Following a unanimous Senate vote, U.S. House of Representatives’ voice vote, and President Trump’s final signing, the monumental Coronavirus Aid, Relief, and Economic Security (“CARES”) Act was signed into law on March 27, 2020. The CARES Act’s unprecedented price tag of $2.2 trillion makes it the largest economic rescue legislation in U.S. history and includes a myriad of provisions that aim to restore economic stability to the United States, such as:
- Stimulus checks for immediate and direct payment to individuals,
- Public health spending to battle the pandemic,
- Industry-targeted financial relief,
- Expanded unemployment benefits to America’s workforce, and
- A massive lending program for small businesses.
KDDK has a multidisciplinary team of attorneys who can provide individualized guidance on many of the questions you may have as you traverse these uncertain times and parse through these new legislative shifts impacting your business. Below is a brief overview and discussion of the CARES Act’s key provisions and how they may affect you and your company.
Individuals with an adjusted gross income (“AGI”) up to $75,000, or joint filers with an AGI up to $150,000, are eligible for recovery rebates up to $1,200 and $2,400 respectively. Filers are also eligible to receive $500 for each additional dependent child under the age of 17. If an income exceeds the threshold amounts above, there is a $50 rebate reduction for every $1,000 of income above these threshold amounts. AGI is calculated based on 2019 tax returns. If the 2019 tax return has not been filed, 2018 will be used.
Small Business Loans and Program Details
Broadly, the CARES Act creates an entirely new type of business loan by amending the Small Business Act (“SBA”) for the covered period of February 15, 2020, to June 30, 2020, to incentivize small businesses to maintain their workforces. The amendment provides for the Small Business Administration to provide strategic loans under the Paycheck Protection Program (PPP) to eligible businesses in order to pay for vital operating costs such as payroll, rent, mortgage interest, and utilities.
Eligible businesses are those that were operating on February 15, 2020 and employ no more than 500 employees, with certain exceptions based on industry. Further, certain eligible self-employed individuals, independent contractors, and sole proprietors may be eligible loan recipients as well. Not-for-profit business are eligible to apply for funds under this program.
All applicants must provide good faith certifications that include the following:
- The current economic uncertainty makes the loan necessary to support ongoing operations;
- The funds will be used to retain workers and maintain payroll or to make mortgage interest, lease, and utility payments; and
- The applicant has not and will not receive another loan under this program.
Loan amounts are subject to certain exclusions, but are determined generally at being the lesser of either:
- 2.5x the average total payroll costs of a company incurred in the year period prior to the loan being made, plus any outstanding amount of a loan made under the SBA Disaster Loan Program, net of any advance received under the SBA Disaster Loan Program but not to exceed $10,000,000 – OR –
- 2.5x the average total monthly payroll payments from January 1, 2020 to February 29, 2020 for businesses not in existence during the required period, plus the outstanding amount of a loan made under the SBA Disaster Loan Program, net of any advance received under the SBA Disaster Loan Program but not to exceed $10,000,000.
Additionally, all loans will carry fixed interest rates of 1% with 2-year repayment terms for amounts not forgiven. Borrowers may repay the loan with no prepayment penalties or fees. In an effort to expedite the loan process, any lenders already approved under the Small Business Administration’s existing umbrella are automatically approved to participate in the program. Other lending sources will be announced as determined by the Department of Treasury. Collateral and personal guarantee requirements normally required under such loan programs, along with borrower and lender fees, will all be waived.
Eligible borrowers may use loan amounts for the following business costs: Payroll including costs of salaries, paid time off (PTO), family, medical, or sick leave payments, payments for group health care benefits including insurance premiums, retirement benefits, state or local taxes assessed for compensation; interest on any debt obligations incurred prior to the covered period; mortgage or lease expenses; and utility expenses.
Borrowers are required to spend no more than 25% of the loan funds on rent, utilities, or mortgage interest payments with at least 75% spent on workforce/payroll and employee benefit expenses.
