By Kenneth H. Bridges, CPA, PFS June 2020
In March, as much of the U.S. (and global) economy began to shut down, Congress went to work passing massive stimulus legislation to try keep the economy going. Federal legislation enacted from March to June 2020 included the Families First Coronavirus Response Act (FFCRA), the Coronavirus Aid, Relief and Economic Security Act (CARES Act), the Paycheck Protection Program Increase Act (PPPIA), and the Paycheck Protection Program Flexibility Act (PPPFA). Collectively, this legislation represents trillions of dollars. Also, the US House passed the Health and Economic Recovery Omnibus Emergency Solutions Act (HEROES Act), but this legislation has not made it through the Senate. We will provide here a high-level summary of this collective legislation.
Paycheck Protection Program – The legislation which has almost certainly received the greatest amount of press, and has likely had the greatest benefit to smaller businesses, is the Paycheck Protection Program (PPP), which was a part of the CARES Act. Given the significance and complexity of the PPP, we discuss it in greater detail in a separate article. However, from a very high level, the PPP provides forgivable loans of up to $10,000,000 to virtually all businesses with 500 employees or less (and in some industries more), and certain nonprofits and tribal concerns. The loan amount is basically 2 ½ months of 2019 payroll, and it will be forgiven so long as used during the 8-week period following its receipt (or up to 24 weeks if elected) for qualifying costs (basically payroll, rent, utilities and mortgage interest, with some limitations).
Paid sick and family leave – The FFCRA requires employers with fewer than 500 employees to provide emergency paid sick leave and family and medical leave to employees who are unable to work or telework due to specified-virus related reasons or in order to care for a child whose school or daycare has been closed as a result of the Coronavirus shutdown. In order to reimburse employers for the cost of this mandated paid leave, the Act provides that the employer can claim a refundable payroll tax credit for the amounts paid. For a self-employed person who is unable to work due to a specified-virus reason or the need to care for another, there is a similar credit which can be claimed as an income tax credit.
Employee retention credit (ERC) – Any employer whose business is partially or fully suspended by orders from a governmental authority due to the Coronavirus (or who has substantial decline in revenue due to Coronavirus) can claim a refundable payroll tax credit of up to 50% of qualified wages (which includes health insurance premiums) paid after March 12. For employers with 100 or fewer full-time employees (based on 2019 average), qualified wages include up to $10,000 per employee (regardless of whether they were able to work). For employers with more than 100 full-time employees, the amount is limited to $10,000 per employee and is only with respect to those employees who were unable to work due to the shutdown. You can claim both the ERC and the FFCRA credit, but you cannot double dip (i.e. cannot take the same wages into account in computing both credits). Also, you cannot claim these credits if accepting PPP funds. Since the PPP is generally more advantageous, most smaller companies are taking advantage of the PPP and foregoing the ERC and FFCRA credits.
Rebate checks to individuals – Subject to income limitations (phaseout begins at $75,000 for individuals and $150,000 for couples), persons who cannot be claimed as a dependent on someone else’s income tax return have received or should receive $1,200 ($2,400 for couples filing a joint return) plus $500 for each child. While the rebate is technically a 2020 tax credit, the IRS has been sending out the checks and basing eligibility on your 2019 income tax return (or 2018, if 2019 has not been filed, or Form SSA-1099 if no 2018 or 2019 return has been filed). If the advance check is less than you should have received, then you can claim the shortfall when you file your 2020 return. Alternatively, if the advance amount you receive is more than you should have received, no repayment is required. Under the income phaseout rules, singles with income above $99,000 and couples with income above $198,000 are not eligible.
No 10% penalty on early retirement plan distributions and 3 years to repay or pay tax – Normally, if you take a distribution from a qualified retirement plan prior to age 59 ½, you pay the tax on the distribution plus a 10% penalty. Under the CARES Act, however, an individual who is diagnosed with COVID-19, whose spouse or dependent is so diagnosed, or who experiences adverse financial consequences as a result of being quarantined, furloughed, or lack of childcare due to the virus can take up to $100,000 of distributions from qualified retirement plans during 2020, not incur the 10% penalty, have up to 3 years to put the money back in the qualified retirement plan, or, alternatively, include the distribution in income ratably over three tax years.
RMD requirement waived for 2020 – Normally, those age 70 ½ (72 following legislation enacted in late 2019), must take a certain minimum amount of distributions (based on life expectancy) from their IRAs each year, or otherwise incur a 50% penalty on any shortfall. The CARES Act provides that the RMD requirements do not apply for 2020.
Charitable contribution limitations temporarily relaxed – For 2020, individuals who do not itemize will be able to deduct up to $300 of charitable contributions. Also, the 60% of AGI limitation which normally applies to cash donations will be suspended for 2020 for cash contributions (except for donations to private foundations, donor advised funds, and supporting organizations).
Deferral of payroll taxes – 50% of the employer 6.2% social security tax for 2020 can be deferred to December 31, 2021, and the other 50% can be deferred to December 31, 2022. A similar rule applies for self-employment tax.
Federal pandemic unemployment compensation – In addition to the amount of unemployment benefits they would normally receive from the state (typically about 62% of prior compensation, but not to exceed $330 per week), unemployed persons will receive an additional $600 per week provided by the Federal government. For many workers, the combination of these amounts will exceed what they were making from working. Also, in some states (e.g. up to $300 in Georgia), you can now receive some amount of compensation for part-time work without diminishing your unemployment benefits. The supplemental $600 per week from the Federal government is set to expire July 31, unless Congress acts to extend it.
TCJA rules pertaining to NOLs, excess business losses, and business interest expense relaxed – In order to help pay for tax rate reductions, the Tax Cuts and Jobs Act (TCJA) legislation enacted in late 2017 imposed new limitations on net operating loss carrybacks and carryforwards, business losses from flow through entities, and business interest expense. Under TCJA, net operating losses (NOLs) could no longer be carried back, and could offset no more than 80% of taxable income in a carryforward year. CARES Act permits NOLs from 2018 – 2020 to be carried back 5 years, and the 80% limitation in carryforward year is relaxed. Under TCJA, the amount of business loss an individual could use as an offset against other sources of income was limited to $250,000 for singles and $500,000 for married filing joint return. CARES Act effectively delays the application of this rule until tax year 2021. TCJA generally limited business interest expense deductions to 30% of EBITDA (with exceptions). The CARES Act increases this to 50% for 2019 and 2020 (with a special rule essentially deferring this benefit to 2020 for partnerships), and provides that in computing the limitation for 2020 you can elect to use 2019 EBITDA.
Technical correction for qualified improvement property – Because of an unintended technical glitch in the Tax Cuts and Jobs Act enacted in late 2017, “qualified improvement property” (certain leasehold improvements, restaurant property, and retail property improvements) did not qualify for 100% bonus depreciation. The CARES Act fixes that.
Kenneth H. Bridges, CPA, PFS is a partner with Bridges & Dunn-Rankin, LLP, an Atlanta-based CPA firm.
This article is presented for educational and informational purposes only, and is not intended to constitute legal, tax or accounting advice. The article provides only a very general summary of complex rules. For advice on how these rules may apply to your specific situation, contact a professional tax advisor.