CARES Act Outlined




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Apr 02, 2020

By Mike Mesch, CPA/ABV, ASA, CFF Partner at Terry Lockridge & Dunn

Major legislation, commonly known as the CARES Act, was passed by Congress and signed by President Trump on March 27th. It is complex. Not only does it provide new funding programs for individuals and businesses, it also includes technical corrections for the TCJA legislation passed a couple of years ago.For those of you that want a deep dive into the CARES Act, we have supplied a PDF attachment you can read.

This article outlines the new federal business loan programs available as a result of the CARES Act, as well as changes you should know about retirement plan payments, charitable contributions and other items of importance to individuals.

There are three sections:  Payroll Protection Program,  Expanded SBA Disaster Loan Program, and  Assistance for American Workers Families, and Businesses.

Keeping Workers Paid and Employed Act – commonly known as the Payroll Protection Program (PPP)

This is a 100% federally backed loan for small businesses affected by COVID-19. The links below include the application form and an information sheet about the program from the U.S. Department of Treasury:

What to do right away:

  • Call your SBA-approved lender to discuss how to apply and set up an appointment
  • Calculate your loan request
    • 2019 average monthly payroll (see below for additional options), plus the balance of any SBA disaster loans made between January 31, 2020 and the date of your loan request (i.e. you can refinance other SBA disaster loans already obtained into this one)
    • Payroll includes:
      • Compensation to employees (salary, commissions, payments for group health benefits, retirement contributions and state & local withholding tax)
    • Sole practitioners can apply as well – compensation for sole practitioners is “net earnings” or income less expenses
    • Excludes individual employee compensation greater than $100,000 per year and employees who live outside the country
  • There are other calculation periods available for seasonal businesses or businesses in existence for less than one year.
  • The max loan amount is $10 million

Borrower requirements:

  • Businesses with under 500 employees
  • Some franchises qualify
  • Must provide a good faith certification that the loan is needed to continue operations during the covid-19 emergency, funds will be used to retain workers and make mortgage interest payments, lease and utility payments
  • Applicant must not have another application pending under this program for the same purpose
  • From February 15 – December 31, 2020 the applicant has not received funds for the same use under this program

Other important aspects of this SBA loan:

  • No collateral or personal guarantee is required
  • Interest rate is 0.5% fixed rate, two-year term
  • All applicants qualify for at least 6 months of payment deferral under this program
  • There is no prepayment penalty
  • Loan forgiveness
    • The loan will be forgiven to the extent the funds are used during the eight weeks following the date of your loan for:
      • Payroll costs (defined above)
      • Mortgage interest costs
      • Rent
      • Utility payments
  • Forgiveness amounts will be reduced for employee cuts and reductions in wages

Forgiveness reduction due to reducing number of employees, use this formula:

Loan amount times,

Average number of full-time equivalent employees (FTEE’s) during the eight weeks following receipt of your loan proceeds, divided by

Either:

Average number of FTEE’s per month employed from February 15, 2019 – June 30, 2019

Or

Average number of FTEE’s per month employed from January 1, 2020 – February 29, 2020

Forgiveness reduction due to decreased wages:

Reduction in wages are calculated as a straight reduction in the loan forgiveness amount by any salary reduction in excess of 25% of wages in the most recent full quarter of employment before the covered period

In other words, you must maintain (or re-establish, see below) your employee count and wages, or you will be forced to pay back a portion of this loan.

Note if you do reduce your employee count you have until June 30, 2020 to re-hire and compensate those employees

Loan recipients will need to keep track of how the money is spent. We suggest keeping a careful ledger of the qualified expenditures (noted above) for the eight-week period following your loan date. This is important to support the amount of your loan to be forgiven.

Expansion of SBA disaster loan program

  • Waives rules for personal guarantees on loans up to $200,000 through SBA
  • Businesses with fewer than 500 employees and sole proprietorships without employees qualify
  • Allows lenders to approve candidates based solely on credit scores (no tax return submission required)
  • Applicants may request an “emergency advance” of up to $10,000 at the time of application which does not have to be repaid, even if the loan is later denied
  • Funds may be used for payroll, sick leave, rent or mortgage payments and repaying debts that cannot be repaid due to lost revenue
  • Banks must consider loan payment deferments on these loans for 6 months.

