The President has signed the Coronavirus Aid, Relief and Economic Security Act (“CARES Act”), and we want clients and friends to understand how this relates to our industry. Earlier today we issued an alert regarding how a contractor can take advantage of the Paycheck Protection Program loan, which is essentially free money being given out to small businesses to meet payroll. Here are some of the other CARES Act provisions which we believe are potentially important to our clients. There are many beneficial areas of the CARES Act – it is over 800 pages – but as always, BLLP will only focus on what we feel is of most immediate interest and importance to our industry.
Remember, what Washington passes into law is one thing – it is then left to the Internal Revenue Service, the Department of Labor and other agencies to implement regulations and figure out how to make these things work in the real world. That takes time, and can often change the scope and impact of enacted laws. For much of this, the devil is in the details, and the details are not yet known.
Individual Cash Rebates
Checks of up to $1,200 ($2,400 for taxpayers married filing jointly) will be made available to most individuals and families, with an additional $500 for every child. There are no limits on the number of children that qualify.
These recovery rebate checks are reduced by $5 for each $100 a taxpayer’s income exceeds $75,000 ($150,000 for taxpayers married filing jointly). The cash payments will be based on your 2018 or 2019 tax return, but are subject to a “true-up” based on your eventual 2020 tax return information.
The refund checks are generally not taxable income and are instead treated as an advance of the refund a taxpayer would normally receive when filing their 2020 tax return. Confusing, but this means that in 2021 a taxpayer may have to recalculate the amount of their credit based on their 2020 information.
Payroll Tax Holiday
Employers are responsible for paying a 6.2% Social Security tax on employee wages. From the time the CARES Act is signed into law through December 31, 2020, employers will be allowed to defer paying this 6.2% tax. Half of this deferred amount would be due on December 31, 2021 and the other half by December 31, 2022. Similar provisions apply to self-employed individuals, although 50% of the self-employment tax still needs to be sent in by the existing deadlines.
Earlier today we issued an alert regarding how a contractor can take advantage of the Paycheck Protection Program loan – please note: employers that receive loan forgiveness under this program are not eligible for this payroll tax holiday.
Unemployment Insurance Provisions
The law provides an estimated $260 billion in enhanced and expanded unemployment insurance benefits to workers unemployed or underemployed because of the COVID-19 pandemic. Essentially, the benefits are (i) an additional $600 per week payment for up to four months (expires on July 31, 2020), and (ii) an additional 13 weeks of unemployment benefits to those who remain unemployed after state unemployment benefits are exhausted (expires on December 31, 2020).
Employment Tax Retention Credit for Damaged Businesses
To qualify for this, your operation has to either (i) experience a full or partial suspension due to shutdown orders (an order from a governmental authority limiting commerce, travel or group meetings due to COVID-19) or (ii) you have a “significant decline” in gross receipts (i.e., there is a decrease of more than 50% of the gross receipts for the same quarter in the prior year).
If you meet either of these tests, then you are allowed a credit against employment taxes equal to 50% of qualified wages (including health benefits) paid to employees.
In general terms, qualifying wages for each employee are limited to $10,000 per calendar quarter. But, the credit is not available if the employer is a borrower under the Payroll Protection Loan Program described in our earlier Client Alert. Further, the amount of the credit will be reduced by any of the tax credits allowed under Section 7001 or 7003 of the Families First Coronavirus Relief Act (i.e., the emergency paid sick leave and the 10 weeks of paid leave under the FMLA leave credits).
Emergency Economic Injury Disaster Loan Grants
If you apply for a Small Business Administration economic injury disaster loan, the SBA may also provide emergency $10,000 grants as part of that loan, to businesses with less than 500 employees that were in operation on January 1, 2020.
The grant must generally be used to provide paid sick leave to employees unable to work for COVID-19, pay rent or mortgage, maintain payroll to retain employment during business interruption and meet increased costs to obtain materials unavailable due to interruption in supply chains.
Business Interest Expense Deduction Limitations
There is also a temporary increase in the amount of interest expense businesses are allowed to deduct on their tax returns –the adjusted taxable income limitation has been increased from 30% to 50% for 2019 and 2020.