The Coronavirus Aid, Relief, and Economic Security (CARES) Act: What Does it Mean for You and Your Business?

The Coronavirus pandemic in the United States has created an economic crisis unlike anything this country has ever seen before. With widespread efforts to shut down cities and enforce social distancing guidelines, the U.S. economy essentially shuttered overnight. Unemployment claims are skyrocketing, companies are performing mass layoffs, and people everywhere are worrying about how they’ll pay for their living and business expenses.

Congress took swift action with the early passing of the Families First Coronavirus Response Act (FFCRA) on March 18. Still, this preliminary relief did not provide nearly the resources required to help stabilize the economy. On March 25, the Senate passed the Coronavirus Aid, Relief, and Economic Security (CARES) Act. The bill was passed by the House of Representatives and signed by the President the same afternoon

The CARES Act will go down in history as the most expensive piece of legislation ever passed. It provides approximately $2 trillion in financial assistance to aid the healthcare system, private nonprofits, and state, local, tribal, and territorial governments. It also provides significant relief to individuals and businesses in the form of tax cuts and rebates, loan assistance, and other financial aid. The impact will be unprecedented, so let’s break it down.

First: How will this affect your business?

The legislation includes many provisions to help small businesses and large corporations continue to support their employees and bounce back from the financial hit of this pandemic, including:

Employee Retention Credit

• The credit is equal to 50 percent of qualified wages paid to employees, which is capped at $10,000 for all calendar quarters per employee
• Qualified wages include: salary, commissions, tips, payments for vacation or medical leave, and allowance for dismissal or separation employee
• Applies to wages paid after March 12, 2020 and before Jan. 1, 2021
• Is not available to employers receiving Small Business Interruption Loans under Section 1102 of the CARES Act, as discussed below
• Is allowed in excess of taxes due, is refundable, and is not taxable

Payroll Tax Deferral

• Designed to help employers free up their cash flow and retain employees during quarantine or shutdown
• Defers payroll tax payments for matching social security taxes (6.2 percent of social security taxable wages) due between the date the CARES Act is signed until Dec. 31, 2020
• Requires payment of half of the deferred payroll taxes by Dec. 31, 2021, and the remainder by Dec. 31, 2022
• Applies to 100 percent of employer matching social security payroll taxes and 50 percent of self-employed individuals self-employment taxes

This benefit is reduced for any other credits claimed by the company under the employee retention credit included in the FFCRA. This benefit is also reduced by the Research & Development tax credit used against payroll withholding taxes.

For companies who utilize a Professional Employer Organization (PEO), the PEO must be a Certified PEO or CPEO in order to claim the benefit. There are provisions that will require the CPEO to coordinate with the employer company to obtain these benefits.

Modification of Net Operating Losses (NOLs) Rules

• While the NOL carryback provisions were eliminated in 2017, this act allows for a five-year carryback of NOLs created in 2018, 2019 or 2020
• Businesses can amend tax returns for tax years dating back to 2013 to take advantage of this change
• Allows NOLs arising in 2018, 2019 and 2020 to be carried back five years and suspends the 80 percent taxable income limit until 2021

Business Interest Expense Limitations

• Increases the limitation, under IRC Section 163(j)(1), for allowable business interest deductions from 30 percent of a taxpayer’s adjusted taxable income to 50 percent for 2019 and 2020
  • Special rule for partnerships: the 50 percent limitation will not apply to partners in partnerships for 2019. The 50 percent limitation applies only in 2020.
• Allows taxpayers to make an election to use their adjusted taxable income for 2019 when calculating the limitation for 2020

Qualified Improvement Property (QIP) Correction

• Provides a technical correction that lowers the depreciable lives of QIPs from 39 years to 15 years, making the QIP eligible for 100 percent bonus depreciation
• Is effective for property acquired and placed in service after Sept. 27, 2017, which will allow taxpayers to amend their tax returns for 2017, 2018 and 2019
• IRS Form 3115 should be filed to change the accounting method, and it is unclear if this will be an automatic change, or one which has to be requested (Certain statements quoted by legislators leads us to conclude this will be an automatic change)

Excise Tax Relief

• Provides a temporary exception from alcohol excise taxes for alcohol used in producing hand sanitizer or in directed use by the FDA related to the pandemic
• Suspends excise taxes on aviation and kerosene used in aviation fuel

Paycheck Protection Program

• Allows for loan forgiveness from the SBA for loans spent on rent, mortgage interest and utilities
• Provides SBA the ability to distribute $350 billion in loans to small business via banks
• Provides eight weeks of cash-flow assistance to small business with 500 employees or fewer at the time of the loan
• Is equal to 50 percent of qualified wages paid to employees and is capped at annualized compensation of $100,000, which includes salary, commissions, tips, payments for vacation or medical leave, and allowance for dismissal or separation employee
• Applies to wages paid after March 12, 2020 and before Jan. 1, 2021
• Stipulates that some of the debt can be cancelled or forgiven and will NOT be taxable income
• Is available to employers, including nonprofits qualified under IRS Code Section 501(c)(3), whose operations have been fully or partially suspended as a result of the government limiting commerce, travel or group meetings
• Excludes employers receiving Small Business Interruption Loans under Section 1102 of the CARES Act and excludes any employee wages that were included in an employer’s Work Opportunity Credit

Qualifying businesses must employ 500 or fewer employees at any one physical location of the business. Therefore, if a company has multiple locations, each location must employ 500 or fewer people to qualify. Businesses within the Accommodation and Food Services industry are also eligible to participate in this program, as are businesses that are franchised or that receive assistance under section 301 of the Small Business Investment Act of 1958.

