On March 27, 2020, Congress passed the Coronavirus Aid, Relief, and Economic Security Act (CARES Act). The CARES Act is a $2 trillion stimulus bill intended to help shore up the American economy and provide relief for businesses and many individuals. Many provisions of the CARES Act are intended to free up cash so that businesses can keep their work forces employed while navigating and weathering the impacts of COVID-19. The full-text of the CARES Act can be found here. Below we highlight some of the provisions of the CARES Act for individuals and small businesses.
Provisions for Individuals
Individual Rebate Checks
Under the CARES Act, most Americans will receive tax-free rebate checks. The rebate checks are $1,200 for individuals with adjusted gross income (AGI) of up to $75,000, and $2,400 for married couples with AGI of up to $150,000. The CARES Act also provides for an additional $500 for each dependent child under the age of 17.
The rebate amounts are phased-out for individuals with AGI between $75,000 and $99,000, and for married couples with AGI between $150,000 and $198,000. The rebates are not available for anyone with AGI over these amounts.
Retirement Account Flexibility
- Penalty Free Distribution of up to $100,000 from a Retirement Plan.
Plan participants (or their spouses or dependents) who have been diagnosed with COVID-19 or who have suffered financial consequences directly because of COVID-19 can receive a distribution of up to $100,000 from the plan exempt from the 10% early withdrawal penalty which generally applies to distributions taken before the age of 59.5. This distribution can be repaid over three years. If the distribution is not repaid, it can be taken into income over a three-year period.
- Temporary Increase in Plan Loan Limit and One-Year Delay in Plan Loan Repayment.
Plan participants (or their spouses or dependents) who have been diagnosed with COVID-19 or who have suffered financial consequences directly because of COVID-19, within 180 days after enactment of the CARES Act, can take a plan loan up to $100,000 or their vested account balance in the plan, whichever is less. This is an increase from the general limits on plan loans, which are the lesser of $50,000 or 50% of the vested account balance.
The CARES Act also postpones for one year any loan repayment that is due after the CARES Act’s enactment and before December 31, 2020.
- No Required Minimum Distributions for 2020.
Participants in defined contribution plans (profit sharing plans and 401(k) plans) and IRA owners or their beneficiaries will not be required to take required minimum distributions in 2020.
Provisions For Small Businesses
Paycheck Protection Program (PPP) and PPP Loan Forgiveness
Below we summarize some of the relevant information related to the PPP and PPP loan forgiveness.
The U.S. Small Business Administration (SBA) recently provided guidance related to the PPP and PPP loan forgiveness. The interim SBA final rule, effective April 2, 2020, can be found here. A sample PPP loan application form, effective April 3, 2020, can be found here.
The SBA website Coronavirus (COVID-19): Small Business Guidance and Loan Resources also provides additional information regarding the PPP, PPP loan forgiveness, Economic Injury Disaster Loans, SBA debt relief, SBA Express Bridge Loans, and other guidance and resources for individuals and businesses suffering economic damage from the COVID-19 outbreak.
The PPP is a federal loan program intended mostly to help small businesses keep their employees on their payroll and also to provide funds to operate their businesses. The federal government aims to get PPP loans to business quickly—with an ambitious goal to provide loan approval and funds same-day.
Small businesses can obtain PPP loans from SBA-approved lenders and use PPP loans to pay payroll, health care benefits, rent, interest on an existing mortgage, utilities, and interest on debts incurred before February 15, 2020. However, at least 75% of the PPP loan proceeds must be used for payroll costs. No origination fees will be charged to borrowers and no collateral or personal guarantees will be required.
A business may be eligible for a PPP loan if the business was in operation on February 15, 2020 and either had employees for whom it paid salaries and payroll taxes or independent contractors, as reported on Form 1099-MISC, and:
(1) the business has 500 or fewer employees whose principal place of residence is in the United States,
(2) the business operates in a certain industry and meets the SBA employee-based size standards for that industry, and
(3) the business is:
(a) a small business concern as defined in section 3 of the Small Business Act (15 USC 632), and subject to SBA’s affiliation rules under 13 CFR 121.301(f) unless specifically waved in the Act,
(b) a tax-exempt organization described in section 501(c)(3) of the Internal Revenue Code, a tax exempt veterans organization described in section 31(b)(2)(C) of the Small Business Act, or any other business.
Individuals who operated under a sole proprietorship, as an independent contractor, or as an eligible self-employed individual may be eligible for a PPP loan if they were in operation on February 15, 2020.
How Much Can I Borrow?
Under the PPP, the maximum loan amount is the lesser of $10 million or an amount calculated using the payroll-based formula provided in the CARES Act. Please see the SBA interim final rule Section III(2)(e) for additional information on this calculation.
