Michael Bosma: Breaking down the $2.2 trillion CARES Act (Voices)

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:

SBA 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).

Paycheck 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 costs.

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.

Deferral 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 working.

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 program.

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.

Recovery rebate

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.

Waiver 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 mike.bosma@claconnect.com.