- March 31, 2020
- Posted by: Jen Gostovic
- Category: COVID-19 Updates, Tax, Tax Legislation
The Coronavirus Aid, Relief, and Economic Security Act (CARES Act) represents the third phase of Congress’s legislative efforts to address the financial and health care crisis resulting from the coronavirus (COVID-19) pandemic. In addition to providing relief to individuals and mustering forces to shore up the medical response, the CARES Act includes numerous provisions intended to help affected businesses, including eligible self-employed individuals, weather the crisis.
Employee retention tax credit
To encourage employers to keep their workforces intact, the CARES Act creates a new refundable credit against payroll tax. The credit is generally available to employers whose:
- Operations have been fully or partially suspended due to a COVID-19-related governmental shutdown order, or
- Gross receipts have dropped more than 50% compared to the same quarter in the previous year (until gross receipts exceed 80% of gross receipts in the earlier quarter).
Employers with more than 100 employees can receive the credit for employees who’ve been furloughed or who’ve had their hours reduced due to one of the reasons above. Those with 100 or fewer employees can receive the credit regardless of whether employees have been furloughed.
The credit equals 50% of up to $10,000 in compensation — including health care benefits — paid to an eligible employee from March 13, 2020, through December 31, 2020. Additional rules and limits apply.
Payroll tax deferral
The new law allows employers to delay their payment of the employer share (6.2% of wages) of the Social Security payroll tax. These taxpayers can pay the tax over the next two years, with the first half due by December 31, 2021, and the second half due by December 31, 2022.
Self-employed individuals receive similar relief under the law.
Relaxed restrictions on losses
The CARES Act allows net operating losses arising in 2018, 2019 or 2020 to be carried back five years and temporarily removes the taxable income limitation for years beginning before 2021, so that NOLs can fully offset income.
The new law also temporarily eliminates the limitation on excess business losses for pass-through entities and sole proprietors. These taxpayers can now deduct excess business losses arising in 2018, 2019 and 2020.
Taxpayers may need to file amended tax returns to obtain the full benefits of these changes.
Expedited depreciation of qualified improvement property
The CARES Act includes a technical correction to fix a drafting error in the 2017 Tax Cuts and Jobs Act that eliminated special depreciation provision for qualified retail improvement property, restaurant property and leasehold improvement property. Hotels, restaurants and retailers that have made qualified improvements during the past two years can claim an immediate tax refund for the bonus depreciation they missed. Taxpayers can also claim bonus depreciation going forward, according to the phaseout schedule.
Expanded SBA assistance for small businesses
The CARES Act expands the ways the Small Business Administration (SBA) can help small businesses remain open and meet payroll. For example, it temporarily doubles the maximum loan amount under its primary low-interest loan program from $5 million to $10 million (or 2.5 times the average total monthly payroll costs for the prior year, whichever is less).
The law expands the allowable use of the so-called “Section 7(a)” funds to include payroll support, including paid leave, mortgage payments, insurance premiums and debt obligations, and waives many of the usual requirements, such as collateral and personal guarantees. Moreover, if employers maintain their payrolls for eight weeks after the loan origination, the portion of the loan applied to payroll, mortgage interest, rent and utilities will be forgiven.
To qualify, businesses generally must have 500 or fewer employees and have been operational on February 15, 2020. Sole proprietors, independent contractors and other self-employed individuals may qualify.
Amendments to the new paid leave law
The CARES Act also makes some critical modifications to the Families First Coronavirus Response Act, which was signed into law on March 18. That law temporarily requires certain employers to provide expanded paid sick and family leave for certain employees affected by COVID-19.
The CARES Act provides a new rule that defines “eligible employee” for purposes of paid sick and family leave to include employees who:
- Were laid off by the employer March 1, 2020, or later,
- Had worked for the employer for at least 30 days in the 60 calendar days prior to the layoff, and
- Have been rehired by the employer.
And the CARES Act allows advances on anticipated tax credits for employers’ paid leave costs and provides penalty relief for employers that don’t deposit tax amounts because they expect credits.
More to come?
Several members of Congress have suggested that the CARES Act won’t be the end of the federal legislative relief in response to the COVID-19 pandemic. We’ll keep you informed of new developments that could affect your bottom line and help you navigate the best financial course forward during these uncertain times.