As previously posted on Forbes.com.
The following post is from Freeman Law, PLLC, and is available at www.freemanlaw.com.
The novel coronavirus pandemic may be unlike anything that we have ever seen. And so it stands as a living, breathing crucible through which to test Newton’s well-known proposition: that for every action there is an equal and opposite reaction. Indeed, the Congressional response to the careening economy left in the pandemic’s wake is, for its part, unlike any that we have seen in modern times. It is nothing short of the largest economic relief bill in American history. But will it be enough? Only time will tell.
On March 27, 2020, President Trump signed into law the Coronavirus Aid, Relief and Economic Security Act—better known as the CARES Act. With the economy teetering on the brink of recession and businesses reeling from commercial stagnation, Congressional delegates came together for long enough to all-but-unanimously support a 2-trillion-dollar economic-relief package. After passing in the Senate by a 96-0 margin, the measure was adopted by the House of Representatives through a voice vote with minimal dissension in its ranks. The Act employs an array of tax breaks, retroactive amendments to the Tax Cuts & Jobs Act of 2017 (the “TCJA”), immediate rebates, and expanded loan relief to small businesses designed to incentivize employee retention. This article will hit the high points—broader analysis of its provisions will come in the days ahead.
Individual Rebates. The highlight for many individual Americans is the CARES Act’s so-called “advanced recovery rebate.” It works like this: Americans who file single, head-of-household, or married-filing-separate tax returns are entitled to an advanced rebate of $1,200, unless they are subject to the phase-out rules that are described below. Couples filing on a married-filing-jointly basis are entitled to a rebate of $2,400. Taxpayers can tack on an additional $500 for each qualifying child, which generally means tax dependents who are under the age of 17. The rebates will be paid “automatically,” with many Americans simply receiving a deposit in their bank account.
But the phase-out rules—a manifestation of that trite truism that what Congress giveth, Congress taketh away—may rain on a rebate-expecting taxpayer’s parade. Under these rules, if a taxpayer makes a threshold amount of money (technically, has an “adjusted gross income,” or “AGI” in tax jargon, in excess of a specified amount), then the promised rebate is reduced, eventually to zero. Generally, the IRS will apply the phase out based on the taxpayers’ 2019 tax year if a return has been filed or 2018 if no return has been filed for 2019, although there may be exceptions for certain taxpayers.
Here is how the phase out works: For an individual who files a single or married-filing-separate tax return, the phase out begins when they make (technically, have an AGI of) more than $75,000. The rebate is reduced by $5 for every $100 over this phase-out threshold. So, if this individual taxpayer makes $99,001, the individual rebate is completely “phased out.”
For head-of-household filers, the phase-out threshold starts at an adjusted gross income of $112,500. The rebate completely phases out at $146,000. And for married-filing-joint taxpayers, the phase-out threshold begins at $150,000 and the rebate completely phases out at $198,000.
So, to demonstrate how this all works, let’s say that you are a single taxpayer making $50,000 a year. Great. You are entitled to a $1,200 rebate. But let’s say that you are fortunate and industrious enough to make $90,000 a year. Well, you are going to be entitled to a rebate of only $450. That is calculated (for those who do not like simple math, look away!) by recognizing that your income exceeds the $75,000 threshold amount by $15,000 ($90,000 – $75,000 = $15,000). The rebate that you are entitled to is reduced by 5% of the amount exceeding $75,000 (that is the same thing as saying $5 for every $100 over $75,000), which is $750. We subtract $750 from the $1,200 that you would otherwise get and—voila!—you arrive at $450. Now to the other marquee provisions of the Act.
The Paycheck Protection Program (“PPP”) Loans. The CARES Act appropriated an eye-popping $349 billion to a newly-established SBA loan program known as the Paycheck Protection Program or PPP for short. The PPP is designed to provide loans of up to $10 million to small businesses, all in an effort to encourage employers to retain their workforces during the coronavirus crisis. And if the loan proceeds are used for the right things, the loan will actually be forgiven. In that sense, it functions more like a grant than a loan.
PPP loans are generally available to businesses with 500 or fewer employees, although there are some exceptions for businesses in the hospitality and dining industry. Sole proprietors, independent contractors, and self-employed individuals are all generally eligible. PPP loans must be made before June 30, 2020. A PPP loan recipient can get a loan of up to either (i) $10 million or (ii) two-and-a-half times their average monthly payroll costs, whichever number is lower.
PPP loan proceeds can be used for the following categories of costs: (1) payroll costs; (2) costs related to continuing group health care benefits; (3) employee salaries, commissions or similar compensation; (4) interest on mortgage obligations; (5) rent; (6) utilities; and (7) interest on debt obligations incurred before February 15, 2020.
