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About the CARES Act and Tax Relief

Morrison and Morrison - Wednesday, April 01, 2020
SMALL BUSINESS LOANS UNDER THE CARES ACT AND
TAX RELIEF FOR BUSINESSES & INDIVIDUALS

SMALL BUSINESS LOANS UNDER THE CARES ACT

The CARES Act expands eligibility for small business loans made under section 7(a) of the Small Business Act by enacting a new Paycheck Protection Program (the “Program.”) Program loans will be 100% guaranteed by the Federal government. The Program is in effect for the period of February 15, 2020 through June 30, 2020.

Eligible Small Businesses - Eligible borrowers include any business, including nonprofits, that employs not more than 50 employees (or the industry size standard set by the SBA). Sole proprietors, independent contractors, and certain self- employed individuals are also eligible. For businesses in the Accommodations and Food Service industries, the 500-employee limit applies to each physical location. Employees include full-time and part-time individuals.

Excluded Small Businesses - Business concerns that appear small but do not meet the requirements due to “affiliation” rules set out by the SBA. However, there are exceptions to the affiliation rules including for:

  • Business concerns in the Accommodation and Food Services industries with not more than 500 employees
  • Franchises that are approved on the SBA’s Franchise Directory
  • Small business concerns that receive financial assistance from a Small Business Investment Company (SBIC)

Loan Amounts - Maximum loan amount generally based upon average monthly payroll costs (plus the amount of certain pre existing disaster loans) multiplied by 2.5 or $10,000,000 whichever is less.

Payroll Costs Definition – “Payroll costs” is defined to include the “sum or payments of any compensation with respect to employees” that is (1) salary, wage, commission, or similar compensation; (2) payment of cash tips or equivalent; (3) payment for vacation, parental, family, medical, or sick leave; (4) allowance for dismissal or separation; (5) payment required for the provisions of group healthcare benefits, including insurance premiums; (6) payment of any retirement benefits; (7) payment of State or local tax assessed on the compensation of employees.

Excluded Payroll Costs - (1) Compensation of an individual employee in excess of an annual salary of $100,000. (2) Any compensation of an employee whose principal place of residence is outside of the United States. (3) Payroll taxes and income taxes. Other exclusions also apply.

Borrower Certification - Applicants are required to make a good faith certification that the loan is necessary due to the uncertainty of current economic conditions, the funds will be used to retain employees and maintain payroll or make permissible lease, utility and mortgage payments, and the borrower does not have a pending application for, and has not received amounts for, the same purpose and duplicative of amounts applied for or received under the Program.

Relation to Other Loans - Applicants who have received an economic injury disaster loan during the period of January 31, 2020 through the date loans under the Program become available and for a purpose other than paying permissible obligations under the Program, may receive assistance under the Program and have the option to refinance the economic injury disaster loan into a loan under the Program.

Use of Proceeds - Loan proceeds may be used for payroll costs, group health care benefits, salaries and commissions,interest on mortgage loans, rent, utilities, and interest on other debt obligations incurred before February 15, 2020.

Express Loans - Maximum loan amount for an SBA express loan is increased from $350,000 to $1,000,000 through December 31, 2020.

Amount of Loan Forgiveness - Borrowers are eligible for loan forgiveness equal to the amount incurred and paid during the eight-week period beginning on the loan origination date for: payroll costs, payments of interest on certain mortgage obligations, payment on certain rent obligations, and certain utility payments. As an additional bonus, this relief is not considered cancellation of debt income to the borrower and is not included in their gross income. Loan forgiveness cannot exceed principal amount of loan.

Reductions to Amount of Loan Forgiveness -The amount of the loan eligible for forgiveness will be reduced proportionally by the number of employees laid off during the eight-week period beginning on the date of the origination of the covered loan relative to the borrower’s prior employment levels for one of two time periods: (1) February 15, 2019 through June 30, 2019, or (2) January 1, 2020 to February 29, 2020. The recipient can elect which period applies. For seasonal employers, the time period of February 15, 2019 to June 30, 2019 applies. The SBA will calculate the average number of full-time equivalent employees by calculating the average number of full-time equivalent employees for each pay period falling within a month. The reduction would also apply if employees’ salaries are reduced by more than 25%.

How to Apply - Please contact your local bank representative or qualified lending institution to request copies of the Paycheck Protection Program application and required supplemental forms.

