On March 19, 2020 Senate Majority Leader Mitch McConnell released a significant economic package. This package is referred to as “Phase 3” as it is the third in a series of legislation dealing with the Coronavirus crisis. The bill is called the “Coronavirus Aid, Relief, and Economic Security” (CARES). Congressional phases to date include:
- A spending bill about two weeks ago on the Coronavirus (this was “Phase 1”)
- The bill signed into law on March 18, 2020 designed to provide paid leave to workers (“Phase 2”).
Now, Phase 3 – CARES is a $1 trillion package (Ten times the amount noted in Phase 2).
The Four Pillars of McConnell’s CARES Plan
McConnell’s CARES plan identified the following four pillars of this significant package as:
- small business;
- direct financial help to families;
- help for impacted industries; and
- public health response to Coronavirus.
This tax alert will focus on the tax incentives of this CARES plan for individuals and businesses, as well as cover some of the proposed loan offerings under the bill for small businesses.
Tax Provisions Included in CARES of Coronavirus-related Economic Package
Below is a selection of some of the tax provisions included in CARES. Again, this is a proposal, and not final yet. Changes are possible to these items; some could be removed, and others added to the mix. It is a fluid situation, but we wanted to provide you the latest on these proposals.
- Individual Recovery Rebates. These checks will be $1,200 per person ($2,400 for Married Filing Jointly or MFJ), plus $500 per child. These rebates apply for single taxpayers of $75,000 of Adjusted Gross Income (AGI), and $150,000 of AGI for married couples, with a phase-out above these levels. There are some complications, but the idea is to get these checks out to the individuals as soon as possible. Once enacted, it will be up to the IRS to issue these rebate checks to taxpayers, which will put a strain on the IRS right at their busiest time of the year.
- The due date for 2019 individual tax returns will be moved to July 15, 2020 from April 15, 2020. IRS in Notice 2020-17 issued March 18, 2020 moved tax payments from July 15, 2020 to July 15, 2020, but not the tax return filing day. The IRS on March 20, 2020 moved this tax return filing date to July 15, 2020. This Senate bill will follow this move in the filing date to July 15, 2020.
- Tax Payments. The proposal also provides that individuals would be allowed to defer estimated tax payments due from the date the bill is signed into law until October 15, 2020. Further, there is no maximum or cap on the amount of these tax payments, which differs from the $1,000,000 cap the IRS included in Notice 2020-17.
- Retirement Distributions. The proposal permits amounts can be taken out of retirement accounts for those impacted with Coronavirus and avoid 10% penalty tax, as has been done with previous disasters. Amounts are also included in income over a three-year period. Also, a loan from a retirement plan can be made up to $100,000.
- Charitable Contributions. The CARES proposal includes a $300 “above-the-line” charitable contribution deduction for non-itemizers in 2020. In addition, the individual charitable contributions limitation based on AGI will be removed for 2020. Further, C Corporations will have a higher 25% limitation on charitable contributions.
- Deferral in Payroll Tax Deposits. The provision allows employers (and self-employed individuals) to defer payment of the employer share of the Social Security tax they are responsible for paying related to their employees (6.2% FICA tax). This deferral would apply for payroll taxes from the date of enactment through December 31, 2020. The provision permits the deferred employment tax be paid over two years: 50% of the amount to be paid by December 31, 2021; and the other 50% by December 31, 2022.
- Estimated Tax Payments for Corporations. The provision allows C Corporations to postpone estimated tax payments due after the date of enactment until October 15, 2020. There is no cap or maximum on the amount of corporate tax payments deferred.
- Changes on Net Operating Losses (NOLs). Several changes with NOLs. One change addresses NOLs incurred in 2018, 2019, and 2020 and these can be carried back five years to receive refund of prior tax years’ tax paid. This provision would apply for individuals and businesses.
- New Limitation on Large Losses of $500,000 by Individuals Delayed until 2021. This new limitation from the Tax Cuts and Jobs Act (TCJA) began in 2018. There were also included some other technical modifications to this provision.
- AMT Credit of C Corporation will be Realized Sooner. The corporate AMT was repealed as part of the TCJA, but corporate Alternative Minimum Tax (AMT) credits were made available as refundable credits up through 2021. The provision in CARES accelerates the recovery of these AMT credits allowing companies to claim a refund sooner.
- Interest Deduction Limitation Changed for 2019 and 2020 from a 30% Limitation to a 50% Limitation. This complex limitation also was introduced by the TCJA and will be relaxed for 2019 and 2020. Further, you can elect to use 2019 amounts for 2020 for purposes of the limitations.
- Qualified Improvement Property (QIP) Reform for Bonus Depreciation (from TCJA) Remedied. This proposal will fix a glitch that developed in the TCJA for Qualified Improvement Property (QIP) that was designed to allow 100% bonus depreciation but was not written correctly into the law. Instead of 100% bonus depreciation, a 39-year depreciable life was provided. This QIP item will be fixed under CARES retroactively for 2018 and 2019.
- Foreign Provision. Companies had the option to pay the tax up front, or in installments over eight years for the one-time repatriation amount. Some companies overpaid their 2017 taxes as a result of this change but were not able to claim a refund of those taxes due to who those rules applied with those electing installment payments. This provision, which corrects an error in the TCJA, allows companies to recover the overpayment of taxes paid on the toll charge to help with liquidity now.
