Cuts and Jobs Act (TCJA). An election is available to retain the lower limitation for any taxable year.
Additionally, for any taxable year beginning in 2020, the taxpayer may elect to use its 2019 ATI for purposes of computing its 2020 Section 163(j) limitation. This will benefit taxpayers who may be facing reduced 2020 earnings as a result of the business implications of COVID-19. As such, taxpayers should be mindful of elections on their 2019 return that could impact their 2019 and 2020 business interest expense deduction.
With respect to partnerships, the increased Section 163(j) limit from 30% to 50% of ATI only applies to taxable years beginning in 2020. However, in the case of any excess business interest expense allocated from a partnership for any taxable year beginning in 2019, 50% of such excess business interest expense is treated as not subject to the Section 163(j) limitation and is fully deductible by the partner in 2020. The remaining 50% of such excess business interest expense is subject to the limitations in the same manner as any other excess business interest expense so allocated. Each partner has the ability, under regulations to be prescribed by Treasury, to elect to have this special rule not applied. No rules are provided in the Act for application of this rule in the context of tiered partnership structures.
Net Operating Losses Carryback Allowed for Taxable Years Beginning in 2018 and Before 2021
Under pre-Act law, the deductibility of net operating losses (NOLs) generated in years beginning after December 31, 2017, was limited to 80% of taxable income in the carryforward year. In addition, pre-Act law did not allow any carryback of an NOL generated in a year beginning after December 31, 2020. The CARES Act provides for an elective five-year carryback of net operating losses (NOLs) generated in taxable years beginning after December 31, 2017, and before January 1, 2021. Taxpayers may elect to relinquish the entire five-year carryback period with respect to a particular year’s NOL, with the election being irrevocable once made.
In addition, the 80% limitation on NOL deductions arising in taxable years beginning after December 31, 2017, has temporarily been pushed to taxable years beginning after December 31, 2020.
Several ambiguities in the application of Section 172 arising as a result of drafting errors in the Tax Cuts and Jobs Act have also been corrected. As certain benefits (i.e., charitable contributions, Section 250 “GILTI” deductions, etc.) may be impacted by an adjustment to taxable income, and therefore reduce the effective value of any NOL deduction, taxpayers will have to determine whether to elect to forego the carryback. Moreover, the bill provides for two special rules for NOL carrybacks to years in which the taxpayer included income from its foreign subsidiaries under Section 965. Please consider the impact of this interaction with your international tax advisors.
However, given the potential offset to income taxed under a 35% federal rate, and the uncertainty regarding the long-term impact of the COVID-19 crisis on future earnings, it seems likely that most companies will take advantage of the revisions. While the highest average corporate federal rate was 35% before 2018, the highest marginal corporate tax rate was 38.333% for taxable amounts between $15 million and $18.33 million. This was part of our progressive tax system to eliminate the benefits of the 34% tax rate. Tax rates for individuals were also higher in prior years, so individuals with business losses may also benefit from this provision. Businesses may wish to revisit their tax accounting methodologies to defer income and accelerate deductions to maximize their current year losses to increase their NOL carrybacks to earlier (higher-rate) years.
Alternative Minimum Tax Credit Refunds
The TCJA had repealed the corporate alternative minimum tax (AMT) and had allowed corporate taxpayers to obtain a refund for a portion of any excess AMT credit in the years 2018-2021.
The CARES Act allows the refundable AMT credit to be completely refunded for taxable years beginning after December 31, 2018, or by election, taxable years beginning after December 31, 2017.
Technical Correction to Qualified Improvement Property
The CARES Act contains a technical (and retroactive) correction to a drafting error in the TCJA that required “qualified improvement property” (QIP), relating to certain interior improvements to commercial buildings, to be depreciated over 39 years, rendering such property ineligible for bonus depreciation. With the technical correction applying retroactively to 2018, QIP is now 15-year property and eligible for 100% bonus depreciation. This will provide immediate current cash flow benefits and relief to taxpayers, especially those in the retail, restaurant, and hospitality industries. Taxpayers that placed QIP into service in 2019 can claim 100% bonus depreciation prospectively on their 2019 return.