FAQs: The CARES Act Paycheck Protection Loan Program -

  1. Is a Business Concern Eligible for Loan Forgiveness if it Already Reduced Salaries or Wages? Yes, borrowers that remedy reduced salaries or wages within a certain period of time will not be penalized for having reduced salaries or wages for one or more employees at the beginning of the period.
  2. Is a Business Concern Eligible for Loan Forgiveness if it Already Laid Off Workers? Yes, borrowers that re-hire employees within a certain period of time that were previously laid off will not be penalized for having a reduced payroll at the beginning of the period.
  3. Can a Business Concern Still Qualify if it Implements a Reduction in Force? Yes, the eligibility requirements for the covered 7(a) loans do not inquire into whether business concerns have conducted reductions in force, furloughed, or otherwise laid off employees. However, as discussed above, the amount of the 7(a) loan that is eligible for forgiveness is reduced if a business concern decreases its workforce and does not re-hire employees within a set period of time.

ADDITIONAL TAX RELIEF FOR BUSINESSES:

Employee retention credit for employers subject to closure due to COVID-19 - Employers whose operation of trade or business was (a) fully or partially suspended due to COVID-19, or (b) whose gross receipts for a calendar quarter beginning after Dec. 31, 2019 are less than 50% of its gross receipts in the same calendar quarter for the prior year, are eligible for a credit against employment taxes up to 50% of wages paid to its employees after March 12, 2020, and before Jan. 1, 2020, not to exceed $10,000 with respect to any employee for all calendar quarters.

Employers with greater than 100 full-time employees are eligible for the credit for wages paid to employees who are not providing services due to suspension or slowdown of business. Employers with less than 100 full-time employees are eligible for the credit for wages paid to employees during such times, and are not limited to wages paid to those employees who are not performing services. Wages may also include qualified health plan expenses, which are those amounts paid or incurred by an employer to provide and maintain a group health plan. An employer who receives certain loans under the CARES Act are not eligible for the credit.

Modification of limitations on charitable contributions during 2020 - Under current law, a corporation’s charitable deduction cannot exceed 10% of its taxable income, with certain modifications. The CARES Act allows a corporation to take a charitable deduction up to 25% of its taxable income, with certain modifications, if the charitable contribution is a cash contribution to public charities (not private foundations or donor advised funds).

Delay of payment of employer payroll taxes - An employer’s share of Social Security taxes on employee wages (which is equal to 6.2% of employee wages) required to be paid for the period beginning with the date of enactment of the CARES Act and ending before Jan. 1, 2021, may be deferred for up to two years. The Act provides that 50% of such payroll taxes are due by Dec. 31, 2021, and the other 50% of such payroll taxes are due by Dec. 31, 2022. This provision also applies to self-employed individuals as to 50% of their Social Security taxes required to be deposited with IRS. The deferral for payroll taxes would not apply if the taxpayer took advantage of certain loan forgiveness provisions of the CARES Act.

Modifications for net operating losses -

  • Temporary repeal of taxable income limitation: Under current law, a taxpayer’s ability to utilize a net operating loss (NOL) was limited to 80% of taxable income. For a taxable year beginning before Jan. 1, 2021, the 80% limitation is lifted and the taxpayer may utilize its full NOL. The 80% taxable income limitation will continue to apply for a taxable year after Dec. 31, 2020.
  • Modification of rules relating to carrybacks: Under current law, a taxpayer may not carry back an unused NOL to offset taxable income in any prior taxable year, and is only able to carry forward the unused NOL. The current law is modified by the CARES Act to provide that an NOL arising in taxable year 2018, 2019 and 2020 may be carried back to each of the five taxable years preceding the taxable year of such loss. This will provide an opportunity for the taxpayer to amend prior year returns for a refund.

Modification of limitation on losses for taxpayers other than corporations - The Tax Cuts and Jobs Act of 2017 (TCJA) imposed a limitation on taxpayers other than corporations to take a deduction for an excess business loss, which is the excess of (i) the taxpayer’s aggregate trade or business deductions over (ii) the sum of the taxpayer’s aggregate trade or business gross income or gain plus $250,000 ($500,000 if married filing joint), subject to inflation. The limitation applied for tax years beginning after Dec. 31, 2017, and before Jan. 1, 2026.

The CARES Act modifies the current law and raises the limitation for tax years 2018, 2019 and 2020. This will provide an opportunity for taxpayers other than corporation to amend prior year returns for a refund.

Modification of credit for prior year minimum tax liability of corporations - The TCJA repealed alternative minimum tax for corporations. Corporations were previously able to recover their refundable alternative minimum tax credits (AMT Credits) over a 4-year period.

Under the CARES Act, the ability to recover refundable AMT credits is now accelerated.

Modification of limitation on business interest - The TCJA limited the amount of business interest expense allowed as a deduction to 30% of adjusted taxable income. For taxable years beginning before Jan. 1, 2022, adjusted taxable income is generally equal to EBITDA. For taxable years beginning after Jan. 1, 2022, the adjusted taxable income is generally equal to EBIT.