If a business has used the loans appropriately and maintained the average size of its full-time workforce, all of the loan will be forgiven. The exact amount of forgiveness calculation is the sum of any payroll expenses, mortgage interest payments, rent, and utilities incurred by the borrower business during an eight-week period starting from the loan’s origination date. Borrowers must spend at least 75% of the loan funds on payroll during the eight-week covered period in order to be eligible for forgiveness. Such forgiven amounts will be excluded from the business’ taxable income.
The amount that is forgiven is reduced if the business has decreased the number of full-time employees or reduced actual salary expenses during the eight-week covered period after the loan is disbursed. These two calculations are based on a business’s payroll. The first measurement looks at the number of Full Time Employee Equivalents (“FTEs”) the company employs per pay period falling within each month and the second looks at the total salary and wages of employees.
This forgiveness reduction is calculated proportionate to (1) the reduction of employees compared to historic employment levels or (2) a reduction of more than 25% of an employee’s wages.
Under the employee reduction calculation, a business divides the average number of FTEs per month for the eight-week period beginning on the loan’s origination by the average number of FTEs employed each pay period falling within each month during either (1) February 15, 2019, to June 30, 2019, or (2) January 1, 2020, to February 29, 2020. The loan amount used during the covered eight-week period should then be multiplied by this ratio to determine the total forgiveness amount.
Under the wage and salary reduction calculation, the total forgiveness amount will be reduced by any reduction in an employee’s salary or wages during the eight-week covered period. This formula is only applicable to employees making $100,000 or less per year. A pay reduction that exceeds 25% of the total salary or wages of an employee as measured against the most recent quarter that the employee worked prior to the loan’s origination will reduce the total forgivable amount dollar-for-dollar.
In an effort to promote the rehiring of laid off employees due to the crisis, companies will also receive full loan forgiveness if by June 30, 2020, the business completely eliminates employee or pay reductions for any employee or salary and wage deductions that occurred between February 15, 2020, and April 26, 2020.
Employee Retention Credit
Employers can earn a 50% refundable payroll tax credit on wages paid after March 12, 2020, through January 1, 2021 (i.e., a maximum credit of up to $5,000 per employee). This credit can be applied against the employer’s Social Security payroll tax liability and is refundable to the extent that the amount of the credit is greater than the employer’s Social Security payroll tax liability.
To qualify for this credit, an employer must have been in business during 2020 and either:
- Have business operations fully or partially suspended due a governmental order, such as Executive Order 20-18 recently announced by Indiana Gov. Eric Holcomb – OR –
- Experience a reduction in gross receipts of at least 50% compared to the prior year’s same calendar quarter.
For employers with more than 100 full-time employees, the credit is available only for employees who are currently not providing services due to coronavirus-related causes. For employers with less than 100 full-time employees, the credit is available for all employees.
If an employer is taking advantage of the above-described small business interruption loans, then the employer is not eligible for the new employee retention credit.
Further, employee retention credit wages cannot also be used for the qualified extended sick and family leave wages provided for under the Family First Coronavirus Response Act. This employee retention credit is also available to nonprofit corporations but not government employers, including public educational institutions.
Delay of Employer Payroll Tax Payments
To further help free up funds, the CARES Act allows for most employers (including self-employed individuals) to delay their portion of Social Security taxes through the end of 2020. The deferred tax liability would then be paid in two equal installments: one due by December 31, 2021, and the remaining due by December 31, 2022.
Amendments to the Emergency FMLA and Emergency PSLA
The CARES Act amends the Emergency Family and Medical Leave Expansion Act (“FMLA+”) and the Emergency Paid Sick Leave Act (“EPSL”) recently enacted under the Family First Coronavirus Response Act (“FFCRA”), which are explained in greater detail in these recent articles:
- “DOL Guidelines for Taking EPSL and FMLA+”
- “IRS Guidance for Employers on Documentation Requirements for Paid Leave”
Payroll Tax Credit Deduction for Sick and Family Leave
The CARES Act amends the FFCRA by allowing employers to immediately make use of the payroll tax credits obtained for providing paid sick and family leave and to also receive an advance on the refundable credits, as explained in this recent article: “Families First Coronavirus Response Act.”
