By Keiter CPAs
Our team is closely monitoring the developments of the COVID-19 pandemic and are working to keep you informed of the implications to you and your business. We have dedicated teams and resources to focus on all aspects of the CARES Act so that we can provide you with meaningful guidance and concise information. Specifically, we have formed dedicated internal teams and resources to focus on the following areas:
- Small business cash flow needs, including integration of the various Small Business Administration loan programs in the CARES Act with federal and state tax deferral programs;
- Business and employment tax, including integration with the Families First Coronavirus Response Act and Payroll credit provisions of the CARES Act;
- Individual needs, including individual rebates and retirement plan relief; and
- Impact of state and local governments changes in tax code
You will be able to access these resources via live and recorded webinars, articles, and white papers published on our COVID-19 Resource Library.
If you have questions about how these changes impact your unique individual or business tax situation, please contact your Keiter advisor. We are here to listen and provide sound advice.
The Coronavirus Aid, Relief and Economic Security (CARES) Act Passed to Support Individuals and Businesses
The Coronavirus Aid, Relief, and Economic Security Act (H.R. 748) (CARES Act, The Act) was signed by the President on March 27, 2020, and is now law. The White House, Treasury Department, Small Business Administration and other agencies will begin to implement the provisions of the CARES Act. The following is a brief summary of various provisions of the Act for businesses and individuals.
CARES Act: Relief for Individuals
INDIVIDUAL RECOVERY REBATE/CREDIT Payments
Under the CARES Act, Individuals are eligible to receive one-time rebate checks of $1,200 ($2,400 for joint filers), with each qualifying dependent claimed increasing the amount by $500.
Single taxpayers with over $99,000 Adjusted Gross Income (AGI) and married taxpayers with over $198,000 AGI will not receive a relief check.
It’s important to note that either the taxpayer’s 2018 or 2019 tax returns are used to calculate the advance. Eligibility is based on 2018 AGI with the value of the amount beginning to phase out at $75,000 of income for individuals; $112,500 for heads of households; and $150,000 for joint filers by $50 for every $1,000 earned above these amounts. Payments will be by direct deposit or mail.
If a taxpayer does not receive a relief check due to phase-out but their 2020 income falls below the threshold, they will receive a credit on their 2020 tax return in the amount of the check that would have been received based on 2020 income.
Enhanced Unemployment Benefits
The CARES Act provides benefits for up to four months including expanded unemployment insurance benefits for those who would not be eligible otherwise, including sole proprietorships (with or without employees) and independent contractors, and as much as $600 a week increase in benefits.
The Act also offers an additional 13 weeks of unemployment compensation funded by the federal government.
Charitable Contributions Amended
The CARES Act amends the rules for charitable contributions, allowing taxpayers a $300 adjustment, which reduces their adjusted gross income. The contribution must be made specifically in cash to certain qualifying charities, such as hospital care, medical research, and educational organizations, and becomes available for tax years beginning after December 31, 2019.
Individuals who do not itemize can deduct up to $300 of charitable deductions along with their standard deduction. There will be no limitation on cash charitable contribution deductions for individuals in 2020. However, contributions to a private foundation or a donor advised fund are not qualifying contributions.
The Act temporarily suspends the required minimum distribution rules for qualified retirement plans including individual retirement accounts (IRAs), 401(k) plans, qualified annuities, some deferred compensation plans, and qualified trusts. The 10% early withdrawal penalty, if taken out before the taxpayer reaches 59 and a half years old, is waived for withdrawals of up to $100,000 if withdrawals relate to financial hardship caused by COVID-19 or either the taxpayer, their spouse or their dependents have been diagnosed with the virus.
In the case of any corona-virus related distribution, any amount required to be included in gross income will be included ratably over the 3-year tax period beginning with the tax year withdrawn.
Student loan repayments
The Act adds to the types of educational payments that are excluded from employee gross income for “eligible student loan repayments” made before January 1, 2021. The payments are subject to the overall $5,250 per employee limit for all educational payments. Student loan repayments for which the exclusion is allowable can’t be deducted.
