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CARES Act: What it means to your business

03-27-2020

by J. Gregory Hamm, JD, CPA

With most businesses in the country forced to close their doors due to the coronavirus, President Trump today signed the roughly $2 trillion Coronavirus Aid, Relief and Economic Security (CARES) Act designed to keep companies and individuals financially afloat.

Lawmakers wanted the stimulus package to help workers and their families left jobless – as well as small businesses. The CARES Act includes provisions that do both.

The following is a summary of what the CARES Act means for businesses and individuals:

Paycheck Protection Program.

The CARES Act amends section 7(a) of the Small Business Act to increase eligibility for certain small businesses to qualify for loans during the period of February 15, 2020 through June 30, 2020. The eligibility standards now include businesses that employ 500 or less employees. The maximum amount of the loan is the lesser of (1) average total monthly payroll costs incurred during the one year before the date the loan is made multiplied by 2.5, or (2) $10,000,000. Payroll costs do not include compensation to an individual employee in excess of annual salary of $100,000 as prorated for February 15,2020 through June 30, 2020, qualified sick leave for which a credit was taken under to the Families First Coronavirus Response Act, and qualified family leave wages for which a credit was taken under to the Families First Coronavirus Response Act.

The loan proceeds may be used for (1) payroll costs, (2) costs related to continuation of group health care benefits during periods of paid sick, medical or family leave, and insurance premiums, (3) employee salaries, commissions and similar compensation, (4) payments of interest on a mortgage obligation, (5) rent, (6) utilities, and (7) interest on certain other debt obligations.

Loan forgiveness is available for amounts paid for (1) payroll costs, (2) payment of mortgage interest, (3) rent, and (4) utility payments during the 8-week period beginning on the date of the original of the loan. The loan forgiveness may not exceed the principal of the loan. The loan forgiveness may be reduced, but not increased, if there was a reduction of employees during the 8-week period beginning on the date of the origination of the loan compared to certain other periods. The loan forgiveness may also be reduced if there is a reduction in salary and wages during the 8-week period.

Unemployment Insurance Provisions

The CARES Act added several unemployment provisions:

  1. Pandemic unemployment assistance was added to provide unemployment benefits to individuals who do not qualify for regular unemployment compensation and are unable to work because of COVID-19.
  2. In addition to the amount of unemployment compensation determined under state law, unemployment recipients to receive an additional $600 as Federal Pandemic Unemployment Compensation.
  3. For an individual who have exhausted his/her state unemployment benefits, an additional 13 weeks of federally funded unemployment benefits is available through December 31, 2020.

Individual Provisions

A. 2020 Recovery Rebate for Individuals
The rebate is an advance refund or credit against 2020 taxes. The amount of the rebate is $1,200 for single filer, $2,400 for married filing joint, plus $500 for each child under age 17. The rebate phases out beginning at $75,000 adjusted gross income for single filers and $150,000 for joint filers. The phase out $5 for every $100 above the threshold amount.

B. Retirement Funds
A coronavirus related distribution made in 2020 of up to $100,000 is not subject to the 10% early distribution penalty. The amount is subject to income tax but may be spread over a 3-year period beginning in 2020. The income recognition can be avoided if the amount is repaid to the retirement plan within 3 years.

Other retirement fund provisions are (1) an increase in the amount that can be borrowed from retirement funds increased from $50,000 to $100,000, and (2) waiver of required minimum distributions for 2020.

C. Charitable Contributions
A $300 deduction charitable contribution deduction is allowed for taxpayers utilizing the standard deduction. For taxpayers itemizing deductions, charitable contributions can be deducted up to 100% of adjusted gross income, an increase from 60%.

D. Employer Payment of Employee Student Loan
An employer can pay $5,250 in 2020 of an employee’s student loan on a tax-free basis. The $5,250 cap includes other tax-free education assistance provided by the employer.

Business Provisions

A. Employee Retention Credit
Credit for employment taxes for a business that is forced to suspend or close due to COVID-19 but continues to pay its workers during this time. The credit is 50% of qualified wages paid during this time. Qualified wages are limited to $10,000 per employee.

B. Payroll Tax Deferral
Employment taxes due through December 31, 2020 can be paid one-half on December 31, 2021 and one-half on December 31, 2022. Self-employed individuals can defer paying 50% of his/her self-employment tax with one-half the deferral due December 31, 2021 and the remainder due December 31, 2022. The payroll deferral cannot be utilized if the taxpayer takes a payroll protection loan.

C. Net Operating Losses
Net operating losses from 2018, 2019, and 2020 can be carried back 5 years and net operating losses in 2018 carried forward to 2019 and 2020 can offset 100% of taxable income in those years.
The $500,000 net business loss limitation has been eliminated retroactive to January 1, 2018.

D. Business Interest Limitation
The 30% of adjusted taxable income limit is increased to 50% of adjusted taxable income for 2019 and 2020. For 2020, the taxpayer can elect to utilize its 2019 adjusted taxable income.

E. Qualified Improvement Property
The technical correction was made to correct the life of qualified improvement property to 15 from 39 years retroactive to January 1, 2018. This will allow bonus depreciation to be taken on qualified improvement property.

Boyer & Ritter’s trusted CPAs and business advisors will continue to review the legislation and update you with information on any clarifications or updates. We are available to answer your questions and help your business navigate the complex guidelines.

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PPP Loan Forgiveness Workbook

With this download, you will receive a total of 4 documents. Two simplified and two average, one for weekly and one for monthly/semi-monthly. Use the document that works best for your company.