By Raffi Yousefian | Published 03/26/2020; Updated 06/03/2020 12:04:03 PM

There’s no feeling like waking up in the early morning and learning that the biggest tax code overhaul (aka Tax Cuts and Jobs Act of 2017, or “TCJA”) since 1986 that you think you just mastered, is once again about to be reconstructed. This time with a one week notice. The Coronavirus Aid, Relief and Economic Security (“CARES”) Act was signed into law on Friday March 27th, 2020. We’ve summarized the key provisions of this legislation below so you can understand, at a very high level, the stimulus and relief options that will be available for your business during this crazy time. If you have any questions or need help navigating this legislation then please feel free to reach out

We will update this post as we learn more about the legislation. 

Paycheck Protection Program (PPP) Loans

This is by far the most favorable piece of small business relief legislation in our opinion, and it deserves its own post.

Existing SBA Loans

Small Business Debt Relief Program

Under this program, the SBA will cover all loan payments including principal, interest, and fees for 6 months on existing non-disaster SBA loans. This includes current 7(a) not made under the PPP, 504, and microloans. 

Other Loan Modifications 

The CARES Act will modify existing SBA loan requirements with the following: 

  • The maximum loan amount for an SBA express loan will increase from $350k to $1 million through December 31, 2020. 
  • Expansion of SBA economic disaster loans (apply here) for the following:
    • Sole proprietors will qualify
    • If you are a private non-profit with an effective ruling letter from the IRS, granting tax exemption under sections 501(c), (d), or (e) of the Internal Revenue Code of 1954, or if you can provide satisfactory evidence from the State that the non-revenue producing organization or entity is a non-profit one organized or doing business under State law. However, a recipient that is principally engaged in teaching, instructing, counseling, or indoctrinating religion or religious beliefs, whether in a religious or secular setting, or primarily engaged in political or lobbying activities is not eligible to receive an EIDL
    • No personal guarantee on loans below $200k required through December 31, 2020
    • Businesses which have applied for disaster loans can receive an immediate advanced Emergency Grant of $10k, even if the disaster loan was denied. If the disaster loan is denied and the business receives a Payroll Protection loan, then the $10k advance will be reduced from the amount of payroll protection debt forgiven. The advance does not need to be repaid under any circumstance, and may be used to keep employees on payroll, to pay for sick leave, meet increased production costs due to supply chain disruptions, or pay business obligations, including debts, rent and mortgage payments. The $10k advance is further limited to $1k per employee on payroll at the time which the advance is awarded. 

Unemployment Benefits for Employees

The CARES act offers two additional types of unemployment – Pandemic Unemployment Assistance (PUA), and Federal Pandemic Unemployment Compensation (FPUC). The PUA guarantees $600 to those who are not eligible to receive state unemployment benefits for up to 39 weeks. The FPUC provides an additional $600 a week in addition to state benefits for up to 13 weeks. The Department of Labor has specifically clarified that if an employee was furloughed, but their employer has reopened and asked them to return to work, then they cannot collect the additional $600. States are being pushed to waive any waiting period for receiving benefits. Details on this program can be accessed here

2020 Recovery Rebate for Individuals

The CARES Act also provides relief for all individuals in the form of a rebate check to taxpayers. The rebate will be based on adjusted gross income (AGI) reported on your 2019 tax returns. If the 2019 tax returns were not filed, then the Treasury will refer to your 2018 tax returns. If you haven’t filed either year then the Treasury will determine whether you are eligible by referring to your 2019 SSA-1099, or Social Security Benefit Statement. Only taxpayers with a valid social security number will receive a rebate. If you didn’t file returns in 2018, 2019 and didn’t receive social security benefits, then you can register to receive the payments here. You will not receive a check if you’re claimed as a dependent.

The rebate amount depends on your adjusted gross income (AGI) and your filing status: 

  • If your AGI is less than $75k for single filers or $150k for joint filers, then you will receive $1200 if single ($2400 if married filing jointly) plus $500 for each child under age 17. 
  • If your AGI is between $75k and $99k for single filers or $150k and $198k for joint filers, then your rebate will be reduced by $5 for every $100 of income over the threshold.
  • If your AGI is greater than $99k for single filers or $198k for joint filers, then you will receive no rebate. 

The 2018/2019 returns and 2019 social security statements are used to determine how much you will receive; however, the amount you are actually entitled to will depend on your 2020 AGI. So when you file your 2020 returns, you will determine how much you should have received. If the amount you received is less than what you’re supposed to receive based on your 2020 income then you will receive a dollar for dollar tax credit for the excess on your 2020 tax return. On the contrary, if you received more than you were supposed to receive based on your 2020 income, you will NOT have to pay back the excess.

The amount will be paid via direct deposit if you provided direct deposit information when filing your most recent tax return, otherwise you will receive a check without doing anything.

