COVID-19 Aid Relief & Economic Security (CARES) Act

Coronavirus Aid Relief and Economic Security (CARES) Act

Business relief provisions include:

• Paycheck Protection Program-READ BELOW
• Employee retention credit (not available if SBA loan is taken)
• Deferral of employer share of 2020 payroll tax. (not available if SBA loan is taken)
• Five-year carryback and 100% for NOL’s in 2018, 2019, and 2020
• An increase in the business interest expense limitation-50% of adjusted taxable income for 2019 and 2020, not 30%. Partnerships are 50% for 2020 only.
• Employer credit for Paid Sick Pay Leave (10 days.)

Individual relief provisions include:

• Advance Rebates for individual taxpayers-The rebate amounts are advance refunds of credits against 2020 taxes, and equal to $1,200 for individuals, or $2,400 for joint filers, with a $500 amount for each child. There is a phase-out provision based upon 2018 or 2019, if filed, adjusted gross income (AGI).
• A waiver of the early distribution penalty from retirement plans for coronavirus-related distributions.
• A waiver of 2020 required minimum distribution (RMD) from pension plans.
• An above-the-line charitable contribution deduction of $300 for 2020, and
• An exclusion from income for employers’ repayments of employees’ student loans

Expanded discussion of some of the Business relief provisions

Paycheck Protection Program-SBA Loan Forgiveness-Employers can receive a loan from the bank (working under SBA guidelines) of an amount equal to 2.5 times their average monthly payroll costs.  Included in the calculation are W-2 wages (up to 100k per employee), 1099-MISC, health insurance benefits, retirement plan costs, and employer taxes.  These loans also feature a loan forgiveness aspect. If the business retains its employees over an eight-week period after the date of the loan origination, the repayment of the loan can be forgiven, which essentially turns the loans into a grant program.  The business would only be responsible for interest during the loan period at a maximum of 4% annually. Employer must maintain employee count during 8-week period following loan or may incur a proportional reduction in amount forgiven or if an employee’s pay is reduced by more than 25% as of the last calendar quarter.  No personal guarantee or collateral required for these loans. Borrowers must apply for loan forgiveness to their lenders by submitting required documentation (See below for “Documents required by lender to offer borrower loan forgiveness”) and should receive a decision within 60 days. If a balance remains after the borrower receives loan forgiveness, the outstanding loan will have a maximum maturity date of 10 years after the application for loan forgiveness.

How does a business apply for a loan under the Paycheck Protection Program? We expect additional guidance from the SBA regarding how to apply for Program loans, including additional resources on the SBA website about how to find a qualified lender. Borrowers who have outstanding SBA loans may also want to contact their existing lenders to inquire about applying for loans under the Program.

50% Employee retention credit-another option for businesses clients is to opt for the employee retention credit.  This is a refundable payroll tax credit for 50% of wages paid by an employer whose operations have been affected by a COVID-19 suspension order, or whose gross receipts have declined by more than 50% compared with the same quarter the previous year. For employers with 100 or fewer employees, all employee wages qualify for the credit. For employers with more than 100 employees, qualified wages include those paid to employees who are not working because of COVID-19-related circumstances. The credit is available to be claimed on a quarterly basis, but the amount of wages, including health benefits, for which the credit can be claimed, is limited to $10,000 in aggregate per employee for all quarters. The credit applies to wages paid after March 12, 2020, and before January 1, 2021.

Employers that claim the Employee retention credits are not eligible for SBA loans.  So, choosing between the SBA loan and the retention credit will have to be considered.  If an employer cannot maintain their employee count in a significant manner, then maybe the retention credit would yield a better result.

A third option for businesses is the deferral of employer share of 2020 payroll tax, employer payroll tax holiday that lets employers defer the employer share of 2020 payroll tax (Employer FICA), paying it back in 2021 and 2022. Clients who receive forgiven SBA loans through the CARES Act are not eligible for this deferral.

Documents required by lender to offer borrower loan forgiveness

Loan forgiveness is available for 8 weeks of payroll costs, mortgage interest or rent payments, and utility payments. To be eligible to receive loan forgiveness, a borrower must submit a complete application to the lender containing the following required documents:

• Documentation verifying the number of full-time equivalent employees on payroll and pay rates for pre- and post-covered periods, including payroll tax filings reported to the IRS and state income, payroll, and unemployment insurance filings;
• Documentation such as cancelled checks verifying mortgage interest, lease, and utility payments;
• Certification from a representative of the recipient that (a) the documentation presented is true and correct, and (b) the amount for which forgiveness is requested was used to retain employees, make interest payments on a covered mortgage obligation, make payments on a covered rent obligation or make covered utility payments; and
• Any other documentation the SBA deems necessary.

Net Operating Losses-Any NOL arising in a tax year beginning after December 31, 2017, and before January 1, 2021, may be carried back five years unless the carryback period is waived. For NOLs that arose in tax years beginning in 2018 or 2019, the time for making the waiver election is extended to the due date (including extensions) for filing the taxpayer’s return for the first tax year ending after the date of enactment of the new law. Normally, the election is required by the due date (including extensions) of the return for the tax year in which the NOL arose. The carryforward period for NOLs remains unlimited. However, the twenty-year carryforward period for NOLs arising in tax years beginning before 2018 is unchanged. The rule limiting an NOL deduction that arises in a tax year beginning after December 31, 2017, to 80 percent of taxable income in a carryback or carryforward year is suspended in a tax year beginning after December 31, 2017, and before January 1, 2021.

The limitation on the deduction of excess business losses for noncorporate taxpayers will not apply for tax years beginning in 2018, 2019, and 2020. The deduction limitation will apply for tax years beginning after December 31, 2020.

Employer Credit for Paid Sick Leave– For the employer credit for required paid sick leave, qualified sick leave wages are wages and compensation required to be paid by the Emergency Paid Sick Leave Act. Under this Act, employers with fewer than 500 employees must provide an employee with paid sick time if the employee cannot work or telework due to a need for leave for the reasons described below. The per-day amount of qualified sick leave wages considered for each employee for the credit is limited based on the reason for the leave. The credit allowed for required paid sick leave cannot be more than the Social Security tax imposed on the employer. If the credit amount is more than the FICA tax on the employer, the excess is treated as a refundable overpayment.

The limit is $511 per day if:

• The employee is subject to a federal, state, or local quarantine or isolation order related to COVID-19; or
• The employee has been advised by a health care provider to self-quarantine due to concerns related to COVID-19; or
• the employee is experiencing symptoms of COVID-19 and seeking a medical diagnosis.
• The limit is $200 per day if:
• the employee is caring for an individual who is subject to a federal, state, or local quarantine or isolation order related to COVID-19, or
• has been advised by a health care provider to self-quarantine due to concerns related to COVID-19; or
• the employee is caring for his or her son or daughter if the child’s school or place of care has been closed, or the child care provider is unavailable, due to COVID-19 precautions; or
• the employee is experiencing a substantially similar condition specified by the Secretary of Health and Human Services in consultation with the Treasury and Labor Secretaries