Summary of CARES Act
Coronavirus Aid, Relief, and Economic Security Act
NOTE: As the Small Business Administration and the Treasury Department work out the implementation of the various provisions of this act, portions of the benefits are subject to change. We will attempt keep this page updated with the latest announcements regarding implementation, but please aware that all of the details are not settled at this time.
The CARES Act, H.R. 748 (Coronavirus Aid, Relief, and Economic Security Act) was signed into law on Friday, March 27th. The law is far-reaching with provisions impacting individuals, businesses and nonprofits of all types. Below we have briefly summarized the key provisions impacting tax-exempt organizations. We also have provided supplemental information on the provisions impacting individuals and businesses.
If you have further questions on issues covered here or on aspects not addressed, please reach out to your Blazek & Vetterling team and we will help you find answers.
Because it has generated the most interest, highlighted first are the provisions of the Paycheck Protection Loan Program. Please note that the various relief programs have some overlap but, in general, recipients cannot benefit for the same relief twice.
Available Additional Resources
- On March 31st, the US Treasury Department made available the application that will be used to apply for the Paycheck Protection Loan Program. The Department maintains a large collection of useful information about various programs on it’s CARES website.
- The National Council of Nonprofits has prepared an informative comparison of the loan types available to nonprofit organizations.
- The US Chamber of Commerce has published a guide for small businesses and nonprofits seeking loans under the Paycheck Protection Loan Program.
Paycheck Protection Loan Program
The Paycheck Protection Loan Program is likely to be the most popular provision in the new legislation because it offers small businesses (including public charities and private foundations) loans which can be converted to grants for amounts spent to retain workers. A few elements of this program are as follows:
- Administered by the Small Business Administration and available to employers with fewer than 500 employees including charitable 501(c)(3) exempt organizations. (Note: Organizations exempt under are 501(c)(4), (5), (6), etc. are not included.) To qualify for relief organizations must have been operating on 2/15/2020.
- Loans to be issued by numerous national and local financial institutions – organizations likely will be able to apply with their current bank
- Loan amount is based upon 2.5 months of average payroll, limited to $10,000,000. Excludes salary in excess of $100,000 for individual employees.
- No collateral or personal guarantee required.
- Loan terms – 1.0% interest rate; first 6 months of payments (principal and interest) automatically deferred; repaid over two years. Revised by the PPP Flexibility Act to defer first 10 months of payments and require repayment over 5 years.
- Loan Forgiveness – amounts the organization spends on payroll, rent or mortgage, and utilities during the first 8 weeks after origination will be forgiven. Revised by the PPP Flexibility Act to allow a 24-week covered period.
- Forgiveness is reduced if the organization: reduces workforce, reduces wages of employees by more than 25%, and by amounts for which the organization already utilized other related employer relief programs.
- Forgiveness for costs other than payroll is limited to 25% of the total forgiveness amount. Revised by the PPP Flexibility Act to limit costs other than payroll to 40% of the total forgiveness amount.
Employee Retention Credit
The Employee Retention Credit (ERC) is a credit against the employer’s portion of payroll taxes on employee wages.
- Tax-exempt employers are eligible if they continue to pay their employees while their operations were partially or completely shut down during any quarter of 2020 due to orders from a governmental authority that limited commerce, travel or group meetings in response to COVID-19.
- If an employer utilizes a loan under the Paycheck Protection Program it reduces their ability to use this ERC.
- The ERC is a refundable payroll tax credit for 50% of the wages (including health benefits) paid by the employer but limited to $10,000 of wages per employee (i.e. up to $5,000 benefit per employee).
SBA Economic Injury Disaster Loans
The SBA Economic Injury Disaster Loan Program (EIDL) is an existing program that has been expanded to assist small businesses during the COVID-19 crisis. Key provisions are as follows: Available to small businesses and nonprofits, including faith-based organizations, with 500 or fewer employees.
- Loans received under the EIDL program cannot be used to pay the same expenses as those for which relief is sought under the Paycheck Protection Loan Program, but EIDL loans do not make the organization ineligible for the Paycheck Protection Loan Program. You should coordinate these relief resources with your lender or financial advisor.
- A $10,000 emergency grant can be issued within 3 days and does not have to be repaid even if the organization is not approved for a loan under the EIDL program.
- Up to $2,000,000 loan available for working capital over up to a 30-year term with interest at 2.75% for nonprofits.
- Loans based upon credit scores – no tax returns required.
- Up to a $200,000 loan without a personal guarantee.
Delay of Payroll Tax Remittance
This delay of payroll tax remittance provision is a deferral of payroll taxes that is intended to help employers with short-term cash flow problems.
- Provides for delay of employer portion of payroll taxes (i.e. the 6.2% of Social Security and Medicare taxes) on wages paid between now and 1/1/2021.
- Delays half of the employer taxes until 12/31/2021 and the remainder until 12/31/2022
- If loans are forgiven under the Paycheck Protection Program, then the employer is ineligible for the delayed payroll tax remittance relief. Revised by the PPP Flexibility Act to allow delayed payroll tax remittance through December 31, 2020.
