The Families First Coronavirus Response Act and the Coronavirus Aid, Relief, and Economic Security Act (CARES Act)
Over the last two weeks, two bills have been passed by Congress and signed into law by President Trump, both of which are intended to provide individuals and businesses with financial relief from difficulties due to COVID-19. These are the Families First Coronavirus Response Act and the Coronavirus Aid, Relief, and Economic Security Act (CARES Act). Pursuant to these two Acts, the following relief is now available.
Mandatory Paid Leave
All employees, including full- and part-time employees, are entitled to two weeks of paid sick, family and/or medical leave (“Mandatory Paid Leave”), if they or a family member is adversely affected by COVID-19. Some employers with fewer than 50 employees may be exempt from this requirement, but no detailed guidance has been released.
Provisions for Small Businesses
Tax Credits for Mandatory Paid Leave
An employer with fewer than 500 employees is entitled to a credit for 100% of Mandatory Paid Leave, up to certain limits. The credit is applied against the employer portion of Social Security and Medicare tax (FICA), and any balance remaining after the FICA liability has been reduced to zero is refundable to the employer.
Small Business Administration (SBA) Loans
Two loan programs have been initiated to help small businesses (those already deemed small businesses by the SBA, or that have fewer than 500 employees) cope with the COVID-19 crisis. While each loan program has different qualification requirements, they are not mutually exclusive, and many businesses will qualify for both.
Economic Injury Disaster Loans (EIDL)
An EIDL will provide up to $2,000,000 of working capital for a business, with an interest rate of 3.75%, and a maximum term of 30 years. A personal guarantee and collateral are required for loans in excess of $200,000, although a loan will not be denied solely because there is insufficient collateral to secure the entirety of the loan amount. Currently, the requirement that a business be unable to obtain credit elsewhere is waived.
As part of the application process, a business can request a $10,000 grant (an “EIDL Grant”), which is to be paid within three days of the request, as an advance. The grant does not have to be repaid and is not contingent upon qualification for the loan. The EIDL Grant may be used for operating expenses for the business, including payroll expenses.
Paycheck Protection Program (PPP)
The PPP is aimed at providing employers with sufficient resources to maintain their workforce. Sole proprietors and independent contractors are also eligible for the PPP.
The size of the loan available under the PPP is based on a calculation related to the average monthly “payroll costs” of the business. The portion of the PPP loan proceeds used for payroll costs and a few other expenses within the eight-week period following the date on which the loan is funded may be forgiven. The Department of the Treasury has indicated, however, that it anticipates that no more than 25% of the amount forgiven may be for non-payroll costs. If the number of employees or certain reductions in salary are made within a certain time frame, the loan forgiveness may be reduced, unless the reductions are cured prior to June 30, 2020. Any EIDL Grant received will reduce the amount of loan forgiveness available, dollar-for-dollar.
The portion of the PPP Loan that is forgiven will not be includable by the taxpayer as gross income.
For any amounts not forgiven, the interest rate may be no higher than 4.0%. Guidance from the Department of the Treasury indicates that the interest rate may be as low as 1.00%, with a term of two years. Payments on the loan will be deferred for six months, following the date of funding. No personal guarantee or collateral is required for this loan, and no prepayment penalty may be charged in the event the loan is paid off by the business prior to its maturity date.
Loan Forbearance for SBA Loans Already in Place
The SBA will make the principal and interest payments due on any outstanding SBA Loans (other than PPP Loans) for a six-month period. The borrower is not obligated to repay these amounts at any time.
Payroll Tax Credit
Businesses that are either suspended due to a government order, or have suffered more than a 50% decline in gross receipts, may qualify for a credit against employer-paid social security tax and Medicare tax equal to 50% of each employee’s wages, including group health care plan expenses allocable to the employee (the “Payroll Tax Credit”). The maximum credit per employee is $5,000.
Delay of Payment of Employer Payroll Taxes
Employers may defer payment of social security, Medicare and federal unemployment tax due between March 27, 2020 and January 1, 2021, such that 50% of the tax will be due on or before December 31, 2021, and the remaining amount must be paid no later than December 31, 2022. A similar provision exists for those who are self-employed and pay self-employment tax. The amount of tax that can be deferred is 50% of the total self-employment tax. A business does not qualify for this deferral if it has received loan forgiveness under the PPP.
Net Operating Loss Carryback Provisions
Any net operating loss incurred from January 1, 2018, through December 31, 2020, may be carried back to each of the five years preceding the loss. Carryforwards and carrybacks can be aggregated without limitation for any tax year beginning prior to January 1, 2021.
Delay of Business Loss Limitations to Tax Year 2021
Business losses had previously been limited for taxpayers beginning in year 2018, such that taxpayers could not offset non-business income in excess of $250,000. The statute was amended to provide that the limitation on business losses does not apply for Tax Years 2018 through 2020, and will apply for Tax Year 2021.
Provisions for Individuals
Expansion of Unemployment Relief
Unemployment income is increased $600/week by the federal government, to anyone who qualifies for “regular unemployment compensation.” The additional unemployment income will come from the state, and either be advanced or reimbursed by the federal government.
Recovery rebates will be provided, either via direct deposit or check, to individuals that meet certain income thresholds. The maximum rebate an individual will receive is $1,200 ($2,400 for married couples filing a joint return), plus $500 per child under age 17 that they claim as a dependent. The rebates phase out at $99,000 for individuals, $136,500 for heads of household, and $198,000 for married couples filing joint tax returns.
Withdrawals from Retirement Accounts
An individual may withdraw up to $100,000 from his or her retirement plan, without penalty, if the employee or the employee’s spouse or dependent is either diagnosed with, or is otherwise negatively affected by, COVID-19. The withdrawals are eligible for some tax deferral and may be recontributed without regard to contribution limits within certain time frames.
Loans from a Qualified Employer Plan
The amount that is available to be withdrawn as a loan from a qualified employer plan was increased from $50,000 to $100,000 for the 180-day period beginning on March 27, 2020 and ending on September 23, 2020. Any loan payments for a loan from a qualified employer plan that are due prior to December 31, 2020 will be extended one year.
No Required Minimum Distributions in 2020
No Required Minimum Distributions (RMDs) need to be withdrawn in 2020, including those for individuals with required beginning dates in 2019 (and for which payment was deferred until 2020).
Finally, if a taxpayer must withdraw all of the assets of a retirement account over five years, and the five-year period includes 2020, this year will not count as a year in the calculation of when the account must be withdrawn in its entirety. This effectively converts all currently active five-year withdrawal periods to six-year withdrawal periods.
Two modifications were made to the treatment of charitable contributions:
First, a $300 above-the-line deduction has been authorized for charitable contributions made by all taxpayers, including those who do not itemize their deductions, beginning in 2020. This is not a temporary provision and is intended to apply to future years. The contribution must be made in cash and cannot be made to a donor advised fund, supporting organization or certain private foundations.
Second, for Tax Year 2020 only, taxpayers can take a deduction for a charitable contribution made in cash (and not to donor advised funds, supporting organization or certain private foundations) of up to 100% of their AGI for 2020. The taxpayer must elect into this treatment.