Congress Passes $2 Trillion Economic Stimulus Package (CARES Act)
President Donald Trump signed into law on Friday, March 27, 2020 a historic $2 trillion stimulus package to help the American people and U.S. economy combat the COVID-19 pandemic. The legislation is the largest emergency aid package in U.S. history.
Key provisions in the stimulus include direct financial assistance to Americans, billions in aid to hospitals struggling to deal with the outbreak, and aid to hard-hit businesses, large and small. Below is an overview of the Coronavirus Aid, Relief, and Economic Stimulus Act (CARES Act).
Deferred employer-share Social Security tax
- The CARES Act allows employers and self-employed individuals to defer the 6.2% Social Security tax on employee wages, otherwise owed to the federal government. The deferred employment tax must be paid a two-year period, of which 50% the total amount is required to be paid by December 31, 2021; the other 50% by December 31, 2022.
Refundable payroll tax credit
- A refundable payroll tax credit is available for 50% of wages paid to employers throughout the COVID-19 pandemic. This credit is for eligible employers whose operations were either fully or partially interrupted due to COVID-19-related shut-down orders, or total proceeds declined by more than 50% compared to the same quarter in the prior year.
- The maximum credit is 50% of up to $10,000 of eligible wages per employee (including health benefits), paid or incurred from March 13,2020 to December 31, 2020.
- The credit applies to employers based on organization size:
- For employers with more than 100 full-time employees, eligible wages are only wages paid to employees who were not providing services to the employer due to COVID-19-related circumstances.
- For employers with 100 or less employees, all wages qualify for the credit, regardless of whether operations are open for business or suspended due to a shut-down.
- Employers of any size may apply for relief loans due to COVID-19-related hardship. A requirement of this provision is loan recipients must maintain employment levels as of March 24, 2020 through September 30, 2020 and cannot reduce their employment by more than 10% from the levels on which the date of the loan is acquired.
- Employers of 500 or fewer employees (full-time, part-time and seasonal/temporary) are eligible to receive a loan to cover costs between February 15 and June 30.
- Loans will support wages, cash tip equivalents, health benefits, retirement benefits, leave (family/sick/vacation), or the payment of State or local taxes assessed on employee compensation.
- The loan can be used to retain workers, pay mortgage interest, rent, and utility bills.
- Eligible employers are defined as: a small business, 501(c)(3) nonprofit, 501(c)(19) veteran’s organization, or Tribal business concern (section 31(b)(2)(c) with no more than 500 employees or an applicable size standard as provided by S.B.A.
- Self-employed individuals may also receive a loan.
- Loan forgiveness: During the covered period (February 15-June 30, 2020), the borrower may have loan forgiveness for payroll costs (not including costs for compensation above $100,000 per year), interest on mortgage payments, rent payments and utility payments. Loans may only be forgiven for employers maintaining an average monthly number of employees that is no less than the number if had before the crisis began. Loan forgiveness will be reduced if borrower reduces salaries and wages of employees.
- Mid-size to large employers and nonprofit organizations (500 to 10,000 employees) may qualify for loans related to COVID-19 losses. Borrowers will not need to make principal payments or interest payments towards the loan for at least the first six months. Requirement: loan recipients must retain at least 90% of employees at full compensation and benefits through September 30, 2020.
Net Operating Losses (NOLs)
- Net operating losses arising in 2018, 2019, and 2020 can be carried back 5 years.
- The 80% taxable income limitation for NOLs is temporary removed, effective for tax years beginning after December 31, 2017.
Excess Business Losses
- The Tax Cuts and Jobs Act (TCJA) limited business losses on an individual’s tax return to $500,000; however, under the CARES Act, 2018, 2019 and 2020 the excess business loss limitation is suspended. This provision will result in affected taxpayers either amending their 2018 returns (to claim a higher loss), or proceeding with a loss carryforward for a 2019 tax return.
Property Retail ‘Glitch’
- The CARES Act provides the much needed technical correction to the Tax Cuts and Jobs Act (TCJA), and designates Qualified Improvement Property (QIP) as 15-year property (20 years for Alternative Depreciation System). This makes QIP property a category eligible for bonus depreciation (100%). The amendment is effective for property placed in service after December 31, 2017.
Unemployment Insurance (UI):
Pandemic Unemployment Assistance Program
- Through December 31, 2020, the Pandemic Unemployment Assistance program will help those not traditionally eligible for UI, including:
- Self-employed individuals
- Independent contractors
- Those with limited work history
- Those who are unable to work as a result of Coronavirus
- Those who may have exhausted benefits
- The program pays 50% of unemployment insurance costs incurred by state, local and tribal governments or nonprofit organizations not part of the UI system.
- Waives traditional one-week period before benefits begin.
- An additional $600/per week for up to four months is available for each UI or Pandemic Unemployment Assistance recipient through the end of July 2020, even if the employee is currently making less.
- An additional 13 weeks of unemployment available to those who remain unemployed beyond when traditional weeks of state unemployment are exhausted.
- States are provided temporary, limited flexibility to hire temporary staff or re-hire laid off staff (increases unemployment claims processing).