The Relief for Workers Affected by Coronavirus Act (“RWACA”) is included in the CARES Act. The RWACA contains unemployment insurance provisions that are detailed as follows:
With respect to COVID-19, employees are eligible for unemployment insurance benefits if they are in quarantine based on a directive from a medical professional or their employer due to COVID-19 and are not receiving sick pay or any other leave pay from their employer. The employee must have earned enough wages to set up a claim and meet the weekly eligibility criteria under state law. Employees must also stay in contact with their employer and be available to work when called back by the employer.
In addition, enhanced benefits are limited to those employees who are unemployed or partially unemployed due to any of the following:
- The individual has been diagnosed with COVID-19 or is experiencing symptoms and seeking a medical diagnosis;
- A member of the individual’s household has been diagnosed with COVID-19;
- The individual is providing care for a family member or household member who has been diagnosed with COVID-19;
- The individual is the primary caregiver for a child or other person in the household who is unable to attend school or another facility as a direct result of COVID-19;
- The individual is unable to reach the place of employment because of a quarantine imposed as a direct result of COVID-19;
- The individual is unable to work because a health care provider has advised the individual to self-quarantine due to COVID-19 concerns;
- The individual was scheduled to commence employment and does not have a job or is unable to reach the job as a direct result of COVID-19;
- The individual has become the breadwinner or major support for a household because the head of household has died as a direct result of COVID-19;
- The individual has to quit his or her job as a direct result of COVID-19; or
- The individual’s place of employment is closed as a direct result of COVID-19.
In these circumstances, the employee must still be otherwise eligible to receive benefits under state law, must not receive sick pay or other pay from their employer, and must meet the minimum amount of wages to set up a claim.
If the employee is entitled to receive state unemployment benefits, he/she is entitled to the $600 premium now provided under the CARES Act. The $600 unemployment premium provided by CARES is not charged to the employer’s experience account and will not otherwise be charged back to the employer.
Many states, including Indiana, Illinois, and Kentucky, have elected to suspend the normal waiting period for the receipt of unemployment benefits. Because of the dramatic increase of unemployment claims and the waiting period waiver, individuals can self-certify that they meet one of the above-listed reasons. However, any fraudulent intent or misrepresentations to obtain payments to which an individual is not entitled will result in ineligibility for any other unemployment compensation benefits under the new law as well as criminal prosecution.
Changes to IRA Early Distributions
The CARES Act removes the 10% early withdrawal penalty on amounts up to $100,000 for individuals making distributions due to a diagnosis of SARS-CoV-2 or COVID-19, their spouse or dependent having been diagnosed, experience of adverse financial consequences as a result of being quarantined, furloughed, laid off, or having suffered reduced working hours, or inability to work due to lack of child care. The amount withdrawn is taxable over three years, unless a taxpayer treats the amount withdrawn as a “tax-free rollover” and repays the amount to a qualified plan or an IRA within three years.
Changes to the Tax Cut and Jobs Act
The CARES Act also made changes to the Tax Cut and Jobs Act (“TCJA”), some of which were technical corrections and some of which are designed to provide more favorable tax advantages to corporations. The following is a brief summary of those changes:
- Net operating losses (“NOL”) arising in 2018, 2019, and 2020 can now be carried back five years and the TCJA’s cap of NOL’s 80% limitation is removed until 2022.
- The limitation on interest deductions imposed by the TCJA is increased from 30% to 50% for tax years beginning in 2019 and 2020. A taxpayer can also elect to use tax year 2019 adjusted taxable income in lieu of tax year 2020 adjustable tax income for the purpose of calculating its tax year 2020 limitation.
- Corporations are allowed to accelerate the recovery of refundable alternative minimum tax (AMT) credits, which were originally to be made partially available over several years (2018-2021 tax years). Instead, those refundable credits can be 100% recovered starting with the 2019 tax year rather than waiting until the 2021 tax year.
- The CARES Act corrects the TCJA to allow for accelerated bonus depreciation rules to qualified improvement property. The correction to the TCJA is retroactive, which may allow for employers to earn a refund, which can be achieved by an amended 2018 return.