Corporations should consider whether they can file Form 4466 to quickly recover overpayments of 2019 estimated taxes. Taxpayers that placed QIP in service in 2018 and that filed their 2018 federal income tax return treating the assets as bonus-ineligible 39-year property should consider amending that return to treat such assets as bonus-eligible. For C corporations, in particular, claiming the bonus depreciation on an amended return can potentially generate NOLs that can be carried back five years under the new NOL provisions of the CARES Act to taxable years before 2018 when the tax rates were 35%, even though the carryback losses were generated in years when the tax rate was 21%. With the taxable income limit under Section 172(a) being removed, an NOL can fully offset income to generate the maximum cash refund for taxpayers that need immediate cash.
Alternatively, in lieu of amending the 2018 return, taxpayers may file an automatic Form 3115, Application for Change in Accounting Method, with the 2019 return to take advantage of the new favorable treatment and claim the missed depreciation as a favorable Section 481(a) adjustment. Partnerships who fall under the Bipartisan Budget Act provisions, and therefore cannot amend 2018 income tax returns, will want to consider the Form 3115 option to take advantage of this technical correction.
Excise Tax Exemption for Hand Sanitizer
The Act exempts from excise taxes any distilled spirits used to produce hand sanitizer during 2020.
Effects of the CARES Act at the State and Local Levels
The tax implications of the CARES Act at the state level depends on whether a state is a “rolling” Internal Revenue Code (IRC) conformity state (such “rolling” state would generally automatically follow the new federal tax law in the Act) or follows “fixed-date” conformity. A number of states have enacted recent updates during their current legislative sessions (e.g., Idaho, Indiana, Maine, Virginia, and West Virginia). Nonetheless, even if a state has enacted recent updates, the effective date of the update may not apply to changes to the IRC enacted after January 1, 2020. Other states have either expressly decoupled from Section 163(j) or conform to an earlier version of federal law and will not follow the CARES Act changes [e.g., California, Connecticut, Georgia, Missouri, South Carolina, Tennessee (starting in 2020), Wisconsin]. Similar considerations will apply to the NOL modifications for states that adopted the 80% limitation, and most states do not allow carrybacks. Likewise, in fixed-date conformity states that do not update, the Section 461(l) limitation will still apply, resulting in a separate state NOL for those states.
Oregon generally provides a rolling tie to federal taxable income, so absent legislation to the contrary, Oregon should conform to any changes in federal taxable income associated with CARES Act tax provisions.
These conformity questions add another layer of complexity to applying the tax provisions of the CARES Act at the state level. Further, once the COVID-19 crisis is past, rolling IRC conformity states must be monitored, as these states could decouple from these CARES Act provisions for purposes of state revenue.
Discussion of the CARES Act in General, with Highlights of Non-Tax-Focused Provisions
The CARES Act is 880 pages long, consisting of the following Divisions and Titles:
Division A: Keeping Workers Paid and Employed, Health Care System Enhancements, and Economic Stabilization
- Title I: Keeping American Workers Paid and Employed Act (which includes paycheck protection and loan forgiveness).
- Title II: Assistance for American Workers, Families, and Businesses (which includes unemployment insurance and tax relief).
- Title III: Supporting America’s Health Care System in the Fight Against the Coronavirus (which includes provisions relating to health care coverage and paid sick and family medical leave).
- Title IV: Economic Stabilization and Assistance to Severely Distressed Sectors of the United States Economy.
- Title V: Coronavirus Relief Funds
- Title VI: Miscellaneous Provisions
Division B: Emergency Appropriations for Coronavirus Health Response and Agency Operations
We will discuss only selected primarily non-tax highlights of the Act below that may be of general interest. It is not a comprehensive discussion of the Act or any specific provision. You should obtain legal advice to determine how any specific provision applies to you or your business.
Division A—Keeping Workers Paid and Employed, Health Care System Enhancements, and Economic Stabilization
Title I—Keeping American Workers Paid and Employed Act
The CARES Act creates a new Business Loan Program (BLP). From February 15, 2020, to June 30, 2020 (covered period), the law allows the Small Business Administration (SBA) to provide 100% federally-backed loans up to a maximum amount to eligible businesses to help pay operational costs like payroll, rent, health benefits, insurance premiums, utilities, etc. Subject to certain conditions, loan amounts are forgivable, as further discussed below. These loans are commonly referred to in the press and related articles as “payroll protection” loans, but can be used for a variety of qualifying purposes, not merely payroll.
