On March 27, 2020, President Donald Trump signed the Coronavirus Aid, Relief and Economic Security Act (CARES Act) into law, which is aimed at providing significant tax and non-tax stimulus to individuals and businesses. Created as a result of the COVID-19 pandemic, the $2.2 trillion package is the most expensive legislation passed in U.S. history.

Some of the CARE Act’s provisions provides opportunities for businesses and individuals to access much-needed cash now, while others may not result in a realized benefit until taxpayers begin filing (or amending in the case of 2019 returns filed before enactment of this law) their 2019 and 2020 tax returns. Doeren Mayhew has provided a brief summary of key provisions impacting individuals and businesses below.

Impact to Businesses

The CARES Act builds on existing legislation to provide more robust support to businesses during these challenging times. Explore the below measures that may impact your business.

Payroll Tax Credit Refunds: The law provides for advance refunding of the payroll tax credits enacted in earlier legislation (see below discussion of Employee Retention Credit).

Additionally, to address cash-flow concerns, the act provides federal payroll tax deferment of the employer’s matching portion of FICA until Dec. 31, 2021. This applies to payroll taxes due from March 27, 2020 until Dec. 31, 2020. One-half of the deferred taxes are required to be deposited by Dec. 31, 2021, and the remaining balance must be deposited by Dec. 31, 2022.

Net Operating Losses (NOL): The 80% income limitation for NOL deductions for the years beginning before 2021 is modified by the act. For business losses arising in 2018, 2019 and 2020, a five-year carryback is allowed. Businesses will be able to amend or modify tax returns for tax years dating back to 2013 in order to take advantage of the carryback.

Alternative Minimum Tax: Accelerates the year for which a fully refundable credit can be claimed in 2019, and corporations can elect to claim the fully refundable minimum tax credits in 2018.

Business Interest Limitation: Limitations have been amended from 30% of adjusted taxable income based on earnings before income tax, depreciation and amortization (EBITDA) to 50% for 2019 and 2020 (2020 in the case of partnerships). Taxpayers may elect to use 2019 income in place of 2020 for the computation.

Excise Tax: A temporary exception from excise tax is allowed for alcohol used to produce hand sanitizer through Dec. 31, 2020. Certain aviation excise tax is also suspended through the creation of an “excise tax holiday” through Dec. 31, 2020.

Improvement Property: Technical corrections to qualified improvement property allows for depreciation as a 15-year property and bonus depreciation for property acquired and placed in service after Sept. 27, 2017, to align with the Tax Cuts and Jobs Act.

Charitable Contributions: Limitations for charitable contributions deduction for businesses have been increased from 10% to 25% of taxable income. This provision also increases the limitation on deductions for contributions of food inventory from 15% to 25% of taxable income.

Employee Retention Credit: Establishes the Employee Retentions Credit, which is a fully refundable tax credit tied to the payment of employee wages against the employer’s share of Social Security tax.

  • All eligible employers would be permitted to claim a 50% credit of wages paid up to $10,000 per employee.
  • The credit is available to employers whose (1) operations were fully or partially suspended due to a COVID-19-related shut-down order, or (2) gross receipts declined by more than 50% when compared to the same quarter in the prior year.
  • For employers with greater than 100 full-time employees, qualified wages are wages paid to employees when they are not providing services due to the COVID-19-related circumstances described above.
  • For eligible employers with 100 or fewer full-time employees, all employee wages qualify for the credit, whether the employer is open for business or subject to a shut-down order. The credit is provided for the first $10,000 of compensation, including health benefits, paid to an eligible employee. The credit is provided for wages paid or incurred from Mar. 13, 2020, through Dec. 31, 2020.

In addition to the above provisions, there are many provisions geared at aiding small businesses generally defined as having 500 or less employees, such as:

Paycheck Protection Program: Provides forgivable Small Business Administration (SBA) loans to small businesses (generally less than 500 employees), including sole proprietors and self-employed individuals.

