March 30, 2020
By Sharon C. Lincoln and Eric W. Dyer
As the economic impact of COVID-19 continues to be felt throughout the United States, the federal government has provided $2.2 trillion in relief by enacting the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”), which was signed into law on March 27.
The CARES Act is extraordinary in its amount and in its scope – providing relief to individuals and families, unemployed workers, and small and large businesses (including nonprofit organizations) in the form of tax relief, refundable tax credits, loans, and outright grants, with a specific focus on severely impacted sectors of the economy such as the aviation industry and hospitals. States, territories, tribal governments, and municipalities also are eligible for trillions of dollars of relief under the Act.
Generally, the tax relief and funding earmarked within the CARES Act are as follows:
Putting money in the hands of individual taxpayers
Recovery Rebates: Direct payments will be made to individuals and families based upon income levels (as provided in the taxpayer’s most recently filed tax return). Payments will be made for up to $1,200 for individuals and $2,400 for married couples, with a $500 additional payment for each qualifying child. The amount of the benefit phases out for individuals with gross income in excess of $75,000 and married couples with gross income in excess of $150,000. Generally, these rebates will be issued automatically with no action required of the taxpayer.
Unemployment Benefits: Unemployment benefits are increased in terms of the length and amount of benefits. The Federal government is offering 13 weeks of benefits after state benefits expire and an additional $600 per week. In addition, the CARES Act creates a Pandemic Unemployment Assistance program for independent contractors, self-employed persons, and those participating in the “gig” economy, in order to ensure that they are not left out of the relief provided by the CARES Act.
Accessing Retirement Funds: Individuals and facilities directly impacted by COVID-19 – that is, those diagnosed or those suffering financial consequences as a result (note that this is very broad category and is meant to cover quarantine, lay-offs, inability to work because of child care, and the like) are able to access retirements funds without the standard penalties for early withdrawals of up to $100,000. However, these withdrawals must be used for covering COVID-19 expenses and must be repaid within three years or else any such withdrawals will be treated as income over a three-year period. Similarly, required minimum distribution rules are waived for certain defined contribution plans and individual retirement accounts (IRAs), allowing individuals to forgo distributions during 2020.
Small Businesses and Tax-Exempt Organizations
Making it easier for qualifying business to obtain loans through the Small Business Administration (“SBA”) in order to keep operations running and retain employees
Paycheck Protection Program: This program is available until June 30, 2020, and is accessible to any business entity, section 501(c)(3) nonprofit organization, section 501(c)(19) veterans organization, and Tribal business concern that has no more than 500 employees or meets the size standard established by the SBA (based upon the relevant industry in which the entity operates). Note that this program is not available to non-charitable tax-exempt organizations (apart from veterans organizations) such as social welfare organizations, agricultural cooperatives, or business leagues.
This program is also available to sole proprietors, independent contractors, and self-employed individuals.
An eligible entity is able to receive a loan of up to $10 million through Paycheck Protection Program. This is intended to cover payroll expenses, such as paid vacation time, sick leave, and health care benefits, and certain other obligations such as mortgage interest, rent, and utilities.
The Paycheck Protection Program offers a certain degree of loan forgiveness so long as the amount forgiven was solely used to maintain payroll and pay mortgage interest, rent, and/or utilities. The amount eligible for forgiveness relates to amounts paid during the first eight weeks of the loan and will be reduced in proportion to the number of employees laid off during this period. Amounts forgiven under this program are not taxable.
In addition to these opportunities, the Traditional SBA Lending Program and Economic Injury Disaster Loan (“EIDL”) lending programs have been expanded and revised to assist small businesses, nonprofit organizations, and agricultural cooperatives affected by COVID-19.
Promoting charitable donations
Charitable Deductions: Individuals that do not itemize deductions can now claim an above the line $300 cash charitable deduction.
Charitable Contributions: Individuals that itemize deductions and corporations have incentives to increase charitable contributions. The CARES Act eliminates the 60% limitation for cash donations for calendar year 2020 so it is possible for an individual taxpayer to offset up to 100% of his or her taxable income with charitable contributions. The Act also raises the cap on corporate level deductions from 10% to 25% of the corporation’s taxable income and increases the food limit deductions from 15% to 25% of the corporation’s taxable income.
These special provisions regarding charitable donations do not apply to non-cash donations or donations of any sort to donor-advised funds or to supporting organizations described in IRC section 509(a)(3).
General Employer and Business Provisions
Promoting Student Loan Payments: Employers may pay employee student loans as a tax-free fringe benefit during 2020, up to $5,250 per employee.
Refundable Tax Credit: Organizations whose operations are fully or partially suspended due to COVID-19 or that have seen a 50% decline in revenue as a result of COVID-19 are eligible for a refundable payroll tax credit of 50% of qualified wages paid to employees between March 13, 2020 and December 31, 2020. Qualified wages are capped at the first $10,000 of compensation, which may include health benefits.
- For employers with an average of more than 100 employees in 2019, qualified wages are wages paid to employees unable to work due to COVID-19 circumstances.
- For employers with an average of 100 or fewer employees in 2019, all wages are qualified.
- Employers who receive a loan under the Paycheck Protection Program are not eligible for this refundable tax credit.
- Self-employed individuals are allowed to defer up to 50% of self-employment taxes.
