CORONAVIRUS AID, RELIEF AND ECONOMIC SECURITY (CARES) ACT SUMMARY
Below is a summary of the highlights of the CARES Act, including those relating to expanded SBA (potentially forgivable) Loans programs, Unemployment Compensation and Other Individual Benefits, and certain Tax Incentives.
The just enacted federal CARES Act offers significant financial support to “small” businesses and individuals who have suffered economic impact from the COVID 19 pandemic. A summary of those portions of the Act which provide benefits to small businesses, individual employees and their families, and certain tax incentives, follows.
SMALL BUSINESS SBA LOAN PROVISIONS
The CARES Act provides for new direct SBA loan programs. Any “small business” (generally a business including certain non-profits with less than 500 employees) can apply for loans equal to 250% of their average monthly payroll costs up to $10 million (referred to as the Paycheck Protection Program under the CARES Act). Loan proceeds must be used to pay for payroll costs, place of business mortgage interest, rent and/or utilities and are made with no required personal guarantees. The interest rate for loans granted under the program is capped at 4%, and the loan is payable over no longer than 10 years. These loans will be processed through banks which are approved SBA lenders.
Businesses are eligible for tax-free forgiveness for loans granted under the Paycheck Protection Program for up to all of the principal amount borrowed, if the proceeds are spent on qualifying expenditures (payroll, rent, interest, etc.) during the eight-week period following the loan funding date. Businesses that receive loans but that cut back on workforce levels or gross payroll after February 15, 2020 are eligible only for limited forgiveness under certain formulas, unless the business restores its current workforce levels and gross payroll to pre-COVID-19 emergency amounts by June 30, 2020. It is important to note that the loan forgiveness, while not taxable for Federal income tax purposes, could still be subject to State income tax.
Unlike prior SBA loan programs, these loans are non-recourse meaning NO personal guarantees and NO liens on your assets. The loan application requires proof of employee wages for the last twelve months and a “good faith certification” that you need the loan, and that you intend to use the funds to retain workers or to make mortgage/lease/utility payments.
A more complete FAQ relating to the Paycheck Protection Program will follow shortly
Also, the SBA already has in place another set of loan rules which provide loans to businesses impacted by disasters. The CARES Act liberalizes the rules under this SBA Economic Injury Disaster Loan (EIDL) program. Now, more small businesses may apply for loans of up to $2 million, depending on economic damages and ability to repay, with an interest rate of no more than 4% and a repayment term of up to 30 years. Small (less than $200,000) loans are made without the need for personal guarantees, and applicants are eligible to receive advances of up to $10,000 within three days of applying. While EIDL loans are not subject to forgiveness, they do present an additional potential source of immediate funds for businesses that are struggling through the current crisis, and use of the loan proceeds are not limited to payroll, interest, rent or utilities (unlike the Paycheck Protection Program loans).
UNEMPLOYMENT COMPENSATION (UC) BENEFITS UNDER COVID-19
Both Pennsylvania and New Jersey have modified their eligibility requirements for unemployment compensation (UC) with respect to COVID-19.
An individual is eligible for unemployment compensation in PA:
- If the individual’s employer temporarily closes or goes out of business because of COVID-19;
- If the individual’s employer reduces his/her hours because of COVID-19;
- If the individual has been told not to work because his/her employer feels you might get or spread COVID-19; or
- If the individual has been told to quarantine or self-isolate, or live/work in a county under government-recommended mitigation efforts.
An individual is eligible for unemployment compensation in NJ:
- If the individual’s employer voluntarily closes because of COVID-19;
- If the individual’s employer is ordered to close because of COVID-19;
- If the individual’s employer reduces his/her hours because of lack of demand or business slow down due to COVID-19.
Previously, individuals applying for UC in PA were not eligible for benefits during their first week of unemployment (the “waiting period”). This waiting period has been suspended, and eligible claimants may receive benefits for the first week that they are unemployed. NJ has not waived its one week waiting period but is now required to waive it under the CARES Act as explained below.
