CARES Act Summary
Official Name: Coronavirus Aid, Relief, and Economic Security Act
Passed March 27, 2020
The Summary below is not a comprehensive summary of the complete CARES Act. Rather, it includes information that the City feels is most beneficial to our business community. To read the CARES Act in its entirety, please visit https://www.congress.gov/bill/116th-congress/house-bill/748/text
Small Business Administration Forgivable Loan Program also known as the Paycheck Protection Program (PPP)
The CARES Act creates a new type of loan for the United States Small Business Administration (SBA) to administer. This is different from the SBA’s current Economic Injury Disaster Loan (EIDL) Program. See our page for more details on the EIDL Program.
- The CARES Act loans are potentially forgivable up to 100% of the principal amount borrowed.
- Collateral and guarantees are not required.
- Businesses, nonprofits, and veterans’ organizations and tribunal concerns with less than 500 employees are eligible.
- Certain businesses with more than 500 employees are eligible if they have no more than 500 employees at one location.
- Sole proprietors, independent contractors, and self-employed individuals (subject to additional requirements) are eligible to apply.
- The maximum loan is the lesser of $10 million and 2.5 times the average monthly payroll costs incurred in the one-year period before the date of the loan. Payroll costs include salary/wages/tips, sick/family leave/PTO, severance payments, group health benefits (including insurance premiums), retirement benefits, and state or local taxes assessed on employee compensation. However, for any employee who is paid more than $100,000 salary, only the amount up to $100,000 (prorated for the covered period) is calculated into the number.
- An eligible borrower may only receive one loan.
- Loans can be used for payroll costs, continuation of group health care benefits during periods of paid sick, medical, or family leave, or insurance premiums, salaries or commissions or similar compensation, interest on mortgage obligations, rent, utilities, and interest on other outstanding debt.
- The terms of the amount of any portion of the loan that is not forgiven will be for a term not to exceed 10 years and at an interest rate of no more than 4%.
- Forgiveness of the loan is calculated from the date of the origination of the loan through the following 8 weeks thereafter.
- Forgivable portions of the loan include the sum of payroll costs, mortgage interest payment, rent, and utilities incurred or paid by the borrower during the 8 weeks period beginning on the loan origination date.
- Any portion of the loan that is forgiven is excluded from taxable income.
- The amount of forgiveness is reduced proportionally by the reduction in employees retained compared to historical levels and by the decrease in pay of any employees beyond 25% of their historical compensation.
- For businesses that might already have or are planning to lay off personnel or cut salaries between February 15, 2020 and April 26, 2020, those changes are not counted, if the business rehires the number of personnel or returns the adjusted salary, as applicable, by June 30, 2020.
CARES Act Business Tax Relief
The CARES Act provides a modification of IRS rules related to net operating losses, interest expense deductions, alternative minimum tax credits and trade or business losses of non-corporate taxpayers. Many of these modifications are designed to provide critical cash flow and liquidity to businesses during the COVID-19 emergency, including through amending prior tax returns to obtain tax refunds.
We highly recommend consulting a certified public accountant or tax attorney and reviewing IRS rules for guidelines and applicability.
Employee Retention Credits
Under the CARES Act, employers may be eligible for a refundable tax credit for the employer’s share of the 6.2% Social Security tax (SSI Tax Credit). The potential SSI Tax Credit is for 50% of the first $10,000 in qualified wages including health plan expenses paid to each employee beginning on March 13, 2020.
To be eligible, an employer must have had operations fully or partially suspended because of a shut-down order from a governmental authority related to COVID-19 or have had gross receipts decline by more than 50% in a calendar quarter when compared to the same quarter in 2019. It will remain eligible until earlier of gross receipts exceeding 80% relative to the same quarter in the prior year or December 31, 2020.
Employers with more than 100 employees (based on 2019 employment levels) are limited to wages paid to employees who were not providing services due to COVID-19. The SSI Tax Credit is not available if the employer receives a covered loan from the SBA, as described under the Forgivable SBA Loan Program.
Payroll Tax Deferral
The CARES Act allows employers to potentially defer the payment of the employer’s share of the 6.2% Social Security tax on wages paid beginning on March 27, 2020 and ending on December 31, 2020. A corresponding deferral is also permitted for the equivalent portion of self-employment taxes. The deferred amounts are payable in two installments, with 50% of such taxes being due on December 31, 2021, and the remainder due on December 31, 2022.
Deferral of Social Security taxes is not allowed where the employer has had a covered loan forgiven as discussed above under the Forgivable SBA Loan Program.
Net Operating Losses
The 2017 tax reform bill changed the treatment of Net Operating Losses (NOLs). The CARES Act relaxes the limitations on a corporation’s use of NOLs. The CARES Act allows businesses to carry back NOLs incurred in 2018, 2019, and 2020 for five years, with some exclusions.
Prior to the CARES Act, these NOLs could only be carried forward. For taxable years beginning prior to January 1, 2021, taxpayers can offset 100% of taxable income with NOL carryovers instead of limiting such offsets to 80% of taxable income.
Business Interest Deductions
The 2017 tax reform bill also introduced new IRC Section 163(j), which generally limits the amount of interest that can be deducted by most taxpayers in a taxable year to 30% of the “adjusted taxable income” (ATI) of such taxpayer for such taxable year. The CARES Act provides for a modification allowing for an increase in the limit on allowable business interest deduction from 30% to 50% of adjusted taxable income (ATI) in the 2019 and 2020 tax years. There are special provisions for partnerships.
Suspension of Non-Corporate Loss Limitation
The CARES Act removes the limitations of Internal Revenue Code Section 461(I), which disallowed the deduction of excess business losses by non-corporate taxpayers during taxable years 2018-2026. It will now apply to taxable years 2021-2026.
Correcting Qualified Improvement Depreciation for Commercial Properties
The CARES Act corrects a drafting error made in the 2017 tax reform bill. The original bill intended for qualified improvement property to have a 15-year depreciation period which would have made those improvements also eligible for 100% bonus depreciation. The drafting error gave such property a 39-year depreciation period, which also meant those improvements were not eligible for 100% bonus depreciation. The CARES Act fixes this error retroactively. Qualified improvement property for the purposes of this Section refers to an improvement to an interior portion of a commercial building after the building was place in service.