More Highlights of the Coronavirus Aid, Relief, and Economic Security Act (Part 2 of 2)

Earlier we posted Part 1 highlighting certain aspects of the CARES Act (Coronavirus Aid, Relief and Economic Security Act), which the federal government enacted to provide financial relief to individuals and businesses experiencing economic hardships related to the COVID-19 pandemic. Below is Part 2 of this blog.

Payroll Tax Relief

The CARES Act includes nine business tax provisions, including a credit to retain workers during COVID-19 related closures, deferral of payroll tax payments for two years, a change to the tax treatment of business losses and some technical corrections to the Tax Cuts and Jobs Act. Below are some key points on the payroll tax credit and payroll deferments.

Tax Credit:

• This provision provides eligible employers with a refundable tax credit against the employer’s share of payroll taxes for applicable employment taxes. For each calendar quarter during the applicable period, the employer can receive a credit in an amount equal to 50 percent of qualified wages (inclusive of health insurance) up to $10,000 per employee per quarter ending on December 31, 2020. The credit is treated as a refund if it exceeds the employer’s applicable employment taxes for a given quarter.

• A business is eligible for this tax credit in two ways: (i) if operations were partially or fully suspended due to a mandatory government shut-down related to COVID-19; or (ii) if the business remained open during any quarter in 2020 but gross receipts for that quarter were less than 50 percent of what they were for the same quarter in 2019. The business would then be entitled to a credit for each quarter, until the business has a quarter where gross receipts exceed 80 percent of what they were for the same quarter in the previous year.

• Eligible employers. Employers with greater than 100 employees are eligible to receive the credit if they continue to pay employees that are not providing services. Employers with fewer than 100 employees may receive the credit if they continue to pay employees whether they are or are not providing services.

• For purposes of this credit, qualified wages do not include wages paid under the Families First Coronavirus Response Act for sick leave or family medical leave, which are already subject to certain tax credits.

• If an employer takes out a payroll protection loan under Section 7(a) of the Small Business Act as amended by the CARES Act, no employee retention credit will be available.

Tax Deferral of Payroll Tax:

• The CARES Act allows a deferral of the employer’s share of the 6.2 percent Social Security tax that would otherwise be due from March 27, 2020, through December 31, 2020.

• A payment of the deferred payroll taxes would be due on December 31, 2021(50 percent) and the remaining amount by December 31, 2022 (50 percent).

• A taxpayer who is self-employed can defer paying his or her self-employment tax that would be due from March 27, 2020, until December 31, 2021 (50 percent) and the remaining amount by December 31, 2022 (50 percent).

• Under this provision, an employer can defer payment of payroll taxes for two years and still take immediate advantage of the new payroll tax credits described above, as well as credits for payment of emergency sick and family leave under the Families First Coronavirus Response Act, if applicable.

• If an employer takes out a payroll protection loan under Section 7(a) of the Small Business Act as amended by the CARES Act, no payroll tax deferral is available.

Unemployment Benefits

Individuals who can work from home, and those receiving paid sick leave or paid family leave, are not covered.

• Under the CARES Act, covered individuals would be entitled to receive an extra $600 per week in addition to their state benefits;

• The CARES Act would provide all eligible individuals with an additional 13 weeks of payments following the end of state benefit programs; provided that the total period cannot exceed 39 weeks (certain states may adopt shorter periods);

• The extra $600 payment would last for up to four months, covering weeks of unemployment ending July 31, 2020;

• Expanded coverage would be available to workers who were newly eligible for unemployment benefits for weeks starting on January 27, 2020, and through December 31, 2020;

Direct Payments to Individuals:

The CARES Act will provide direct payments to individuals depending on income.

• $1,200 per single individual who earns up to $75,000 in adjusted gross income;

• $2,400 for married couples who earn up to $150,000; and

• An additional payment of $500 per child under the age of 17.

The payment would scale down by income, phasing out entirely at $99,000 for singles and $198,000 for couples without children. Qualifying income levels will be based on 2019 federal tax returns, if already filed, and otherwise on 2018 returns.

Retirement Savings

Waiver of 10 percent Early Withdrawal Penalty: 

The CARES Act waives the 10 percent early withdrawal penalty for distributions up to $100,000 from qualified retirement accounts for an individual:

(i) Who is diagnosed with COVID-19;

(ii) Whose spouse or dependent is diagnosed with COVID-19; or

(iii) Who experiences adverse financial consequences as a result of being quarantined, furloughed, laid off, having work hours reduced, being unable to work due to lack of child care due to COVID-19, closing or reducing hours of a business owned or operated by the individual due to COVID-19, or other factors as determined by the Treasury Secretary (a “Coronavirus-related Distribution”).

The distribution will not be subject to withholding, and income tax on the Coronavirus-related Distribution may be spread ratably over a three-year period. Employees are required to sign a certification of the reason for the distribution. Plan administrators are not required to verify the reason.

Alternatively, the CARES Act allows individuals to recontribute the funds to an eligible retirement plan during the three-year period commencing on the day after the date on which the Coronavirus-related Distribution was received without having the amount recognized as income, as if it were a rollover back into the retirement plan or IRA.

Temporary Waiver for Required Minimum Distributions: 

The CARES Act includes a temporary waiver for calendar year 2020 for required minimum distributions (“RMDs”), which applies to both 2020 RMDs and RMDs due by April 1 for individuals who turned 70½ last year. Any individual who attained age 70½ prior to January 1, 2020, is not required to receive a required minimum distribution, as well as certain death beneficiaries.

Business Losses

The CARES Act amends the net operating loss (“NOL”) provisions of Section 172(b) of the Internal Revenue Code to allow the carryback of losses arising in taxable years ending after December 31, 2017, and before January 1, 2021, to each of the five (5) taxable years preceding the taxable year of such loss. However, real estate investment trusts (REITS) are not permitted such carrybacks.

The CARES Act also eliminates the limitation that NOLs can be used to offset no more than 80 percent of taxable income (disregarding the NOL deduction itself). The amendment applies to taxable years beginning before January 1, 2021 (previously, tax years beginning after December 31, 2017, were subject to the 80 percent limitation).

In this unprecedented time of uncertainty and turmoil we are committed to providing you with guidance regarding the CARES Act, and updates regarding forthcoming programs designed to help you navigate this emergency.

Peter L. Ente is a corporate transaction and tax attorney at our firm.

This information provides an overview of a specific developing situation. It is not intended to be, and should not be construed as, legal advice for any particular fact or situation.