As promised, below are our thoughts and observations on the CARES Act as we feel like it pertains to our clients. The bulk of the bill was focused on small businesses and typical taxpayers and the information relevant to our clients in this single bill is almost overwhelming from a planning standpoint, but as each one becomes a concrete reality with the ability to be used from a practical sense, I encourage everyone to take advantage of whatever programs apply to you in this uncertain time.
I do want to say that we have been told of many, many acts of kindness and generosity from and for our clients all over the US and the world and have been encouraged by all of those who have put personal kindness and generosity toward small businesses above personal security and wealth. Our team at Scroggins CPAs is determined to do at least our part to help our clients and our community in the same spirit.
CARES Act Personal Items
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Recovery Rebates [Section 2201] – A completely refundable credit is being pre-paid to every eligible taxpayer. This credit will not be considered taxable income, will be paid to you the same way your 2019 or 2018 refunds or payments were made (check in the mail or direct deposit), and will never need to be repaid. If your bank account has been closed and the payment is returned, a check will be mailed out.
The credit amounts are $1,200 for Single filers, $2,400 for Married Filing Jointly filers, and $1,200 for Head of Household filers, along with $500 per dependent child under age 17.-
Eligibility: Anyone who:
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is NOT a non-resident alien or a dependent on someone else’s tax return (or trust or estate), and
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did file a 2018 or 2019 tax return or at least received Social Security income during either year (if you have not filed either, we recommend doing so immediately), and
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has Adjusted Gross Income (AGI) below the overall thresholds of $99,000 for Single filers, $198,000 for Married/Jointly filers, and $136,500 for Head of Household filers. The thresholds begin at $75,000 for Single filers, $150,000 for Married/Jointly filers, and $112,500 for Head of Household filers. If your income is between those figures, your credit will be reduced by 5% of the income over the bottom figure.
For example, if you file jointly and your AGI is $160,000, your $2,400 credit will be reduced by ($162,000-$150,000 = $12,000 * 5%) $600, making it $1,800.
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Retirement Account Distributions [Section 2202] – For retirement plan distributions up to $100,000 made in 2020, if the distribution is requested as relief related to COVID-19 (make sure your advisor is aware that’s the intention behind the distribution!):
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The 10% early distribution penalty is waived, if applicable (for those under 59 1/2),
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the taxable income from the distribution may be recognized over a 3 year period in order to ease the tax burden, and
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the amount distributed can be paid back and the repayment will be treated like a rollover.
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If you opt for a loan from your retirement account rather than a distribution, know that the loan limit was doubled to $100,000 or 100% of your vested balance. If you have an existing loan, you can delay your loan repayments for up to one year, even if the plan doesn’t contractually allow for hardship repayment plans.
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Required Minimum Distributions have been waived [Section 2203] – RMDs from essentially all retirement account types are not required for 2020, so consider contacting your advisor to discontinue them if you do not need the extra taxable income.
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Pandemic Unemployment [Sections 2102, 2104 and 2107] – An additional 13 weeks of unemployment benefits through the end of 2020 have been granted for those who are still unemployed after state unemployment is no longer available. An additional $600 per week payment to each recipient of unemployment or Pandemic Unemployment Assistance has been granted for up to four months. Also, for anyone not otherwise eligible for regular compensation or extended benefits under their State or Federal unemployment laws, like self-employed individuals, contractors, or those with limited work history, Pandemic Unemployment is available.
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New line for 2020 Charitable Donations [Section 2204] – There will be a new line on the 2020 personal tax returns that will provide a deduction for up to $300 of charitable donations, regardless of your ability to itemize.
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AGI limitation on charitable donations has been lifted [Section 2205] – For a few of our particularly generous clients each year, the limitation on making charitable deductions in excess of 50% of your Adjusted Gross Income has been lifted for 2020.
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Exclusion for Employer-paid student loans [Section 2206] – Previously, an employer was able to compensate an employee for up to $5,250/year of non-taxable tuition reimbursement. The CARES Act extended the definition to include existing student loan payments. This is non-taxable income to the employee and is a full deduction to the employer.
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COVID-19 testing covered [Section 3202] – The cost of COVID-19 testing (not treatment) is now officially covered indefinitely and that fact does not violate high-deductible plan contracts. For those without insurance, cash payments must be published on the provider’s website.
