Updated March 31, 2020: As the CARES Act rolls out, the SBA and banks have provided further, significant guidance on the small business interruption loans the act enables. To keep you up to date with those changes, we are issuing this update that provides the latest information as of March 31, 2020. Please use this document as your guide, letting it replace the previous information we provided on small business interruption loans. We encourage you to reach out to your LaPorte professional if you have questions about the CARES Act or would like further assistance.
The Coronavirus Aid, Relief, and Economic Security (CARES) Act seeks to stimulate the US economy by pumping $2.2 trillion of liquidity – cash – into it as quickly as possible. This economic relief will be accomplished through a package of loans, rebates, tax credits, and tax deductions, some of which are retroactive. The CARES Act is designed to provide relief to individuals, businesses, and nonprofits. It constitutes the most expensive legislation ever passed. While the intricacies of the Act are still being ironed out, we want to introduce to you the impacts to your business, your nonprofit, or you as an individual taxpayer.
The outline below gives you details on what benefits might apply to you as:
- A business or nonprofit seeking an SBA loan or who holds an existing SBA loan,
- A business or nonprofit wanting assistance in the form of payroll tax credits or payroll tax deferral to continue paying employees,
- A business wanting more information on new and retroactive tax deductions that could generate tax refunds,
- An individual seeking information on the recovery rebates or wanting to utilize and protect your retirement accounts
Small Business Interruption Loans
The CARES Act has provisions for two different types of loans: an Economic Injury Disaster Loan and a Paycheck Protection Program and Loan Forgiveness. Below is a description of each of these loans, followed by a checklist of what to do to apply for either.
Loan Types
Economic Injury Disaster Loan
These loans are available to businesses and 501(c)(3) organizations with fewer than 500 employees. The government encourages businesses to apply online at SBA.gov/disaster, and turnaround time is expected to be 14 to 20 days. The SBA will approve this loan directly.
- Maximum amount is: $2 million and the maximum amount is tied to the businesses economic injury from COVID-19
- Grant: The CARES Act includes $10 billion in funding to provide $10,000 advances to small businesses and nonprofits within three days of their applying for this loan
- Interest rate: 2.75% for 501(c)(3) organizations and 3.75% for businesses
- Terms: Terms can be extended up to 30 years
- Uses: Working capital and ordinary expenditures
- Lending criteria: 500 or fewer employees and most non-manufacturing businesses with average annual receipts under 7.5 million dollars
- Payment deferral: Payments can be deferred up to one year
Eligibility for these loans should be reviewed carefully since there are some variations by industry.
Paycheck Protection Program
For the Paycheck Protection Program (the “PPP”), the Treasury Department has pushed money down to local banks for lending. The loans are SBA guaranteed and are available to businesses and 501(c)(3) organizations with fewer than 500 employees.
If borrowing money under the PPP, a business cannot have received a loan under the Economic Injury Disaster Loan for the same purpose. We are waiting on further guidance as to what is meant by “for the same purpose”. However, borrowers who received an Economic Injury Disaster Loan between 2/15/2020 and 3/15/2020 can receive assistance under the PPP through a refinancing mechanism.
- Maximum amount is the lesser of:
- 2.5 times the average monthly payroll costs for the prior one year period AND the outstanding balance of the Economic Injury Disaster Loan obtained during the period 1/31/2020 through the date of this loan available to be refinanced.
- Average monthly payroll includes:
- Salary wages, commissions or similar compensation, tips or equivalent
- Vacation, sick & medical leave paid,
- Group health care benefits, including insurance premiums
- Retirement benefits
- State or local tax on employee pay
- Average monthly payroll excludes:
- Salary amount for any employee exceeding $100,000
- Pay to employees outside the United States
- Payments for which credits are allowed under the Families First Coronavirus Response Act
- Average monthly payroll includes:
- 10 million dollars
- 2.5 times the average monthly payroll costs for the prior one year period AND the outstanding balance of the Economic Injury Disaster Loan obtained during the period 1/31/2020 through the date of this loan available to be refinanced.
- Interest rate: .5%
- Term: 2 years
- Prepayment penalty: Waived
- Fees: Waived
- Lending criteria: This loan does not have to be pre-approved by the SBA. The lender has full authority to accept the application and issue the funds the same day. The “credit elsewhere test” and “personal guarantee requirement” under the traditional SBA loan program do NOT apply to this loan.
- Automatic deferral: Payments are automatically deferred for the first six months and can be extended up to one year.
- LOAN FORGIVENESS FEATURE: If a business maintains payroll from 2/15/2020 through 6/30/2020, as defined by headcount and amount of wages, forgiveness can be requested for funds used on payroll, mortgage interest, rent, and utilities over an eight week period with no recognition of income required for the portion forgiven. The maximum amount of forgiveness is the principle of the loan – any accrued interest will still be owed.
