Need Assistance Understanding the CARES Act?
Provided by PAPPA Member Eric Frank
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Below is a summary of the many facets of the newly enacted CARES Act that was signed on Friday, March 27, 2020.
Please note that the deadline for filing your Federal/State income taxes is now 7/15/20. If you are required to file a first quarter estimate on 4/15/20, the IRS and PA has extended that payment due date to 7/15/20. What is important to note is that your federal second quarter estimated tax payment is still due on 6/15/20, but your PA estimated tax payment is not due until 7/15/20.
Forgivable SBA Loan Program
The CARES Act creates a new type of loan for the United States Small Business Administration (the “SBA”) to administer. Unlike the disaster loans currently available through the SBA, these loans are potentially forgivable up to 100% of the principal amount borrowed. Additionally, unlike the disaster loans, these forgivable loans are not tied directly to establishing losses suffered during the national disaster — there is a presumption of negative impact from COVID-19. These loans do not require collateral or guarantees. What this means to you is that the other eligibility requirements of the SBA loan participation (e.g., average annual receipts) are not applicable, and this program is available (i) to many new businesses not otherwise able to avail themselves to the SBA loan programs, and (ii) provides much friendlier terms than traditional SBA loan programs.
Businesses, nonprofits, and veterans’ organizations and tribunal concerns with less than 500 employees are eligible (unless the applicable industry has a higher size standard under the SBA rules). Certain businesses (food services and accommodation) with more than 500 employees are eligible if they have no more than 500 employees at each physical location. The loan program is even available to sole proprietors, independent contractors, and self-employed individuals (subject to additional requirements). In calculating the number of employees, business generally need to include the employees of all affiliates. This could result in portfolio companies of private equity companies and other business with common controlling ownership not being eligible for the loans. The CARES Act waives the strict SBA affiliation rules for this new loan for: (i) businesses with no more than 500 employees that is assigned a NAICS code beginning with 72; (ii) businesses operating as a franchise that is assigned a franchise identifier code by the SBA; and (iii) businesses that receive financial assistance from a company licensed under section 301 of the Small Business Investment Act. Businesses not provided a waiver to the SBA affiliation rules by the CARES Act would need to determine if a waiver under existing law applies.
Amount of Loan
Generally, the amount of the loan is capped at the lesser of $10 million and 2.5 times the average monthly payroll costs incurred in the one-year period before the date of the loan. Payroll costs include salary/wages/tips, sick/family leave/PTO, severance payments, group health benefits (including insurance premiums), retirement benefits, and state or local taxes assessed on employee compensation. However, for any employee who is paid more than $100,000 salary, only the amount up to $100,000 (prorated for the covered period) is calculated into the number.
Terms of Loan
An eligible borrower may receive one covered loan, and such proceeds may be used for: payroll costs; continuation of group health care benefits during periods of paid sick, medical, or family leave, or insurance premiums; salaries or commissions or similar compensation; interest on mortgage obligations; rent; utilities; and interest on other outstanding debt. The terms of the amount of any portion of the loan that is not forgiven will be for a term not to exceed 10 years and at an interest rate of no more than 4%.
The amount of the loan that is forgivable is the sum of the payroll costs, mortgage interest payment, rent, and utilities incurred or paid by the borrower during the 8-week period beginning on the loan origination date. Any portion of the loan that is forgiven is excluded from taxable income. If the recipient of the loan laid off employees or reduced wages/salaries of its workforce in the period between February 15, 2020 and June 30, 2020, the amount of forgiveness is reduced proportionally by (i) any reduction in employees retained compared to historical levels, and (ii) the decrease in pay of any employee beyond 25% of their historical compensation. Notably, furloughs would necessarily impact this loan forgiveness analysis as well. To encourage workforce stabilization, the CARES Act takes into account that many businesses might already have or are planning to lay off personnel or cut salaries. If those changes were made between February 15, 2020 and April 26, 2020, those changes are not counted if the business rehires the number of personnel or returns the adjusted salary, as applicable, by June 30, 2020.
The CARES Act also creates a new grant program under the SBA’s Office of Disaster Assistance to provide quick relief for applications awaiting processing of SBA Economic Injury Disaster Loans (“EIDL”). Loan applicants can get up to $10,000 to cover immediate payroll, mortgage, rent, and other specified expenses. This grant does not have to be repaid. A business that receives an EIDL can apply for, or refinance its EIDL into, the forgivable loan product.
Further, lenders on existing SBA backed loans are encouraged to provide payment deferments and extend maturity dates to avoid balloon payment or requirements that would increase debt as a result of deferment. The SBA will pay lenders the deferred principal and interest for a period.
Business Tax Relief
The CARES Act also provides assistance to businesses through the modification of rules related to net operating losses (“NOLs”), interest expense deductions, alternative minimum tax credits and trade or business losses of non-corporate taxpayers. Many of these modifications are designed to provide critical cash flow and liquidity to businesses during the COVID-19 emergency, including through amending prior tax returns to obtain tax refunds. What this means to you is that employers have several tools available to them to help with cash flow, claim tax refunds, or reduce upcoming tax payments.