The CARES Act modifies the 30% limitation to 50% for tax years beginning in 2019 and 2020. However, for partnerships, the increase in the limitation does not apply to its partners beginning in 2019. Instead, 50% of the excess business interest expense will be allowed as a deduction, without limitation, in 2020, and the remaining 50% will be subject to the usual limitations. In addition, taxpayers may elect to calculate their 2020 business interest expense limitation by using their adjusted taxable income for their last tax year beginning in 2019.

Technical amendments regarding qualified improvement property - Prior to the TCJA, improvement property that was considered qualified improvement property was subject to a 15-year depreciable life. When changes were being made under the TCJA to the depreciation provisions in the Internal Revenue Code, qualified improvement property was inadvertently subject to a 39-year depreciable life, although the intent was that they would have a 15-year depreciable life. By virtue of being a 39-year life property, qualified improvement property was unable to take advantage of 100% bonus depreciation.

The CARES Act corrects this mistake to provide that qualified improvement property is a 15-year property, and makes this provision retroactive as if the provision had been included in the TCJA. Thus, taxpayers have the ability to amend prior year returns to take advantage of bonus depreciation on qualified improvement property.

TAX RELIEF FOR INDIVIDUALS:

Filing and payment extensions - The IRS postponed to July 15, 2020 the due date for both filing a return and for making income tax payments due April 15, 2020. The postponement is automatic; no Form 4868 or Form 7004 is required. Initially, only the due date for making income tax payments was extended, and the amount of payment eligible for postponement was limited.

Payments that may be postponed are limited to federal income tax payments in respect of a taxpayer’s 2019 taxable year and federal estimated income tax payments due on April 15, 2020 for a taxpayer’s 2020 taxable year. However, as of the date this alert was written, second quarter federal estimated tax payments are still required to be paid by June 15, 2020. The period from April 15, 2020 to July 15, 2020 will be disregarded in the calculation of interest, penalty, or addition to tax for failure
to file returns or pay taxes.

Illinois’ relief follows the IRS except that Illinois did not extend the due date for payment of first quarter 2020 estimated taxes. Nor did Illinois extend the due date for payment for nonresident withholding on flow-through entities such trusts and partnerships.

California has postponed personal income tax, business tax filings and payment deadlines to July 15, 2020. This postponement includes first and second quarter estimates, LLC taxes and 2020 nonwage withholding payments.

Massachusetts and New York have each extended April 15, 2020 filings for personal income tax, business tax and required payments to July 15, 2020.

Please contact us directly for additional state filing and payment information not detailed above.

Recovery rebate credits and advance cash payments - Advance payments of up to $1,200 ($2,400 for married filing joint returns) plus an additional $500 per qualifying child will be paid out to eligible taxpayers. The amount of the cash payments are reduced for higher income taxpayers and the amount will be based on the taxpayer’s 2019 federal tax return (if filed) or the 2018 federal tax return. If an individual has not field a return for the tax year 2018, the IRS will use income information from Form SSA-1099, Social Security Benefit Statement, or Form RRB-1099, Payments by the Railroad Retirement Board, for calendar year 2019.

Allowance of partial above the line deduction for charitable contributions - For taxable years beginning in 2020, cash contributions up to $300 to public charities may be claimed as an above-the- line deduction. This provision is only applicable to taxpayers who do not itemize their deduction and does not expire. Donations to private foundations or donor-advised funds are not included in this allowance.

Modification of limitations on charitable contributions during 2020 - Under current law, charitable contributions of cash to public charities are limited to 60% of a taxpayer’s adjusted gross income (AGI). The CARES Act temporarily suspends the limitation for cash contributions made to a public charity (not private foundations or donor advised funds) during calendar year 2020. Thus, taxpayers may make qualified contributions up to 100% of their AGI.

However, the ability to deduct qualified contributions is limited to the excess of the qualified contributions over the amount of other nonqualified charitable contributions the taxpayer makes. The taxpayer must make an affirmative election to apply this provision with respect to its qualified contributions.

Special rules for use of retirement funds - Waiver of 10-percent early withdrawal penalty for distributions up to $100,000 from qualified retirement accounts for coronavirus-related purposes made after January 1, 2020. Income attributable to such distributions would be subject to tax over three years.

Temporary waiver of required minimum distribution rules for certain defined contribution and IRAs for calendar 2020.
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Client Update is published by Morrison & Morrison, Ltd. as a news reporting service to clients and other friends. The information contained in this publication should not be construed as legal or tax advice. Should you require further analysis or explanation of the CARE Act, please contact us or your attorney or other advisor with whom you normally consult.