High-Level Summary of the Coronavirus Aid, Relief, and Economic Security (CARES) Act
- The CARES Act provides for direct financial assistance to Americans in the form of a one-time direct payment in the amount of $1,200 for individuals earning $75,000 or less, $2,400 for individuals filing a joint return earning $150,000 or less, $1,200 for heads of household earning $112,500 or less, and $500 per child. The amount of the payment is reduced by 5 percent for earnings over those dollar amounts and would go away at $99,000 for individuals and $198,000 for married people. The cash payments are based on either your 2018 or 2019 tax filings. People who receive Social Security benefits, but don't file a tax return are still eligible. They don't need to file taxes; their checks will be based on information provided by the Social Security Administration. Treasury Secretary Steven Mnuchin stated that the administration expects to begin direct payments to individuals within three weeks of the CARES Act being signed into law.
- The CARES Act temporarily suspends the required minimum distribution (RMD) 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 taxable three year period beginning with 2020.
- Typically, self-employed people, freelancers, and independent contractors can't apply for unemployment. This bill creates a new, temporary Pandemic Unemployment Assistance program through the end of this year to help people who lose work as a direct result of the public health emergency.
- They are allowing an “above-the-line” deduction for up to $300 in charitable contributions for taxpayers who do not itemize deductions in 2020.
- Removing the AGI limit on individual itemized cash deductions for charitable contributions in 2020.
- 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. Please visit the Small Business Administration website for more information (https://www.sba.gov/). Generally, the amount of the loan is capped at the lesser of $10 million or 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. 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.
- Businesses, nonprofits, and veterans’ organizations and tribunal concerns with less than 500 employees are eligible. The loan program is even available to sole proprietors, independent contractors, and self-employed individuals (subject to additional requirements).
- 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.
- Employers can suspend payment requirements for the 6.2% employer portion of Social Security taxes from the date of enactment through the end of 2020, with half the balance due by the end of 2021, and the other half due by the end of 2022.
- Certain employers may receive a payroll tax credit of as much as $5,000 per employee for wages (and health benefits) paid after March 12, 2020, and before January 1, 2021. Businesses fully or partially suspended in 2020 due to government orders associated with COVID-19 or that experienced a significant decline in gross receipts (or that is a tax-exempt organization) may be eligible to receive this refundable employment tax credit.
- The Tax Cuts and Jobs Act limited net operating loss deductions. The CARES Act has amended those provisions to allow net operating losses incurred in 2018, 2019, and 2020 to be fully deductible, without the 80% limitation. The net operating losses from 2018, 2019, and 2020 are also allowed to now be carried back five years to allow businesses to claim refunds of taxes paid in prior years.
- Owners of pass-through entities are no longer subject to excess business loss provisions for 2018, 2019, and 2020. They will be able to take full advantage of pass-through losses, as available
- Fixing the “Retail Glitch.” It was recognized that a drafting error was made in the 2017 tax reform bill. The legislative history showed that Congress intended for “qualified improvement property” – defined as improvement to an interior portion of a commercial building after the building was placed in service (e.g., tenant improvements) – to have a 15-year depreciation period, which also would have made those improvements eligible for 100% bonus depreciation. Due to a drafting error, the enacted bill actually gave such property a 39-year depreciation period, which also meant those improvements were not eligible for 100% bonus depreciation. The IRS took the position that an amendment to the statute was required to fix the error. The CARES Act fixes this so-called “retail glitch” retroactively.