The President has signed the Coronavirus Aid and Economic Relief Act (Cares Act) that was earlier approved by the US Senate and House of Representatives. The $2 trillion act contains many significant provisions that expand the availability of loans offered by the Small Business Administration (SBA). Additionally, the act provides substantial tax savings provisions that help individuals and businesses to create needed cash-flow during this urgent time. This summary will highlight many of the key provisions of the Cares Act. Note that many of the measures in the act have requirements and limitations that must be analyzed on a case by case basis by each taxpayer. In addition, the SBA, IRS and the Department of Labor are currently drafting procedures and regulations to implement these benefits in a timely manner. It remains uncertain how provisions in the Cares Act and other measures under the Emergency Paid Sick Leave Act and Emergency Family and Medical Act (approved two weeks prior) will work together.
SBA Loan Program
- The SBA 7(a) Loan Program has been expanded to cover employers that have up to 500 employees and in certain instances, even more, based on particular industry sectors. Typically, the threshold to obtain an SBA loan requires fewer employees and revenue.
- Loans will be made to cover costs for payroll and other expenses – such as rent, utilities, and mortgages.
- Loan forgiveness will be available, however, if an employer reduces employment or wages by 25% the loan forgiveness will be reduced. We are analyzing the details of this provision and how this will be regulated by the SBA.
- Economic Injury Disaster Loans will continue to be made available. The SBA is seeking to streamline this process by adding additional resources to meet small business needs.
Individual Tax Provisions
- Under the Cares Act the IRS will make cash payments to taxpayers. The IRS will base the payments generally on the 2018 tax returns filed –where available the IRS may use recently filed 2019 tax returns as the base.
- The Act provides for payments to individuals of up to $1,200 per person and $2,400 for a married couple – with an additional $500 for each child.
- The payment is subject to a phase-out for individuals with an adjusted gross income of $75,000 and married persons filing jointly with an AGI above $150,000.
- If a taxpayer’s 2020 AGI is ultimately less than the prior tax years – the IRS is developing a mechanism to obtain a credit on the 2020 tax return.
Retirement Fund Rules
- To generate additional access to cash for individuals the act will permit early withdrawal and distributions from retirement accounts and waive penalties. Also, these distributions can be re-contributed to the plan within three years without affecting that year’s contribution limit.
Business Tax Provisions Employee Retention Credit
- An eligible employer is allowed a credit against employment taxes for each calendar quarter equal to 50% of the qualified wages for each employee for the quarter.
- The credit can be claimed up to $10,000 per employee.
- This employment tax credit may be limited by other tax credits taken by employers under the Emergency Sick Leave and Medical Leave enacted provided in the Families First Coronavirus Response Act. Once again, the impact and process for obtaining the credits are being developed by the IRS.
- The IRS has issued guidance that the employer will take these credits and refunds on their quarterly form 941 employment tax returns.
Self-employed individuals will have similar payroll tax credits available
This discussion serves a general outline of the provisions of the Cares Act. Each of these provisions has requirements that must be evaluated on an individual taxpayer basis. Additionally, other approved COVID-19 legislation may impact the tax benefits of this Act. If you have any questions regarding the application of these tax credits or the process for claiming these credits, please contact your trusted advisor at RVG & Company.