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Student Loan Relief [Section 3513] – All Federally-held ( Direct Loans and FFEL Loans by the Department of Education) student loans are now in automatic deferment, will not accrue interest, and will be indicated as “paid” on credit reporting through September 30, 2020. Also, for any students who withdrew during the Spring semester due to COVID-19-related reasons, all Federal student loans are forgiven for that semester.
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TEACH grant service requirements [Section 3519] – Any teacher with a TEACH grant who is unable to fulfill their service requirement due to COVID-19 shutdowns will be considered having full-time service for 2020.
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Various Medical items [Sections 3701, 3702, and 3705] – The deductible for tele-health appointments has been waived, HSA/FSA plans now include over-the-counter menstrual care products in acceptable medical costs, and the requirement for face-to-face dialysis patient visits has been waived.
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Credit Protection [Section 4021] – As an amendment to the Fair Credit Reporting Act, if an information furnisher (the business that reports on your credit) makes an accommodation to your otherwise current account (e.g. Honda allows you to delay your car payment for 60 days), they must report that the payments are being made as scheduled. This ends 120 days after the COVID-19 national emergency is declared over by the President.
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Foreclosure Moratorium [Section 4022] – Any federally-backed mortgage holder is prohibited from initiating a foreclosure process, seeking foreclosure judgments or orders of sale, or executing a foreclosure-related eviction or sale for at least the 60 days beginning on March 18, 2020.
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Federally-backed Mortgage forbearance [Section 4023] – All federally-backed mortgage holders may contact their mortgage holder and request up to 12 months of forbearance without late fees or negative credit reporting. Eligible mortgage holders include those that are:
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Insured by the Federal Housing Administration (FHA)
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Insured under section 255 of the National Housing Act
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Guaranteed under section 184 or 184A of the Housing and Community Development Act of 1992
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Guaranteed or insured by the Department of Veterans Affairs
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Guaranteed, insured, or made by the Department of Agriculture
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Purchased or securitized by the Federal Home Loan Mortgage Corporation or the Federal National Mortgage Association
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Net Operating Losses for Non-Corporations [2304] – As of 2018, individuals with Net Operating Losses (NOLs) created by passthrough business interests like S-Corporations and Partnerships were no longer able to take more than the $250,000/$500,000 loss limit in a given year and the remainder was carried forward. The CARES Act removed the limitation for 2018-2020 and the carryback period returns for the 5 years prior to the NOL.
CARES Act Business Items
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Paycheck Protection Program through SBA 7(a) [Section 1102] – One of the biggest (in terms of entities eligible & affected) programs created by the CARES Act, the PPP is based on providing loans for companies with fewer than 500 employees (with a few caveats, which won’t apply to our clients) to help cover the costs of payroll, mortgage interest (not principle!), rent, utilities, and other business interest. Currently, the loan process must be done through an SBA loan-eligible bank, though many banks don’t have a published process at the moment.
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Your maximum loan amount is the lesser of: $10,000,000 or 250% (2.5x) your average monthly payroll costs for the year leading up to the loan or January 1st through February 29th, 2020 if your business is new or seasonal. Any payroll at a level above $100,000 per employee is disregarded.
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The loans can be partially or fully forgiven, based on a few conditions:
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They must be used to pay rent, mortgage interest, utilities, and payroll costs. Payroll costs include everything you might expect (wages, salaries, PTO, commissions), but also include state & local payroll taxes (though not federal), tips received & paid to employees (that’s you, restaurant clients!), and costs associated with group health care coverage for employees.
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You must maintain at least 75% of your pre-disaster payroll level by or on June 30th, 2020. The loan forgiveness is reduced by the dollar amount your payroll decreases by June 30th, 2020, up to the amount you borrowed. The idea is the funds will help you keep your employees employed and at least at 75% capacity.
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The payments are deferred at least 6 months (to accommodate for the June 30th timeline mentioned above, likely) and up to 12 months at a maximum of 4% interest with no lender or borrower fees.
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Forgiven loans are NOT considered taxable income, no collateral is needed, and there are no personal guarantees tied to the loans or forgiveness.
