March 27, 2020, the President signed into law the Coronavirus Aid, Relief and Economic Security (CARES) Act. The CARES Act, estimated to be in excess of $2 trillion, is the third round of federal support coming after the Coronavirus Preparedness and Response Supplemental Appropriations Act, 2020 and the Families First Coronavirus Response Act. This round of stimulus funding aims to provide greater tax and labor relief to businesses and individuals. Site Selection Group has summarized some key provisions related to companies and their employees.

1. CARES Act Aid for Businesses

As companies are grappling with the effects of the COVID-19 pandemic, some relevant provisions to consider for businesses are:

  • Employee Retention Tax Credit

A refundable payroll tax credit against an employer’s share of Social Security taxes equal to 50% of wages paid from March 13, 2020, to Dec. 31, 2020, up to a total of $10,000 per employee, for a maximum credit of $5,000 per employee. The credit is available to employers whose businesses were disrupted due to virus-related shutdowns and firms experiencing a decrease in gross receipts of 50% or more when compared to the same quarter last year. The credit applies to employees retained but not currently working due to the crisis for companies with more than 100 employees, and for all employee wages for companies with 100 or fewer employees.

  • Deferral of Employer Portion of Social Security Payroll Tax

The employer portion of Social Security payroll tax payments for both employers and self-employed individuals may be delayed with 50% due on December 31, 2021 and the other 50% due on December 31, 2022.

  • Business Tax Provisions

Some relevant business tax provisions that were included in the CARES Act include:

    • Companies may take net operating losses earned in 2018, 2019 or 2020 and carry back those losses five years. This suspends the NOL limit of 80%, so companies may use NOLs to fully offset taxable income.
    • Companies with tax credit carryforwards and previous alternative minimum tax liability can claim larger refundable tax credits. 
    • The net interest deduction limitation is expanded to 50% of earnings before interest, tax, depreciation and amortization (EBITDA) for 2019 and 2020 which is currently limited to 30%.
    • The excise tax applied on alcohol used to produce hand sanitizer is temporarily suspended for tax year 2020.
    • Aviation excise taxes are suspendeduntil January 1, 2021.

  • Loans and Grants for Small Business

Two of the primary provisions to aid small businesses through the Small Business Administration are the expanded SBA loans and loan forgiveness. The CARES Act increases the government guarantee of emergency loans made under Section 7(a) of the Small Business Act to 100% for loans of up to $10 million. Eligible businesses include businesses with less than 500 employees and includes employees earning up to $100,000 per year. Loans may be used to meet payroll, health benefit costs, employee compensation, mortgage interest, rent, utilities and interest on debt incurred before June 30, 2020. Furthermore, SBA loan recipients are eligible for loan forgiveness generally for loan proceeds spent on payroll, interest payments on certain debt obligations, rent and utility payments. Any reduction in employees retained compared to the prior year period or any pay reduction in excess of 25% would result in a proportionate reduction in the loan amount forgiven.

2. CARES Act Aid for Employees

Some significant relief provisions for employees under the CARES Act are:

  • Unemployment Insurance

An additional unemployment insurance payment of $600 per week will be made to recipients for up to four months, and extends UI benefits to self-employed workers, independent contractors and those with limited work history. The federal government is encouraging states to waive any waiting periods and will provide temporary full funding of the first week of regular unemployment for states with no waiting period. Finally, the CARES Act extends UI benefits for an additional 13 weeks through December 31, 2020, after state UI benefits end.

  • Recovery Rebate for Individual Taxpayers

The bill provides a $1,200 direct cash payment for individuals and $2,400 for joint taxpayers. Furthermore, a $500 rebate for each child will be granted to taxpayers with children. These payments will be used as a credit against 2020 income tax liability and will phase out as follows:

    • $75,000 for singles,
    • $112,500 for heads of household, and
    • $150,000 for joint taxpayers at 5% per dollar of qualified income, or $50 per $1,000 earned.
    • It phases out entirely at $99,000 for single taxpayers with no children and $198,000 for joint taxpayers with no children.

Tax returns from 2018 or 2019 will be used to calculate the rebate. A taxpayer will need to file prior year returns to be eligible if they haven’t done so already.

It is possible additional rebates could be added if the economy continues to stall based on COVID-19.

  • Retirement Plans

Under the CARES Act, an individual may withdraw up to $100,000 from an eligible retirement plan due to the coronavirus, and the 10% early-withdrawal penalty will be waived. A “coronavirus-related distribution” and eligible retirement plan is further defined under the Act. An individual can elect to pay the income tax on such distribution over three years; moreover, if the amount is recontributed to the plan within three years, it will not be subject to income tax.

The Act also increases the amount one can borrow from retirement plans from $50,000 to $100,000.

  • Student Loan Payments

Employer contributions toward employees’ student loans are excluded from taxable income, up to $5,250 annually.

Conclusion

The CARES Act includes many other measures, but the items noted above aim to keep individuals employed and earning wages. Site Selection Group is here to help our clients navigate this difficult time and will connect you with experts as needed.

Source: Tax Foundation

Let us know what you think!