On March 27, President
Trump signed the Coronavirus Aid, Relief, and Economic Security (CARES) Act,
the third phase of legislation aimed at fighting the COVID-19 pandemic and
mitigating the related economic harm for families, workers and businesses.
It's the largest stimulus package in history, with an estimated cost of $2.2 trillion. The government, rather than relying on unemployment, has instead decided to channel funds to small businesses to “keep the lights on.”
Here are the highlights:
Economic Injury Disaster Loan program (EIDL)
Businesses may apply directly with the SBA at sba.gov/disaster. This program:
- expands eligibility to include private nonprofit organizations and small agricultural cooperatives,
- waives personal guarantees on loans under $200,000,
- waives the “unable to obtain credit elsewhere” provisions,
- provides organizations with immediate funding of $10,000 upon application, once eligibility has been verified; and
- may be eligible to be refinanced into a PPP loan (below).
Protection Program (PPP)
This program authorizes up to $349 billion in
forgivable loans to small businesses to pay their employees during the COVID-19
crisis. All loan terms will be the same for everyone.
The loan amounts will be forgiven as long as:
- The loan proceeds are used to cover payroll costs, and most mortgage interest, rent, and utility costs over the 8 week period after the loan is made; and
- Employee and compensation levels are maintained.
Payroll costs are capped at $100,000 on an
annualized basis for each employee. Due to a likely high subscription, it is
anticipated that not more than 25% of the forgiven amount may be for non-payroll
Loan payments will be deferred for 6 months, then be
amortized over two years at a 1% annual interest rate. You can apply through
any existing SBA lender or through any federally insured depository
institution, federally insured credit union, and Farm Credit System institution
that is participating.
of employer Social Security tax
You can generally defer
the employer share of the 6.2% Social Security tax on wages paid from March 27,
2020, through Dec. 31, 2020, with 50% due on Dec. 31, 2021, and 50% due on Dec.
31, 2022. A similar rule applies to 50% of the self-employment tax liability of
partners and sole proprietors.
The deferral is not
available if you take advantage of loan forgiveness under the PPP (above).
Employee retention credit
The CARES Act added a refundable payroll tax credit equal to 50% of certain compensation paid from March 13, 2020 to December 31, 2020. To qualify, your business must either have had its:
- Operations fully or partially suspended due to a COVID-19-related shutdown order; or
- Gross receipts decline by more than 50% when compared to the same quarter the prior year.
If your business has more
than 100 employees, the credit is available only for compensation paid to
employees who are not working as a result of one of the two situations listed
above. If your business has 100 or fewer employees, any compensation paid
during the period when the operations were impacted by one of the two scenarios
is eligible for the credit, even if it's paid to an employee who is still
The credit is limited to
the first $10,000 of compensation paid to a particular worker. The credit is
not available for compensation taken into account in computing the sick leave
or family medical leave credits under the Families First Coronavirus Response
Act (go here to learn more: bit.ly/345UtOX). Similarly, the credit is not
available to employers who take advantage of a small business interruption loan
under the paycheck protection program, so you'll need to take the loss of the
credit into account in determining whether to use the paycheck protection
Other changes impacting businesses:
- Reinstatement of NOL carrybacks,
- Temporary suspension of excess business loss rules,
- Modification of business interest limitation; and
- Bonus depreciation for qualified improvement property.
For individuals, you may
be entitled to a “recovery rebate” of $1,200 ($2,400 married filing joint),
plus an additional $500 per qualifying child, if you are a U.S. resident and
can't be claimed as a dependent of another taxpayer.
The rebate begins phasing
out if your income exceeds $75,000 ($112,500 head of household/ $150,000
married filing joint).
The IRS will begin direct
depositing the rebate or mailing checks around April 6, and will base the first
round of payments on income reported on your 2018 tax return (or 2019 return,
if you've already filed). If you receive a rebate but your 2020 income makes
you ineligible for the rebate, there is no requirement for you to pay it back.
of early withdrawal penalty
The 10% penalty on an early withdrawal from a retirement account is waived for up to $100,000 of distributions for coronavirus-related purposes made on or after January 1, 2020. A distribution is considered coronavirus related if it is made to an individual:
- Who is diagnosed with SARS-CoV-2 or with COVID-19 by a test approved by the Centers for Disease Control and Prevention,
- Whose spouse or dependent is diagnosed with SARS-CoV-2 or COVID-19; or
- Who experiences adverse financial consequences because of quarantine, furlough, lay off, work hour reduction, or inability to work due to lack of childcare.
If you take a
coronavirus-related distribution, you can either report the distribution as
ordinary income ratably over a three-year period beginning in 2020 or you can
re-contribute the funds to a retirement plan within three years to avoid tax on
the withdrawal altogether.
New dates for 2019 tax filings
The April 15, 2020, deadline
is now July 15, 2020. Payment of any shortfall of 2019 taxes are now due July
15, 2020 as well. 2020 estimated tax payments begin October 15, 2020. This
payment will be a “whopper” since the first, second, and third estimated tax payments
are all due on this day.
Please note that this
discussion is general in nature, and not intended to be tax advice. Please
consult with a CPA to get answers to your specific fact pattern. Follow me on
Facebook to receive updates on current developments. John Werlhof, Principal of CLA Sacramento (Roseville) assisted with
this week's column.
Michael Bosma, CPA, is Principal-in-Charge of the Reno
office of CliftonLarsonAllen LLP. His NNBW column, “Covering Your Assets,”
focuses on effective planning strategies for every business owner. Reach him
for comment at firstname.lastname@example.org.