On March 27, 2020, the Coronavirus Aid, Relief, and Economic Security Act (“CARES Act,” the “Act”) was signed into law by President Trump. This is the 3rd piece of legislation designed to combat the economic impact of COVID-19 on businesses and individuals. Previous legislation includes the spending bill (March 6th) and the Families First Coronavirus Response Act (March 18th). This whitepaper is intended to cover selected tax provisions, as well as the cornerstone of the CARES Act – the Paycheck Protection Program.
Paycheck Protection Program
Keeping American Workers Paid and Employed Act – providing relief for small businesses and employees affected by the outbreak of COVID-19.
Potentially the most critical provision, and most widely asked about, is the Paycheck Protection Program (“PPP”), which is an emergency lending facility administered by the Small Business Administration (“SBA”) under its 7(a) lending program. This program is designed to provide small business loans on incredibly favorable terms to borrowers impacted by the outbreak of COVID-19. The underlying intent of the PPP appears to be to help small businesses manage near-term liquidity concerns and cover operating expenses during the worst of the crisis and provide a strong incentive for employers to retain their workforce. The intent is to then shift the burden of this near-term liquidity crisis to the federal government by way of loan forgiveness for all or a portion of the loans for businesses that are eligible.
Many complicated rules and regulations exist, pertinent to the program, but some of the key provisions are outlined below.
Key Loan Provisions
PPP loans cannot have a maturity beyond 10 years and cannot bear interest at a rate above 4.00%. These loans will be guaranteed 100%, if made between February 15, 2020 and June 30, 2020. Generally, principal and interest payments will be deferred for at least six months. Generally, the interest rate has been determined to be a 1.0% per annum, fixed rate. These loans do not require a personal guarantee.
Loans can be made in amounts up to a maximum of $10,000,000. Loan amounts are determined by a rate factor applied to payroll of the business during a specified period before the loan origination, which could result in a lower loan amount. The loan amount is generally calculated as follows:
The lesser of (1) average monthly payroll over the past 12 months times a 2.5x rate factor, plus any outstanding economic injury disaster loan (“EIDL”) amounts, or (2) $10,000,000. Eligible employers may use an alternative measuring period.
New businesses may qualify for a loan based on the 2.5x rate factor multiplied by average monthly payroll costs incurred during January 1, 2020 through February 29, 2020.
At least 75% of the loan proceeds must be used for payroll costs, including salaries, sick leave (not previously covered under the Families First Coronavirus Response Act), medical leave (not previously covered under the Families First Coronavirus Response Act), retirement benefits, and insurance premiums. Salaries and wages per employee is maxed at an annualized $100,000 cap. The remaining 25% of the loan proceeds can also be used to cover mortgage interest, rent, and utilities.
A PPP borrower may be eligible to apply for loan forgiveness equal to an amount spent during an 8-week period after the loan origination (subject to a maximum of the total principal amount of the loan). The amount spent is restrictive as proceeds may only be used for payroll costs, including salaries, sick leave (not previously covered under the Families First Coronavirus Response Act), medical leave (not previously covered under the Families First Coronavirus Response Act), retirement benefits, and insurance premiums as well as mortgage interest, rent, and utilities to be considered forgivable. Any amount of the loan that is forgiven will not be considered federally taxable income to the business.
The application period for this program begins on April 3, 2020 and the loans are provided through SBA approved lenders. Grapp Lerash suggests that small business owners immediately contact their banker to determine if their financial institution will be participating in these programs, as this will likely provide the most seamless path of applying for a PPP loan.
Critical information to have available when applying is as follows:
- Payroll reports for the last 12 months.
- 1099s issued for commissions or other forms of compensation.
- Documentation of health insurance for all employees.
- Documentation of retirement plan funding arrangements.
- Sole proprietors should provide a schedule C filing that reflects both gross and net self-employment income.
Individual-Centric Tax Provisions
Economic Impact Payments (Individual Rebates)
The CARES Act established a critical component of the COVID-19 relief, aimed at individual taxpayers in the form of economic impact payments of up to $1,200 per eligible taxpayer ($2,400 for married filing joint taxpayers), plus an additional $500 per qualifying child. Eligibility is determined by adjusted gross income (“AGI”) from the most recently filed tax return (2019, if filed; 2018, if 2019 has not been filed yet). Full economic impact payments are available for taxpayers with AGI of up to $75,000 for individuals, and $150,000 for married couples filing joint returns. For filers above these AGI thresholds, the economic impact payment is reduced by $5 for every $100 above the applicable AGI threshold, with complete phase-out at $99,000/$198,000, respectively.