Employee Retention Credits
Under the CARES Act, employers may be eligible for a refundable tax credit for the employer’s share of the 6.2% Social Security tax (the “SSI Tax Credit”). The potential SSI Tax Credit is for 50% of the first $10,000 in qualified wages (including health plan expenses) paid to each employee commencing on March 13, 2020. To be eligible, an employer must (i) have had operations fully or partially suspended because of a shut-down order from a governmental authority related to COVID-19, or (ii) have had gross receipts decline by more than 50% in a calendar quarter when compared to the same quarter in 2019 (and will remain eligible until the earlier of (i) gross receipts exceeding 80% relative to the same quarter in the prior year, or (ii) December 31, 2020). For employers with more than 100 employees (based on 2019 employment levels), qualified wages are limited to wages paid to employees who were not providing services due to the COVID-19 crisis. Note, however, that the SSI Tax Credit is not available if the employer receives a covered loan from the SBA, as discussed above under Forgivable SBA Loan Program.
Payroll Tax Deferral
In addition to potentially receiving the SSI Tax Credit, the CARES Act allows employers to defer the payment of the employer’s share of the 6.2% Social Security tax on wages paid beginning on March 27, 2020 and ending on December 31, 2020. A corresponding deferral is also permitted for the equivalent portion of self-employment taxes. The deferred amounts are payable in two installments, with 50% of such taxes being due on December 31, 2021, and the remainder due on December 31, 2022. This deferral of Social Security taxes is not, however, allowed where the employer has had a covered loan forgiven, as discussed above under Forgivable SBA Loan Program.
Unemployment Compensation Benefits
Federal funding is provided for unemployment benefits for workers adversely impacted by COVID- 19. Employees that are not eligible for state provided unemployment benefits or have otherwise exhausted such unemployment benefits will be eligible to receive the same amount of assistance that is provided under the state’s unemployment benefits program for the period beginning on January 27, 2020 and ending on December 31, 2020. Additionally, employees will be eligible to receive an additional $600 per week for up to 4 months, whether such employees are eligible for state provided unemployment benefits or they are receiving the unemployment benefits set forth above. If employees remain unemployed after their state employment benefits are exhausted, the federal government will fund up to 13 weeks of unemployment benefits.
The CARES Act provides for recovery rebates of up to $1,200 for individuals with adjusted gross income (“AGI”) up to $75,000 ($2,400 for joint filers with AGI up to $150,000) plus an additional $500 for each child under the age of 17 (subject to certain exceptions) for US taxpayers through an advance refundable tax credit against 2020 income taxes. There is a phase out of the rebate, which causes a $50 reduction in the rebate for every $1,000 of AGI above these thresholds. For example, individuals with no children having an AGI of more than $99,000 and married couples with no children filing jointly having an AGI of more than $198,000 would be phased out completely and receive no recovery rebate. The advanced payment of the recovery rebates will be based on the AGI reported on tax returns filed for 2019, and if no such tax return has been filed for 2019, the AGI reported on the 2018 filed tax returns will be used. Delaying the filing of the 2019 tax return may be beneficial for some.
All payments of principal and interest for certain federal student loans are suspended. The suspended payments are treated as if made for consumer credit reporting. The CARES Act also waives or modifies requirements with respect to the receipt of federal education grants, and allows deviations in the use and distribution of such grants. Further, provisions are made for students who have withdrawn from school or relocated due to the COVID-19 crisis
Retirement and Other Employee Benefit Plans Relief
The CARES Act provides additional relief with respect to distributions and participant loans under defined contribution plans, funding relief for defined benefit plans and enhanced flexibility for health care options and tuition assistance. The deadline for amending retirement plans for these changes is the last day of the first plan year beginning on or after January 1, 2022. These provisions can be implemented immediately. What this means to you is that these provisions offer employees and employers additional options to address the potential financial hardships that arise as a result of the effects of COVID-19 and offer additional ways to access health care and prescriptions.
Minimum Required Distributions
The CARES Act temporarily waives the required minimum distribution rules for 2020 with respect to certain defined contribution plans and IRAs.
Individuals may take coronavirus-related distributions from qualified retirement plans of up to $100,000 without such distributions being subject to the 10% early distribution tax. Such distributions are subject to federal income taxation, which may be ratably spread over the three taxable year period beginning with 2020. An individual who takes a coronavirus-related distribution may repay the distribution to an eligible retirement plan during the three-year period beginning on the day after the date of the distribution. Repayments within the three-year period will result in the distribution not being subject to federal income taxation, or in the case that the income tax has already been paid, permit the individual to receive a refund of the previously paid federal income tax. An individual must satisfy certain requirements in order to qualify for coronavirus-related distributions.
Enhanced Participant Loans
A participant who qualifies for coronavirus-related distributions is permitted to take loans of up to the lesser of (1) $100,000 (increased from $50,000) or (2) 100% (increased from 50%) of the participant's vested account balance. In addition, loans from qualified retirement plans with respect to participants who qualify for coronavirus-related distributions are subject to participant loan delayed repayment relief. This relief provides that any due date for a participant loan repayment that occurs during the period beginning March 27, 2020, and ending December 31, 2020, shall be delayed for one year.
Funding Relief for Defined Benefit Plans
Any required minimum contributions for a single employer defined benefit that are due during the 2020 calendar year are not required to be made until January 1, 2021, with accrued interest from the original payment due date to the actual payment date. Additionally, plan sponsors of defined benefit plans may treat the last plan year's adjusted funded target attainment percentage as the percentage applicable to plan years which include the 2020 calendar year for purposes of applying the funding-based limitation on shutdown benefits and other unpredictable contingent event benefits.