The highly anticipated Covid-19 economic stimulus bill, the CARES Act, was passed by the Senate late Wednesday evening. Joining two previously passed bills issued as part of the congressional response, this massive ($2.2 trillion) piece of legislation has multiple provisions designed to stabilize the economy amid the ongoing pandemic. As of this writing, the CARES Act has not been approved by the House of Representatives, so these provisions are subject to change.
Provisions to Stabilize Businesses:
Small Business Loans. Under the CARES Act, there is expanded eligibility for businesses with under 500 employees to obtain loans of up to $10,000,000. The loans will not require collateral or personal guarantees. In addition, loans may be forgiven (tax free) under certain circumstances. This will be of critical importance for many small businesses. Stay tuned for a future alert on the topic which will take a deeper dive into the eligibility and forgiveness requirements.
Payroll Tax Deferral. Payroll taxes for the period beginning on the date the CARES Act becomes law through December 31, 2020 will be deferred with 50% of the deferral due on December 31, 2021 and the remaining 50% due on December 31, 2022. This applies to all of an employer’s payroll tax as well as half of any self-employment tax liability.
Employee Retention Credit. A credit of up to $10,000 per employee has been granted under the CARES Act. Eligible employers would be entitled to this credit against their employment taxes. The credit is equal to 50% of the wages paid to employees who are not currently working due to an employer’s full or partial termination of business or for a significant reduction in gross receipts.
Net Operating Loss (NOL) Carrybacks. The 2017 Tax Cuts and Jobs Act (TCJA) changed the rules regarding NOLs by eliminating the carryback period and limiting the amount of taxable income an NOL could offset. In response to the need for business access to cash currently, the restrictions have been softened. Under the CARES Act, an NOL arising in 2018, 2019, or 2020 can be carried back 5 years and can fully offset income without limitation.
Interest Expense Limitation Increased. The previous TCJA enacted interest expense limitation for certain taxpayers has been increased to 50% (up from 30%).
Corporate charitable contribution limitation increased. Corporations would be entitled to a charitable deduction on up to 25% of income (up from 10%).
Qualified Improvement Property. Under a drafting glitch under TCJA, many types of leasehold improvements were excluded from favorable tax treatment. Under the CARES Act, this matter has been corrected. This provision has a particular benefit to industries hit hardest by the pandemic including retail and hospitality businesses.
Provisions Relating to Individuals:
Stimulus Payments. Payments of $1,200 per adult and $500 per child are authorized under the bill. Single taxpayers with income over $99,000 and married taxpayers with income over $198,000 would not be eligible for these stimulus payments. (The payments begin to phase out at lower levels of income.) The income limitations will be based on the 2019 adjusted gross income (or 2018 for those that have not yet filed). Taxpayers who have not yet filed their 2019 return may wish to delay filing until they better understand this provision.
Penalty-Free Retirement Account Withdrawals. Taxpayers can take distributions as a result of a Covid-19 impact and the statutory 10% penalty will not apply, subject to a $100,000 limit. In addition, these retirement account distributions would be subject to income tax over a three-year period and repayments of any distributions may be available.
Required Minimum Distributions (RMDs) Suspended. The CARES Act eliminates required minimum distributions for tax year 2020.
“Above the Line” Charitable Contributions. All taxpayers would be eligible for a charitable contribution of up to $300 in addition to their standard or itemized deduction for tax year 2020.
Charitable Contribution Limitation Increased. The adjusted gross income (AGI) limitation on charitable contributions will be suspended for 2020.
Student Loan Payments Suspended. The CARES Act suspends payments for certain student loans through September 30, 2020.
Expanded Unemployment Benefits. Under the CARES Act, unemployment benefits are expanded along with the definition of those eligible for unemployment. Most notably, benefits are granted to self-employed taxpayers and independent contractors.
The above discussion focuses primarily on tax benefits which are part of the CARE Act. There are other significant non-tax provisions that also focus on maintaining economic stability. We will include a summary of those benefits in future Alerts. Your WilkinGuttenplan advisors will be closely monitoring all developments of this relief process.