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Any amounts not forgiven have a maximum 10 year maturity and will maintain the 4% maximum interest rate.
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Economic Injury Disaster Loan (EIDL) grants & loans [Section 1110] – Under an already existing SBA program, up to $10,000 can be borrowed and immediately granted forgiveness and are meant to cover not just payroll, but any business expenses that would have been covered had the disaster not happened, i.e. any business expense. If given, an EIDL “grant” is subtracted from the PPP loan forgivable loan balance and the grant portion of any EIDL award doesn’t have to be repaid even if no additional EIDL loan is awarded. EIDL loans will be awarded based on tax return and/or personal credit information for the small business borrower(s). Keep in mind that the EIDL loan (as opposed to grant) is an ordinary business loan and must be repaid in full as opposed to the grant or aforementioned PPP loans.
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Forbearance on Multi-Family Rental Property Mortgages [Section 4023] – This is the business-side of the Section 4022 transaction listed in the Personal section above. For federally-backed mortgages on multi-family rental property, the owner can request forbearance of the loan for up to (and at the moment, should be considered “at least”) 120 days.
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Payroll Tax Partial Deferral [Section 2302] – Employers may defer (but are not forgiven) 100% of the employer portion of payroll taxes. It is very important to note that the employee portion of the taxes withheld from employee checks must be paid in (Social Security, Medicare, and Federal Income Tax Withheld). 50% of the payment will not be due until December 31, 2021 (next year!) and the other 50% would be due December 31, 2022 (the year after!). If the employer takes a PPP loan – forgiven or otherwise – this deferral is not available to them.
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Exclusion of employer payments of Student Loans [Section 2206] – This is the employer-side of the Section 2206 rule listed in the Personal section. Previously, an employer was able to compensate an employee for up to $5,250/year of non-taxable tuition reimbursement. The CARES Act extended the definition to include existing student loan payments. This is non-taxable income to the employee and is a full deduction to the employer and not subject to payroll taxes for the employer or the employee.
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Employee Retention Credit [Section 2301] – Firstly, the ERC is not available in conjunction with the PPP. With that said, for employers subject to closure (full or partial) at any point during the disaster or whose income declined by more than 50% compared to the same quarter last year, this credit will provide a refundable payroll tax credit for 50% of the wages paid to employees during the disaster, up to $10,000 of compensation including health benefit costs, providing a credit up to $5,000 per employee.
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For employers with greater than 100 full-time employees, qualifying wages are those paid to employees when they are not able to provide service due to COVID-19-related circumstances.
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For employers with fewer than 101 full-time employees, all wages qualify for the credit whether the employer is open or subject to a shut-down order (as opposed to shut down voluntarily).
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Net Operating Losses for Corporations [Section 2303] – The recently-shelved NOL carryback for Corporations was temporarily repealed and granted for tax years 2018-2020 for up to 5 prior years and the 80% limitation no longer applies. All other old NOL carryback rules apply.
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Business Interest Limitations [Section 2306] – The business interest expense limitation of business interest income + 30% of the taxpayer’s adjusted taxable income has had the latter component increased to 50% of adjusted taxable income.
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Single Employer Plan Funding [Section 3608] – The due date for SEP funding is now delayed until January 1st, 2021, but must include the plan’s effective interest through the date of contribution.
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Other CARES Act thoughts and items [Sections 1103, 1108, and 1113, respectively] – The CARES Act has created many agencies and oversight boards on many different levels, but two of the more important initiatives in my opinion are those aimed at Entrepreneurial Development – who will issue grants aimed at educating, training and advising small businesses on dealing with COVID-19-related business issues particularly in economically depressed areas – and a Minority-owned (more than 50% of “socially disadvantaged” ownership) Business Development Agency, which will issue grants to entities doing the same, but specifically for minority-owned businesses. Additionally, several bankruptcy rules and procedures have been changed, so if you find yourself or you business in such a position due to the COVID-19, the process should be just slightly less difficult to deal with. With proper legal, tax, and business planning and the numerous federal, state, and local programs aimed at keeping small businesses in America running, we expect this will still be a rare need to address!
Lastly, if you have any questions, comments, or useful additions for the information above, please do not hesitate to reach out or leave a comment below! Thanks for reading and stay healthy!