- Are guaranteed 100% by the Small Business Administration (no personal guarantees or collateral required);
- Must be taken out between February 15, 2020, and June 30, 2020;
- May be forgiven for amounts used to cover defined operating expenses such as payroll costs, rent, mortgage interest payments, and utilities for up to two months from the loan origination date (forgiveness is excluded from taxable COD income); and
- Have a maximum maturity rate of 10 years and 4% interest if not forgiven.
The SBA has no recourse against any individual, shareholder, member, or partner of an eligible loan recipient for non-payment unless the individual uses the loan proceeds for unauthorized purposes as discussed below.
Eligible Loan Recipients
Businesses eligible for new BLP loans include but are not limited to any business concern, nonprofit organization, veterans’ organization, or Tribal business if it employs no more than the greater of:
- 500 employees (includes full-time, part-time, and those employed on other bases); or
- If applicable, a stated number of employees established by the SBA for the applicant’s industry.
There is a special eligibility rule for businesses in the hospitality and dining industries. For such businesses having more than one physical location, if it employs 500 or fewer employees per location and is assigned to the “accommodation and food services” sector (Sector 72) under the North American Industry Classification System (NAICS), the business is eligible to receive a loan.
Sole proprietors, independent contractors, and eligible self-employed individuals, as defined in the recent Families First Coronavirus Response Act, are potentially eligible loan recipients.
Loan Maximum, Borrower Eligibility Requirements, and Permissible Uses
The absolute maximum loan amount is $10 million, further limited to the lesser of (1) or (2) below:
a.) 2.5 times average total monthly payroll costs incurred in the one-year period before the loan is made (or for seasonal employers the average monthly payroll costs for the 12 weeks beginning on February 15, 2019, or from March 1, 2019, to June 30, 2019);
b.) then increased by the outstanding amount of a loan made under the Disaster Loan Program between January 31, 2020, and the date on which such loan may be refinanced as part of this new program;
(2) Upon request, for businesses that were not in existence during the period from February 15, 2019, to June 30, 2019 –
a.) 2.5 times the average total monthly payroll payments from January 1, 2020, to February 29, 2020;
b.)then increased by the outstanding amount of a loan made under the Disaster Loan Program between January 31, 2020, and the date on which such loan may be refinanced as part of this new program.
The borrower requirements to obtain a loan under the new BLP are fairly limited. The requirements include a good-faith certification that:
- The loan is needed to continue operations during the COVID-19 emergency;
- Funds will be used to retain workers and maintain payroll or make mortgage, rent, and utility payments;
- The applicant does not have any other application pending under this program for the same purpose; and
- From February 15, 2020, until December 31, 2020, the applicant has not received duplicative amounts under the new BLP.
Allowable uses of the BLP loan funds include:
- Payroll costs of up to $100,000 per individual per year, prorated for any covered period of less than one year. Payroll costs include such items as wages, salaries, bonuses, cash tips, commissions, vacation, parental/medical/sick leave, severance, retirement benefits, health insurance benefits and related premiums, amounts paid to independent contractors, and state/local taxes on qualifying compensation.
- Eligible payroll costs do not include compensation to certain employees residing outside the U.S., or sick/family leave costs for which a credit is allowed under the Families First Act, and certain federal taxes.
- Payments of interest on mortgage obligations and other debt obligations;
- Rent/lease agreement payments; and
Loan Forgiveness and Payment Deferral Relief
Regarding loan payment deferral rights, the CARES Act provides that businesses that were operating on February 15, 2020, and that have a pending or approved loan application under this program are presumed to qualify for complete payment deferment relief (for principal, interest, and fees) for six months to one year. Lenders are generally required to provide such relief during the covered period.
The BLP loans qualify for the CARES Act’s broader loan forgiveness provisions contained in Act Section 1106. Specifically, indebtedness is forgiven (and excluded from gross income) in an amount (not to exceed the principal amount of the loan) equal to the following costs incurred and payments made during the covered period (subject to limitations described below):
- Payroll costs;
- Interest payments on mortgages;
- Rent; and
- Utility payments.
Forgiveness amounts will be reduced for any A.) employee reductions, or B.) reductions in wages.
- Employee reductions – the reduction formula for fewer employees is:
- The maximum available forgiveness per the rules above, multiplied by the percentage derived in 2. below:
- The average number of full-time equivalent employees (FTEs) per month (calculated by the average number of FTEs for each pay period falling within a month) during the covered period divided by:
Either (at the election of the borrower, presumably choosing the lesser FTE below) –
a.) the average number of FTEs per month employed from February 15, 2019, to June 30, 2019; or
b.) the average number of FTEs per month employed from January 1, 2020, until February 29, 2020;
Or, in the case of seasonal employers, the denominator above shall be the average number of FTEs per month employed from February 15, 2019, until June 30, 2019.
