[Updated March 27, 2020]
The Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”), which was signed into law on March 27, provides assistance, including new SBA loan programs, to small businesses during the COVID-19 outbreak. The following is intended to provide a general overview of the relief that is provided by the CARES Act to small businesses. Stay tuned for further updates.
- A refundable payroll tax credit for 50% of wages paid by employers to employees during the COVID-19 crisis is available to employers whose operations were suspended or gross receipts were reduced by more than 50% compared to the same quarter in 2019. Certain limitations apply if the employer has more than 100 full-time employees, but for those with fewer than 100 employees, all wages apply for the credit. The credit is provided for the first $10,000 of compensation paid to the employee, and the wages must be paid between March 13, 2020, and December 31, 2020.
- Employers with multiple related entities should consider the application of aggregation rules.
- Because the bill also defers the employer side of Social Security payroll taxes this year (discussed below), qualifying companies can receive payments in advance since this credit is refundable.
- Employers and self-employed individuals can defer their portion of Social Security tax deposits owed in 2020 and can delay such payments of Social Security tax over the following two years, with half payable by the end of 2021 and the other half payable by the end of 2022.
- Net operating losses are allowed to offset income without the 80% taxable income limitation enacted by the Tax Cut and Jobs Act, and in addition, net operating losses can be carried back five years to offset income from prior years. These temporary changes apply to net operating losses that arose in tax years 2018, 2019, or 2020.
- Certain loss limitations are modified for pass-through entities to permit them to utilize some losses previously disallowed.
- Alternative Minimum Tax (AMT) credits that became available after the passage of the Tax Cut and Jobs Act (TCJA) that had to be allocated over future years and ending in 2021 can be accelerated to allow for current use of those credits.
- Interest expense deduction limitations are increased from 30% of EBITDA to 50% of EBITDA for tax years beginning in 2019 and 2020.
- “Qualified improvement property” fix of error contained in TCJA. Accelerated depreciation is permitted with respect to certain improvements made by businesses – generally any improvement made to the interior portion of a nonresidential building any time after the building was placed in service – to allow for current depreciation on items that would otherwise have to be depreciated over a 39-year life. The fix is retroactive, which will allow taxpayers to file amended returns to obtain the benefit of this provision if applicable to them.
- Employers may provide a benefit to employees in the form of student loan repayments on behalf of employees, subject to certain limitations, that will not be included in income of the employee.
- The federal excise tax on distilled spirits used with respect to the production of hand sanitizer produced and distributed in accordance with regulations of the Food and Drug Administration is waived for the calendar year 2020.
- It is important to note that some of the tax benefits in the CARES Act are not available if certain other benefits available under the CARES Act are utilized, such as “payroll protection loans.”
- Payments to states are authorized to reimburse nonprofits, government agencies, and Indian tribes for half of the costs they incur through December 31, 2020, to pay unemployment benefits.
- There are modifications to various unemployment assistance programs that provide for additional unemployment relief and extensions of unemployment benefits.
- Individuals eligible for unemployment compensation are entitled to receive the amounts they would receive under existing law plus an additional amount of $600 per week to qualifying individuals. The additional $600 in unemployment assistance will be available until July 31, 2020.
- Unemployment benefits are available for the first week of unemployment in situations where states would otherwise require unemployment for one week prior to eligibility for unemployment benefits.
- Unemployment benefits are extended for an additional 13 weeks, or through December 31, 2020, for certain qualifying individuals who remain unemployed after the termination of unemployment benefits.
- Additional funding is provided to states with existing “short-time compensation” programs and incentives. Funding will also be provided to support states that create such programs so that employers can reduce employee hours without laying off workers. The employees with reduced hours will then receive a pro-rated unemployment benefit.
- The CARES Act provides for rebates to taxpayers who have gross income up to $75,000 ($150,000 if married) in the amount of $1,200 per person ($2,400 for a couple), and an additional $500 will be provided for each child under the age of 17. The taxpayer’s 2019 tax return (or 2018 tax return if the 2019 tax return has not yet been filed) will be used to determine the gross income to be eligible for the rebate. The rebate is phased out for taxpayers earning above the thresholds. Once filers have gross income of $99,000 for individuals and $198,000 for joint filers, they are no longer eligible.
- The limitations with respect to charitable contribution deductions are suspended for 2020 for individuals, and the 10% of taxable income limitation for corporations is increased to 25% for 2020.
- The 10% penalty that typically applies to early withdrawals from qualified retirement accounts is waived if the withdrawal is for a coronavirus-related purpose. To qualify as a coronavirus-related purpose, the withdrawal must be from a person diagnosed with COVID-19, has a spouse or dependent diagnosed with COVID-19, or suffered adverse consequences financially from being quarantined, furloughed, laid off, having work hours reduced, being unable to work due to lack of child care, or closing or reducing hours of a business. The tax liability arising from these withdrawals (besides the penalty that is waived) still applies but can be allocated over the following three years, and any of the funds withdrawn can be recontributed within 3 years, even if such contribution causes the annual limits to be exceeded.
- Individuals can deduct up to $300 of cash contributions to charitable organizations, regardless of whether individuals itemize their deductions or not.
- The required minimum distribution for certain defined contribution plans and IRAs are suspended for 2020.