Cares Act COVID-19

Client Newsletter: CARES Act

To Our Valued Clients,

On March 27, 2020, Congress passed the Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”) to alleviate the economic impact of the coronavirus pandemic. This newsletter is intended to provide a detailed summary of the provisions that we believe our clients will be impacted by the most.

Income Tax Deadline Changes

Federal Changes:

Congress has extended the April 15 deadline for filing and paying your 2019 income taxes to July 15.
Taxpayers who owe money at April 15 are able to defer federal income tax payments to July 15. Taxpayers will not incur any interest or penalties on this deferral, regardless of the amount owed. Interest and penalties will begin to accrue on any remaining unpaid balances as of July 16, 2020.
The deadline to contribute to an IRA and HSA for 2019 has been extended to July 15.
Income tax returns not filed by April 15will be automatically extended to October 15.
The first quarter estimated income tax payment for 2020 that would be due April 15 has been extended to July 15.
As of now, the second, third, and fourth quarter estimated income tax payments for 2020 are still due on their respective dates – June 15, September 15, and January 15 of the subsequent year. Congress is still considering legislation that would further delay the due dates for the payment of estimated income taxes in 2020.

Illinois Changes:

The Illinois Department of Revenue has extended the 2019 Illinois income tax return due date and payment deadline from April 15 to July 15.
Illinois taxpayers will not incur any interest or penalties on this deferral, regardless of the amount owed. Interest and penalties will begin to accrue on any remaining unpaid balances as of July 16, 2020.
Illinois income tax returns not filed by April 15will be automatically extended to October 15.
Unlike the federal estimated income tax deadline changes, Illinois has decided to not change any of the quarterly estimated income tax payment deadlines for 2020. Consequently, the first quarter estimated income tax payment for 2020 is still due April 15, 2020.

Relevant Tax Provisions

Recovery Rebate Checks

Recovery rebate checks of up to $1,200 ($2,400 for taxpayers married filing joint) will be made available to taxpayers that qualify.

Taxpayers with an Adjusted Gross Income (AGI) of $75,000 or less ($150,000 for taxpayers married filing joint) will receive the full amount of the rebate check.
The rebate check is reduced by $5 for each $100 a taxpayer’s Adjusted Gross Income exceeds $75,000 ($150,000 for taxpayers married filing joint).
Taxpayers will receive an additional $500 for each qualifying child on their tax return.
The rebate checks will be based on a taxpayer’s 2020 taxable income; however, since nobody knows those amounts yet, the rules provide that qualifying income levels can be tentatively based on the taxpayer’s most recently filed tax return (either 2019 or 2018).
The rebate checks are NOT taxable income and will be paid between now and December 31, 2020 and will be paid electronically if direct deposit information was provided on 2018 or 2019 tax returns.
Any payments received are considered advance payments of a credit that will be computed on 2020 income tax returns. There is no explicit language in the CARES Act that speaks to income recognition or repayment of the rebate in the case that the amount calculated using 2020 information would result in a lessor amount.

Paycheck Protection Loan Program

The CARES Act created the Paycheck Protection Program, administered by the Small Business Administration (SBA) to provide small business loans on favorable terms to borrowers impacted by the current state of economic uncertainty.

Businesses with less than 500 employees are potentially eligible for this loan.
The loan program is also available to sole proprietors.
The loan does not require the business be unable to obtain credit elsewhere and does not require personal guarantees.
The loan has a maximum term of 10 years and an interest rate of no more than 4%.
The amount of the loan is subject to a limitation that is based on the product of average monthly payroll costs of the borrower. The amount of the loan is limited to the lessor of $10 million or 2.5 times the average monthly payroll costs incurred in the one-year period before the date of the loan.
Certain payroll costs are excluded from this calculation, such as payments of salaries in excess of $100,000. For an employee who is paid more than $100,000 in salary, only the amount up to $100,000 is included in the calculation.
The funds received can be used for a multitude of expenses including payment of payroll costs, employee benefits, mortgage interest (not principle or prepayment), rent, utilities, and interest on other debt obligations incurred prior to the covered period.
During the 8-week period beginning on the loan origination date, any funds from the loan used to pay qualified expenses will be forgiven (payroll costs, employee benefits, mortgage interest, rent, utilities, and interest on other prior debt obligations). Any portion of the loan that is forgiven is excluded from taxable income.
If the recipient of the loan laid off employees or reduced the wages of its workforce in the period between February 15, 2020 and June 30, 2020, the amount of the debt forgiveness will be reduced. A reduction in debt forgiveness will not be applicable when there is a rehiring of terminated employees.

Emergency Economic Injury Disaster Loans (EIDL)

For the period between January 31, 2020 and December 31, 2020 Emergency EIDL eligibility is greatly expanded to include any small business, sole proprietorship, or independent contractor with not more than 500 employees.

