Senate Passes CARES Act

March 26, 2020 - Late on the night of March 25, the Senate passed the CARES Act to provide emergency assistance to individuals and businesses impacted by the coronavirus pandemic. The $2 trillion bill passed unanimously and is now going to the House of Representatives where House Speaker Nancy Pelosi is expected to take it up soon.

The bill includes a number of tax and non-tax provisions meant to provide relief to those impacted as well as a stimulus to the economy. Below is a summary of some key provisions of the bill.

Provisions Impacting Businesses

Tax Provisions

• The bill establishes an Employee Retention Credit providing eligible employers a credit of 50% of qualified wages (up to a maximum credit of $5,000 per employee), paid or incurred between March 13, 2020, and December 31, 2020.
  • The credit is a refundable credit against certain payroll taxes and is claimed on the quarterly payroll filings.
  • Eligible employers are those conducting business in a calendar quarter where the operations are:
    • 1) fully or partially suspended due to government orders limiting commerce, travel or group meetings due to the coronavirus, or
    • 2) within a period of significant decline in gross receipts. A period of significant decline in gross receipts begins when the gross receipts for the calendar quarter are less than 50% of the gross receipts for the same calendar quarter in the prior year, and ends when gross receipts are 80% of the gross receipts for the same quarter in the prior year.
  • The definition of qualified wages depends on the size of the employer. If the employer has greater than 100 full-time employees qualified wages are wages paid to the employee when they are not providing services as a result of the coronavirus.  For employers with 100 or fewer full-time employees qualified wages include wages paid for employees providing service to the employer as well as those who are not because of the coronavirus.
  • There are limitations for employers claiming other payroll credits and those taking small business loans described later.
• The bill allows for delayed payments of certain employer payroll taxes through the end of the 2020 calendar year with remittances due in two equal installments on December 31, 2021, and December 31, 2022.
• The bill modifies the Net Operating Loss (NOL) rules for years beginning before January 1, 2021, allowing for carrybacks of the loss to the previous 5 tax years and temporarily allowing full utilization of the NOL’s rather than the 80% limitation.
• The bill modifies the excess business loss rules for non-corporate taxpayers, delaying the effective date to years beginning after December 31, 2017, to years beginning after December 31, 2020.
• The bill modifies the IRC 163(j) interest limitation rules to allow for a 50% limitation for years beginning in 2019 and 2020 (rather than 30%) and provides an election for taxpayers to apply the interest limitation for the 2020 tax year using the 2019 adjusted taxable income. There are special rules for partnerships regarding  the treatment of disallowed business interest as well as the utilization of the increased percentage.
• The bill provides a technical correction to the TCJA allowing qualified improvement property a 15-year depreciable life making it eligible for bonus depreciation.
• The bill increases the charitable contribution limitation for corporations of food donations from 15% to 25% during 2020.

Business Loans

The bill establishes a “Paycheck Protection Program,” modifying Section 7(a) of the SBA act, to allow loans to businesses with 500 or fewer employees (or, if higher, the standard number employees established by the SBA for certain industries) as well as sole proprietors and eligible self-employed individuals to participate. The loans would be available in amounts up to $10 million based on a formula of the business's payroll and can only be used for payroll costs, benefits, wages, interest, rent, and utilities.

The loan is forgivable to the extent of certain payroll, interest, rent and utility costs incurred during the 8-week period beginning on the date of the loan. However, the amount eligible to be forgiven is reduced if there is a reduction in the number of employees or employee wages over a threshold.  There are also certain exceptions for rehired employees. The portion of the loan not forgiven is payable over 10 years at an interest rate not in excess of 4%.

Provisions Impacting Individuals

• The bill expands unemployment insurance benefits to those impacted by the coronavirus to more workers, including self-employed individuals, and also provides for both an increase to eligible benefits of $600 and a lengthened time period to receive the benefits.
• The bill provides “recovery rebates” to eligible individuals of up to $1,200 per person ($2,400 in the case of joint filers) plus $500 for each qualifying child of the taxpayer. The credit is reduced by 5% for those with AGI in excess of $150,000 for joint filers, $112,500 for head of household, and $75,000 for other taxpayers.
• The bill allows a waiver of the 10% additional tax on certain retirement plan fund distributions made during 2020 up to $100,000. The bill also increases the amount that may be borrowed from retirement plans.
• The bill allows an above the line charitable contribution deduction (up to $300) for cash contributions to public charities.
• The bill increases the limitation on charitable contributions to public charities during 2020 from 60% of AGI to 100% of AGI.
• The bill allows individuals an exclusion of up to $5,250 for employer payment of student loans.

Redpath and Company, Ltd. will follow up with additional details as the bill progresses as well as more detailed articles outlining the key provisions and the impacts to individuals and businesses.