  • Loan size would equal 250% of an employer’s average monthly payroll, maxing out at $10 million.
  • The maximum loan amount for SBA Express loans would increase from $350,000 to $1 million.
  • Allowable loan uses include payroll, insurance premiums, mortgage, rent and utility payments.
  • The cost of participation in the program would be reduced for borrowers and lenders by providing fee waivers for an automatic deferment of payments for one year, and no prepayments penalties.

Emergency Economic Injury Disaster Loans (EIDL)  Grants: Expands eligibility for access to tribal businesses, cooperatives, sole proprietors, independent contractors and private non-profits during the covered period from Jan. 31, 2020, to Dec. 31, 2020.

  • Allows for an EIDL to be expedited to provide access to capital through an emergency grant, which is an advancement of $10,000 within three days to maintain payroll, provide paid sick leave and to pay other debt obligations.

Impact to Individuals

Under the new law, individual taxpayers will reap many benefits as well. Check out the main beneficial measures below.

Recovery Rebates: A provision of the new law provides eligible individuals with a recovery rebate that is an advancement against 2020 taxes.

  • Individuals will qualify for a $1,200 rebate, while joint filers will receive a $2,400, with a $500 credit for each child.
  • Threshold amounts will apply and be based on 2018 adjusted gross income (unless a 2019 return has already been filed).
  • Phaseouts will begin at $75,000 for single filers, $112,500 for heads of households and $150,000 for joint filers.
  • Rebates will be phased out by $5 for every $100 in excess of a threshold amount. Therefore, rebates are completely phased out for single filers with 2018 (or 2019, if applicable) adjusted gross income over $99,000, heads of household with $136,500 and joint filers with $198,000.
  • Individuals must meet certain requirements to be eligible for the recovery rebate, including:
    • Not being a nonresident alien.
    • Must not be able to be claimed as a dependent on another taxpayer’s return.
    • Cannot be an estate or trust.
    • Must have included a Social Security number for both the taxpayer, the taxpayer’s spouse and eligible children (or an adoption taxpayer identification number, where appropriate).

Retirement Plans: The bill waives the 10% penalty on early withdrawals up to $100,000 from qualified retirement plans for COVID-19-related distributions if the withdrawal meets the following guidelines:

  • Occurs during the 2020 calendar year to an individual (or the spouse of an individual) diagnosed with COVID-19 with a CDC-approved test.
  • Made by an individual who experiences adverse financial consequences as a result of quarantine, business closure, layoff or reduced hours due to the virus.

Income attributable to an early withdrawal is subject to tax over a three-year period. Withdrawn amounts can be recontributed to qualified retirement plans without being subject to an annual contribution cap if made within three years (instead of the normal 60 days). The bill also waives all required minimum distributions for 2020 for all taxpayers, even those not impacted by the COVID-19 pandemic.

Charitable Contributions: Individuals will be allowed to claim an above-the-line deduction up to $300 for charitable contributions for the 2020 tax year of 2020 contributions (i.e. not carryforwards). Furthermore, individuals may be able to claim unlimited itemized deductions for a charitable contribution for the 2020 tax year, which is normally limited to 50% of adjusted gross income.

Unemployment Insurance: An increase in unemployment insurance benefits are available to each recipient in the amount of $600 per week. It also extends these benefits to self-employed workers, independent contractors and those with limited work history. Additionally, the federal government will extend these benefits for an additional 13 weeks through Dec. 31, 2020 after state-funded benefits end.

Employer-Paid Student Loans: Employer-paid student loans can apply for an exclusion of up to $5,250 from the student’s taxable income for the 2020 tax year if payments were made by the employer after March 27, 2020 and before Jan. 1, 2021.

While the act has many more provisions that could assist taxpayers, the items discussed above may have an immediate benefit. Please reach out to your Doeren Mayhew tax advisor for more information on any of the above or for assistance with evaluating whether these changes might generate cash flow for your business.