The above formula can only reduce the maximum forgiveness, not increase it.
- Wage/salary reduction (retained employee with reduced compensation) effect on forgiveness. For reductions in wages, the forgiveness reduction is a straight reduction by the amount of any reduction in total salary or wages of any employee during the covered period that is in excess of 25% of the employee’s salary/wages during the employee’s most recent full quarter of employment before the covered period. “Employee” is limited for this purpose to only those employees who were not compensated during any pay period in 2019 at an annualized rate in excess of $100,000. There are additional rules reducing the penalty for employees rehired by June 30, 2020.
There are some required processes to apply for loan forgiveness. Borrowers seeking forgiveness of amounts must submit to their lender information regarding employees and pay rates, qualifying/covered costs, and loan proceed use certifications, as well as any other information the SBA may require.
Taxability – the Act specifically states with respect to forgiven loans under the above provision:
“For purposes of the Internal Revenue Code of 1986, any amount which (but for this subsection) would be includible in gross income of the eligible recipient by reason of forgiveness described in subsection (b) shall be excluded from gross income.” Despite the explicit exclusion from gross income of the principal of the loan used for qualifying business expenses, there appears to be no provision within the Act that would preclude the recipient from deducting for tax purposes the covered expenses.
Expansion of SBA Disaster Loan Program
In addition to expansion of the Business Loan Program described above, the CARES Act expands the Disaster Loan Program. The covered period for this is January 31, 2020-December 31, 2020. In addition to current eligible entities, the following may receive disaster loans:
- A business with 500 or fewer employees;
- Sole proprietorships, with or without employees, and independent contractors;
- Cooperatives with 500 or fewer employees;
- ESOPs with 500 or fewer employees; and
- Tribal small business concerns.
The CARES Act makes the following additional changes to the Disaster Loan program during the covered period for loans made in response to COVID-19:
- Waives rules related to personal guarantees on advances and loans of $200,000 or less for all applicants;
- Waives the “1 year in business prior to the disaster” requirement (except the business must have been in operation on January 31, 2020);
- Waives the requirement that an applicant be unable to find credit elsewhere; and
- Allows lenders to approve applicants based solely on credit scores (no tax return submission required) or “alternative appropriate methods to determine an applicant’s ability to repay.”
Entities applying for loans under the Disaster Loan Program in response to COVID-19 may, during the covered period, request an emergency advance from the Administrator of up to $10,000, which does not have to be repaid, even if the loan application is later denied. The Administrator is charged with verifying an applicant’s eligibility by accepting a “self-certification.” Advances are to be awarded within three days of an application.
Disaster loan advances may be used for the following purposes:
- Providing sick leave to employees unable to work due to direct effect of COVID-19;
- Maintaining payroll during business disruptions during slow-downs;
- Meeting increased supply chain costs;
- Making rent or mortgage payments; and
- Repaying debts that cannot be paid due to lost revenue.
The CARES Act would appear to deem all states and their subdivisions to have sufficient economic damage to small business concerns to qualify for assistance under this disaster loan program (rather than the current state declaration and certification approach).
Title II—Assistance for American Workers, Families, and Businesses
Subtitle A—Unemployment Insurance Provisions
While this subtitle addresses other unemployment benefits, it does contain the far-reaching provision whereby states are given the opportunity to enter agreements with the federal government to provide enhanced unemployment benefits under existing state unemployment benefit programs. This subtitle provides for immediate unemployment compensation payments, without any waiting period, for an additional $600 per week for up to four months (even if the employee is currently making less), and an additional 13 weeks of unemployment benefits for participating states.
Subtitle B & C – Individual and Corporate\Business Tax Provisions
The tax provisions are contained in Subtitles B and C of Title II of Division A of the CARES Act. Subtitle B provides for tax relief for individuals and Subtitle C provides tax relief for businesses. The primary tax provisions in both are discussed at the beginning of this bulletin.
The Act also delays minimum funding contributions for qualified plans, including quarterly contributions until January 1, 2021. The amount of each such minimum required contribution shall be increased by interest accruing for the period between the original due date and the payment date, at the effective rate of interest for the plan year in which the payment is made.