Other Tax Law Incentives and Benefits

  • 100% Deduction for Qualified Improvement Property
    • The CARES Act provides a technical correction to the TCJA by giving qualified improvement property a useful life of 15 years, instead of 39 years, thus making it eligible for 100% bonus depreciation deduction for the year it is placed in service. If you were previously limited by this deduction, then you know who you are. You should be able to retroactively apply the deduction to 2018 moving forward.
  • Charitable Contributions Expansion
    • Although this is not a tax benefit designed for small business, there have been changes in charitable contribution limits that will impact almost everyone beginning in tax year 2020, including those receiving charitable contributions from a pass-through entity via K-1:
      • An individual will be able take a charitable deduction up to $300 towards AGI, even if they don’t itemize.
      • If the individual does itemize, then charitable contributions can be deducted up to 100% of AGI. That means they’re no longer limited to 60% of AGI.
      • For corporations, the limit increases from 10% of AGI to 25% of AGI.
  • Employer Student debt payments
    • Employers can now pay up to $5,250 of student loans for employees without triggering taxable income for the employees. Previously, the entire amount would have been taxable to the employees.
  • Unleash the Losses
    • Guess who’s back? Back again? The Net Operating Loss (NOL) carryback options! They are back after they were eliminated by the TCJA. 
      • Net operating losses can now be carried back 5 years for losses incurred in 2018, 2019, and 2020. Losses can offset 100% of taxable income for all carry-back years, and 2019/2020, instead of the 80% limited by the TCJA for all post 2017 losses.
      • An individual’s business loss deduction against other sources of income is no longer capped at $250k (single) / $500k (MFJ). This provision can be retroactively applied to 2018, but will expire after 2020.
  • Business Interest Limitation
    • The limitation of interest expense deduction to 30% of adjusted taxable income has been increased to 50% of adjusted taxable income for 2019 and 2020. Consult your tax adviser to see if this affects you. 
  • Penalty Free IRA Withdrawal
    • A provision in the relief bill allows Americans to take penalty-free distributions from IRAs and qualified retirement plans up to $100,000. The standard 10% penalty for withdrawals under age 59.5 (except in the event of death or disability) is waived. The no-penalty allowance applies to “coronavirus-related distributions” — i.e. people who are diagnosed with COVID-19 or have experienced financial hardship from quarantine, layoffs, reduced hours, or furlough between now and December 31, 2020. Income attributable to such distributions would be subject to tax over three years, and can be recontributed to an eligible retirement plan within three years without regard to that year’s cap on contributions.

Employee Retention Credit

Who is eligible? 

If a business (or nonprofit organization described under 501(c) of IRC and exempt from tax under 501(A)) is:

  • fully or partially suspended by government order due to COVID-19 during the calendar quarter; or
  • the employer’s gross receipts are below 50% of the comparable quarter in 2019 (once the employer’s gross receipts go above 80% of a comparable quarter in 2019, they no longer qualify after the end of that quarter);

and continues to pay its workers, then the business can receive a credit against the payroll taxes it pays on wages equal to 50% of qualified wages paid to each employee for that quarter. The amount of qualified wages for each employee across all quarters cannot exceed $10k. So basically, you can receive up to $5k back from the Federal government for each employee during each of the qualified quarters mentioned above.  

Employers can immediately see the benefit of this by reducing their required payroll tax deposits that have been withheld from employees wages. The employer will report their total qualified wages and the related health insurance costs for each quarter on their quarterly Form 941 beginning with Q2 2020 through Q4 2020. If the employer’s employment tax deposits are not sufficient to cover the credit, the employer may receive a refund from the IRS by submitting Form 7200, Advance Payment of Employer Credits Due to COVID-19. Employers will need to ask their payroll processor how they’re going to administer this process. 

What are qualified wages?

The business’s qualified wages depend on whether it has less than or more than 100 employees.

  • If < 100 employees, then the the credit is based on wages paid to all employees, regardless if they worked or not. If the employees worked full time and were paid for full time work, the employer still receives the credit. 
  • If > 100 employees, then the credit is allowed only for wages paid to employees who did not work during the calendar quarter.

Limitation

Finally, no double dipping is allowed. If you take advantage of this credit, then you can’t use those wages to claim the sick and paid leave credit under the Families First Coronavirus Response Act, and vice versa. Also, the payroll retention credit is not available if you leverage a payroll protection loan through the SBA as mentioned above. Contact us or your tax adviser for determining qualified wages and detailed eligibility requirements.

Payroll and Self-Employment Tax Deferral

You may think we’ve covered it all, but wait… there’s more! 

Employers can defer payments of social security tax on wages paid between March 27, 2020 through December 31,2020, for about two years. Of the total Social Security tax deferred, 50% needs to be paid by December 31, 2021, and the remaining 50% by December 31, 2022. This also applies for self-employment taxes that would be due between March 27 and December 31, 2020. 

You may have been told that you can’t have your cake and eat it too, but that was a lie all along. This legislation will allow employers to defer Social Security taxes, but still be able to claim the newly enacted family leave credit, sick leave credit, PPP loan forgiveness, and employee retention credit towards those taxes. 

God bless the payroll companies who need to re-code their systems to be able to process all of these nuances.