What Expenses Qualify as “Payroll Costs” and What Expenses Do Not Qualify as Payroll Costs?
Payroll costs consist of compensation to employees (whose principal place of residence is the United States) in the form of salary, wages, commissions, or similar compensation; cash tips or the equivalent (based on employer records of past tips or, in the absence of such records, a reasonable, good-faith employer estimate of such tips); payment for vacation, parental, family, medical, or sick leave; allowance for separation or dismissal; payment for the provision of employee benefits consisting of group health care coverage, including insurance premiums, and retirement; payment of state and local taxes assessed on compensation of employees; and for an independent contractor or sole proprietor, wage, commissions, income, or net earnings from self-employment or similar compensation.
Exclusions from Payroll Costs
The following are excluded from “payroll costs”:
(1) Any compensation of an employee whose principal place of residence is outside of the United States;
(2) The compensation of an individual employee in excess of an annual salary of $100,000, prorated as necessary;
(3) Federal employment taxes imposed or withheld between February 15, 2020 and June 30, 2020, including the employee’s and employer’s share of FICA (Federal Insurance Contributions Act) and Railroad Retirement Act taxes, and income taxes required to be withheld from employees;
(4) Qualified sick and family leave wages for which a credit is allowed under sections 7001 and 7003 of the Families First Coronavirus Response Act (Public Law 116–127); and
(5) Independent contractors do not count as employees for purposes of the PPP loan calculations because independent contractors have the ability to apply for a PPP loan on their own.
- PPP Loan Forgiveness.
For most small businesses, the most appealing element of PPP loans is the potential for PPP loan forgiveness. Under the PPP loan forgiveness program, the borrower will not be responsible for any loan payment, including principal and interest, if the borrower uses all of the loan proceeds for forgivable purposes and employee and compensation levels levels are maintained.
The actual amount of loan forgiveness will depend, in part, on the total amount of payroll costs, payments of interest on mortgage obligations incurred before February 15, 2020, rent payments on leases dated before February 15, 2020, and utility payments under service agreements dated before February 15, 2020, over the eight-week period following the date of the loan. However, not more than 25 percent of the loan forgiveness amount may be attributable to non- payroll costs.
While the CARES Act provides that borrowers are eligible for forgiveness in an amount equal to the sum of payroll costs and any payments of mortgage interest, rent, and utilities, the SBA PPP interim final rule provides that the non-payroll portion of the forgivable loan amount should be limited to effectuate the core purpose of the statute and ensure finite program resources are devoted primarily to payroll. To that end, the SBA PPP interim final rule instructs that the 75 percent payroll requirement is an appropriate percentage in light of the CARE Act’s overarching focus on keeping workers paid and employed.
Tip: Carefully Track PPP Loan Expenditures
For purposes of loan forgiveness, borrowers will need to document and verify their use of the PPP loan proceeds for eligible purposes. To that end, it may be helpful for businesses to use a separate bank account to more easily track all PPP loan expenditures.
Employee Retention Tax Credit (ERTC)
The CARES Act provides for a refundable tax credit against the employer’s social security taxes for a business which has had to shut down or experienced a significant decline in revenue due to COVID-19. The ERTC is not available for a business with a PPP or other SBA loan.
The ERTC is equal to 50% of the first $10,000 of wages paid to an employee between March 13, 2020 and December 31, 2020, up to a maximum credit of $5,000 per employee.
For employers with 100 or fewer employees, all employee wages and payments made for health care coverage (subject to a $10,000 limit) paid during a period in which there was a severe COVID-19 impact can be included in the credit calculation.
For employers with more than 100 employees, only wages paid to employees not performing any services (whether in person or remotely) to the company due to the virus can be included in the calculation.
The severe impact standard necessary to qualify for the payroll tax credit is either (a) more than a 50% reduction in gross receipts (compared to the same quarter in the prior year) or (b) the business has fully or partially suspended its operations due to orders from an applicable government authority due to COVID-19.
Payroll Tax Payment Deferred
Section 2302 of the CARES Act allows employers and self-employed individuals to postpone deposits of their share of federal Social Security tax on employees’ wages paid as of the enactment date through and including December 31, 2020.
Employers are generally responsible for paying a 6.2% Social Security tax on employees’ wages. The CARES Act allows employers to deposit 50% of the deferred taxes on or before December 31, 2021, and the remaining 50% by December 31, 2022.
However, this deferral is not available to employers who receive PPP loan forgiveness.
The Internal Revenue Service issued Notice 2020-22 regarding this relief from penalty for failure to deposit employment taxes, which can be found here.