Title III—Supporting America’s Health Care System in the Fight Against the Coronavirus
Changes to Paid Sick Leave and Family Leave Provisions from Families First Act
The Act provides a few clarifications and makes modest changes to the Family Medical Leave Act provisions in the previous Families First relief package. Those changes include:
- A new rule for rehired employees under which “eligible employee” (defined as employed for at least the last 30 calendar days) includes someone who:
- Was laid off by the employer March 1, 2020, or later,
- Had worked for the employer for at least 30 days in the last 60 calendar days prior to the lay-off; and
- Has been rehired by the employer; and
- Allows for advances on anticipated tax credits for employers’ paid family leave costs (the details/process for which will be worked out in instructions provided by the Department of Labor (DOL)), and provides penalty relief for failure to deposit tax amounts in anticipation of credits allowed under this section.
In terms of clarifications, the Act clarifies that the $200 per day/$10,000 total cap on paid leave is per employee, which was omitted from the Families First Act.
There are similar changes made to the paid sick leave provisions from the Families First Act, which include:
- provisions intended to improve the ability of taxpayers to monetize the benefit of the recently enacted sick and family leave credits. Specifically, the Act allows employers to receive an advance tax credit from Treasury instead of having to pay and be reimbursed. Also, it provides penalty relief for failure to deposit tax amounts in anticipation of credits allowed under this section.
The Act also makes a clarification that the paid sick leave dollar limits are also per employee.
Health Savings Accounts
In addition, the CARES Act repeals the rule enacted in the Affordable Care Act that prohibited over-the-counter medicines (i.e., non-prescribed) other than insulin from being “qualified medical expenses.” Thus, users of health savings accounts or flexible spending accounts would be able to use funds in those accounts to cover over-the-counter medical products, including those needed in quarantine and social distancing, without a prescription. The provision also adds menstrual products to the definition of qualified medical expenses.
Title IV—Economic Stabilization and Assistance to Severely Distressed Sectors
Title IV of the Act provides approximately $500 billion to the Treasury’s Exchange Stabilization Fund for loans, loan guarantees, and investments in the Federal Reserve’s lending facilities to support states, municipalities, and “eligible businesses,” which include air carriers and U.S. businesses that have not received “adequate economic relief” in the form of other loans or loan guarantees.
The $500 billion is allocated as follows:
- $25 billion in loans and loan guarantees for air carriers;
- $4 billion in loans and loan guarantees for cargo air carriers;
- $17 billion in loans and loan guarantees for businesses critical to maintaining national security; and
- $454 billion for loans, loan guarantees, and investments in support of facilities established by the Federal Reserve to support lending to eligible businesses, states, and municipalities.
Loans and Loan Guarantee Criteria
The CARES Act gives the Treasury Secretary discretion to make loans and loan guarantees for a duration no longer than five years and at an interest rate not less than prevailing market rates prior to the COVID-19 outbreak. The loans cannot be forgiven.
To access a loan, a business must be U.S.-domiciled, and its employees must be predominately located in the United States. The business also must show that alternative financing is not reasonably available.
For 12 months after the expiration of the loan or loan guarantee, the business will be prohibited from buying back its company stock, paying dividends or making other capital distributions, and reducing its workforce by more than 10%.
Participants in loan or loan guarantee programs must also agree to provide the Treasury Secretary with a warrant or equity interest in the business or, alternatively, a senior debt instrument issued by the borrower. The Treasury Secretary will not exercise voting power with respect to any shares of common stock and retains the right and discretion whether to sell, exercise, or surrender these interests for the primary benefit of taxpayers.
Main Street Lending Program
The Act encourages the Federal Reserve to establish a facility that supports lending to small and mid-size businesses.
Executive Compensation Restrictions
In order for an eligible borrower to participate in CARES Act funding programs, the borrower receiving specified Act Title IV loans must agree to cap all employee compensation (including salary, stock, and bonuses) for a period ending one year after the loan is repaid. For employees receiving more than $425,000 per year, (i) these employees cannot receive more compensation than they received in 2019; or (ii) severance pay or other benefits upon termination cannot exceed twice the 2019 compensation amount. Officers or employees receiving more than $3 million per year cannot receive total compensation in excess of (i) $3 million, plus (ii) 50% of the excess over $3 million.
Conflicts of Interest
The CARES Act prohibits any company in which the President, Vice President, executive department head, Member of Congress, or any of the individuals’ spouse, child, son-in-law, or daughter-in-law own a controlling interest, from participating in these programs.