Many questions exist relative to how payments will be received and how the Internal Revenue Service (“IRS”) will distribute economic impact payments to taxpayers not required to file tax returns. Economic impact payments will be made available for social security recipients and others who are not required to file a return. Most taxpayers will not need to take any action to receive payments, as the IRS will calculate and send the economic impact payments automatically. The IRS has also made reference to a web-based portal for taxpayers to provide banking information online, to expedite the receipt of economic impact payments. For those who do not utilize this methodology, physical checks will be mailed.
Charitable Contribution Deduction
Another key provision of the Act amends previously established charitable contribution limitations by providing for an above the line deduction of up to $300 for taxpayers that do not itemize. Historically, charitable contributions are a “below-the-line” deduction available only to taxpayers who itemize. Only certain types of charitable contributions are applicable for this “above-the-line” deduction; excess charitable contribution carryovers are not included for purposes of this provision. Perhaps the most important detail is that this provision is not temporary, extending this benefit into the foreseeable future. Further, limitations previously imposed on contributions have been temporarily modified from a maximum of 60% of adjusted gross income to 100%. These provisions take effect for taxable years ending after December 31, 2019.
Student Loan Relief
All federal student loan payments (principal and interest) are suspended for 6 months (through September 30, 2020), without penalty. This provision applies only to federally owned loans.
Business-Centric Tax Provisions
Employee Retention Tax Credit
For eligible employers, an employment tax credit for each calendar quarter is available equal to 50% of qualified wages (up to $10,000) paid to each employee. Eligible employers are those which were carrying on a trade or business during calendar year 2020 and (1) the operation of that trade or business is fully or partially suspended due to orders from an appropriate governmental authority for specified reasons, or (2) the business has seen a significant decline in gross revenue, defined as 50% less than the same calendar quarter in the prior year and for so long until the business recovers from said decline, defined as gross receipts greater than 80% for the same calendar quarter in a prior year. One key provision is that if a business receives any small business interruption loan, such as the Paycheck Protection Program (discussed below), the business is not eligible for the Employee Retention Tax Credit.
Delay of Payment of Employer Payroll Taxes
The Act permits most employers to delay payment of the employer portion of social security taxes (6.2%). This deferment applies to payroll taxes from the enactment of the Act (March 27th, 2020) to December 31, 2020. 50% of the deferred payroll taxes will be payable on December 31, 2021; while the remaining 50% will become payable on December 31, 2022. Once again, if the business receives a small business interruption loan, such as the Paycheck Protection Program, the business is not eligible to defer payment of payroll taxes.
Business Interest Expense Limitation
Section 163(j) of the Internal Revenue Code (“IRC”) imposed a limit on trade or business interest deductions starting in 2018. The CARES Act increases the limitation for adjusted taxable income from 30% to 50%. Special rules apply to partnerships and pass-through businesses. It is expected that the increase in allowable deduction will stimulate liquidity for businesses with significant interest expense related to a trade or business.
Technical Correction of Bonus Depreciation for Qualified Improvement Property
The CARES Act includes a fix, as well as rule clarifications, for bonus depreciation under Section 168(k) of the IRC. The Tax Cuts and Jobs Act of 2017 (“TCJA”) defined qualified improvement property (“QIP”) but failed to assign it a 15-year depreciable life, thereby preventing it from being treated as QIP that would otherwise be eligible for bonus depreciation deduction. The CARES Act corrects this error by assigning the expected 15-year depreciable life to QIP, thereby allowing it to be characterized as qualified property eligible for bonus depreciation. These corrections are effective retroactively, as if they had been included within the TCJA.
Tax Deadline Change
The deadlines to FILE and PAY federal income taxes, as well as some state income taxes are extended to July 15, 2020.
If you have any questions related to the content of this document, believe you may qualify for one of the programs described above or would like further clarification on how the Coronavirus Aid, Relief, and Economic Security Act applies in your specific tax situation, we recommend that you promptly reach out to your Grapp Lerash business advisor for assistance.
It is important to note that information related to COVID-19 and the various pieces of legislation targeted at addressing the economic impact of COVID-19 can change daily. This information is also not considered legal, tax or accounting advice and clients should consult their legal and/or tax advisors before making any financial decisions, as not all components of the legislation may apply in every scenario and all tax situations are different.
For more information, please reach out to a Grapp Lerash business advisor.