- NOTE – A business cannot utilize both the Paycheck Protection Program and the employee retention credit discussed in the business tax provisions section.
For additional information about the Paycheck Protection Program or to complete an application for a loan, visit the following links on the US Treasury website:
- Small Business Paycheck Protection Program Overview
- Paycheck Protection Program Information Sheet
- Paycheck Protection Program Application Form
Existing SBA Loan Holders
Previous SBA loans still being repaid from prior disasters have automatic deferments through 12/31/20. There is no need to contact the SBA to cease payments.
Planning Now to Take Advantage of these Provisions
If you are considering an SBA loan for your business, take care that you are applying for the proper SBA loan. In some circumstances, it may be best to take the disaster loan and the retention credits rather than the forgivable loan. Consult with LaPorte if you have questions about which is the right fit for you.
Planning for the Economic Injury Disaster Loan
- Begin the application process at SBA.gov/disaster, making sure to select the economic injury disaster loan
- Gather your tax returns and/or financial statements for the previous one to three years
- Gather your year-to-date financial statements through the date of the loan application
- Gather a personal financial statement (SBA form 413) for any 20% or greater owner, each general partner or managing member and, for any owner who has more than a 50% ownership in an affiliate business
- Prepare a schedule of fixed liabilities (SBA form 2202 may be used)
- Prepare IRS form 4506-T for the business and each 20% or greater owner, each general partner or managing member and, for any owner who has more than a 50% ownership in an affiliate business
- Gather any other data that can support the financial impact of COVID-19
Planning for the Paycheck Protection Program and Loan Forgiveness
- Calculate the average monthly payroll over the latest twelve months and gather documents supporting your calculation
- Gather proof of monthly payroll costs for the latest 12 months
- Contact your local banker to inquire about what documentation the bank will require and arrange for an appointment to place your loan application
- Gather your tax returns and/or financial statements for the previous one to three years
- Gather your year-to-date financial statements through the date of the loan application
Business Tax Incentives
What Provisions Are Available
Payroll Tax Deferral
Employers can defer the payment of payroll taxes due beginning on the date the bill is signed and ending on December 31, 2020. The taxes will still be due in the future: 50% are due December 31, 2021 and the other half will be due December 31, 2022.
For self-employed individuals, 50% of the self-employed taxes are granted the same deferral period.
For entities that receive an SBA loan, this deferral only applies if the loan is not forgiven.
Employee retention credit
Eligible employers will be entitled to a credit of 50% of qualified wages paid to employees who are not working due to the employer’s full or partial cessation of the business or significant decline in gross receipts. The credit is refundable; however, the qualified wages for each employee for all quarters cannot exceed $10,000.
Employers are not eligible for the credit if the employer receives a Paycheck Protection Program loan from the SBA as described in the previous section.
Net Operating Loss Carryback
Taxpayers will be allowed to carryback losses generated in 2018, 2019, and 2020 to taxable years beginning before December 31, 2017 years, in the same manner as was allowed before the Tax Cuts and Jobs Act of 2017 (“TCJA”). The CARES Act allows the loss to be carried back up to five years.
The TCJA also limited the net operating loss (NOL) allowed to a taxpayer in any one year to 80% of the net income. The CARES Act allows the NOL to be applied to 100% of the net income for tax years beginning before 2021.
Pass-through Business Losses
Under the TCJA, flow-through business losses were capped at $250,000 if filing single ($500,000 if married filing jointly). The ACT will put a halt on this cap, which will be retroactive to January 1, 2018.
Taxpayers who had limited losses in 2018 will want to file amended returns and seek a refund.
Business Interests Expense Limitation
The 2017 tax act limited the amount of interest deductible for a business to 30% of the business’s adjusted gross income for companies with gross receipts of more than $25 million in 2019 and $26 million in 2020. The CARES Act allows a deduction of up to 50% of a business’s adjusted taxable income.
Qualified Improvement Property, Technical Glitch Corrected
All leasehold improvement property is defined as qualified improvement property again and eligible for bonus depreciation. This change is retroactive to the enactment of the TCJA; in other words, it is as if the TCJA itself had defined leasehold improvements as qualified improvement property from the beginning.
Taxpayers who incurred expenses for qualified improvement property will want to file amended returns for the 2018 tax period to seek a potential refund.
Minimum Tax Credits
The current tax laws eliminated the alternative minimum tax for corporations, but any unused minimum tax credits carried forward could be used in 2021 to get a refundable credit. The credit was limited to 50% of the excess minimum tax and fully refundable in 2021. The bill accelerates the refunding of the credit.
Corporate Charitable Contribution Deductions
Instead of the normal 10% charitable deduction allowed to corporations, corporations are allowed to deduct up to 25% of the corporation’s taxable income if the excess contributions consist of qualified contributions. A qualified contribution is a contribution of cash or food to a charitable organization that is not a private foundation or a donor-advised fund.