Assistance for American Workers, Families and Businesses

  • Expands Unemployment assistance
    • Self-employed workers are covered
    • Expands benefits for the first 4 months of unemployment by an additional $600/week
    • Expands benefits for an additional 13 weeks (to 39 weeks total)
  • Recovery rebates
    • Non-taxable cash payments up to $1,200 per individual and $500 per child will be sent to taxpayers
      • Amount of payment is reduced for single taxpayers who make more than $75,000 annually, heads of household who make more than $112,500 and married taxpayers who make more than $150,000 – talk to your accountant if you need an estimate of your recovery rebate amount
    • Income limitation is based on your 2019 return, if filed, or your 2018 return. If you did not file 2018 or 2019 because you were not required to file, the treasury will use alternative means to determine your income amount such as SSA statements
    • A web-based portal for individuals is being developed to provide taxpayers’ bank information to the IRS online so they can receive payments immediately as opposed to checks in the mail
  • Retirement provisions
    • 10% penalty is waived for 2020 premature distributions up to $100,000 from retirement plans or IRA’s for people who:
      • Have been diagnosed with COVID-19 or experiences adverse consequences as a result of being quarantined, furloughed, laid off or who is unable to work due to lack of childcare
    • Premature distributions can be repaid to your retirement account any time within a 3-year period
    • Note, these provisions do not include those whose salary has been reduced as a result of a business contraction
    • You can include any distribution in your income ratably over a 3-year period (i.e. you do not have to pick up the income all in one year)
    • The amount you are allowed to borrow from your qualified retirement plan (instead of a distribution) is 100% of its current value up to a maximum of $100,000. This is an increase from 50% and $50,000
    • Required minimum distributions (RMD) can be suspended for 2020 tax year
      • If you already took your RMD for 2020, you have 60 days to repay it without owing taxes on it (subject to further guidance from IRS).
  • Charitable contributions
    • Taxpayers can take a $300 “above the line” deduction to 501(c)(3) charities in 2020 in addition to expanded charitable contribution rules that are based on percentage of income.
  • Employee retention credit
    • Eligible employers receive a refundable credit against social security (FICA) payroll taxes equal to 50% of the first $10,000 in wages per employee (including health plan benefits)
    • To be eligible:
      • Business operations must have been fully or partially suspended due to orders from a governmental entity; or
      • Businesses must have experienced a year over year reduction in gross receipts of at least 50%
    • Note, businesses with more than 100 employees have additional restrictions and this credit is not available to businesses with PPP loans.
  • Delay of employer payroll taxes
    • The due date for depositing employer social security payroll taxes (i.e. generally 6.2% of wages paid) and 50% of self-employed social security payroll taxes is delayed:
      • ½ must be paid by 12/31/2021 and the other ½ by 12/31/2022
    • Note: Businesses with PPP loans do not qualify for this deferral
  • Treatment of business losses
    • The “80% of net income” loss limitation is suspended for tax years 2018, 2019 and 2020
    • Net operating losses realized in 2018, 2019 and 2020 can be carried back 5 years to request refunds
    • The limitation on excess farm losses and on the use of a pass-through business loss against non-business income is suspended for tax years 2018, 2019 and 2020
  • Corporate amt credits
    • These credits can be recovered on an accelerated basis
  • Limitations on interest deductions for businesses
    • These are temporarily increased for tax years 2019 and 2020 to 50% of “adjusted taxable income” instead of 30%
  • Foreclosures & forebearances
    • A borrower of a federally backed mortgage loan may request forbearance without penalties or interest by submitting a request to their lender and affirming hardship as a result of COVID-19.

These are challenging times and updates are coming out almost daily. We will keep you informed. Please reach out to the accountants at Terry Lockridge & Dunn for assistance as you work through the next weeks. They can be reached in Cedar Rapids at 319-364-2945, or in Iowa City at 319-339-4884. Even though we cannot meet with you in person, we are here for you! Please stay safe and healthy.




     
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Tags: CARES Act
Category: Featured