In PA, work search and work registration requirements are temporarily waived for all UC claimants. Claimants in PA are not required to prove they have applied or searched for a new job to maintain their UC benefits. In NJ, work search and work registration requirements are temporarily waived for all UC claimants for the first eight weeks. After eight weeks, the claimant is required to actively look for employment.
The federal CARES Act expands the states’ unemployment compensation and provides financial assistance to states in administering the expanded unemployment compensation. Highlights of the enhanced unemployment compensation under the CARES Act are as follows:
- Eligibility: individuals (including the self-employed, independent contractors, and those with a limited work history) who are (1) able or available to work but are unemployed or partially unemployed, or (2) unable or unavailable to work because of certain COVID-19 reasons.
- Benefit Period: The CARES Act extends the benefit period to 39 weeks or such longer period as may be provided under state or federal law enacted after the enactment of the Cares Act. In Pennsylvania and New Jersey, the current total benefit period is 26 weeks. The CARES Act thereby extends the benefit period in Pennsylvania and New Jersey for an additional 13 weeks.
- Supplemental Benefits: For participating states (those that have entered into an agreement with the Secretary of Labor), eligible individuals will receive an extra $600.00 per week on top of the state unemployment compensation benefit which will run through July 31, 2020 or date that the state terminates the agreement with the Secretary of Labor if the agreement is terminated by the state prior to July 31, 2020, provided that the individual is able to work, available to work and actively seeking work. In Pennsylvania, individuals are entitled to UC benefits of approximately 50% of their average weekly wage up to the maximum of $573 per week. In New Jersey, individuals are entitled to UC benefits of approximately 60% of their average weekly wage up to a maximum of $713 per week.
- Waiting Period Waived: Notwithstanding any state law to the contrary, eligible individuals are entitled to UC benefits without any waiting period. As stated above, Pennsylvania, which had a one week waiting period for receipt of UC benefits, has waived the waiting period. New Jersey has not issued a waiver, but will be required to do so under the CARES Act.
- Flexibility on Actively Seeking Work Requirement: States are required to provide flexibility in meeting the active work search requirements where individuals are unable to search for work because of COVID-19.
CARES ACT RELIEF FOR INDIVIDUALS AND FAMILIES
In addition to benefits available to small businesses, large businesses, and those applying for Unemployment Compensation, the federal CARES Act offers direct financial assistance to employees and workers. Following is a brief summary of the benefits available.
Payments to Individuals and Families
The CARES Act provides for direct aid to individuals and families. The aid comes as a direct payment from the government, structured in the form of a “tax credit”. The amount available is up to $1,200 for individuals and $2,400 for married couples. Individuals that had adjusted gross income of $99,000 ($198,000 for married couples) as shown on their 2019 tax return (or 2018 if a 2019 return has not yet been filed) may be eligible for an additional $500 per child (limit 2 children). Individuals and married couples that had adjusted gross income greater than $75,000 (but not more than $99,000) or $150,000 for married couples (but not more than $198,000), respectively, are eligible for a lesser amount—reduced by $5 for each additional $100 of income above $75,000 and $150,000, respectively.
Taxpayers that filed tax returns in either 2018 or 2019 will receive this payment, which will only be reduced for individuals and households with earnings above the respective $75,000 and $150,000 thresholds. The refund payment will be automatically made through the IRS directly to taxpayers, either through electronic payment deposit (if the taxpayer had a prior refund processed electronically, or by mailed check. Treasury Secretary Mnuchin has announced that the payments could start as early as 3 weeks following final passage of the legislation. The outside deadline for this payment under the Act is December 31, 2020.
