Detailed Business Tax Provisions in the CARES Act
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The Coronavirus, Aid, Relief, and Economic Security (CARES) Act passed in the Senate in the evening of March 25, 2020. Details of the Senate bill follow:
Employee retention credit for employers
This provision provides a refundable payroll tax credit for 50% of wages paid by eligible employers to certain employees during the COVID-19 crisis. (Act Sec. 2301(a)).
Eligible employers. The credit is available to employers, including non-profits, whose operations have been fully or partially suspended as a result of a government order limiting commerce, travel, or group meetings. The credit is also provided to employers who have experienced a greater than 50% reduction in quarterly receipts, measured on a year-over-year basis. (Act Sec. 2301(c)(2))
The credit is not available to employers receiving Small Business Interruption Loans under Sec. 1102 of the Act. (Act Sec. 2301(j))
- Based on qualified wages paid to employees during crisis, tied to number of employees (100+ full time employees = wages paid when they are not providing services due to COVID-19 and less than 100 full time employees = wages paid regardless of business closure status)
- Covers up to $10,000 paid per employee, including benefits, for the period 3/13/20 – 2/31/20
Delay of payment of employer payroll taxes
The CARES Act allows taxpayers to defer paying the employer portion of social security taxes through the end of 2020.
- Payroll tax-deferred, payments to be spread over 2 years
Temporary repeal of taxable income limitation for net operating losses (NOLs)
The CARES Act temporarily removes the taxable income limitation to allow an NOL to fully offset income.
- Net operating losses (NOLs) modification: NOLs arising in FY’s ‘18, ‘19, and ‘20 can be carried back 5 years
Modification of limitation on losses for noncorporate taxpayers
The CARES Act temporarily modifies the loss limitation for noncorporate taxpayers so they can deduct excess business losses arising in 2018, 2019, and 2020.
The CARES Act allows corporations to claim 100% of AMT credits in 2019
The CARES Act also provides for an election to take the entire refundable credit amount in 2018.
- AMT credits available as refundable credits through 2021 can be claimed as a refund now
- Taxpayers may file an application for a tentative refund of any amount for which a refund is due by reason of an election under Code Sec. 53(e)(5). We are waiting for the IRS guidance to be published.
The CARES Act temporarily and retroactively increases the limitation on the deductibility of interest expense under Code Sec. 163(j)(1) from 30% to 50% for tax years beginning in 2019 and 2020
- Taxpayers may elect out of the increase, for any tax year, in the time and manner IRS prescribes.
- Under a special rule for partnerships, the increase in the limitation will not apply to partners in partnerships for 2019 (it applies only in 2020).
SBA 7(a) loan program ( aka: Paycheck Protection Loans or PPL)
Eligibility of a borrower is determined by whether or not the borrower was in operation on 2-15-20 and had paid wages to EE or paid independent contractors during at that time.
- Helps small businesses, 501(c)(3)’s, 501(c)(19)’s, and 31(b)(2)(c)
- Limited to under 500 employees
- Includes independent contractors, sole proprietors and the self-employed
- Entities must have been operational by 2/15/20; had payroll, paid taxes
- Covered loan period is 2/25/20 through 6/30/20
- Maximum loan amount via 7(a) set to $10 million through 12/31/20
- 100% loan guarantee through 12/31/20
- Eligible expenses include payroll, insurance, rent, mortgage and utilities.
- Borrower cannot apply/carry both PPP and Economic Injury Disaster Loan (EIDL) for COVID-19, but can carry previous, non-COVID-19 EIDL and participate in PPP
- Borrow must good-faith certify that funds are needed for COVID-19 related purposes, the funds will be used to retain workers, and that their request is not duplicative with other SBA funds for the same purpose
- Waives borrower and lender fees
- Waives credit elsewhere requirements
- Waives collateral and personal guarantees
- Sets maximum interest rate of 4%
- No prepayment fees
- Defers payments on PPP loan for 6-12 months
- Delegates authority to all existing 7(a) lenders to expedite approvals/distributions
- Authorizes bank and non-bank lenders to participate in PPP program
- New lenders in program can only participate in PPP and not other 7(a) loans
- Amount spent by borrower in the first 8 weeks from loan origination may be forgiven; amount reduced proportionate to reductions in workforce as compared to previous year; if rehires made during 8-week period, no penalty in reflection of possible layoffs early in the 8-week period
- Allows inclusion of additional money paid to tipped workers
- Anything not forgiven or repaid by 12/31/20 will convert to a max 10-year loan at a max 4% interest rate; loan will remain 100% guaranteed
Emergency Injury Disaster Loan (EIDL)
SBA’s Economic Injury Disaster Loans offer up to $2 million in assistance for each affected small business. These loans can provide vital economic support to small businesses to help overcome the temporary loss of revenue they are experiencing.
- Eligibility expanded to include tribal businesses, cooperatives, ESOP’s, individual contractors, sole proprietors, and private non-profits with less than 500 employees
- Waives credit elsewhere requirement for advances and loans below $200,000
- Waives personal guarantee for advances and loans below $200,000
- Waives 1-year-in-business requirement for advances and loans below $200,000
- SBA has greater flexibility in determining borrower eligibility
- Entities eligible to apply for EIDL may request an advance in the form of an emergency grant of up to $10,000
- SBA must distribute EIDL emergency grant within 3 days
- Applicants are not required to repay emergency grant, even if they are ultimately denied EIDL
- Additional funding provided to Small Business Development Centers (SBDCs) and Women’s Business Centers (WBCs)
- Match requirements for WBCs are waived for 3 months
- State Trade Expansion Program funds from FY ‘18 and FY ‘19 will be made available through FY ‘21
- Requires SBA to subsidize 6 months of payments on existing 7(a), 504, or microloans beginning with the next payment.