Work Sharing Programs
- Funding for states to maintain existing short-term compensation programs, as well as create short-term compensation programs if the state does not already have these in place.
- $100 million in grants are available for states to create short-term compensation programs.
Modifications to the Emergency Sick Leave and Family Medical Leave Act
- Certain workers laid off on or after March 1, 2020 are eligible to receive family and medical leave benefits if they are rehired by the employer. The employee would have had to work for the employer at least 30 days prior to being laid off. Previous information can be found here.
- Single employer pension plan companies are being given more time to meet their funding obligations by delaying contributions typically due in 2020 to January 1, 2021.
- Paid leave requirements will expire after a worker has been paid for 80 hours leave or returned to work—whichever happens first.
- Federal contractors who, due to the nature of their job, are unable to go to work or telework as a result of COVID-19 will continue to get paid.
Testing for COVID-19
- All testing for Coronavirus is covered by private insurance plans without cost sharing, including both tests provided by public health labs and state-developed labs. Coverage will also extend to costs incurred during a medical visit (in-person or telehealth visit) at a doctor’s office, urgent care center or emergency room in which Coronavirus testing or screening occurred. Coverage began on March 18 (when Families First Coronavirus Response Act was enacted <link to previous blog post on FFCRA) and will remain in effect until the declared public health emergency is lifted.
Changes to Health Savings Account Usage
- CARES Act will allow a high-deductible health plan (HDHP) with a health savings account (HSA) to cover telehealth services prior to reaching the deductible, until December 31, 2021 or Congress takes other action.
Changes to Qualified Expenses
- Certain over-the-counter medical products now count as qualified expenses. Patients can now purchase over-the-counter medical products needed for quarantine and social distancing, without a prescription from a physician. Patients can use funds in HSAs, Flexible Spending Accounts, Archer medical savings accounts and health reimbursement arrangements to cover the expenses incurred for these products anytime after December 31, 2019.
- Certain menstrual care products, such as tampons and pads, purchased after December 31, 2019 are considered qualified medical expenses; HSAs and similar arrangements noted above may be used to pay for these products.
Withdrawals from A Retirement Plan or IRA:
- Individuals who are diagnosed with COVID-19; whose spouse or dependent is diagnosed with COVID-19; who experiences financial hardship due to COVID-19 related circumstances; or other factors determined by the Treasury Secretary, are eligible for a waived 10% tax on early withdrawals from a retirement plan or IRA after January 1, 2020.
- Individuals can withdraw up to $100,000 penalty-free from their qualified retirement plan through the end of 2020 and treat these withdrawals as non-taxable rollover contributions. These funds, with additional contributions, can then be repaid to the plan over the next three years, otherwise the withdrawal is taxed over the three-year period beginning in 2020.
- The CARES Act adds a provision permitting a one-year delay in required minimum distributions (RMDs) for IRAs and defined contribution plans, applying to both 2019 RMDs that needed to be taken by April 1, 2020 and 2020 RMDs—including the first RMD for individuals that reached age 70 ½ in 2019. The Act also adds the special rollover rule similar to the one enacted in 2009, allowing amounts subject to the RMD rules in 2020 to be rolled over.
- Affected individuals can also receive loans from retirement plans up to the lesser of $100,000 or 100% of the participant’s vested benefits. This is double the current loan limitation. Loan repayment is delayed up to one year for individuals with a repayment due from the date of the CARES Act enactment through Dec. 31, 2020.
Student Loan Repayment Benefit:
- The CARES Act expands the definition of employer-provided educational assistance that is excluded from gross income to include up to $5,250 in student loan payments made by an employer after the date of enactment and before January 1, 2021. It also suspends involuntary collections on student loans, including by offsetting an income tax refund.
Direct Payments or “Advanced Rebate” or “Stimulus Checks”
- On the individual level, the Act attempts to soften the blow as a result of lost income by providing immediate relief in the form of an advanced tax rebate credit. Adult taxpayers will receive a lump-sum check of up to $1,200 ($2,400 for joint tax returns). Families will receive an additional $500 for each qualifying child.
- For taxpayers with annual incomes over $75,000 ($150,000 for joint returns), the rebate phases out by $5 for every $100 of income over $75,000, dropping to zero for incomes over $99,000 per year for a single filer (or $198,0000 for joint returns).
- The IRS will use the taxpayer’s 2019 tax return. If the 2019 return hasn’t been filed yet, the 2018 return will be used.
- A new above-the-line deduction of up to $300 for charitable donations has now been created and limits on other charitable deductions have been relaxed in order to increase charitable giving during this time. These include cash contributions and donations of food, and they apply to both individuals and corporations.
- For the remainder of 2020, individuals no longer have a contribution limitation of 60% of adjusted gross income. This figure is increased to 25% of taxable income for corporations and 25% for deductions on contributions of food inventory.
- For Charitable Contribution tax strategies for today’s environment, watch our webinar on giving strategies here.
If you have questions regarding the CARES Act and how it will affect you or your organization, please contact one of our Trusted Advisors for assistance.