The Emergency EIDL application may be approved solely based on an applicant’s credit score or by other methods determined by the SBA.
In addition, the Small Business Administration (SBA) provision creates an opportunity to request in advance up to $10,000 as part of the Emergency EIDL application process in order to provide sick leave, maintain payroll costs, meet increased costs to obtain materials, make rent or mortgage payments, and repay other obligations.
The Emergency EIDL advance of $10,000 may be not be required to be repaid back under the CARES Act regardless of whether the Emergency EIDL application is approved.

Net Operating Losses

The CARES Act temporarily eases some of the limitations on net operating loss provisions enacted by the Tax Cuts and Jobs Act from 2017.

Business losses that taxpayers generate in taxable years 2018, 2019, and 2020 can be carried back for five years by filing an amended return. Previously, starting in 2018 any business losses generated were only allowed to be carried forward to future years.
For 2018, 2019, and 2020 any business losses generated in these years, and any losses carried back or forward to these years, will be eligible for a full business loss deduction. Previously, for taxable years 2018 – 2026, there was a limitation on the ability for taxpayers to deduct net business losses over a certain amount. This limitation will be reenacted for taxable years starting in 2021.

Deferral of Employer’s Share of Social Security Tax

The CARES Act allows employers and sole proprietors to delay payment of a portion of their social security taxes.

The Bill delays the payment due date for the employer’s share of social security (6.2%) taxes from March 27 – December 31, 2020.
Half of the deferred payroll taxes are due on December 31, 2021 with the other half due on December 31, 2022.
This payroll tax deferral is not permitted for those taxpayers that have a loan forgiven by the SBA under the CARES Act.

Retirement Account Early Withdrawal Penalty

The CARES Act waives the 10% early withdrawal penalty from qualified retirement accounts for distributions of up to $100,000 if a withdrawal from a retirement account is for a Coronavirus-related distribution.

A “Coronavirus-related distribution” is defined as a distribution made to an individual: (1) who is diagnosed with COVID-19, (2) whose spouse or dependent is diagnosed with COVID-19, or (3) who experiences adverse financial consequences as a result of being quarantined, furloughed, laid off, having work hours reduced, being unable to work due to lack of child care due to COVID-19, closing or reducing hours of a business owned or operated by the individual due to COVID-19, or other factors as determined by the Treasury Secretary.
The distribution is still subject to income tax. The taxpayer can include the income ratably over a three-year period beginning with 2020. The taxpayer may also repay the distribution to the retirement plan within three year of receiving it to avoid any income recognition.

Required Minimum Distributions

Required minimum distributions have been waived for the calendar year 2020 for individuals who would otherwise be required to withdraw funds from their retirement accounts.

Charitable Contributions

The CARES Act makes changes to the amount of cash charitable contributions deductible by taxpayers who itemize as well as those that take the standard deduction.

For taxable years beginning in 2020, the CARES Act allows a taxpayer to make a cash contribution to a qualifying public charity and to deduct those contributions from gross income. This is available for 2020 and beyond but is only available to taxpayers who do NOT itemize.
For taxpayers who itemize, the CARES Act temporarily lifts the limit on charitable contributions for 2020. The Act allows cash contributions to public charities to be deductible up to 100% of AGI for 2020. The previous tax law limited this deduction to 60% of AGI.

Employment Tax Credit

The bill provides a refundable tax credit against employment taxes for qualifying employers.

An employer is eligible for this credit if the operation of the trade or business is fully or partially suspended during the calendar quarter due to orders of a governmental authority that limited commerce, travel, or group meetings.
An employer can also become eligible for this credit in the first calendar quarter in which the employer has a reduction of gross receipts of more than 50% in a calendar quarter as compared to the same calendar quarter in the prior year. Eligibility for the credit continues in each calendar quarter thereafter until gross receipts exceed 80% of gross receipts for the same calendar quarter in the prior year. Testing begins with the first calendar quarter of 2020.
The amount of the tax credit is 50% of the qualifying wages of the employer. In general terms, qualifying wages for each employee are limited to $10,000 for all quarters and wages paid to certain employees after March 12, 2020 and before January 1, 2021.
In addition, the credit is NOT available if the employer is a borrower under the Paycheck Protection Loan Program. Further, the amount of the credit is reduced by any credits allowed under the Families First Coronavirus Relief Act (i.e., the sick leave and family leave credits).

Student Loans

All payments due for federal student loans held by the Department of Education are suspended through September 30, 2020.

Interest will not accrue on a loan during the period for which payment is suspended.
For purposes of any loan forgiveness programs, each month for which a loan is suspended will be treated as if the borrower had made a loan payment.
During the period in which payments are suspended, involuntary collection related to the loan will be suspended to prevent wage garnishment, reductions in tax refunds and other federal benefit payments, and any other involuntary collection activity.