Residential Mortgage Provisions and Foreclosure Moratorium
Foreclosure Moratorium and the Right to Request Forbearance
The Act provides that a borrower with a federally backed mortgage loan may request forbearance, regardless of delinquency status and without penalties, fees, or interest, by submitting a request to the borrower’s servicer and affirming financial hardship due to COVID-19. A forbearance must be granted for up to 180 days and extended for an additional period of up to 180 days at the request of the borrower, though the initial or extended forbearance may be shortened. Servicers must notify the borrower in writing of their right to request forbearance throughout a national emergency. Multifamily borrowers with a federally backed multifamily mortgage loan that was current on February 1, 2020, may also request a forbearance for up to 30 days, with two additional 30-day extensions.
The Act also prohibits the servicer of a federally backed mortgage loan, except for a vacant or abandoned property, to initiate any foreclosure process, move for a foreclosure judgment or order of sale, or execute a foreclosure-related eviction or foreclosure sale for at least 60 days beginning on March 18, 2020.
The CARES Act prevents landlords/lessors from taking legal action to recover possession from any tenant for nonpayment of rent or other fees or charges for 120 days if the dwelling is a property insured, guaranteed, supplemented, protected, or assisted in any way by the U.S. Department of Housing and Urban Development (HUD), Fannie Mae, Freddie Mac, the rural housing voucher program, or the Violence Against Women Act of 1994.
Suspension of GAAP for COVID-19 Loan Modifications
The Act allows financial institutions to make loan modifications related to COVID-19 or its effects without being categorized as a troubled debt restructuring. Such suspensions are applicable for the term of the loan modification and may be made from March 1, 2020, through the earlier of (i) 60 days after the expiration of the national emergency declaration or (ii) December 31, 2020.
Credit Reporting Relief
The Act requires reports to credit reporting agencies to show accounts as current even when there has been an account forbearance or agreement to modify payments on an account impacted by COVID-19. This will apply from January 31, 2020, through the later of 120 days after (i) enactment, or (ii) expiration of the national emergency declaration.
Tax Treatment of Loans
The Act treats loans made or guaranteed by Treasury as debt for federal income tax purposes. It also instructs Treasury to issue guidance ensuring that modified ownership interests arising from loans and loan guarantees provided by the federal government under the CARES Act do not trigger a change in ownership for section 382 purposes.
Aviation Excise Taxes
The Act provides an excise tax holiday from the date of enactment through the end of 2020 for aviation ticket taxes (both passengers and freight) and taxes on kerosene used in commercial aviation.
Title V—Coronavirus Relief Funds
No information included for this title.
Title VI—Miscellaneous Provisions
No information included for this title.
Division B—Emergency Appropriations for Coronavirus Health Response and Agency Operations
Division B of the CARES Act consists of emergency appropriations for a wide variety of federal programs to help deal with the consequences of the COVID-19 pandemic. We have summarized only the program below intended to benefit those in the fishing industry since this provision could have substantial benefit in the Northwest and may be of interest to many readers. There are many other areas of program funding by Division B of the CARES Act not addressed here.
Financial Assistance to Fishery Participants
- $300 million will be provided for assistance for fishermen, run by the National Marine Fisheries Service (NMFS).
- Disaster assistance is available to Tribal, subsistence, commercial, and charter fishermen, as well as aquaculture farmers.
- Recipients must have either, as a direct or indirect result of the coronavirus pandemic, incurred (1) economic revenue losses greater than 35% as compared to the prior 5-year average revenue, or (2) any negative impacts to subsistence, cultural, or ceremonial fisheries.
- May include direct relief payments.
- Funds may be awarded on a rolling basis and within a fishing season.
- Provided funds are to remain available until September 30, 2021.
Disclaimer: The information contained in this communication, including attachments and enclosures, is not intended to be a complete analysis of all related issues. Nor is it sufficient to avoid tax-related penalties. It has been prepared for informational purposes and general guidance only and does not constitute professional advice. You should not act upon the information contained in this publication without obtaining specific professional advice. No representation or warranty (express or implied) is made as to the accuracy or completeness of the information contained in this publication, and Perkins & Company, its members, employees and agents accept no liability, and disclaim all responsibility, for the consequences of you or anyone else acting, or refraining to act, in reliance on the information contained in this publication or for any decision based on it.