Donovan, Klimczak & Company CPAs

Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”)

On March 27, 2020 President Trump signed The Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”) into law. The CARES Act provides stimulus to individuals and businesses. A summary of the key provisions affecting individuals and business are as follows:

Impact on Individuals

  • Rebates of up to $1,200 for single filers and $2,400 for joint filers with amounts increased by $500 for each qualifying child under 17. These rebates are subject to phase-outs beginning at $75,000 adjusted gross income (AGI) for single filers, $112,500 AGI for head-of-household filers, and $150,000 AGI for joint filers. The phase out is 5% of the amount by which the eligible taxpayer’s adjusted gross income exceeds the AGI limitation amount.
  • The early withdrawal penalty for certain coronavirus-related withdrawals from qualified retirement plans up to $100,000 is waived. Income from those distributions would be subject to tax over three years and the taxpayer can recontribute those funds within the three year period without regard to the annual contribution cap.
  • The amount taxpayers can borrow from certain qualified retirement plans is doubled to $100,000.
  • Required minimum distribution from certain defined contribution plans and IRAs for calendar year 2020 are suspended.
  • Allowance of up to $300 of charitable deductions for non-itemizing taxpayers for tax years beginning in 2020 and relaxation of the limitations for those taxpayers who itemize. The 50% of adjusted gross income limitations on deductions for charitable contributions is suspended for 2020.
  • Student loan repayment contribution by the employer for an employee is not taxable to the employee up to $5,250 annual cap for contributions made prior to January 1, 2021.
  • Taxpayers can use health savings accounts and flexible spending arrangements to purchase over-the-counter medicine.
  • Establishes a temporary Pandemic Unemployment Assistance program through December 31, 2020, to provide payment to those not traditionally eligible for unemployment benefits (self-employed, independent contractors, those with limited work history and others) who are unable to work as a direct result of the coronavirus public health emergency.
  • Provides an additional $600 per week payment to each recipient of unemployment insurance or Pandemic Unemployment Assistance for up to four months.
  • Provides an additional 13 weeks of unemployment benefits through December 31, 2020, to help those who remain unemployed after weeks of state unemployment benefits are no longer available.

Impact of Businesses

  • Net operating losses (NOLs) arising in 2018, 2019 and 2020 can be carried back 5 years and the 80% of taxable income limit is suspended until 2021.
  • The limit on excess business loss deductions under Section 461(l) is suspended for 2018, 2019 and 2020 and now takes effect in 2021.
  • The business interest limitation under IRC Section 163(j) of 30% of adjusted taxable income based on EBITDA, is changed to 50% of EBITDA for 2019 and 2020. A business can elect to use its 2019 adjusted gross income in computing its 2020 limitation.
  • Limitations for charitable contributions deduction for businesses increased from 10% to 25% of taxable income.
  • The error in the TJCA that prevented qualified improvement property to be eligible for bonus depreciation is corrected to treat qualified improvement property as 15-year property under MACRS, and eligible for bonus depreciation. These corrections are retroactive to the effective date of the Tax Cuts and Jobs Act.
  • Businesses and self-employed individuals can defer payment of the employer share of the Social Security tax they otherwise are responsible for paying to the federal government with respect to their employees through the end of 2020. The amounts deferred are to be paid over the two years. One-half of the amount required is to be paid by December 31, 2021 and the other half by December 31, 2022.
  • Establishment of the Employee Retention Credit. The credit is up to $5,000 for paying wages while business operations are suspended or if gross receipts of a business drop by 50%.
  • Corporations can claim refunds for all remaining AMT credit for 2018 and 2019.

As some of the business provisions are retroactive to 2018, we will be contacting those business directly impacted to discuss amending 2018 and 2019 business tax returns.

Business Loan Programs

  • Paycheck Protection Program (PPP)
    The Program provides forgivable Small Business Administration loans to businesses with 500 or fewer employees (generally), including sole proprietors and other self-employed individuals. The maximum loan amount is $10 million. The loans can be used to cover payroll, insurance premiums, mortgage, rent and utility payments. Eligible payroll costs do not include compensation above $100,000 in wages. The covered loan period is February 15, 2020 through June 30, 2020.

  • Loan Forgiveness
    A borrower under the Paycheck Protection Program will be eligible for loan forgiveness equal to the amount spent by the borrower during the 8 week period after origination date on (i) rent, (ii) payroll costs for workers making less than $100,000, (iii) interest on a mortgage, and (iv) utility payments. The amount forgiven may not exceed the principal amount of the loan. There is a reduction in the loan forgiveness if wages are reduced compared to the prior year, with the loan forgiveness being reduced proportionately. The amount of the loan forgiven will not be considered taxable income to the business.

    The portion of the loan not forgiven would be payable over a maximum of 10 years with a maximum interest rate of 4%.

  • SBA Express Loan
    The Act increases the maximum loan for an SBA Express loan from $350,000 to $1 million through December 31, 2020.

  • Emergency Economic Injury Disaster Loans (EIDL)
    The SBA will waive any personal guarantee on advances and loans below $200,000

    Establishes an Emergency Grant to allow an eligible entity who has applied for an EIDL loan due to COVID-19 to request an advance on that loan, of not more than $10,000, which the SBA must distribute within three days. Applicants shall not be required to repay advance payments, even if subsequently denied for an EIDL loan.

As always, please contact us with any questions you may have with regards to any of the provisions and how they affect your business and you personally.

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