Provisions applicable to Individuals
Recovery rebates for individuals. To help individuals stay afloat during this time of economic uncertainty, the government will send up to $1,200 payments to eligible taxpayers and $2,400 for married couples filing joints returns. An additional $500 additional payment will be sent to taxpayers for each qualifying child dependent under age 17 (using the qualification rules under the Child Tax Credit).
Rebates are gradually phased out, at a rate of 5% of the individual’s adjusted gross income over $75,000 (singles or marrieds filing separately), $122,500 (head of household), and $150,000 (joint). There is no income floor or ”phase-in”-all recipients who are under the phaseout threshold will receive the same amounts. Tax filers must have provided, on the relevant tax returns or other documents (see below), Social Security Numbers (SSNs) for each family member for whom a rebate is claimed. Adoption taxpayer identification numbers will be accepted for adopted children. SSNs are not required for spouses of active military members. The rebates are not available to nonresident aliens, to estates and trusts, or to individuals who themselves could be claimed as dependents.
The rebates will be paid out in the form of checks or direct deposits. Most individuals won’t have to take any action to receive a rebate. IRS will compute the rebate based on a taxpayer’s tax year 2019 return (or tax year 2018, if no 2019 return has yet been filed). If no 2018 return has been filed, IRS will use information for 2019 provided in Form SSA-1099, Social Security Benefit Statement, or Form RRB-1099, Social Security Equivalent Benefit Statement.
Rebates are payable whether or not tax is owed. Thus, individuals who had little or no income, such as those who filed returns simply to claim the refundable earned income credit or child tax credit, qualify for a rebate.
Waiver of 10% early distribution penalty. The additional 10% tax on early distributions from IRAs and defined contribution plans (such as 401(k) plans) is waived for distributions made between January 1 and December 31, 2020 by a person who (or whose family) is infected with the Coronavirus or who is economically harmed by the Coronavirus (a qualified individual). Penalty-free distributions are limited to $100,000, and may, subject to guidelines, be re-contributed to the plan or IRA. Income arising from the distributions is spread out over three years unless the employee elects to turn down the spread out. Employers may amend defined contribution plans to provide for these distributions. Additionally, defined contribution plans are permitted additional flexibility in the amount and repayment terms of loans to employees who are qualified individuals.
Waiver of required distribution rules. Required minimum distributions that otherwise would have to be made in 2020 from defined contribution plans (such as 401(k) plans) and IRAs are waived. This includes distributions that would have been required by April 1, 2020, due to the account owner’s having turned age 70 1/2 in 2019.
Charitable deduction liberalizations. The CARES Act makes four significant liberalizations to the rules governing charitable deductions:
(1) Individuals will be able to claim a $300 above-the-line deduction for cash contributions made, generally, to public charities in 2020. This rule effectively allows a limited charitable deduction to taxpayers claiming the standard deduction.
(2) The limitation on charitable deductions for individuals that is generally 60% of modified adjusted gross income (the contribution base) doesn’t apply to cash contributions made, generally, to public charities in 2020 (qualifying contributions). Instead, an individual’s qualifying contributions, reduced by other contributions, can be as much as 100% of the contribution base. No connection between the contributions and COVID-19 activities is required.
(3) Similarly, the limitation on charitable deductions for corporations that is generally 10% of (modified) taxable income doesn’t apply to qualifying contributions made in 2020. Instead, a corporation’s qualifying contributions, reduced by other contributions, can be as much as 25% of (modified) taxable income. No connection between the contributions and COVID-19 activities is required.
(4) For contributions of food inventory made in 2020, the deduction limitation increases from 15% to 25% of taxable income for C corporations and, for other taxpayers, from 15% to 25% of the net aggregate income from all businesses from which the contributions were made.
Exclusion for employer payments of student loans. An employee currently may exclude $5,250 from income for benefits from an employer-sponsored educational assistance program. The CARES Act expands the definition of expenses qualifying for the exclusion to include employer payments of student loan debt made before January 1, 2021.
Break for remote care services provided by high deductible health plans. For plan years beginning before 2021, the CARES Act allows high deductible health plans to pay for expenses for tele-health and other remote services without regard to the deductible amount for the plan.
Break for nonprescription medical products. For amounts paid after December 31, 2019, the CARES Act allows amounts paid from Health Savings Accounts and Archer Medical Savings Accounts to be treated as paid for medical care even if they aren’t paid under a prescription. And, amounts paid for menstrual care products are treated as amounts paid for medical care. For reimbursements after December 31, 2019, the same rules apply to Flexible Spending Arrangements and Health Reimbursement Arrangements.
Business only provisions
Net operating loss liberalizations. The 2017 Tax Cuts and Jobs Act (the 2017 Tax Law) limited NOLs arising after 2017 to 80% of taxable income and eliminated the ability to carry NOLs back to prior tax years. For NOLs arising in tax years beginning before 2021, the CARES Act allows taxpayers to carryback 100% of NOLs to the prior five tax years, effectively delaying for carrybacks the 80% taxable income limitation and carryback prohibition until 2021.