PPP loans are backed by a SBA guarantee. They are “non-recourse” and do not require a personal guarantee or collateral. PPP loans come with an interest rate of 1%, and payments can be deferred for six months. There is no prepayment penalty and the SBA will not charge a fee on a PPP loan. The SBA has also waived its otherwise-applicable requirement that the recipient be unable to obtain credit somewhere else.
A PPP loan recipient must provide a certification that:
- The uncertainty of current economic conditions makes the loan request necessary to support ongoing business operations;
- The funds will be used to retain workers and maintain payroll or make mortgage, lease, or utility payments;
- There are no other duplicative loan applications; and
- During the period from February 15, 2020 through December 31, 2020 the borrower has not received other duplicative PPP loan amounts under the CARES Act.
And now to the grand finale: If used properly, the PPP loan can be forgiven, in whole or in part. The loan proceeds will be forgiven to the extent that they are used to pay the following costs during the eight-week period following the loan: (1) payroll costs; (2) interest on a debt for real or personal property that was incurred in the ordinary course of business before February 15, 2020; (3) a rent obligation under a leasing agreement that was in force before February 15, 2020; and (4) payment for electricity, gas, water, transportation, telephone, or internet access if the service began before February 15, 2020. While not in the Act itself, the SBA’s interim guidance provides that no more than 25% of the amount forgiven can be attributable to non-payroll costs. In other words, in order to have the entire loan forgiven, at least 75% of the loan proceeds must be used on payroll costs.
While the forgiveness of a debt is normally treated as a taxable event—and, thus, as gross income for federal tax purposes to the extent of the liability that is forgiven—the CARES act specifically provides that the amount of the PPP loan that is forgiven will not be subject to tax. The forgiven loan thus looks more like a grant than a loan.
But buyer beware, as there are some restrictions in place that can limit the amount of the loan that is forgiven. For example, if an employer reduces the number of employees during the eight-week period after the loan, the amount of forgiveness may be reduced. In addition, if the employer reduces the total salary or wages for an employee by more than 25%, the forgiveness may also be reduced, although this particular limitation does not apply to employees who make more than $100,000.
Employee Retention Credit for Employers. The CARES Act provides eligible employers with access to a potential credit against their employment taxes. The credit is generally available to employers carrying on a trade or business during 2020 who saw operations fully or partially suspended due to an order from a governmental authority limiting commerce, travel, or group meetings due to COVID-19 or who experienced a drop of one-half or more in their gross receipts compared to the same quarter in the prior year. The credit, however, is not available to a recipient of a PPP loan.
The employee retention credit allows for a credit of one-half of the wages paid to employees due to these circumstances. The amount of wages taken into account during any particular quarter cannot be more than $10,000 for any particular employee. And wages that are paid for family or sick leave under the Families First Coronavirus Response Act (the “FFCRA”) are not eligible for the credit. Instead, the FFCRA provides for a separate and distinct credit for those payments.
Where available, the CARES Act’s employee retention credit can be used against the 6.2% social security taxes that are imposed on the employer under the Federal Insurance Contributions Act (“FICA”). While that is good, note that it does not provide a credit against the 1.45% Medicare tax imposed on the employer.
Payroll Tax Deferral. The CARES Act also postpones the due date for depositing the employer portion of certain payroll taxes. This postponement also applies to 50% of the self-employment taxes on earnings after the date of the CARES Act. Just like with the employee retention credit, however, the deferral is not available to a recipient of a PPP loan.
Where available, the Act delays the payment of the 6.2% employer portion of social security taxes imposed under FICA—at least on wages paid for work starting on the date of the Act through the end of 2020. The payment of one-half of these taxes is delayed until December 31, 2021. The due date for the other half is delayed until December 31, 2022. For many employers, this delay will free up a substantial amount of cash and infuse liquidity that can be used to keep their workforce employed. But a word of caution: Like the employee retention credit, the delayed due date does not apply to a recipient of a PPP loan who has part, or all, of that debt forgiven.
We have just covered several of the more prominent aspects of the CARES Act. But in truth, they really just scratch the surface of a complex, interrelated web of relief provisions. The Act itself provides for a host of tax credits and related measures designed to quell the collateral damage caused by a global “supply shock” and to right a pandemic-stricken economy. In the end, it is more of a relief package than a stimulus bill—an effort to stem the tide of an economic freefall. In that respect, it is truly of a scale and type that is unlike anything we have seen in modern times, possibly ever. Whether it proves to be an “equal and opposite” reaction to this novel foe, however, remains to be seen.
For a link to the above post, click here.