Payment of Student Loans
Payment is suspended for 3 months, and the interest for the three months will not be applied. This can be extended for an additional three months by the Treasury Department.
Excise Tax Relief
The Federal excise tax will not be charged for alcohol used for the production of hand sanitizing products and aviation fuel and kerosene.
Planning Now to Take Advantage of these Provisions
- Examine depreciation schedules for leasehold improvements placed in service after December 31, 2017
- Examine old returns to see if a net operating loss was incurred in 2018 or 2019.
- Review interest expenses and determine how the new law will affect current tax liability and whether interest expenses alter past tax returns.
Individual Provisions
How the Bill Helps Individual Taxpayers
Advanced Credit Rebate Stimulus Checks
- $1,200 for Single Taxpayer
- Phaseout begins at $75,000 to totally phased out if AGI exceeds $99,000
- $2,400 for Joint Filers
- Phaseout begins at $150,000 to totally phased out if AGI exceeds $198,000
- $500 credit for each eligible child
- Head of Household
- Phaseout begins at $112,000 to totally phased out at $136,500
- Rebate phased out by $5 for every $100 in excess of the threshold amount
- These rebates not subject to reduction or offset, so individuals will get funds they are entitled to by calculation
- The rebate will be calculated based on 2019 AGI, or 2018 AGI if a return for 2019 not yet filed. If a return for neither year has been filed calculation will be based on their 2019 Social Security Benefit Statement
The funds will be disbursed electronically to any account the payee authorized on or after January 1, 2018 or paper check sent to last known address. Fifteen days after the payment, a letter will be sent to the last known address of the taxpayer with details related to the payment including amount, date of payment, method of payment, and instructions on what to do if the payment was not received.
Special Rules for Use of Retirement Funds
- Withdrawals of up to $100,000 in aggregate from qualified retirement plans (IRAs, 401Ks, other qualified trusts and certain deferred compensation plans) will not be subject to 10% penalty on early withdrawals if it is a “coronavirus-related distribution” made during 2020 if:
- Made to an individual who has been diagnosed with SARS-CoV-2 or COVID-19 by a CDC-approved test, or whose spouse or dependent has been diagnosed with the same.
- Made to an individual who experiences financial hardship due to quarantine, business closure, layoff, furlough, reduced hours, or being unable to work due to lack of childcare due to COVID-19
- If the “coronavirus-related withdrawal” is to be taken into income, the taxpayer can elect to include it in taxable income ratably over 3 years, and they can recontribute the withdrawn funds within 3 years from the date of withdrawal without affecting their retirement account caps
- Required Minimum Distributions have been waived for certain retirement plans for 2020, so as to allow those funds to remain in participant accounts and potentially rebound from any losses experienced due to the pandemic
- Increase in Limit on Loans from Qualified Plans Not Treated as Distributions
- The loan limit is raised up to “the lesser of $100,000 or the present value of the non-forfeitable accrued benefit of the employee under the plan” from “the lesser of $50,000 or one half of the present value of the non-forfeitable accrued benefit of the employee under the plan”
- Individuals with a qualified plan loan outstanding and a repayment due from the date of enactment of the CARE Act through December 31, 2020 may delay their loan payments for up to a year
- Increase in Limit on Loans from Qualified Plans Not Treated as Distributions
Charitable Contribution Limits
For those itemizing deductions, the 60% of AGI limit as instituted the Tax Cut and Jobs Act is suspended for 2020 for cash contributions to qualifying organizations. Any excess contributions may be carried forward to future years based on current carry forward rules for excess charitable contributions
For those who do not itemize in 2020, an “above the line” charitable contribution of up to $300 can be used.
Education Loan Payments
The Act allows for up to $5,250 of loan payments made by an employer for an employee’s education loans to be excluded from income in 2020.
- In order for this to exclusion to apply, the loans must be the employee’s and not a loan incurred for the education of the employee’s child
- The exclusion only applies to payments made by an employer after the date of enactment of the CARE Act and before January 1, 2021
Planning Now to Take Advantage of these Provisions
- Contact a LaPorte Tax Advisor to project tax year 2020, so as to:
- Review qualified retirement plan account balances and projected cash needs to decide if a “coronavirus-related distribution” is advisable
- Decide if a loan from your qualified retirement plan makes more sense than a “coronavirus-related distribution”
- Decide if you can forgo the RMD during 2020 to allow your qualified retirement plan to rebound
- See if taking advantage of the charitable contribution limit easement is a viable tax strategy for 2020
- Get guidance on the charitable contribution deduction of up to $300 that can be taken above the line if you aren’t itemizing in 2020
Conclusion
Clocking in at over 800 pages the CARES Act has the potential to impact most individuals, businesses, and nonprofits in the United States. While there is still much to learn it is important for everyone to understand how this legislation may help them. We will be updating our Coronavirus Resource Center as more information becomes available over the coming days and months. Of course, you should contact your LaPorte tax advisor directly if you need assistance.