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Senate Passes "CARES Act" to Assist U.S. Small Businesses and Individuals

Thursday, 26 March 2020 20:46 Written by  Michael W. Mills

As most of you know, last night the U.S. Senate passed the “Coronavirus Aid, Relief and Economic Security Act”, being referred to as the CARES Act, which is now being sent to the House of Representatives for a final vote.  It is expected that the House will pass the measure without further changes, and that it will be signed into law by the President.  More details will be provided as we move along, but broadly speaking the CARES Act provides the following benefits and stimulus to U.S. small businesses and individuals:

Forgivable Loans for Small Businesses

•    Eligibility – Available to small businesses with 500 or fewer employees (with some exceptions for larger businesses), as well as self-employed individuals.  No personal guaranties or collateral required.
•    Loan Amounts – Based on a formula that takes average payroll and multiplies it by 2.5 times (not to exceed $100,000 per employee), and then considers certain other expenses such as rent. Total loan may not exceed $10,000,000.
•    Interest Rate – The interest rate is not to exceed 4%.
•    Use of Proceeds – May be used for salaries, paid sick/medical leave, certain insurance premiums, rent, mortgage payments, and utilities.
•    Implementation – Loans are to be processed through FDIC lenders, and ostensibly including those that have not previously been SBA-approved.  The legislation provides that lenders will be paid fees by the Federal government for processing the loans.
•    Requirements for Forgiveness – Employment and wage levels need to be maintained during the period from February 15th to June 30th. For businesses that have laid off workers, there are opportunities to cure/fix those prior reductions.
•    Tax Effects – The loan forgiveness will not be taxable income.

Individual Rebates

•    U.S. residents will receive a rebate so long as their Adjusted Gross Income (AGI) is below $75,000 if they file single or as married filing separate, (except it will be $112,500 for head of households) and $150,000 if married filing joint.  However, those who are
     claimed as a dependent on another’s return will not receive a rebate.
•    The rebate will be $1,200 per individual (and so $2,400 for joint filers), plus $500 per child.
•    No application is necessary.  The IRS will be computing the rebate based on 2019 tax return filings, and if there is no 2019 return yet filed, it will use the 2018 return.

Unemployment Compensation

•    The Federal government will provide weekly unemployment compensation of $600, in addition to that provided by state unemployment compensation insurance, for up to 4 months.
•    In certain states, an additional 13 weeks of federal unemployment may be available.

Payroll Tax Credits and Deferrals for Small Businesses

•    There will be a refundable payroll tax credit equal to 50% of wages paid from March 13, 2020 to December 31, 2020, for employers whose operations were fully or partially suspended due to COVID-19 shutdown orders, or whose gross receipts decline by
      greater than 50% as compared to the same prior year period.
•    The credit is capped at an employee’s first $10,000 of compensation.
•    For employers with more than 100 employees, the credit will be reduced based on how many employees were not able to provide services.
•    Further, both employers and self-employed individuals will be able to defer payment of the 6.2% OASDI employer portion of the Social Security Tax that is due during 2020 and following the Act’s enactment.  The deferred amounts will be paid in equal
      installments on December 31, 2021 and December 31, 2022.

Other Business Tax Adjustments

•    Increased deductibility of interest expenses by businesses (from 30% of taxable income to 50% of taxable income).
•    5-year NOL carrybacks for NOLs created during 2018, 2019 and 2020 tax years; and with a temporary removal of the 80% taxable income limitation on the use of NOLs.
•    Bonus depreciation is available for qualified improvement property, and retroactive to January 1, 2018 the depreciable life of qualified improvement property will be 15 years (rather than 39 years).

Retirement Account Provisions

•    The 10% premature withdrawal penalty is waived for up to $100,000 of distributions to participants who are diagnosed with COVID-19, have a spouse or dependent diagnosed with COVID-19, or who undergo adverse financial conditions resulting from being
     quarantined, being furloughed, being laid off, having hours reduced, or being unable  to work due to lack of child care.  In the case of a self-employed person, they may be eligible for the penalty waiver if their business was subject to closure or reduced hours.
•    While the premature distribution will be taxable, the reporting of the income can be spread over 3 tax years; and if the distribution is repaid within 3 years, then it will be treated as a rollover, and not be taxable.
•    The required minimum distribution rules for most retirement accounts are generally waived for 2020.

Charitable Contributions

•    The 50%-of-AGI limitation for charitable contributions by individuals is waived for 2020, thus allowing for a 100% deduction of charitable gifts.
•    The 10%-of-taxable income limit for charitable contributions by corporations is increased to 25% for 2020.

We plan to continue to analyze this legislation, and other COVID-19 legislation and policy changes, and will continue to keep you updated.

Last modified on Friday, 27 March 2020 13:11
Michael W. Mills

Michael W. Mills

Mike is devoted to helping businesses build value and improve working capital, and helping individuals preserve and protect their family wealth.  Foundational to this mission is his concentration in the area of taxation, which impacts so much of business and personal financial planning.  In representing businesses, this includes counseling clients on the tax aspects of business formation, financing, reorganization, and acquisition transactions, as well as business succession planning.  With individual clients, this includes assistance with income tax planning, and planning for estate, inheritance, and other death taxes.

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