The Act also temporarily liberalizes the treatment of NOL carryforwards. For tax years beginning before 2021, taxpayers can take an NOL deduction equal to 100% of taxable income (rather than the present 80% limit). For tax years beginning after 2021, taxpayers will be eligible for: (1) a 100% deduction of NOLs arising in tax years before 2018, and (2) a deduction limited to 80% of taxable income for NOLs arising in tax years after 2017.
The provision also includes special rules for REITS, life insurance companies, and the Code Sec. 965 transition tax. There are also technical corrections to the 2017 Tax Law effective dates for NOL changes.
Deferral of noncorporate taxpayer loss limits. The CARES Act retroactively turns off the excess active business loss limitation rule of the TCJA in Code Sec. 461(l) by deferring its effective date to tax years beginning after December 31, 2020 (rather than December 31, 2017). (Under the rule, active net business losses in excess of $250,000 ($500,000 for joint filers) are disallowed by the 2017 Tax Law and were treated as NOL carryforwards in the following tax year.)
The CARES Act clarifies, in a technical amendment that is retroactive, that an excess loss is treated as part of any net operating loss for the year, but isn’t automatically carried forward to the next year. Another technical amendment clarifies that excess business losses do not include any deduction under Code Sec. 172 (NOL deduction) or Code Sec. 199A (qualified business income deduction).
Still another technical amendment clarifies that business deductions and income don’t include any deductions, gross income or gain attributable to performing services as an employee. And because capital losses of non-corporations cannot offset ordinary income under the NOL rules, capital loss deductions are not taken into account in computing the Code Sec. 461(l) loss and the amount of capital gain taken into account cannot exceed the lesser of capital gain net income from a trade or business or capital gain net income.
Acceleration of corporate AMT liability credit. The 2017 Tax Law repealed the corporate alternative minimum tax (AMT) and allowed corporations to claim outstanding AMT credits subject to certain limits for tax years before 2021, at which time any remaining AMT credit could be claimed as fully-refundable. The CARES Act allows corporations to claim 100% of AMT credits in 2019 as fully-refundable and further provides an election to accelerate the refund to 2018.
Relaxation of business interest deduction limit. The 2017 Tax Law generally limited the amount of business interest allowed as a deduction to 30% of adjusted taxable income (ATI). The CARES Act generally allows businesses, unless they elect otherwise, to increase the interest limitation to 50% of ATI for 2019 and 2020, and to elect to use 2019 ATI in calculating their 2020 limitation. For partnerships, the 30% of ATI limit remains in place for 2019 but is 50% for 2020. However, unless a partner elects otherwise, 50% of any business interest allocated to a partner in 2019 is deductible in 2020 and not subject to the 50% (formerly 30%) ATI limitation. The remaining 50% of excess business interest from 2019 allocated to the partner is subject to the ATI limitations. Partnerships, like other businesses, may elect to use 2019 partnership ATI in calculating their 2020 limitation.
Technical correction to restore faster write-offs for interior building improvements. The CARES Act makes a technical correction to the 2017 Tax Law that retroactively treats (1) a wide variety of interior, non-load-bearing building improvements (qualified improvement property (QIP)) as eligible for bonus deprecation (and hence a 100% write-off) or for treatment as 15-year MACRS property or (2) if required to be treated as alternative depreciation system property, as eligible for a write-off over 20 years. The correction of the error in the 2017 Tax Law restores the eligibility of QIP for bonus depreciation, and in giving QIP 15-year MACRS status, restores 15-year MACRS write-offs for many leasehold, restaurant and retail improvements.
Accelerated payment of credits for required paid sick leave and family leave. The CARES Act authorizes IRS broadly to allow employers an accelerated benefit of the paid sick leave and paid family leave credits allowed by the Families First Coronavirus Response Act by, for example, not requiring deposits of payroll taxes in the amount of credits earned.
Pension funding delay. The CARES Act gives single employer pension plan companies more time to meet their funding obligations by delaying the due date for any contribution otherwise due during 2020 until January 1, 2021. At that time, contributions due earlier will be due with interest. Also, a plan can treat its status for benefit restrictions as of December 31, 2019 as applying throughout 2020.
Certain SBA loan debt forgiveness isn’t taxable. Amounts of Small Business Administration Section 7(a)(36) guaranteed loans that are forgiven under the CARES Act aren’t taxable as discharge of indebtedness income if the forgiven amounts are used for one of several permitted purposes. The loans have to be made during the period beginning on February 15, 2020 and ending on June 30, 2020.
Suspension of certain alcohol excise taxes. The CARES Act suspends alcohol taxes on spirits withdrawn during 2020 from a bonded premises for use in or contained in hand sanitizer produced and distributed in a manner consistent with FDA guidance related to the outbreak of virus SARSCoV- 2 or COVID-19.
Suspension of certain aviation taxes. The CARES Act suspends excise taxes on air transportation of persons and of property and on the excise tax imposed on kerosene used in commercial aviation. The suspension runs from March 28, 2020 to December 31, 2020.