CARES ACT and COVID-19 TAX IMPACT
Due to the pandemic crisis, U.S. business and economic activity has essentially come to a grinding halt. In response, the Government has stepped in to provide cash flow and economic incentives to stabilize businesses by providing bank financing and deferral of tax payments.
- Payment Protection Program (PPP) Loans
The program provides cash-flow assistance through 100-percent federally guaranteed loans to employers who maintain their payroll during this emergency. If employers maintain their payroll, the government will forgive the loans. PPP provides forgiveness of up to 8 weeks of payroll based on employee retention and salary levels, with no SBA fees, and at least six months of deferral with maximum deferrals of up to a year. Small businesses and other eligible entities will be able to apply for the loans if COVID-19 harmed them between February 15, 2020, and June 30, 2020. This program is retroactive to February 15, 2020, in order to help bring workers back onto payrolls who may have already been laid off.
Small businesses (including non-profits) and sole proprietorships were able to start applying for PPP loans on Friday, April 3, 2020. Independent contractors and self-employed individuals can apply starting on Friday, April 10, 2020. Loans are available through June 30, 2020.
- Small Business Debt Relief Program
This program will provide immediate relief to small businesses via non-disaster SBA loans, in particular 7(a), 504, and microloans. Under this program, the SBA will cover all loan payments, including principal, interest, and fees, for six months. This relief will also be available to new borrowers who take out loans within six months of the CARES Act’s enactment.
- SBA Loans -The CARES Act provides for new SBA loans of up to $10 million available to small businesses. The interest rate on these loans is 3.75% payable up to 30 years. In addition, all or a portion of the PPP loan may be eligible for forgiveness. However, the requirements for SBA loans are somewhat restrictive and complex.
- Economic Injury Disaster Loans & Emergency Economic Injury Grants (EIDL)
These grants provide an emergency advance of up to $10,000 to small businesses and private non-profits that have been harmed by COVID-19. Advances can come within days of applying for an SBA Economic Injury Disaster Loan (EIDL). To access the advance, you must first apply for an EIDL and then request the advance. The advance does not need to be repaid under any circumstance, and it may be used to keep employees on payroll, to pay for sick leave, to meet increased production costs due to supply chain disruptions, or to pay business obligations, including debts, rent and mortgage payments. To be eligible, you Have to be located in a disaster declared county or contiguous county
Up to $2 million can be available for payroll, fixed debts, accounts payable, other expenses as a result of the disaster impact.
- Shared Work Program
The program allows employers to reduce the hours of full-time employees by as much as 60 percent, while their workers collect partial unemployment benefits to replace a portion of their lost wages. All employers with two or more full-time or permanent part-time employees can participate in the program. To qualify, the business’ reduction of work cannot be less than 10 percent or more than 60 percent. NOTE: The Shared Work Program is not designed for seasonal separations.
- Refundable Tax Credits for Paid Leave Obligations
As required under the Families First Coronavirus Response Act, the Internal Revenue Service issued guidance about the government’s plan to provide tax credits for eligible small and midsize businesses that offer paid leave for workers.
- Employee Retention Credit
The credit is not available to employers receiving assistance through the Paycheck Protection Program (PPP).
This provision of the CARES Act provides a refundable payroll tax credit for 50 percent of wages paid by eligible employers to certain employees during the COVID-19 crisis. The credit is available to employers, including non-profits, whose operations have been fully or partially suspended as a result of a government order limiting commerce, travel or group meetings. The credit is also provided to employers who have experienced a greater than 50 percent reduction in quarterly receipts, measured on a year-over-year basis.
This Employee Retention Credit applies to qualified wages paid after March 12, 2020, and before January 1, 2021. The maximum amount of qualified wages taken into account with respect to each employee for all calendar quarters is $10,000, so that the maximum credit for an Eligible Employer for qualified wages paid to any employee is $5,000.
- Delay of Payment of Employer Payroll Taxes
Deferral is not provided to employers receiving assistance through the Paycheck Protection Program.
This provision would allow taxpayers to defer paying the employer portion of certain payroll taxes through the end of 2020, with all 2020 deferred amounts due in two equal installments, one at the end of 2021, the other at the end of 2022. Payroll taxes that can be deferred include the employer portion of FICA taxes, the employer and employee representative portion of Railroad Retirement taxes (that are attributable to the employer FICA rate), and half of SECA tax liability.
- Recovery Rebates for Individuals –
- $1,200 per single filers. AGI not over $75000
- $2,400 for joint filers, plus $500 per qualifying child. Phased out gradually for joint filers with AGI over $150,000.
- Tax Due Dates – Income tax filing and payment due dates have been extended to July 15th, 2020 by the IRS as well as NY, NJ and CT and several other states. In addition, individual quarterly estimated tax payments are deferred through October 15th, 2020.
- Required Minimum Distributions (RMDs) – Distribution requirements are suspended through 2020.
- Coronavirus Related Early Distributions from Qualified Retirement Plans – Early distributions of up to $100,000 for individuals who are directly affected by Coronavirus are not subject to the 10% early withdrawal penalty. In addition, income attributable to such distributions will be subject to tax over three years, and the taxpayer can repay the withdrawals back into the retirement plan within three years without regard to that year’s cap on contributions.
- Retirement Plan loan limits – Retirement plan loan limits are increased to the lesser of $100,000 or 100% of the participant’s vested account balance in the plan. Individuals with an outstanding loan can delay their loan repayment(s) for up to one year.
- Charitable Contributions – To encourage charitable giving, the CARES act allows for an above-the-line deduction of up to $300 for cash donations regardless of whether an individual itemizes their deductions. In addition, the 50% of AGI limitation on charitable contributions is raised to 100% for 2020.
- Net Operating Losses – Business losses for tax years beginning in 2018, 2019 or 2020 can be carried back five years.
- Qualified Improvement Property (QIP) – Based on a technical correction under the new legislation, QIP placed in service in 2018 and after is now 15-year property and is eligible for 100% bonus depreciation, providing many taxpayers with significant tax savings opportunities.
We realize these are extraordinarily difficult times. It’s easy to feel overwhelmed by all the changes, disruptions and potential relief opportunities related to the pandemic and related economic impact. If you or someone close to you has questions or concerns about the CARES Act of COVID-19 Tax Impact, please don’t hesitate to contact us.
Cecil Nazareth, CPA, MBA