On March 27, 2020, President Donald J. Trump signed into law a sweeping $2.2 trillion stimulus package designed to abate the economic damage caused by the coronavirus (COVID-19) pandemic. The Coronavirus Aid, Relief, and Economic Security (CARES) Act is the third piece of legislation crafted to address the economic havoc created by COVID-19. The bill contains many provisions, including an expansion of unemployment insurance, direct payments to Americans, a loan guarantee program for industries, a suite of aid programs for small businesses, and more. Some details of the provisions included in the bill are laid out below.
Portion of the stimulus package: $260 billion (estimated)
The expansion of unemployment insurance, sometimes referred to as “unemployment insurance on steroids,” is the greatest expansion of unemployment insurance benefits in decades. It expands the coverage window to four months, increases weekly benefits by $600, and extends coverage to the self-employed and gig workers. A secondary purpose of this provision is to allow companies to furlough workers, so they can stay on as employees and quickly return to work when the crisis is over. This portion of the bill is retroactive to January 27, 2020.
Individual Stimulus Checks (Recovery Rebate/Credit)
Portion of the stimulus package: $300 billion (estimated)
The Senate bill includes a provision for sending direct payments to Americans who earned less than $75,000 ($150,000 for married filing jointly, $112,500 for head of household) in 2019 adjusted gross income (or 2018 if you haven’t yet filed your 2019 returns). Individuals who earned $75,000 or less will receive recovery rebates of $1,200 each; married couples who earned $150,000 or less will receive recovery rebates of $2,400. Those with children will receive an additional $500 per qualifying child. For those whose income exceeds the thresholds, the recovery rebates will be reduced at a rate of $5 for every $100 of income in excess of the applicable threshold.
Please note that the current recovery rebate is actually an advance of a refundable tax credit to be claimed on 2020 individual tax returns. If the credit allowable on your 2020 tax return is greater than the recovery rebate you previously received, the difference will be credited against your 2020 tax liability and can be refunded. If instead, the credit allowable on your 2020 tax return is less than the recovery rebate you previously received, currently you will not be required to pay back the excess.
Scenario 1: Jane Doe, who files as an individual, had 2018 AGI of $63,500 (she has not yet filed her 2019 tax return so the IRS will look at her 2018 return). In this scenario, she is entitled to receive the full $1,200 recovery rebate.
Scenario 2: John and Sally Smith, who file as a married couple with 2 children under the age of 17, had 2019 AGI of $125,000. In this scenario, they are entitled to receive a recovery rebate of $3,400.
Scenario 3: Betty Jones, who files as an individual, had 2019 AGI of $85,000. In this scenario, Betty would be entitled to a recovery rebate of $700 = $1,200 – [($85,000 – $75,000) x 5%].
Scenario 4: Timothy Green, who files as an individual had 2019 AGI of $125,000 and 2020 AGI of $80,000. In this scenario, Timothy would be entitled to a recovery rebate of $0. However, on his 2020 tax return, Timothy would be entitled to a refundable credit of $950 = $1,200 – [($80,000 – $75,000) x 5%] – $0.
Keeping Workers Paid and Employed Act
Portion of the stimulus package: $350 billion+ (estimated)
The goal of this part of the bill is to prevent job loss and keep businesses from failing due to COVID-19. It provides $350 billion+ in “paycheck protection loans” to small businesses (defined as businesses with fewer than 500 employees and including sole proprietors and non-profits) to maintain their existing workforce and pay their obligations. These loans are fully guaranteed by the federal government through December 31, 2020. They will be limited to the average of monthly payroll costs for 1 year multiplied by 2.5 AND any disaster loan that has been refinanced (capped at no more than $10M). A separate section of the CARES act allows for these “paycheck protection loans” to be forgiven on a tax-free basis. The amount to be forgiven is limited to an 8-week period beginning on the date of the loan and is a sum of the following expenses during that period:
- Payroll costs
- Mortgage interest
- Certain utility payments
To receive forgiveness, the borrower would submit an application with documentation of expenditures. However, if the employer reduces their workforce or salaries (to employees that earn less than $100,000), the forgiveness amount may be reduced.
Scenario 5: Avian Engineering had a total payroll of $1.8 million over the prior 12-month period (looking back from the date they apply for the loan under this portion of the Act). The monthly average payroll is $1.8 million/12 = $150,000 which is then multiplied by 2.5 to arrive at the total loan amount of $375,000, which is less than the $10 million cap. If Avian pays $300,000 in qualified expenses (detailed above) over the 8-weeks after the loan is granted, $300,000 of the $375,000 loan will be forgiven under the Act (so long as their workforce and salaries are not reduced during this time.
Business Tax Provisions
The CARES Act includes a wide variety of business tax provisions. In some cases, it enhances or modifies existing provisions; in other areas, it creates new tax provisions. Here is an overview of some of the business tax items included in the new legislation:
Net Operating Loss (NOL) – The CARES act modifies limitations on NOLs that were implemented with the Tax Cuts and Jobs Act (TCJA). NOLs generated in 2018, 2019, or 2020 may now be carried back to the preceding five tax years. Additionally, the taxable income limitation has temporarily been removed, allowing NOLs to fully offset income.
Excess Business Loss – There is a provision for temporarily suspending the “excess business loss” limitation for non-corporate taxpayers. This allows these taxpayers to benefit from the NOL carryback modification.