Calculating Excess Businesses Losses: The Act repeals the excess business loss limitation under IRC section 461(l) for tax years beginning prior to January 1, 2021; this change is retroactive to December 31, 2017, and effectively makes the changes to IRC section 461(l) made by the Tax Cuts and Jobs Act (TCJA) effective for any tax year starting after December 31, 2020, and before January 1, 2026.
Net Operating Losses (NOL): Businesses may carry-back NOLs for five years based on NOLs from tax years beginning in 2018, 2019, and 2020. For tax-years beginning prior to 2021, businesses may offset 100% of taxable income with NOLs generated in those tax years.
Qualified improvement property: The Act provides for depreciation periods of 15 years on qualified improvement property and allows for a 100% bonus depreciation on certain improvements to interior portions of commercial buildings.
Interest Deductions: Interest expense deduction limitations are increased from 30% to 50% of adjusted taxable income for tax years beginning in 2019 and 2020.
Industry Specific Provisions
- $100 billion for health care providers “to remain available until expended, to prevent, prepare for, and respond to coronavirus, domestically or internationally, for necessary expenses to reimburse, through grants or other mechanisms, eligible health care providers for health care related expenses or lost revenues that are attributable to coronavirus …”
- An allocation of $1.3 billion for community health centers to cover COVID-19 patient costs.
- An allocation of $16 billion dedicated to the Strategic National Stockpile to cover equipment for preventing and responding to COVID-19.
- An additional $1.32 billion in supplemental assistance in 2020 to health centers.
- An additional allocation of approximately $27 billion “to remain available until September 30, 2024, to prevent, prepare for, and respond to coronavirus, domestically or internationally, including the development of necessary countermeasures and vaccines, prioritizing platform-based technologies with U.S.-based manufacturing capabilities, the purchase of vaccines, therapeutics, diagnostics, necessary medical supplies, as well as medical surge capacity…”
- Telehealth is considered a key tool to treating the COVID-19 epidemic.
- The Act authorizes federally qualified health care centers and rural health clinics to provide telehealth services to individuals in their homes and receive payment for such services.
- For plan years beginning on or before December 31, 2021, the Act preserves the status of high deductible health plans even if the plans do not explicitly include deductibles for telehealth or remote health services.
- The Act permits telehealth services to qualify as a face-to-face visits for certain home dialysis and hospice services during the COVID-19 crisis.
- Physician assistants, nurse practitioners and certain other nurses are able to order home health services.
The Act requires that student loan payments (principal and interest) be deferred until September 30, 2020, without penalty, on all federally owned loans.
Universities may continue to pay work-study students who are unable to work due to campus closures. Public and nonprofit institutions may also utilize unused work-study funds for supplemental grants.
Public and nonprofit universities may seek waivers for institutional matching requirements for campus-based aid programs for the current academic year through September 30 of the fiscal year following the end of the COVID-19 emergency.
Educators unable to finish their year of teaching service due to COVID-19 may count their partial year as a full year of service toward TEACH grant obligations or Teacher Loan Forgiveness. In addition, the Act waives the requirement that teachers must serve consecutive years of teaching service for Teacher Loan Forgiveness eligibility, if a teacher’s service is not consecutive as a result of COVID-19.
Large Businesses and Nonprofits
The CARES Act allocates $454 billion for loans, loan guarantees, and “other investments” in support of states and municipalities, as well as businesses and nonprofit organizations too large to receive support under the Paycheck Protection Program.
The Act authorizes loans and loan guarantees to businesses and nonprofit organizations that employ between 500 and 10,000 employees. In brief:
- The interest rate on such loans is capped at 2%.
- The maximum term for any such loan or loan guarantee is five years.
- No payments of principal or interest is required during the first six months of the loan.
- Organizations applying for such loans and loan guarantees must make several certifications, including that the loan will be used to retain at least 90% of the organization’s workforce, at full salary and benefits, through September 30, 2020.
The Act also allocates up to $17 billion for “loans and loan guarantees for businesses critical to maintaining national security.” No official statement has yet been provided regarding which businesses are considered critical to maintaining national security and are therefore eligible for this special allocation under the Act.
Commercial airlines are eligible to receive $25 billion in loans and loan guarantees, while cargo air carriers are eligible to receive $4 billion in loans and loan guarantees.
To preserve aviation jobs and compensate air carrier workers, the CARES Act allocates $25 billion to be used by passenger air carriers, $4 billion by cargo carriers, and $3 billion by aviation industry contractors exclusively for the continued payment of employee wages, salaries, and benefits. Guidance regarding how to apply for this assistance must be issued by the Secretary of the Treasury no later than April 1, 2020. Initial payments to air carriers and contractors that apply for this financial assistance must be made no later than April 6, 2020.
State, Territory, and Tribal Government Relief
States may receive no less than $1.25 billion to fund COVID-19 efforts, with more populous states eligible to receive proportionately more than less populous states. The Act authorizes $3 billion to be allocated among regions such as the District of Columbia and Puerto Rico, and $8 billion to be allocated among tribal governments.
Should you need assistance or have any questions concerning the CARES Act, contact Sharon C. Lincoln at firstname.lastname@example.org, Eric W. Dyer at email@example.com, or your Casner & Edwards attorney.