- Changes for Severely Impacted Industries. This section of CARES includes the airline and transportation industries, and perhaps others. This could include loans, changes with excise taxes, and other items.
- Other Items. Last, the fourth pillar mentioned at the beginning relates to the public health response to the Coronavirus, and this is a major part of the CARES bill. Included in this portion of the bill are some changes and enhancements with HSAs. Also, there are several changes to the provisions found in H.R. 6201 (the “Families First Coronavirus Response Act,” FFCRA or “Phase 2” noted above) that was just signed into law. So as companies are still learning about this new law, realize the proposed CARES bill could modify FFCRA.
Loan Provisions in CARES
The loan provisions in CARES are mostly directed at small businesses. Below is a summary of selected key loan programs in this proposed legislation.
Business Loans (SBA)
- The Small Business Act (SBA) 7(a) loan program is expanded to include Small Business Interruption Loans (SBILs). Eligible covered businesses include any business concern, private not-for-profit organizations, or public not-for-profit organizations with not more than 500 employees.
- Not-for-profits receiving Medicaid expenditures are specifically excluded from eligibility.
- To be eligible for a loan, the business interruption must have occurred between March 1 and December 31, 2020. Eligible borrowers must have been in business on March 1, 2020 and had employees for which they paid salaries and payroll taxes. Borrowers that receive assistance under this section must have been adversely impacted by COVID-19.
- The Maximum Loan Amount for each eligible business is the lesser of $10 million, or the product of average monthly payments for payroll, mortgage payments, rent payments, and other debt obligations incurred for the one-year period before the date on which the loan is made. Seasonal employers can use the average of the period of March 1 through June 30, 2019. Effectively, the loan amount is designed to cover 1 month of payments for rent, payroll, and other debt obligations.
- Funds can be used for salaries and employee benefits, mortgage and debt payments, as well as rent and utilities.
- Borrowers receiving assistance under 7(b)(2) of the SBA are also not eligible. This section covers assistance to areas affected by a disaster.
- Normal SBA guarantee fees are waived or reduced under this program. The SBA Guarantee is 100% until December 31, 2020, then reduced depending on the balance of the loan at the time of disbursement. Loans with an original balance of $150,000 or less have a guarantee reduced to 75% in 2021. Loans above $150,000 are subject to a guarantee of 85% starting in 2021.
- Borrowers under this program are eligible for payment deferment of up to one year.
- The Express Loan limit is increased from $350,000 to $1,000,000.
Entrepreneurial Development Provisions
- SBA Resource Partners will receive an appropriation for a variety of purposes. Resource partners include Small Business Development Centers and Women’s Business Centers. These Resource Partners will provide assistance including grants for small business concerns located in an area substantially affected by COVID-19.
- The allowed use of grant funds include disruptions caused by COVID-19, accessing resources for capital and relief, addressing the impact and prevention of COVID-19, expansion to allow for remote workplaces, risks and mitigation of cyber threats, and, any other relevant business practices necessary to mitigate the economic effects of COVID-19 or similar occurrences. The requirement for matching funds is waived.
- Any small business concern that obtains a 7(a) SBIL loan during the 4-month period starting on March 1, 2020 and ending on June 30, 2020, can have a portion of their loan forgiven for the costs of maintaining payroll continuity incurred for certain wage earners, during this same 4-month period.
- Compensation limits apply. Eligible employees must have compensation not exceeding $33,333 during the 4-month period. Annualized, this includes all employees under $100,000 in annual wages.
- Compensation includes sick pay covered under the Families First Coronavirus Response Act as well as family leave wages under the same Act.
- There are additional provisions regarding limits to the compensation that can be included. Additionally, tipped workers are not subject to the wage limitation.
- Any loan forgiveness under this section is not taxable income to the small business concern.
McConnell plans to meet with Senate Minority Leader Schumer on CARES and that will be key if they can agree on these items as 60 votes will be needed to move this bill forward in the Senate. Senate leaders from both parties are scheduled to work through the weekend to come up with an economic stimulus package. Changes in the above items are possible and other items will emerge, but the Senate is committed to coming up with a major economic package.
They will then need to work out the details with the House.
The House has several members now affected with the Coronavirus, so voting logistics in the House will be challenging. We will keep you posted as developments occur in the coming days. It is a dynamic situation, but Congress plans to work in a bipartisan manner with this legislation. We will continue to follow this.
Here are two executive summaries on CARES for your reference.
About the Authors
Jim Brandenburg has extensive experience and knowledge in corporate and partnership tax law, mergers and acquisitions and tax legislation. His expertise includes working with owners of closely held businesses to identify tax planning opportunities and assist them in implementing these strategies.
Thomas E. Bayer, CPA, CExP, has more than 25 years of experience providing a broad range of accounting, tax, and business advisory services to commercial clients across various industries and Sikich offices.
Tom has specialized expertise in the areas of business succession planning, tax planning and compliance, and business advisory. He puts his business succession planning abilities and knowledge to work firm-wide, serving clients in advisory services across the country.