Employee Retention Credit – This is a new credit created by the legislation. The credit is equal to 50% of up to $10,000 per employee in qualified wages, including qualified health plan expenses, for eligible employers. Eligible employers are those whose operations were fully or partially suspended OR those whose gross receipts declined by more than 50% (compared to the same quarter in 2019). The definition of qualified wages (QW) varies depending on if an eligible employer has greater than 100 full time employees or 100 of fewer full-time employees.
○ Greater than 100 full time employees: QW are wages paid to employees that are not providing services while the employer is considered an eligible employer.
○ Equal to or less than 100 full time employees: QW are wages paid to all employees, whether or not they are providing services while the employer is considered an eligible employer.
Employer Payroll Taxes – The legislation allows for a deferral of the employer’s share of the Federal Social Security tax for both employers and self-employed individuals from the date of enactment through December 31, 2020. The deferred amount must be paid over the course of the next two years. At minimum, half must be paid by December 31, 2021 and the remainder by December 31, 2022.
Business Interest Deduction – Previous legislation had limited business interest expense deductions to the sum of business interest income and 30% of adjusted taxable income. The CARES Act temporarily allows businesses to increase the amount of interest expense they deduct. To do so, it increases the limit of adjusted taxable income to 50% for 2019 and 2020, and allows taxpayers to elect to base their 2020 limit on their 2019 income in lieu of their 2020 income.
Charitable Contribution Limits – For 2020, the limit on charitable contribution deductions for corporations is increased from 10% of taxable income to 25%. The limit on contributions of food inventory deductions is increased from 15% to 25%.
Qualified Improvement Property (QIP) – The CARES Act includes a key technical correction to an oversight in the 2017 Tax Cuts and Jobs Act. It reduces the depreciation window of QIP from 39 to 15 years and makes the change retroactive to January 1, 2018. This allows businesses to expense costs associated with qualified interior improvements on nonresidential real property through 100% bonus depreciation, rather than depreciating the property ratably over 39 years. Many businesses and property owners with qualified improvement property placed in service during 2018 and 2019 should consider amending their 2018 and/or 2019 tax returns to obtain refunds.
Federal Aviation Excise Tax – The legislation includes a temporary repeal of the Federal Aviation Excise tax. The repeal is effective from the date of enactment through December 31, 2020.
Alcohol Excise Tax Exception – For 2020, the Federal excise tax on distilled spirits is waived for spirits used to produce hand sanitizer.
Individual Tax Provisions
The CARES Act also provides a number of tax provisions for individuals, including:
Retirement Funds – Individuals may take distributions of up to $100,000 from qualified retirement accounts without incurring the 10% early withdrawal penalty. Within a three-year window, the withdrawals can be recontributed to the retirement plan regardless of the annual contribution cap. Additionally, tax on withdrawn income will be spread over three years. The funds may only be withdrawn for coronavirus-related purposes. To be eligible to withdraw, an individual must (1) be diagnosed with COVID-19, (2) have a spouse or dependent who is diagnosed with COVID-19, or (3) experience financial hardship as a result of COVID-19 (e.g., be quarantined, furloughed, laid off, etc.).
Required Minimum Distributions Waived for 2020 – For most defined contribution plans and IRAs, the CARES Act offers a temporary waiver of the required minimum distribution rules for 2020.
Charitable Contributions – In order to encourage individuals to contribute to charitable organizations, the CARES Act allows an “above the line” $300 deduction for 2020 contributions for taxpayers who do not itemize their deductions. For taxpayers who do itemize deductions, the legislation includes an increase of the allowable limit of charitable contribution deductions.
Employer Payment of Student Loans – The legislation temporarily allows payments of qualified education loans to be included in the tax exclusion for employer-provided educational assistance. Employers may contribute up to $5,250 towards an employee’s student loans (and exclude the amount paid from the employee’s income). This is effective from the date of enactment through January 1, 2021.
Emergency Lending Fund for Industries
Portion of the stimulus package: $500 billion (estimated)
This portion of the bill makes federal loans available to large corporations, with some money earmarked for particular industries (e.g., $32 billion in payroll protection grants to air carriers). In order to promote transparency and accountability, the following measures are imposed on corporations that receive loans through this program:
- Incentives to keep workers on the payroll
- Restrictions on executive compensation (with a two-year timeframe)
- Oversight from a Treasury Department Special Inspector General
- Oversight from an Accountability Committee
- Oversight from a Congressional Committee
- Ban on recipients performing stock buybacks for the length of the loan plus one year
- No organizations owned by Congressional leaders, President Trump, or his family, may receive loans through this program
- The names of recipients and terms of their loans will be public information
Emergency Aid to State, Local, and Tribal Governments
Portion of the stimulus package: $150 billion (estimated)
The package allocated $150 billion to be distributed among state and local governments, including county and tribal governments. Specifically, $8 billion is allocated to tribal governments.
Emergency Aid to the American Medical System
Portion of the stimulus package: $150 billion (estimated)
Described as “a Marshall Plan for the American medical system,” this portion of the Senate bill allocates $100 billion to bolstering the American healthcare system. The money will be made available to hospitals, nursing homes, Medicaid providers, community health centers, and other healthcare facilities. It can be used for a wide variety of purposes, including, but not limited to, personal protective equipment (PPE), testing supplies, additional Medicare funding, and COVID-19 research funding.
Support for the Department of Defense
Portion of the stimulus package: $10.5 billion (estimated)
Within the $10.5 billion, $1.4 billion is earmarked for any National Guard deployments and $1 billion is allocated to the Defense Production Act in order to support the creation of medical supplies.
We expect additional refinements to these new rules as the IRS issues regulations. If you have questions or wish to discuss these matters, please contact us.