Cares act: Relief for Businesses
Tax Filings and Payments
Businesses closed because of COVID-19 or who experience a significant decline in gross receipts are allowed a credit of 50% of quarterly employment taxes per quarter for each employee during the quarters the business is affected.
- The credit is applicable to the first $10,000 in wages for each eligible employee over the year.
- For businesses with more than 100 employees, the credit is only allowed for employees not providing services.
Payment of the employer’s portion of Social Security taxes due through January 1, 2021 is delayed for employers and self-employed individuals, with taxes for this period due in equal installments on December 31, 2021 and December 31, 2022.
Small Business Administration (SBA) Loans
The CARES Act makes available $350 billion through the Small Business Administration 7(a) loan program for businesses with 500 or fewer employees during the covered period of February 15, 2020, through June 30, 2020. Borrower and lender fees will be waived and the government guarantee of loans will be increased to 100% through the end of 2020.
- Loans are to be used to retain workers and maintain payroll or make mortgage, rent, and certain utility payments.
- A portion of these loans are to be forgiven based on eligible payments made by the borrower during the eight-week period beginning on the date of the loan.
The CARES Act also expands access to Economic Injury Disaster Loans under Section 7(b) to sole proprietor and ESOPs, as well as small businesses.
- The federal government will pay the principal and interest for the first six months for which payments are due (also available to businesses with 7(a) loans that are not paycheck protection loans).
- A new emergency grant allows a business that has applied for a disaster loan to get an immediate advance of up to $10,000 and can be used for payroll and does not have to be repaid, even if the request for a 7(b) loan is denied.
Healthcare and Medical Services Assistance
The CARES Act provides for economic assistance including funding for hospitals up to a total of $100 billion, and $500 billion in loans, loan guarantees, and other investments. Eligible health care providers, including public entities and for-profit and not-for-profit entities that provide diagnosis, testing, or care for individuals with potential- or actual cases of COVID-19, may be given funding through grants or other means of assistance to reimburse for expenses and revenue losses due to Coronavirus.
Funds will be available for building temporary structures, leasing property, emergency operation centers, medical supplies and equipment, surge capacity, increased workforce, and retrofitting facilities.
The 10% limit for corporations is increased to 25% for 2020. These changes do not apply to donations to donor advised funds for corporations.
Alternative Minimum Tax (AMT) Credit
The Act allows that any unused corporate AMT credits remaining are fully refundable on either a 2019 tax return or a 2018 amended return.
Net Operating Losses (NOL)
The CARES Act will allow losses incurred in 2018, 2019, and 2020 to be carried back for up to five years and fully offset taxable income.
Excess Business Loss limitations
The Act suspends the loss limitations from noncorporate excess business losses for 2018, 2019, and 2020 and such losses may be used in full to reduce a taxpayer’s current or prior year (2018 only) income tax liability.
Qualified Improvement Property
The CARES Act changes the depreciable life of Qualified Improvement Property (QIP) to 15 years and, retroactive to the beginning of 2018 allows a 100% write-off for qualified improvement property as bonus depreciation.
Business Interest Expense Limitation
The Act increases the Section 163(j) business interest expense deduction limitation to 50% of adjusted taxable income for 2019 and 2020. Businesses will also be permitted to elect to use its 2019 adjusted taxable income to compute its 2020 limitation. Under a special rule for partnerships, the increase in the limitation will not apply to partners in partnerships for 2019 (it applies only in 2020).
We are closely monitoring this evolving and unique economic situation. We will keep you updated and informed on how to respond to these and additional tax and regulation changes as they are announced.
About the Author
The information contained within this article is provided for informational purposes only and is current as of the date published. Online readers are advised not to act upon this information without seeking the service of a professional accountant, as this article is not a substitute for obtaining accounting, tax, or financial advice from a professional accountant.