There is a computation laid out to determine the eligible size of the loan and the uses of the loan are restricted to compensation, interest on mortgages, rent and utilities. The usage of the loan will determine if any and how much can be forgiven.

Second: How will this affect you as an individual?

In addition to the assistance to businesses throughout the country, the CARES Act also aims to provide individual relief through the following provisions:

Recovery Rebates

• Provides rebates of:
  • $1,200 for individuals
  • $2,400 for joint filers
  • $500 for each child
• Rebates are based on an income threshold, phasing out the rebate amounts as the following gross income amounts:
  • $75,000 for individuals
  • $112,500 for heads of households
  • $150,000 for joint filers
• Rebates are completely phased out for people whose Adjusted Gross Income (AGI) exceeds the following thresholds:
  • $99,000 for individuals
  • $146,500 for head of household
  • $198,000 for joint filers.
• The AGI amounts considered will be based on either 2018 or 2019 income tax returns filed, using the most recent year filed

This credit is not taxable to the person receiving the money.  When you file your 2020 tax return, you can make a claim for this amount if you were eligible and did not receive some or all of the funds in 2020.

Removal of Loss Limitations Rules from S Corporations, Partnerships and Self-Employed Businesses:

• Eliminates loss limitation rules for sole proprietors and pass-through entities created in 2017
• Allows taxpayers who were limited by the rules put in place in 2017 to amend their 2018 and 2019 return and claim the losses in excess of the prior limit of $500,000 for joint filers
• Aims to encourage more new business start-ups since the losses will not be limited

Unemployment Benefits Expansion

• Provides expanded federal unemployment assistance to individuals impacted by the coronavirus
• Expands access to independent contractors, self-employed individuals and those with limited work histories
• Provides assistance for full or partial unemployment for up to 39 weeks between Jan. 27, 2020 and Dec. 30, 2020
• Authorizes state governments to waive the waiting period before receiving benefits

Retirement Plan Waivers

• Provides a temporary waiver of the minimum distribution rules for retirement plans
• Waives the 10 percent penalty on early withdrawals up to $100,000 for coronavirus-related distributions
• Stipulates that the waivers only apply to coronavirus-related distributions made during the 2020 calendar year, such as:
  • distribution to individuals or spouses diagnosed with COVID-19
  • distribution to an individual who experiences adverse financial consequences due to quarantine, business closure, layoffs, reduced hours, or providing care to a child whose school or place of care has closed due to coronavirus
• Early withdrawals must either be paid back in full or will be taxed over a three-year period

Charitable Contribution Tax Deduction Expansions

• Allows an above-the-line deduction of up to $300 for charitable contributions by individuals who do not itemize their deductions
• Allows individuals to claim itemized deductions for cash charitable contributions up to the amount of AGI
• Allows corporations to claim up to 25 percent of AGI in charitable deductions, instead of the previous 10 percent limit
• Increases the deduction for food inventory donations from 15 percent to 25 percent

Employer-Paid Student Loan Exclusions

• Provides for an exclusion of up to $5,250 from income for payments of an employee’s education loans
• Requires the loan to be incurred by the employee for their education
• Allows payment directly to the employee or the lender
• Only applies to payments made by an employer after the date the CARES Act is signed and before Jan. 1, 2021

Student Loan Payments Suspension

• Suspends student loan payments and interest accrual through Sept. 30, 2020
• Stipulates that suspended payments should be treated as if on time payments were made for federal loan forgiveness programs
• Suspends the collection of delinquent student loans by wage garnishments and tax refund reductions through Sept. 30, 2020

The CARES Act is expansive, and the ramifications on the economy are nearly unimaginable. In addition to the provisions for businesses and individuals mentioned in this article, there are countless other sections providing relief for the healthcare, education and labor industries. Still, this bill provides a starting point for how businesses and individuals can begin to recover from the unprecedented impact of this pandemic. Now is the time to start preparing.

Aprio’s expert advisors are closely monitoring changes to the legislation and are equipped to help you start preparing for the impact now. Reach out to your Aprio Relationship  Partner or contact us here to get answers to your most pressing questions and to start making a plan.

Please click here to join us Monday, March 30 at 1 p.m. for our webinar to unpack the CARES Act.

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