Insight Alert: Key Provisions of the CARES Act
On March 27th, President Trump signed the $2.2 trillion Coronavirus Aid, Relief and Economic Security Act, or CARES Act, making it the largest emergency aid package in U.S. history. Along with providing funds for individuals and small businesses, the CARES Act includes provisions which aim to assist businesses in their recovery from the economic effects of the current COVID-19 pandemic.
CGS3’s COVID-19 Legal Task Force compiled a summary of the key provisions of the CARES Act:
- The CARES Act provides for payments to low- and middle-income households – up to $1,200 per adult ($2,400 for married couples) and $500 per child for individuals earning less than $75,000 and individuals filing joint returns making less than $150,000.
- These benefits start phasing out once an individual’s adjusted gross income exceeds $99,000 or $198,000 for joint filers.
Paycheck Protection Program
- The CARES Act created the Paycheck Protection Program (PPP), a new SBA loan program that allows businesses with 500 or fewer employees (or hospitality and dining businesses with 500 or fewer employees per location) to borrow up to 2.5 times their average monthly payroll costs incurred during the one-year period before the loan.
- The loan may be used to pay payroll costs, interest on mortgages, rent and utilities during the eight-week period after the loan is originated, and may be forgiven to the extent used to pay these costs over an eight-week period after the loan is made.
- With certain exceptions for small changes, the forgiveness amount is reduced for any employee cuts or reductions in wages as compared to the average the loan amount was based on – but the reduction can be avoided by rehiring to old levels.
- For retail tenants, especially those subject to a closure order, the PPP is an incomplete solution. In most cases, the retail tenant will desire the loan to be fully forgiven and accordingly, will likely use the funds for employee payroll instead of rent. Landlords may benefit from the PPP in the short term by their tenants avoiding insolvency and by allowing tenants to tap other resources to pay rent – but the program does not incentivize tenants to make payment of rent a priority.
Withdrawals from IRA Plans
- The CARES Act provides for a coronavirus-related distribution, or CVD: an individual may withdraw up to $100,000 without a 10-percent penalty, provided it must be repaid within a three-year period beginning on the date of distribution.
- This generally applies to distributions made in 2020 to individuals:
- diagnosed with COVID-19, or
- whose spouse or dependent has been diagnosed with COVID-19, or
- who experience severe financial consequences as a result of being quarantined, furloughed, laid-off, having work hours reduced,or
- who are unable to work due to the lack of child care.
- Employees may take a CVD from a tax-favored company retirement plan. There are no limitations on what funds can be used for during the three-year period.
- The Act increases loans from qualified plans from $50,000 to $100,000 and temporarily waives certain minimum distribution rules for calendar year 2020.
- For individuals who do not itemize deductions, the CARES Act allows an above-the-line charitable contribution for tax year 2020, not to exceed $300.00.
- For individuals who do itemize their deductions, the Act provides a temporary suspension of the 50% adjusted gross income limitations on cash contributions.
Employer Payment of Student Loans
- The CARES Act allows an exclusion from income up to $5,250 from certain payments made by employers toward student loans.
Credit for Employee Retention
- The CARES Act creates a credit against employment taxes equal to 50% of the qualified wages paid by employers to retain employees whose trade or business is impacted due to governmental authority limiting commerce, travel or group meetings because of the coronavirus – or whose gross receipts declined by more than fifty percent when compared to the same quarter in the prior year.
- For employers with more than 100 employees, only employees who are currently not providing services for the employer due to COVID-19 causes are eligible for the credit.
Delay of Payroll Taxes
- The Act defers the due date of some payroll taxes which must be paid back in the future on a staggered time basis over the following two years, one half on December 31, 2021, and one half on December 31, 2022.
Net Operating Losses
- It provides for businesses to carry losses back five years for years 2018 through 2020 and removes the 80% taxable income limitation. Generally, this will not provide an immediate benefit since most businesses will not be able to carry back 2020 losses until 2021.
Modification of Business Interest Limitations
- The bill provides that for tax years 2019 and 2020 instead of business interest being limited to 30% of adjusted taxable income, it is now limited to 50% of adjusted taxable income.
Qualified Improvement Property
- The new law also fixes a technical correction retroactive to 2018 in the 2017 Tax Cuts and Jobs Act for Qualified Improvement Property, which may now be immediately expensed rather than depreciated over 39 years.
- This includes qualified leasehold improvement property, qualified restaurant property and qualified retail improvement property.
Suspension of Loss Limitations
- The Act allows losses from pass-through (g., limited liability companies and partnerships) to offset other sources of income. This suspends a new loss limitation imposed by the 2017 Tax Cuts and Jobs Act.
As always, please contact us should you need assistance navigating tax-related changes and determining the potential impacts on your business. CGS3 attorneys have a long history of guiding our clients through tough times. Both our Distressed Real Estate practice group and our COVID-19 Legal Task Force – comprised of multidisciplined attorneys with expertise in real estate, finance, litigation, construction, tax, and creditor’s rights – are here to help guide you through this difficult process.
CGS3 Insight Alerts are curated with you in mind. They deliver focused, relevant, and timely information on trending topics to our clients, colleagues, and others in the industry. Please note that they are intended for general informational purposes only, and should not be construed as legal advice for any specific situation. Always remember to contact an attorney to obtain advice with respect to a particular issue or problem