Increased Flexibility Under Retirement Plans
Distributions From Retirement Plans
Individuals may make withdrawals from a tax-qualified retirement plan of up to $100,000 in 2020 as a “coronavirus-related distribution” and avoid the 10 percent additional tax penalty that would otherwise apply to such an early distribution. Such distributions will, however, be taxable as ordinary income under current rules if they are not repaid as described below. A “coronavirus-related distribution” is broadly defined to include a distribution made during the 2020 calendar year to individuals:
- Who are diagnosed with SARS-CoV-2 or COVID-19; or
- Whose spouse or dependent is diagnosed with SARS-CoV-2 or COVID-19; or
- Who experiences adverse financial consequences as a result of (1) being quarantined, furloughed, or laid off or having work hours reduced because of SARS- CoV-2 or COVID-19; (2) being unable to work due to lack of child care due to SARS-CoV-2 or COVID-19; or (3) closing or reducing hours of a business owned or operated by such individual due to SARS-CoV-2 or COVID-19.
A company plan administrator may rely on an employee’s certification that such employee’s distribution qualifies as a coronavirus-related distribution. Individuals who receive coronavirus-related distributions from their retirement plan will have the right to repay such distributions by making contributions to the plan from which the distribution was received over the three-year period following receipt of the distribution. Any repaid amounts will be treated as a retirement plan rollover distribution (meaning that it will not be taxable to the individual).
To the extent that a coronavirus-related distribution is not repaid, any amount included in gross income for the tax year of the distribution will generally be prorated as income over the three taxable years beginning with the tax year of the distribution.
Loans from Qualified Retirement Plans
For the 180 days following the date of the enactment of the CARES Act, for individuals who would qualify for distributions as noted above, the limit on loans from qualified retirement plans will be increased to the lesser of (1) $100,000 (from $50,000), or (2) 100 percent of the present value of the vested accrued benefit of the employee under the plan (under current law, loans cannot exceed 50 percent of such value).
Additionally, the CARES Act provides for relaxed repayment terms for loans from a qualified retirement plan made to individuals who would qualify for coronavirus-related distributions.
CARE Act Tax Incentives
Employee Retention Credit
For eligible employers (including for-profit and non-profit companies) who do not receive a loan through the Paycheck Protection Program, there is available a credit against its employment taxes. For eligible employers with greater than 100 full-time employees, qualified wages are wages paid to employees when they are not providing services because (i) the business has been partially or fully shut down or (ii) its gross receipts have declined by more than 50% relative to the same quarter in the prior year. For employers with 100 or fewer full-time employees, all employee wages qualify for the credit. The credit is provided for the first $10,000 of compensation, including health benefits, paid to an employee in the quarter, for wages paid from March 13, 2020 through December 31, 2020.
Payroll Tax Deferral
There is a deferral of the employer’s share of payroll taxes (employer portion of social security tax) for the period beginning on March 27, 2020, to January 1, 2021. The deferred taxes must be paid over the following two years, 50% by December 31, 2021, and the other 50% by December 31, 2022.
Net Operating Losses
As a consequence of legislation passed in 2017 (the TCJA), net operating losses were no longer eligible to be carried back, and their usage, when carried forward, was limited to 80% of taxable income. The CARES Act reverses these rules and will permit net operating losses created in the 2018, 2019 and 2020 to be carried back 5 years with no limitation on their usage. This will allow businesses that had been profitable in the past and are now facing large losses in 2020 to use those losses against the prior year profits and thereby qualify for tax refunds.
The CARES Act also modifies another set of limitations on losses imposed by the TCJA by reinstating taxpayers’ ability to deduct without limit excess business losses attributable to pass-through entities and sole proprietorships for tax years 2018-2020, against non- business income.
Bonus Depreciation for Qualified Improvement Property
The CARES Act cures a legislative error under the TCJA, by permitting the costs for Qualified Improvement Property to be eligible for bonus depreciation (i.e, treatment as 15 year property, not 39 year property, for depreciation purposes). This change applies to Qualified Improvement Property acquired and placed in service after September 27, 2017, and therefore may justify amending prior year returns to increase losses or reduce income of the business.
It is important to note that the above taxpayer friendly incentives are Federal tax incentives, and State implications may differ.