CARES Act Legislation – What You Need to Know

 
CARES Act

President Trump signed the Coronavirus Aid, Relief, and Economic Security Act (commonly known as the CARES Act) into law on Friday, March 27 in response to the economic impact of COVID-19 on American businesses, jobs, and the economy. It provides an estimated $2 trillion of financial support through checks to families, loans to businesses, and support for severely impacted sectors of the economy.1 This support is divided among seven main groups: individuals and families, small businesses, large corporations, hospitals and public health, Federal safety nets, state and local governments, and education. In this update we’ll focus on the key provisions for individuals and small businesses.

Source: Guggenheim Investments

INDIVIDUALS:

For individuals, the bill includes several elements to provide financial support. This includes direct cash payments, extended unemployment benefits, and new rules for things like tax filing dates and withdrawals from retirement plans.

Cash Payments: Most individuals earning less than $75,000 can expect a one-time cash payment of $1,200.2 Married couples would each receive a check and families would receive $500 per child. This means a family of four earning less than $150,000 with two kids could expect a payment of $3,000. The payments phase out for individuals earning more than $99,000 or couples earning more than $198,000.

The IRS will use 2019 tax returns (or 2018 tax returns if the 2019 return is not yet available), or social security statements to calculate the direct payment owed.3

Expansion of Unemployment Benefits: The act expands unemployment insurance by extending the duration of benefits by 13 weeks, increasing payments by $600 per week for four months, and allows gig economy workers and those who are self-employed newly eligible for benefits.4

Tax Returns: The deadline for filing taxes and making tax payments for 2019 taxes has been moved to July 15.

Insurance Coverage: The bill requires all private insurance plans to cover COVID-19 treatments, a vaccine, and makes all coronavirus tests free.

SMALL BUSINESSES:

For Small Businesses (defined as 500 or fewer employees) the main features of the CARES act include a forgivable loan program, changes to rules for expenses and deductions designed to make it easier for employers to keep employees on the payroll and stay open.

Emergency Grants: The bill provides $10 billion in grants up to $10,000 to provide emergency funds to small businesses to cover immediate operating costs. These grants will be available through the Small Business Administration Emergency Economic Injury Disaster Loan (EIDL) program. Borrowers seeking an immediate influx of cash can receive a $10,000 emergency advance after applying for an EIDL grant.5 If the application is denied the applicant is not required to repay the $10,000 advance. Emergency funds can be used for payroll costs, increased material costs, rent or mortgage costs, or for repaying obligations that cannot be met due to revenue losses. Borrowers can apply for an EIDL grant in addition to a loan under the Paycheck Protection Program (below), provided the funds are not used for the same purpose.

Forgivable Loans: There is $350 billion allocated to the Small Business Administration to provide loans up to $10 million per business. This program is called the Paycheck Protection Program and is modeled on the existing SBA 7(a) loan program that has been in existence for some time.6 Businesses can apply for loans on the SBA website here. Any portion of that loan used to maintain payroll, keep workers on the books or pay for rent, mortgage and existing debt could be forgiven, provided workers stay employed through the end of June. Congress has designed the program to make funds available to qualifying businesses quickly through approved banks and nonbank lenders.7

Qualifying businesses are defined as:8

  • Having 500 or fewer employees and meeting the size standards the SBA uses to ensure a business is not too large
  • Businesses in the accommodation and food services industries with more than one physical location but no more than 500 employees at each location
  • Non-profits
  • Eligible independent contractors and sole proprietors

Loans will be available from SBA and treasury approved banks, credit unions and some nonbank lenders. We expect guidance from the SBA regarding how to apply for loans. Borrowers can borrow up to 2.5 times their monthly payroll expenses, up to $10 million. Eligible uses for the loan proceeds include:

  • qualified payroll costs (including paid leave, severance, group health benefits, retirement benefits, and state and local employment taxes). Funds cannot be used for compensation for employees, independent contractors, or sole proprietors in excess of an annual salary of $100,000
  • rent, utilities, and interest on mortgage and other debt obligations.

Loan forgiveness is available for funds used to pay eight weeks of payroll and other qualified expenses (including rent, utility, and mortgage interest payments). Borrowers will apply for loan forgiveness to their lenders by submitting required documentation and will receive a decision within 60 days.

Existing Loans and Expansions: The Act expands current SBA loan programs and covers existing loan payments. It increases the amount of an express loan from $350,000 to $1mm.9 Express loans are designed for rapid response and the SBA replies to applications within 36 hours.10 The ACT also offers to cover six months of payments for businesses already using SBA loans.

Employee Retention Tax Credit: businesses are eligible for a refundable employee retention tax credit on wages up to $10,000 per employee on wages paid between March 13, 2020 through December 31, 2020.11 A business is eligible if: 1) the business operations were fully or partially suspended due to COVID-19 shutdown order or 2) Gross receipts declined more than 50% compared with the same quarter last year.

Delayed Payroll Tax Payments: Businesses and individuals can delay their employer share of payroll tax payments. The employer share of social security tax payments owed for 2020 can be deferred and paid over the next two years. Note – the ability to defer these payments does not apply to a business that has a Paycheck Protection loan forgiven.

Net Operating Losses: Some restrictions on net operating losses (NOL) have been relaxed. If your business had net operating losses in 2018, 2019, or 2020 that NOL can now be carried back five years.12 This may improve cashflow and liquidity for some businesses.

Corporate Alternative Minimum Tax Credit: Under the CARES Act, corporate AMT credits would be fully refundable starting in 2019, and corporations can elect to claim the entire refundable credit amount in 2018. The Act instructs the IRS to process any refund claims within 90 days of filing.13

Business Interest Expense Deductions: Businesses will be able to increase their business interest expense deductions on their tax returns. For 2019 and 2020, the amount of interest expense businesses are allowed to deduct on their tax returns is increased to 50% from 30% of taxable income.14

Business Qualified Improvement Property: Businesses, especially those in the hospitality industry, will be able to immediately write off costs associated with improving facilities, increasing cash flow.15

We encourage individuals and small business owners to consult with their tax advisor regarding these benefits and appropriate steps to take advantage of the elements of the CARES act that apply to them.

All written content is for information purposes only. Opinions expressed herein are solely those of Summit Hill Wealth Management, LLC and our editorial staff. Material presented is believed to be from reliable sources; however, we make no representations as to its accuracy or completeness. All information and ideas should be discussed in detail with your individual adviser prior to implementation. Advisory services are offered by Summit Hill Wealth Management, LLC a Registered Investment Advisor in the State of Colorado. Summit Hill Wealth Management, LLC is not affiliated with or endorsed by any government agency.

 
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